How Harshad Mehta did it again
Flashback to March 1992: Harshad Mehta was the darling of the stock markets -- a superstar whose popularity had begun to rival that of a matinee star. He was the cover story on several magazines and was being shot by audio-visual newsmagazines symbolically feeding peanuts to bears at the Bombay zoo.
April 23, 1992: Almost exactly nine years ago, the story began to fall apart with the revelation that Harshad had helped himself to a cool Rs 5 billion from State Bank of India by making a SGL receipt vanish.
June 1998: It is the astounding story of an irrepressible and ambitious Harshad Mehta attempting to cock a snook at the system, which tried to tie him down in 35-odd court cases and re-work his charismatic magic with investors. Fortunately for Indian investors, the comeback died a quick death.
Harshad had made his plans carefully. He anticipated the Internet as a powerful tool and launched his own website -- www.harshad.com to dispense stock tips and analyse market trends. A set of media managers then set him up with columns in several leading newspapers.
The next step was to convince a set of companies to collaborate with him in ramping up their prices and find several legitimate brokers to put through his trades.
Sebi's investigation reveals that a set of brokers was happy to deal with these unknown companies with no financial standing or professional expertise and without taking any security or deposit, only because of their faith in the Harshad Mehta magic. BPL, Videocon and Sterlite were lured by Harshad's sales pitch and by February 1998, the market was buzzing about the return of the Big Bull. Sebi's investigations show that from April to June 4, 1998, BPL, Videocon and Sterlite's scrip prices moved up 137 per cent, 232 per cent and 41 per cent respectively, even while the bellwether BSE Sensex declined 11 per cent due to various domestic and international factors.
But April 1998 was very different from April 1992. Harshad had limited access to funds, his trading cards were suspended. More importantly, he needed to create a large network of front companies to do his business. Sebi refers to these as the Damayanti Group. The companies included Damayanti Finvest, CDP Fincap and Leasing, KRN Finvest and Leasing, Rijuta Finvest and Ikshu Finvest which operated through a set of brokers and sub-brokers who did Harshad's bidding.
All these companies had the same address: 1208 Maker Chambers V, Nariman Point, Bombay 400 021 -- once famous as Harshad's nerve centre and the office of Growmore Research & Asset Management Ltd.
He also started another set of companies in keeping with his plans. They were Money Television Industries, Esquire International, Starshare Investment and Finanz, Stable Constructions and New Prabhav Finvest.
The Damayanti group began to face payment difficulties and papered this over by rolling their positions from one bourse to another and transferring positions among brokers though a system of kaplis or credit notes. (This was a loophole for manipulation, which has since been plugged).
Sebi says the Bombay Stock Exchange, which was perfectly aware about Harshad's shenanigans, not only failed to take "effective surveillance measures", but also lowered margins in these scrips and later tried to bail him and his brokers out by arm-twisting companies to cover the payment default. They also opened the trading system in the middle of the night to insert synchronised trades at prices that were completely out of line with the day's trading.
When the payment crisis hit the market, it was common knowledge that Harshad had gone broke. Newspapers wrote about it, but Sebi's job was to track his front companies and to link them to him. That was a tough proposition, since Sebi has limited powers of search and seizure. At every stage, Harshad's people fudged their answers, refused to co-operate and tried to cover their tracks. Yet, the 1999 investigation was complete.
Sebi found that four persons -- Anil Doshi, Dinesh Doshi, Dilip Shah and Vinod Shah -- were directors of the Damayanti group in various permutations and combinations. The first two were his wife's brothers. The latter two claimed they were just salaried employees and had carried out orders. Pankaj Shah, Sunil Samtani and Atul Parikh, who were co-accused with Mehta in 1992, were also an important part of the front operators.
After searches at the Damayanti offices, Sebi established links to Harshad through telephone bills, payment to lawyers, investment details and brokers such as LKP Securities and Digital Leasing.
Travel bills found at Harshad's office were key to linking the Mehtas. Though the bills and invoices of the two travel agencies -- Taurus Travels and Bonik Travels -- were fudged to show purchases in the names of company employees, Sebi managed to verify through the airlines that it was Harshad Mehta, his family and associates who had actually traveled on the tickets.
It also found payments to the tune of Rs 1.4 million made from the front companies to Harshad's lawyers Mahesh Jethmalani, S D Jaisinghani, and Chougle & Co when they had sought no legal advice from them.
Sebi also tracked telephone calls from the Damayanti group to senior BPL executives such as its director T C Chauhan, who admitted he had made the calls to Harshad at the Damayanti group offices.
Sebi hit pay dirt when it found a document from the Damayanti office which listed details of investments of Rs 1.46 billion in BPL, Videocon and Sterlite in the second week of June, which pertained to the BSE and NSE settlements of that period.
The document also connected Harshad Mehta's activities to a series of brokers -- El Dorado Guarantee, Dil Vikas Finance, LKP Securities, Madhukar Sheth, Sony Securities and GNH Global Securities. Of these, Madhukar Sheth and LKP have figured prominently in the 2001 debacle too.
S S Gulati of LKP Shares and Stockbrokers and Digital Leasing, which had tried to recover money from Harshad Mehta, provided further corroboration. Shrenik Jhaveri and Bharat Khona were two other brokers who informed Sebi that Harshad had delivered a large quantity of BPL shares to them through the front companies in lieu of old liabilities.
The key to Mehta's market manipulations were his dealings with BPL, Videocon and Sterlite which were finally barred last week from accessing the capital market for four, three and two years respectively.
Sebi discovered that these companies lent Harshad the initial money to build up concentrated position in these counters. The outstanding purchases were particularly heavy at the end of each settlement period in order to provide price benchmarks for the next settlement. In fact, at one stage the brokers operating in BPL for the Damayanti group accounted for 70 per cent of the total outstanding position of the scrip on the BSE -- a clear indicator that the BSE was studiously turning a blind eye to their activities.
Interestingly, another set of brokers operating on the NSE took delivery of 70 per cent of the total delivery for BPL in settlement no 22 of 1998 -- indicating how positions were rolled over from on bourse to another. Exactly the same operation was replicated in Videocon and Sterlite as well.
Having established that the Damayanti Group was set up by Harshad Mehta, the rest was easy. The three corporate houses did not even cover their tracks as we show in the next two parts. As Sebi points out, such cornering of shares and price manipulation created an artificial market that ultimately led to the collapse and was detrimental to the interest of investors in general.