Page 206 - A Banker Down the Rabbit Hole

Instead, the borrower, i.e. the seller of securities, gave the buyer of the
securities a Bank Receipt (BR) that confirmed the sale of securities. It
acted as a receipt for the money received by the selling bank. Hence the
name - Bank Receipt. It promised to deliver the securities to the buyer.
It also stated that in the meantime, the seller held the securities in trust
for the buyer.

Having figured this out, Mehta needed banks, which could issue fake BRs,
or BRs not backed by any government securities. Two small and little
known banks - the Bank of Karad (BOK) and the Mumbai Mercantile Co-
operative Bank (MCB) - came in handy for this purpose. Once these fake
BRs were issued, they were passed on to other banks and the banks in
turn gave money to Harshad Mehta, plainly assuming that they were
lending against government securities when this was not really the case.

Mehta deployed well over Rs 1,000 crore and triggered the biggest Bull
Run in the Indian stock market. The stock markets were overheated and
the bulls were on a mad run. Since he had to book profits in the end,
the day he sold was the day when the markets crashed. The BSE Sensex
rose from around 2,000 points in January 1992 to 4,467 points in April
the same year. The Sensex tanked to 2,529 points in August, wiping out
over Rs 100,000 crore in market capitalization.

The honest Chairman unfortunately got into trouble
After about a quarter and a year later, after his visit to Hong Kong, we
came to know that the Chairman was suspended for being a party to
Harshad Mehta Stock Scam leading to systemic risk in India. On enquiry,
it was found that he had instructed two Metropolitan branches to provide
funds to the Harshad Mehta owned companies to invest in Bond market
so that our bank could make trading profits that Harshad Mehta had
made for many other banks.

It was a push for enhancing the profitability of the bank for which he was
appointed. The charge was that the funds were provided into personal

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