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Markets fear another Harshad scam

Syed Firdaus Ashraf in Bombay

Are the days of stock market scams returning? Will he or will he not rule the market again?

That question resonated through Dalal Street, home of the Bombay Stock Exchange, after the Sensex crashed on Wednesday on rumours that the former big bull -- Harshad Mehta -- was in serious financial difficulties.

The BSE Sensex collapsed 4.5 per cent -- 156 points -- to close at 3311.41, while the National Stock Exchange -- Nifty -- shed 3.5 per cent (32.15 points) to close at 962.90. However, the market recovered today.

Since Mehta has been barred from taking part in stock exchange transactions, he is alleged to conduct his deals through trusted aides and confidants.

"Though Harshad Mehta is not officially allowed to operate in the market after the 1992 fiasco, people are well aware of those who trade on his behalf," says Ajit Ambani, a stockbroker at Share Deal Financial Consultants Private Ltd.

After the infamous 1992 scandal, in which investors lost Rs 80 billion, Mehta was barred from trading on the BSE. Cases against him are still pending in the courts. However, the Supreme Court passed a judgment eight months ago declaring that Mehta was free to conduct any other business if he so desired, but must distance himself from trading activities on the stock exchange.

"Though Harshad's bank accounts were frozen and cases were going on against him, he used to freely express his views about which stocks are the best to invest in," says one stockbroker. This, however, stopped -- at least in the media columns -- after the Securities Exchange Board of India passed strictures against the big bull.

According to the broker, Mehta's recommendations include software firms, BPL, Sterlite and Videocon.

The afore-quoted stockbroker alleged that Mehta bought shares through associates in a few select companies.

"He bought the shares on credit, hoping to pay once the price went higher, thereby making a neat profit. However, they did not go higher. The financiers panicked and sought their dues. This caused the panic yesterday," says the broker.

"No one will buy shares at such high prices. And even if the prices collapse, not all the shares are sought after," added the broker, "For instance, the Unit Trust of India today bought 900,000 Sterlite shares, but there remain no buyers for BPL and Videocon."

"He has made a clever move by concentrating on software scrips which are against market sentiment," adds another broker.

Though SEBI's senior executive director L K Singhvi stated that the stock exchanges have been assuring the regulatory body that they are absolutely comfortable, brokers feel otherwise. They feel that any trouble for Mehta will affect the market adversely as he holds the key to many major scrips.

"The share of a well-known multinational like Colgate was priced at Rs 240 per share, whereas BPL was quoted at Rs 305 per share. Where is the logic in this?" asks one broker.

Interestingly, no representative from any Foreign Institutional Investor or stockbrokers are willing to go on record against the bull. Moreover, as one stockbroker pointed out, giving names will only worsen the position of the broker concerned, making it harder for him to sell off his shares.