Page 205 - A Banker Down the Rabbit Hole

58. The Chairman and the Securities

Scam

1992: The Securities Scam
At 37, one stock broker namely, Harshad Mehta had everything going for
him. The New India Assurance employee-turned stockbroker was living
in a 15,000 sq.ft. plush apartment with a swimming pool in up-market
Worli. Dalal Street worshipped him as the "Big Bull".

The Modus Operandi
Up to the early 90s, banks in India were not allowed to invest in the
equity markets. However, they were expected to post profits and to retain
a certain ratio (threshold) of their assets in fixed interest bearing
Government bonds known as SLR (Statutory Liquidity Ratio) securities.
To address this requirement of banks, Mehta cleverly squeezed funds out
of the banking system and pumped this money into the share market.

At that time, a bank had to go through a broker to buy securities and
bonds. He as a broker, promised the banks higher returns while asking
them to transfer the money into his personal account, under the guise
of buying securities for them from other banks. Mehta used this money
temporarily in his account to buy shares, thus hiking up demand of
certain shares dramatically (of good established companies then like ACC,
Sterlite Industries and Videocon), selling them off, passing on a part of
the proceeds to the bank and keeping the rest for himself. This resulted
in stocks like ACC which was trading in 1991 for Rs. 200/- a share to nearly
Rs. 9000 a piece in just 3 months.

Another instrument used in a big way was the Bank Receipt (BR). In a
ready forward deal, securities were not moved back and forth in actuality.

202 | A Banker down the Rabbit Hole