April, Scam, and the Big Bull: Have Regulators Learnt From Harshad Mehta's Case?

The scam led to SEBI announcing measures to prevent market manipulation by financial predators. Did these work?

Harshad Mehta was the raging bull of the Indian stock markets before he was arrested in 1992. 

(Photo: Namita Chauhan/The Quint)

(This is part three of a four-part 'April' series that revisited significant historical events or policies and how the lessons learned from them continue to be of relevance in present-day politics and society. Read the part one here, part two here, and part four here.)

In April 1992, in the magazine Business Today, we published a cover story on Harshad Mehta, the rising star and raging bull of the Indian stock markets. The cover featured a flashy-looking Mehta posing somewhere near Worli sea face with his Toyota Lexus car. Cynical colleagues and seniors had warned us that this fairy tale being spun around Harshad Mehta was too good to be true and that the bubble would soon burst. 

As predicted, the bubble burst within days of the cover story being published.

A former colleague, Sucheta Dalal, wrote a damning story for The Times of India, highlighting how the stock broker was playing fast and loose with the law and was “illegally” accessing funds from the State Bank of India to finance his stock market fantasies.

All hell broke loose as investigative authorities, including the Central Bureau of Investigation, swung into action, while Dalal followed up her first story with a series of reports that came to be known as the Harshad Mehta scam. More on this in a while.

Have SEBI, RBI, and IRDAI Been Effective Regulators? 

31 years later, a few bitter facts about scams and financial markets remain relevant. The most important fact is that the average Indian continues to be extremely vulnerable to such scams and millions have lost almost all their savings to them. Second, regulators like the Securities Exchange Board of India (SEBI), the Reserve Bank of India, and the Insurance Regulatory & Development Authority of India do play their role as watchdogs; but there is a big question mark over their effectiveness as regulators. Third, the advent of Big Data, the Internet, Artificial Intelligence, and the like, will encourage scammers to become more active.

Back to the Harshad Mehta scam, a series of cases were filed against him, and the Big Bull was arrested and thrown behind bars. Several mid-level bank executives were also arrested as sleuths dug deeper. A prominent “collateral damage” was the venerable MJ Pherwani of the UTI, whose alleged involvement in the scam ruined his reputation. 

Pherwani died of a heart attack soon after the scam, which became the talk of the town. Ironically, almost a decade after the scam broke, Harshad Mehta himself died of a heart attack in 2001, aged 47, in a jail cell in Thane near Mumbai. Prior to his death, Mehta had been convicted in a few cases while trials were ongoing in several other ones. As part of the economic reforms launched by the PV Narasimha Rao government, the office of the Controller of Capital Issues, which regulated stock markets, was abolished. Many restrictions that were imposed on buying and selling of shares were lifted.

However, as it was important to have a regulator for the stock markets, SEBI was formed in January 1992, just a few months before the scam broke out. The scam led to SEBI announcing a series of measures to prevent such market manipulation by financial predators.

The question is: did regulators learn any lessons from the Harshad Mehta scam? Did SEBI succeed in its mission to prevent a repeat of such scams? Not by a long shot. 

After Mehta Came Ketan Parekh

When Harshad Mehta died, he received scant attention from the media. This was because a new, villainous star had started dominating public discourse and the media landscape. Ketan Parekh was another audacious stock market player whose shenanigans destroyed the financial institution of UTI, along with the reputation of the then Union Finance Minister Yashwant Sinha. 

Ketan Parekh was another Big Bull who presumed he could access depositors' money parked in banks to artificially jack up the share prices of selected companies. His illegal activities continued merrily for years, until 1 March 2001, when his bubble burst just one day after the Union Budget was presented. Two banks; Global Trust Bank, and the Gujarat-based Madhavpura Mercantile Cooperative Bank, collapsed, with many depositors in MMCB losing their life savings. Incidentally, Parekh worked as an employee of Harshad Mehta in the early 1990s. But Parekh has since been luckier, as he lives on after spending a few years in prison, while senior journalists like Sucheta Dalal accuse Parekh of using “fronts” to play around in Indian stock markets, despite a SEBI ban.

When the Harshad Mehta scam broke out in April 1992, the initial sum involved was a few hundred crores. In contemporary times, the amounts involved in these financial scams would run into tens of thousands of crores.

The most egregious of these was the NPA scam, during the UPA regime, between 2006 and 2010, when public sector banks were “persuaded” to lend money to favoured companies to finance ambitious infrastructure projects. Lakhs of crores of that money has disappeared as banks have been forced to write off these loans as “bad debts”. The bill was eventually paid off by the taxpayers of India. 

The Jury's Still Out

Did things improve after the advent of the NDA regime? The jury is still out. It took years for regulators like the RBI to discover that bankers like Rana Kapoor of Yes Bank were allegedly cooking books. Tycoons like Vijay Mallya, Nirav Modi, and Mehul Chokshi have fled India after supposedly skimming tens of thousands of crores of loans taken from public sector banks.

There were NDA governments in place in both Maharashtra and the centre when the Punjab & Maharashtra Cooperative Bank collapsed without warning in 2019. Thousands of hapless depositors are yet to get back their life savings.

There seems to be no end to such scams. Can Indian regulators, as some suggest, learn a few lessons from their counterparts in the West?

Unfortunately not. The track record of regulators in preventing scams and bank collapses in the US and UK is just as bad, if not worse than the RBI and SEBI. From the Silicon Valley Bank to the Credit Suisse affair (not to mention the Morgan Chases and the Goldman Sachs of the world), the saga seems to be ongoing. In a connected world, every piece going down has a Domino effect across the world markets.

(Yashwant Deshmukh & Sutanu Guru work with CVoter Foundation. This is an opinion piece and the views expressed are the authors' own. The Quint neither endorses nor is responsible for them.)