Chronology Authors’ Note
On the morning of 4th June 1992 the vast Arabian Sea, a few paces away from Madhuli, looked calm.
But on the third and fourth floors of the building, home of the first Indian stock market superstar, Harshad Mehta, the atmosphere was tense. Harshad stood exposed for having taken money from the State Bank of India and for not delivering securities. For the past six weeks, Harshad had been trying to settle the problem commercially. But the Central Bureau of Investigation had already been called in and Harshad’s appeals to allow him time to pay back was being ignored. For the flashy, immensely wealthy Harshad and his clever brother Ashwin, the situation was grim.
A little past 8 in the morning, some eighty people from CBI descended. Tactically, neither did they interrogate the Mehtas nor give any hint of arrests. They spread out through the apartment and started turning things unsndle the scam investigation.
Madhavan wanted to meet Harshad. The CBI officer supervising the operation turned towards Ashwin and said:“I want you to come too.”Around 7.30 pm, They started towards Kitab Mahal, one of the offices of the CBI.
The Scam Surfaces
Within a month, a bank had gone under; the CBI had been called in to nab the biggest player in the stock market; and a pillar of the financial establishment had died under mysterious circumstances. But all this was just the beginning.
it was early morning at Palani, a small, sleepy town 150 kilometres from Coimbatore. Palani has had no claim to fame except for its temple atop a hill. It has no industry, no major railhead, and it has never produced a luminary. But on 12 th April 1992, Palani was to witness a historic event. Only five persons could have sensed that. Harshad Mehta? He hadn’t a clue. He hadn’t even heard of Palani.
At five on that Sunday morning, in one of the rooms of a small hotel called Subam, RL Kamat, a deputy general manager, funds management department of State Bank of India, was out of bed. Unassuming and honest, Kamat had arrived from Bombay the previous evening. By six he had had a bath, dressed up and stepped out. He was headed for Palani’s landmark, the temple.
He had been there the previous evening too. But not on a pilgrimage. What Kamat set out to do in a nondescript town hundreds of kilometres away from Bombay would later turn out to be among the first steps to shatter the Harshad Mehta myth.
Kamat’s mission in Palani was to bring back to Bombay one of his colleagues, R Sitaraman. Sitaraman, a junior management grade officer, would later emerge as the key figure in Harshad Mehta’s scheme to pick up money from SBI without securities. But on that Sunday morning, Sitaraman was merely a suspect and that too within the bank; nobody had imagined the extent of his wrongdoing. He was wanted as he was the only one who could throw light on what his bosses feared was a massive fraud.
Banker, Broker, Sucker, Thief
“We had become the principals while the banks were acting as brokers. Banks could decide on the brokerage they would pay. We used to tease them by asking how much bankerage they would charge on the deals we created for them.”
DURING the summer of ’92, new revelations about widespread corruption in the money market left not only the lay public, but financial journalists, even key players in the financial sector and regulatory authorities aghast. It was a world few knew existed.
Harshad Mehta’s rags-to-riches story, including his fleet of cars and a 15,000 square foot house with huge terrace lawns, became public knowledge. Much less known were facts about traders earning a salary of Rs 2.5 crore; one-year-old finance companies buying and selling shares worth Rs 7000 crore; blank bank documents (bank receipts or BRs) stacked in brokers’ offices; crores of rupees sent by one bank to another, but deposited in individual accounts.
Suddenly, the shadowy, cabalistic world of money market brokers and obscenely wealthy operators was under the arc lights. As the scam felled one big name after another, tarnished by charges of wrongdoing, the air was thick with names of people one had never heard of, bizarre market practices and maddeningly complicated deals that foxed even RBI officials.
At its core, the structure of the business was simple. One bank wanting to sell securities to another would hire a broker who would do the buying and selling and get a brokerage. But the market was shallow, brokers very few in number and the expertise was concentrated in the hands of a few individuals. This created strange relationships and distorted market prices.
It was a world glued together by its own mores. The swank and technologically fortified treasury of Citibank merged with small and shady offices of brokers like Hiten Dalal.
High-flying executives manning foreign banks were hand-in-glove with down-to-earth brokers in accommodating each other. Money snaked in and out of the coffers of public sector companies, banks, brokers’ personal accounts – a movement about which the RBI officials were partly clueless and partly tolerant. It was a world of fast moving money facilitated by fig leaf of securities, false BRs and privileged information.
