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

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

    Scam 1992: Was Harshad Mehta the mastermind or fall guy of securities scam? A bit of both
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    By Santosh Nair   IST (Updated)


    Hustler, scamster, flawed genius, visionary—call him what you may, but it is unlikely that there will ever be another stock-broker with the mass following that Harshad enjoyed at his peak.

    More than 28 years after India’s biggest financial scam first came to light, there finally seems to be a successful attempt at telling the story to the masses.
    Scam 1992—The Harshad Mehta Story, based on the book by Sucheta Dalal and Debashish Basu, has done a good job of capturing the multiple layers of the scam, the key players involved, and the factors that provided a fertile ground for one of the most sordid chapters in the history of the Indian financial markets.
    Till now, for most people, the scam could be explained in a couple of lines—Harshad  Mehta took money from banks, played the stock market and then could not return the money when the stock market crashed. The actual story is far more complex, and the cast of players and subplot so numerous that the series can easily run for another 10 seasons.
    But the central figure of the scam remains Harshad, and the 1992 securities scam is often referred to as the Harshad Mehta scam, which would be either giving him too much credit, or making him the scapegoat, depending on how you look at it.
    So what does one make of Harshad? Was he a skilled stock picker, or just a clever salesman who was able to sell tall stories, or a hustler adept at exploiting the cracks in the system or a convenient fall guy for those at the highest levels of power?
    A fair answer would be that he was a little of everything but by no means a Superman who could move India’s stock market at will. Like stock market operators before him and after him, he only controlled a handful of stocks—but stocks important enough to influence the direction of the index and thereby the mood in the market.
    Harshad had started investing in the stock market from the early 80s, but there was no concept of long-term investing back. Much of what passed off as research was merely trading on the basis on information available to only a few. This was a common practice and most big brokers of that time made their fortune this way.
    Barring a handful, most of the companies that Harshad Mehta was bullish on, are no longer in existence. ACC, SPIC and Apollo Tyres are among those which survive but none of them has been spectacular wealth creators over the long term.
    Harshad came up with the replacement cost theory, whereby the stock of a manufacturing company should be valued at what it would cost to set up a similar plant. This theory found many takers and sent shares of even the most dubious companies soaring to exorbitant levels.
    The replacement cost theory was not an original one, except that he managed to sell it well. During the debate on the Securities Contracts Regulations Bill in 1956, Lok Sabha MP PD Himatsingka countered a colleague’s theory blaming manipulation as the sole reason for the rise in the price of any stock.
    Himatsingka gave the example of Indian Iron and Steel Corporation, which was set up at an initial cost Rs 5.2 crore. He pointed out that if the cost of an IISC share had risen to Rs 36 from the issue price of Rs 10, the cost of setting up a new steel plant had increased 20 times to Rs 100 crore. Even if all the outstanding shares were bought at Rs 36, it would only cost Rs 18 crore to gain control of a steel plant worth Rs 100 crore.
    Harshad managed to convince financial institutions to buy the stocks he was bullish on. He may have had some good ideas, but it can’t be denied that the institutions’ support for Harshad also had to do with his clout in the corridors of power in Delhi and the quest for quick profits, rather than their belief in his stock-picking skills.
    Harshad managed to divert large sums from the banking system to the stock market, by exploiting the loopholes in the system. But foreign banks and their chosen brokers too had been toying with the system much before Harshad stumbled into the loopholes. RBI was aware but given India’s precarious forex reserves position and the periodic dependence on foreign banks chose to turn a blind eye.
    The only difference between Harshad and the foreign banks in this matter was that the foreign banks and their brokers were not reckless enough to divert large sums into the stock market to manipulate share prices. This could be one reason that they never suspected Harshad of funding his stock purchases with bank funds. After all, it was a highly risky strategy given the volatile nature of the stock market.
    So what sets Harshad apart from his contemporaries of that era, and what will he be remembered for? After all, Harshad is the name that comes to mind first whenever the 1992 securities scam comes up for discussion.
    Tenacity, chutzpah and an insatiable appetite for risk were Harshad’s defining traits, even when the odds were heavily against him.
    Crippling losses in the stock market more than once failed to dampen his enthusiasm for big bets. The first time, he came close to having to sell his house to repay his broker. The second time he had to pay money out of his pocket to clients to convince them that rumours about him facing financial difficulties were untrue.
    To have broken the back of a well-entrenched cartel of foreign banks and their pet brokers—some of those traditional ones—was no mean feat, given Harshad’s own modest background. Harshad’s intent and means were questionable, but there was no denying his resolve.
    After having spent time in jail and been hauled over the coals by almost every government agency, anybody would have sued for peace with authorities or kept a low profile at the very least. Not Harshad. He accused the then Prime Minister Narasimha Rao of having accepted Rs 1 crore from him in return for political favours.
    Hustler, scamster, flawed genius, visionary—call him what you may, but it is unlikely that there will ever be another stock-broker with the mass following that Harshad enjoyed at his peak. Ketan Parekh in the late 90s did have a fair bit of following but was never a household name like his mentor.
    What if…
    One can’t help wondering what course India’s financial history would have taken had news of Harshad’s problems not become public, had the stock market not been shut because of a strike, and had Harshad somehow repaid the money he had borrowed from National Housing Bank?
    From the book and the series, it is clear that Harshad’s career in the market could have ended only in one way, given his overconfidence in his own ability to turn things around and a penchant for outsized bets.
    Getting off the hook would have most likely emboldened him further and he would have been eager to settle scores with the bear cartel. At some point, his run of luck would have ended and he may have got into a far bigger mess.
    But a temporary reprieve for Harshad would have certainly spelt ruin and a one-way ticket out of Dalal Street for some members of the bear cartel. Maybe India would have had one retail chain less, and the stock market, a different Big Bull today.
    Santosh Nair, Editor of CNBCTV18.com, is author of Bulls, Bears and Other Beasts - A story of the Indian stock market.
    Check out our in-depth Market Coverage, Business News & get real-time Stock Market Updates on CNBC-TV18. Also, Watch our channels CNBC-TV18, CNBC Awaaz and CNBC Bajar Live on-the-go!
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