Scam 1992: Was Harshad Mehta the mastermind or fall guy of securities scam? A bit of both

Greater than 28 years after India’s greatest monetary rip-off first got here to gentle, there lastly appears to be a profitable try at telling the story to the plenty.

Rip-off 1992—The Harshad Mehta Story, primarily based on the e-book by Sucheta Dalal and Debashish Basu, has carried out job of capturing the a number of layers of the rip-off, the important thing gamers concerned, and the elements that offered a fertile floor for probably the most sordid chapters within the historical past of the Indian monetary markets.

Until now, for most individuals, the rip-off might be defined in a few traces—Harshad  Mehta took cash from banks, performed the inventory market after which couldn’t return the cash when the inventory market crashed. The precise story is much extra complicated, and the solid of gamers and subplot so quite a few that the sequence can simply run for an additional 10 seasons.

However the central determine of the rip-off stays Harshad, and the 1992 securities rip-off is sometimes called the Harshad Mehta rip-off, which might be both giving him an excessive amount of credit score, or making him the scapegoat, relying on the way you take a look at it.

So what does one make of Harshad? Was he a talented inventory picker, or only a intelligent salesman who was in a position to promote tall tales, or a hustler adept at exploiting the cracks within the system or a handy fall man for these on the highest ranges of energy?

A good reply could be that he was a bit of all the pieces however under no circumstances a Superman who may transfer India’s inventory market at will. Like inventory market operators earlier than him and after him, he solely managed a handful of shares—however shares essential sufficient to affect the path of the index and thereby the temper available in the market.

Harshad had began investing within the inventory market from the early 80s, however there was no idea of long-term investing again. A lot of what handed off as analysis was merely buying and selling on the idea on data out there to just a few. This was a standard follow and most large brokers of that point made their fortune this manner.

Barring a handful, a lot of the corporations that Harshad Mehta was bullish on, are not in existence. ACC, SPIC and Apollo Tyres are amongst these which survive however none of them has been spectacular wealth creators over the long run.

Harshad got here up with the alternative value concept, whereby the inventory of a producing firm ought to be valued at what it will value to arrange an analogous plant. This concept discovered many takers and despatched shares of even essentially the most doubtful corporations hovering to exorbitant ranges.

The alternative value concept was not an unique one, besides that he managed to promote it effectively. Throughout the debate on the Securities Contracts Rules Invoice in 1956, Lok Sabha MP PD Himatsingka countered a colleague’s concept blaming manipulation as the only purpose for the rise within the value of any inventory.

Himatsingka gave the instance of Indian Iron and Metal Company, which was arrange at an preliminary value Rs 5.2 crore. He identified that if the price of an IISC share had risen to Rs 36 from the problem value of Rs 10, the price of organising a brand new metal plant had elevated 20 instances to Rs 100 crore. Even when all of the excellent shares had been purchased at Rs 36, it will solely value Rs 18 crore to achieve management of a metal plant value Rs 100 crore.

Harshad managed to persuade monetary establishments to purchase the shares he was bullish on. He might have had some good concepts, however it may’t be denied that the establishments’ help for Harshad additionally needed to do along with his clout within the corridors of energy in Delhi and the hunt for fast earnings, reasonably than their perception in his stock-picking abilities.

Harshad managed to divert massive sums from the banking system to the inventory market, by exploiting the loopholes within the system. However overseas banks and their chosen brokers too had been toying with the system a lot earlier than Harshad stumbled into the loopholes. RBI was conscious however given India’s precarious foreign exchange reserves place and the periodic dependence on overseas banks selected to show a blind eye.

The one distinction between Harshad and the overseas banks on this matter was that the overseas banks and their brokers weren’t reckless sufficient to divert massive sums into the inventory market to control share costs. This might be one purpose that they by no means suspected Harshad of funding his inventory purchases with financial institution funds. In any case, it was a extremely dangerous technique given the risky nature of the inventory market.

So what units Harshad aside from his contemporaries of that period, and what is going to he be remembered for? In any case, Harshad is the title that involves thoughts first at any time when the 1992 securities rip-off comes up for dialogue.

Tenacity, chutzpah and an insatiable urge for food for threat had been Harshad’s defining traits, even when the chances had been closely in opposition to him.

Crippling losses within the inventory market greater than as soon as didn’t dampen his enthusiasm for large bets. The primary time, he got here near having to promote his home to repay his dealer. The second time he needed to pay cash out of his pocket to purchasers to persuade them that rumours about him dealing with monetary difficulties had been unfaithful.

To have damaged the again of a well-entrenched cartel of overseas banks and their pet brokers—a few of these conventional ones—was no imply feat, given Harshad’s personal modest background. Harshad’s intent and means had been questionable, however there was no denying his resolve.

After having frolicked in jail and been hauled over the coals by nearly each authorities company, anyone would have sued for peace with authorities or stored a low profile on the very least. Not Harshad. He accused the then Prime Minister Narasimha Rao of getting accepted Rs 1 crore from him in return for political favours.

Hustler, scamster, flawed genius, visionary—name him what it’s possible you’ll, however it’s unlikely that there’ll ever be one other stock-broker with the mass following that Harshad loved at his peak. Ketan Parekh within the late 90s did have a good bit of following however was by no means a family title like his mentor.

What if…

One can’t assist questioning what course India’s monetary historical past would have taken had information of Harshad’s issues not change into public, had the inventory market not been shut due to a strike, and had Harshad one way or the other repaid the cash he had borrowed from Nationwide Housing Financial institution?

From the e-book and the sequence, it’s clear that Harshad’s profession available in the market may have ended solely in a technique, given his overconfidence in his personal potential to show issues round and a penchant for outsized bets.

Getting off the hook would have probably emboldened him additional and he would have been desirous to settle scores with the bear cartel. Sooner or later, his run of luck would have ended and he might have gotten right into a far larger mess.

However a short lived reprieve for Harshad would have definitely spelt spoil and a one-way ticket out of Dalal Road for some members of the bear cartel. Possibly India would have had one retail chain much less, and the inventory market, a distinct Huge Bull in the present day.

Santosh Nair, Editor of CNBCTV18.com, is writer of Bulls, Bears and Different Beasts – A narrative of the Indian inventory market.