Three decades after Harshad Mehta, the absence of strong deterrents leaves investors vulnerable

In 1998, six years after the stock market scam broke, I met Harshad “Big Bull” Mehta in his Maker Chamber office in Mumbai’s Nariman Point. The context: even though the broader index – the 30-share Bombay Stock Exchange Sensitive Index or Sensex– was falling, a few stocks such as BPL, Videocon and Sterlite, were going up every day. There were strong rumours that Mehta was at it again, this time as an advisor, since his trading licence had been suspended.

He was late for the meeting. “I spend the entire day with one investigative agency or another,” he explained. After all, he was India’s highest tax defaulter in those days. In fact, according to an Income Tax Appellate Tribunal report, he was still number three at Rs 12,000 crore in 2010 – almost a decade after his death.

In addition, with hundreds of charges of a civil and criminal nature levelled against him, Mehta’s was perhaps the most high-profile case of the 1990s, spiced up with rumours about the involvement of senior politicians.

Despite the storm around, Mehta seemed calm. He explained that he was just an advisor now, and had no role in stock rigging. He even dropped us (a senior colleague was with me) to our office, possibly in the famous Lexus, though I was then too young and raw to remember the make of the vehicle. Unfortunately, he died three years later, in 2001, at the age of 47.

Memories of that meeting were revived by Scam 1992 – The Harshad Mehta Story, the recent web series about those tumultuous days in the Indian stock market. A little research on stocks meant a lot of ‘tip-based’ betting. And anyone who has visited the Bombay Stock Exchange building or the Rotunda building, or just walked around Dalal Street, would remember the three buzzwords in Gujarati, “tip aapo ne” – give me a tip.

Riches to rags

Thanks to the show, Mehta’s dream run and fall from grace are being discussed again. But while everyone remembers Mehta for pushing up the market with the aid of money received through fraudulent bank receipts, there was another scheme, a government-backed one, on at the same time, that ruined investors barely a decade later – the infamous US-64 from the Unit Trust of India.

As a former employee would say: “There was competition among chairpersons to pay higher returns to investors. At one time, the scheme was returning over 15% a year – an almost-impossible feat in those days.”

And scams that wiped out investors’ money have not ceased in the decades since. Whether it is the CR Bhansali scam in 1996 or the K-10 (Ketan Parekh) scam in 2001 and, more recently in 2013, the National Spot Exchange Limited commodities market scam, we have seen at least one Rs 1,000-crore plus scam per decade and several smaller ones too.

For, the creativity of scamsters has no limits. One sold the idea of farming the emu, the Australian bird, to investors in Tamil Nadu. Then, the Saradha chit fund scam in West Bengal and Odisha lost investors thousands of crores of rupees. In fact, as a country, we are quite used to businessmen, builders or chit funds disappearing with bank or buyer money.

The common thread in all these scams is that people risk their lives’ savings to make an extra buck. India has an extremely low annual per capita income of Rs 135,000, which works out to Rs 11,250 a month. No wonder, men earning just about Rs 20,000-Rs 30,000 a month in Mumbai, barely enough to support their families, trade every day in small cap stocks for a Rs 1,000-Rs 2,000 profit/loss?

Then, there were chartered accountants betting their clients’ money on unknown stocks, just for the exhiliration of making a quick buck. To quote the web show on Mehta, “Risk hai to ishq hai” (where there is risk, there is thrill).

Lack of deterrent

But besides poverty and greed, the main reason why scams have flourished in India is the absence of a strong deterrent. Before we compare elections in the US and India, let us take the twin cases of Bernie Madoff and B Ramalinga Raju. The former Nasdaq chairman, whose Ponzi scheme was reported by his own sons in December 2008, was arrested within a day. By March 2009, he was handed a 150-year sentence in less than 150 days.

Around the same time, in January 2009, Raju, former chairman of Satyam Computers (now merged with Tech Mahindra), confessed to cooking his books. Eleven years later, he is still out on bail. Recently, his lawyers managed to stop Netflix from airing an episode on him in the Bad Boy Billionaire series. Of course, the law needs to take its course. But quickly. Because, as they say, darna zaroori hai. Fear is the key.

Joydeep Ghosh is a New Delhi-based business journalist with over 25 years’ experience. His Twitter handle is @joyghosh2.