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Bulls, Bears and other Beasts by Santosh Nair

Dalal Street And Harshad Mehta

The Dalal street of the 1980s was quite literally the financial equivalent of the Wild West. With the introduction of the NSE (National Stock Exchange) and screen-based trading in 1994, clients could verify what prices their shares were traded for. Before the NSE was introduced, brokers had to adhere to the rules of the stock exchange, but in reality, these rules were violated quite frequently. There was no proper mechanism to resolve the grievances of investors. It was believed that the exchange was controlled by a group of influential brokers to such an extent that many joked that BSE was an abbreviation for Broker's Stock Exchange and not Bombay Stock Exchange. Cartel wars in the stock market were quite common at that time. Lala's skills were steadily improving and he began to earn ₹10,000 per month where initially he was only earning ₹2,000.


After the Janata-Dal-led national coalition came to power in 1989, there was little activity on Dalal Street. The stock market appeared to be existing in a world of its own, unmindful of the economy as a whole. Investors did not concern themselves beyond such policies that impacted specific companies or sectors. The action was slowly building up in the murky interbank market for government securities, the reverberations of which would soon be felt in the stock market. 


The Sensex had risen to 1,100 by the end of July 1990. Harshad Mehta's scale of activity had increased considerably and the big moves in stocks like ACC, Apollo Tyres and Tata Tea were being attributed entirely to him. He had become a powerful broker in the money market too. At that time the CRR and SLR added up to nearly 50%. This reduced the bank's ability to earn profits as well as issue loans. To get around the rigid CRR/SLR rules, banks came up with a "buyback" or "ready forward" arrangement. 


The issuance of bank receipts was on the rise at that time and before long, Bank receipts began to be misused on a large scale. Banks were permitted to trade securities only with other banks. However, Harshad rewrote the rules when he decided to become a counterparty. This helped him to rapidly scale up the size of his transactions. Sharma, one of his associates, worked in the same firm as Lala. Sharma was the one who had introduced Lala to Harshad. Harshad was quite impressed with Lala and asked him to call him up if he had any interesting ideas. A couple of weeks later, Lala started doing trades for Harshad. Lala's orders started getting bigger and his commissions were growing steadily.


The Bharatiya Janata Party (BJP) withdrew its support to the VP Singh government in October. The Sensex crashed the following January as a war in the Gulf seemed imminent. However, Associated Cement Companies (ACC) was rising steadily. This rise stemmed from Harshad's heavy purchases in the stock. After the Gulf war ended, inflation climbed to a record 13.6% and there was despondency everywhere. Then Finance Minister Manmohan Singh's sturdy response to the crisis was a groundbreaking budget, which allowed FIIs (Foreign Institutional Investors) to invest in India. 


The Controller of Capital Issues was proposed to be replaced by the SEBI (Securities and Exchange Board of India) to regulate stock markets and exchanges. The bulls managed to lift the Sensex by 300 points over the next month. Their leader was none other than Harshad himself who had then become the "Big Bull". The moment Harshad and his associates would make inquiries about a stock, its prices would start rising. Harshad's flashy lifestyle made headlines and he became a role model for every player on Dalal Street. Very soon, Harshad started to have delusions about his power and he believed that a company's performance could be easily influenced by him. The post-budget excitement in the market lifted the Sensex to around 1,900. Soon, Lalchand began earning an average of ₹40,000 per month.


The daily trade turnover had risen to around ₹4000 crores towards the end of 1991-92. Along the way, Harshad had lost his sense of proportion and had become dangerously overconfident. The bear cartel constantly attempted to fell him by short-selling the stocks Harshad was long on. Between January and April of 1992, the Sensex rose to a high of 4,546. Harshad's prophecy about ACC going beyond anyone's imagination came true when the stock touched 10,500 on the day the Sensex peaked.


Over the three months of the bull run, Lala made close to ₹3.5 lakh. He had also begun to get closer to Harshad. People resented their growing proximity and fed Harshad tales about how Lala's loyalty lay with the bear cartel. Lala got along well with Manubhai and did some trades for him as well. Soon Harshad's trust in Lala started fading and he started doing deals with other firms.


While protesting against some rules set forth by the SEBI, many exchanges had gone on a strike in mid-April. While checking its books, SBI (State Bank of India) had found that Harshad had not delivered the securities that he had taken money for. Before a settlement could be reached, the matter had already gone to the press. This blew the lid off the scam and it was found that many banks and financial institutions were not holding the securities that they had paid for or were holding forged bank receipts. The size of the scam was estimated at over ₹8,300 crores. The scam tarnished many reputations and ended dozens of careers. Harshad Mehta became the face of the biggest scam in the history of the financial markets, popularly referred to as the Scam of 1992

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