The Rise and Fall of Harshad Mehta: The Big Bull of Indian Stock Market

Table of contents

• Introduction
• Early Life and Career
• The Bull Run
• The Fall from Grace
• The Aftermath
• Conclusion

Introduction

Harshad Mehta, the man who once dominated the Indian stock market and earned the moniker “The Big Bull,” remains an enigmatic and controversial figure in the annals of India’s financial history. His story is a gripping tale of rags to riches, audacity, and ultimately, a spectacular downfall that shook the foundations of the country’s financial system. Harshad Mehta’s life and career are a testament to the volatile nature of financial markets and the consequences of unchecked ambition. In this blog post, we will delve into the life, career, and the fascinating rise and fall of Harshad Mehta, shedding light on one of the most iconic figures in India’s financial landscape.

Early Life and Career

Harshad Mehta’s journey into the world of finance and stock trading began in humble surroundings. He was born on July 29, 1954, in Raipur, a small town in Gujarat, India. Raised in a modest family, Mehta’s early life was far from the extravagance that would later become associated with his name.

Mehta’s initial foray into the financial world was as a small-time broker in the Bombay Stock Exchange (BSE). He navigated the bustling streets of Mumbai, also known as the financial capital of India, striving to make his mark in the fast-paced and competitive world of stock trading.

What set Harshad Mehta apart early in his career was his unwavering determination and a unique understanding of the market. He quickly gained a reputation for his shrewd insights and willingness to take calculated risks, characteristics that would play a pivotal role in his eventual ascent.

Mehta’s career gained momentum in the late 1980s when he became known for his aggressive trading strategies. His ability to manipulate stock prices and engineer bull runs in various companies made him a prominent figure in the Indian stock market. Mehta was a master of the art of speculation and stock price manipulation, which earned him admiration among many investors and market enthusiasts.

It was during this time that Mehta initiated his now-infamous “pump and dump” strategy. He would strategically purchase significant quantities of a particular stock, artificially inflate its price, and then quickly sell it at a profit. This practice had a cascading effect as other investors followed suit, further driving up the stock’s value. His success with this strategy earned him notoriety as well as the nickname “The Big Bull.”

As Harshad Mehta’s influence grew, he managed to propel even the most stable and well-established companies’ stock prices to new heights. His activities had a profound impact on the market, with the media and the public celebrating him as a stock market wizard akin to Bollywood superstar Amitabh Bachchan.

The remarkable journey of Harshad Mehta from a small-town boy with modest beginnings to a stock market maven on the brink of unparalleled wealth marked the first act in the compelling saga of his life. His ability to bend the market to his will was about to lead him to even greater prominence and, ultimately, to a colossal fall from grace.

The Bull Run

Harshad Mehta’s name became synonymous with the term “Bull Run” in the Indian stock market during the early 1990s. Mehta’s market manipulation techniques and audacious trading strategies orchestrated one of the most iconic bull runs in India’s financial history. This period of exuberant optimism and surging stock prices was fueled by his ability to influence the market on an unprecedented scale.

Mehta’s primary modus operandi during the bull run was to inflate the prices of selected stocks artificially. He would often target stocks that were already showing signs of potential, using their inherent strengths as a foundation for his manipulation. His remarkable ability to push stock prices to dizzying heights captured the imagination of investors and speculators alike.

The “pump and dump” strategy that Mehta had perfected was the driving force behind the bull run. Here’s how it worked:

1. Accumulation: Mehta would accumulate a substantial quantity of shares of a particular company. These shares served as the ammunition for his market manipulation.
2. Inflation: Once Mehta had amassed a significant number of shares, he would begin a series of strategic trades to artificially inflate the stock’s price. This involved a mix of circular trading, where shares were bought and sold among his associates to create the illusion of demand and heightened trading activity.
3. Media Hype: Mehta was not shy about being in the limelight. He often shared his predictions and insights with the media, which further fueled the hype surrounding the stocks he was manipulating. This attracted more investors and traders into the market.
4. Cascade Effect: As the stock prices of these companies skyrocketed, it attracted a cascade of other investors who wanted a piece of the action. They believed they were riding the wave of prosperity that Mehta appeared to create.
5. Profit Realization: As the stock prices reached their peak, Mehta would start offloading his shares at a significant profit, sometimes pocketing enormous sums of money in the process.