Driving the deals were a set of brokers and treasury officials of banks – Citibank, Bank of America, ANZ Grindlays Bank, Standard Chartered, State Bank of India, Canara Bank, Syndicate Bank and a few others. The brokers were VB Desai, Bhupen Champaklal Devidas, Hiten Dalal, C Mackertich, Naresh Aggarwala, Harshad Mehta, DS Purbhoodas and Jayantilal Khandwala.
Creed of Greed
The scam was not limited to individuals. Everybody was in it, like vultures nibbling at a rotten corpse.
THE scam was inevitable. What eventually emerged as a gigantic securities scandal was a collection of small sores that had been festering just under the skin of a gasping banking system. The sores were created by two decades of over-regulation on paper, lack of control in practice, a creaking infrastructure and the misguided policies of RBI that refused to acknowledge the reality of the market place. That banking system, still in place, was so flawed that Harshad came up with this telling justification of his wrongdoing: “I am a part of the system.”
The system was unique. Imagine a business where the government dictates what price you pay for your raw material (interest paid on deposits), selling prices (interest earned) and whom to sell – a business that is a 53.5% disaster. Till the 1992-93 Budget, 38.5% of the deposits went into statutory liquidity ratio as forced subscription to low-interest bonds issued by the government and its various agencies. Another 25% went into cash reserve ratio as cash and other low-interest short-term securities like treasury bills. You were free to deploy only 36.5% of the cash you collected and that too went into the “priority sector” and political lending.
Imagine also that though your hands are so tied behind your back, the money outside the core banking system carries varying costs and returns. For instance, if you ran a company and had some surplus cash you could finance buying and selling of shares and make more than, say, 40% per annum. In this fashion, different segments of the financial sector offered different rates of return; commercial banking offered one of the lowest.
This was ironic because banks controlled virtually 70% of money flows, with insurance companies, the corporate sector and mutual funds accounting for the rest. But though rates of return were high in some pockets at the fringes of the financial system and lowest at the vast middle, money was not allowed to flow freely from a low-return area to a high-return one (a movement called arbitrage) thanks to rigid lending parameters and controlled interest rates. But successive finance ministers and RBI governors (including Manmohan Singh, who has served in both the capacities) failed to acknowledge a simple fact: the flow of money is uncontrollable. If brokers are choked off from bank credit when the stock markets offer 40% interest per annum, whereas government securities offer 12.5% and corporate lending 21%, money will find a way towards the brokers’ accounts. This would be illegal, but commer-cially understandable. Academics even have a name for it: regulatory arbitrage.
A Greenhorn
He stepped in to watch how the world, of the share market spun on its invisible axis. That afternoon a new chapter began in the life of Harshad Mehta. This was an unfamiliar world, a world that would be his kingdom 10 years later.
THE year was 1971 and the place Raipur, a semi-industrial town in Madhya Pradesh, located along the main trunk route that connects Bombay to Calcutta. There, in a small private school, a loud, brash 16-year-old boy was making life miserable for his fellow-students and teachers. A Gujarati by birth, he was particularly weak in Hindi. Ms Ghosh, the Hindi teacher, found it difficult to deal with his pranks, get him to do his homework and attend classes. One morning, unable to bear it any longer, she complained to the principal. The principal called the boy. “Ask your father to see me”, he said.
That scared the boy to death because his father was a stern man. Instead of heading back home, he went to a movie. He then roped in an elderly-looking man called Mr Sahu and produced him before the principal. “My father is not in town. So I have brought this gentleman. He is my uncle.” Mr Sahu listened carefully to the principal’s complaints and promised to take care of the unruly boy. It was a neat little trick. Too neat for a 16-year-old prankster to remain discreet about. Soon he was bragging to the class that he has managed to fool Ms Ghosh and the principal. That was a terrible mistake. One of his foes squealed.
The principal was livid and promptly rusticated him. His father, equally angry, put him to work in the family shop. The boy had to open the shop at 8 a.m. every morning. He got cut off from his friends and his favourite game, cricket.
Of all the fascinating stories about Harshad Shantilal Mehta, this is the most telling. Twenty years later, the story would repeat itself in a gigantic, much more complex and agonising fashion. Like he tried to substitute his father, he would try to substitute hundreds of crores of rupees he had taken out of State Bank of India.
Like he unnecessarily bragged about his trick to his classmates, Harshad would show off his house, Toyota Lexus and Rs 26- crore tax return. Just as his classmate tattled, one of his rivals at the Bombay Stock Exchange would engineer an income tax raid on him. And just as he was held captive in his father’s shop, Harshad would have to spend months and months in prison, roughed up and humiliated like a common criminal.
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