This cycle of inflating stock prices, attracting more investors, and then capitalizing on the surge repeated itself across several stocks in the market. Companies like ACC, Videocon, and Reliance Industries were among the many targets of Mehta’s manipulative practices.

The bull run created a sense of euphoria and irrational exuberance in the Indian stock market. Investors, both retail and institutional, were drawn into the frenzy, hoping to make quick and substantial profits. Mehta’s ability to seemingly bend the market to his will led to comparisons with mythical figures, and his meteoric rise to fame was unprecedented.

However, as history has shown time and again, bull runs built on manipulation and speculation are not sustainable. The downfall of Harshad Mehta was as spectacular as his rise. It would come in the form of a scandal that would forever alter the financial landscape of India.

The Fall from Grace

The incredible bull run orchestrated by Harshad Mehta in the Indian stock market was bound to have consequences. It was during this period of soaring stock prices and unchecked market manipulation that the seeds of Harshad Mehta’s ultimate downfall were sown. His reign as the “Big Bull” was soon to give way to a catastrophic financial scandal that would send shockwaves throughout the nation.

The Harshad Mehta scandal, which unfolded in 1992, was centered on his fraudulent activities in the banking and financial sector. Mehta’s intricate web of deceit involved massive misappropriation of funds, fraud, and deceit on an unprecedented scale.

The primary means through which Mehta carried out his fraudulent activities was by using a technique known as “Ready Forward” (RF) transactions. In RF transactions, banks provide funds against government securities. Mehta manipulated these transactions to create an illusion of vast funds moving between banks. This enabled him to borrow huge sums of money from the banking sector.

Here’s how the scheme worked:

1. Fake Securities: Mehta used counterfeit or non-existent government securities to obtain loans from various banks. This gave him access to vast amounts of money, which he could then use to manipulate stock prices.
2. Circular Trading: Mehta engaged in a complex series of circular transactions. He used the money borrowed from one bank to repay loans at another, creating the appearance of legitimate securities transactions and increasing the circulation of funds in the banking system.
3. Market Manipulation: With the borrowed funds, Mehta systematically inflated the prices of stocks, causing a bull run. This artificially elevated the net asset value (NAV) of his investment portfolios, further convincing banks to lend him money.
4. Covering Tracks: Mehta would then sell the inflated stocks, repay the banks, and continue the cycle of borrowing and trading. This scheme was unsustainable, but the market’s euphoria and the absence of adequate regulatory oversight allowed it to continue for a considerable period.

The recklessness of Mehta’s actions eventually caught up with him. In April 1992, the scam was exposed, and Harshad Mehta was arrested. The revelation of his fraudulent activities sent shockwaves through the financial system and led to a crisis of confidence in the Indian banking sector.

The Aftermath

The aftermath of the Harshad Mehta scandal was significant. It exposed the vulnerabilities and weaknesses in India’s financial and banking systems. As a result, a series of reforms were initiated, aimed at strengthening regulatory mechanisms and enhancing transparency and accountability in the financial sector. The establishment of the Securities and Exchange Board of India (SEBI) was a pivotal step in this direction.

Mehta faced a protracted legal battle that continued for years. He was arrested and released multiple times during the course of the trial. Sadly, Harshad Mehta passed away in 2001 while still facing charges related to the scam. His legacy remains deeply polarizing in India, with some seeing him as a financial genius and others as a symbol of unchecked greed and manipulation.

The Harshad Mehta scandal left an indelible mark on India’s financial history, serving as a stark reminder of the importance of a robust regulatory framework, ethical conduct, and the need for constant vigilance in the financial sector. It also underscored the perils of unchecked ambition and the consequences of fraudulent practices in the world of finance.

The Aftermath

The Harshad Mehta scandal, one of the most significant financial scandals in India’s history, left a lasting impact on the country’s financial landscape and prompted far-reaching changes in regulatory and financial systems. The aftermath of the scandal witnessed a series of reforms, legal actions, and shifts in public perception that continue to shape the Indian financial sector to this day.

1. Reforms and Regulatory Changes:
   • Establishment of SEBI: In response to the scandal, the Securities and Exchange Board of India (SEBI) was established in 1992 as the regulatory authority for the securities market in India. SEBI’s role was to enhance transparency, monitor market activities, and protect the interests of investors.
   • Banking Sector Reforms: The banking sector underwent significant reforms to strengthen the lending process, improve risk assessment, and enhance transparency. These measures aimed to prevent such scams from recurring.
2. Legal Proceedings:
   • Harshad Mehta’s Legal Battle: Harshad Mehta faced a prolonged legal battle, with numerous charges and cases related to the securities scam. He was arrested and released multiple times during the trial.
3. Impact on Investors and Financial Institutions:
   • Losses and Repercussions: The scandal led to substantial financial losses for both individual investors and financial institutions. Many investors who had been lured into the bull run suffered significant financial setbacks.
4. Changes in Public Perception:
   • Loss of Trust: The Harshad Mehta scandal eroded public trust in the stock market and the financial system. Many investors became more cautious and skeptical, and the memory of the scam continued to affect investor sentiment.
5. Media and Cultural Impact:
   • Media Coverage: The scandal received extensive media coverage and was a major news event. It was also the subject of books, documentaries, and, more recently, a Bollywood movie called “The Big Bull.”
   • Cultural References: Harshad Mehta and the securities scam have become part of India’s cultural and financial history. The phrase “Harshad Mehta scam” is used to refer to financial fraud and manipulation.
6. Lessons Learned:
   • Increased Awareness: The scandal raised awareness about the importance of ethical conduct and the need for effective regulatory oversight in the financial industry.
   • Risk Mitigation: Investors and financial institutions have become more cautious about risk management and due diligence, leading to a more robust and resilient financial system.
7. Legacy:
   • Harshad Mehta’s legacy remains a topic of debate in India. Some see him as a financial genius, while others view him as a symbol of unchecked greed and manipulation. His life and the scandal are often cited as cautionary tales in the financial world.

In the years following the Harshad Mehta scandal, India has taken significant steps to fortify its financial and regulatory systems. The reforms and lessons learned from this episode have contributed to the evolution of a more transparent and accountable financial sector. While the memory of Harshad Mehta’s rise and fall persists, it is also a reminder of the enduring importance of integrity and oversight in the world of finance.

Conclusion

The story of Harshad Mehta, the “Big Bull” of the Indian stock market, is a gripping narrative that traverses the peaks and valleys of ambition, audacity, and the perils of unchecked ambition. Mehta’s remarkable journey from a modest background to dominating the stock market in India during the late 1980s and early 1990s is a testament to the potential and pitfalls of the financial world.

The bull run he orchestrated, marked by soaring stock prices and a sense of euphoria in the Indian stock market, is legendary. Mehta’s “pump and dump” strategy became the stuff of financial lore, and his market manipulation techniques drew both admiration and apprehension. His ability to bend the market to his will and create unparalleled wealth seemingly out of thin air earned him the adulation of some and the scorn of others.

However, the fall from grace was as swift and dramatic as the ascent. The exposure of the Harshad Mehta scandal in 1992 sent shockwaves through the financial sector, leading to significant reforms and the establishment of SEBI to strengthen regulatory oversight. The aftermath of the scandal highlighted the vulnerabilities in India’s financial systems and the need for robust mechanisms to protect investors and maintain the integrity of the financial markets.

Harshad Mehta’s legacy remains a subject of debate and discussion in India. While some remember him as a financial maverick and genius, others see him as a symbol of greed and deceit. The Harshad Mehta saga serves as a cautionary tale, reminding us of the consequences of unchecked ambition and the enduring importance of ethical conduct and regulatory vigilance in the world of finance.

As India’s financial sector continues to evolve and grow, the lessons from the rise and fall of Harshad Mehta remain etched in the nation’s financial history, serving as a reminder of the need for integrity, transparency, and accountability in the pursuit of financial success.

ALSO READ ABOUT: Abdul Karim Telgi and the Stamp Paper Scam of 2003