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D. Sampathkumar

THE `Big Bull' would charge no more, even if for some time now, it became evident that the earlier energy was clearly missing in his more recent attempts. In the end, his demise was as abrupt as the collapse of the bubble that he helped create in 1992.

He would be remembered primarily as the man who drove thousands of gullible investors to penury and perhaps even a few, to their death. History would point out to him as the man who held a mirror to the country's financial face to reveal to the world, how effete and easily capable of manipulation, are the systems and its players. But that is not all. His record is far more complex than that. The thousands of investors who were driven to despair by the mirage he created, are undoubtedly, a fact of history. But equally, it would be fair to say that he didn't sow the seeds of greed in their minds. He merely leveraged it, to use a phrase from market literature that he was so fond of, for his personal ends. The benign neglect that passed for a `regulatory mechanism' and a permissive market structure that made it all possible weren't his creation either. He merely exploited it as have many others before him and as would many others, in the years to come - his guilt, such as it is, leavened only by a desire to do so on a far grander scale than as has been attempted by any one else. Consider the evidence.

Back then, the speed with which the Reserve Bank of India moved to complete the bookkeeping on secondary market transactions in government securities would have put to shame even those at the Bombay Stock Exchange - a place not particularly noted for excessive energy in these matters. So bankers created their own solution in the form of `Bankers' Receipts (BRs) - a sort of an IOU in government securities - to square up their own records for purchases and sales. In other words, the BRs themselves came to represent a `virtual' government security and by extension, hard cash. In no time at all these BRs acquired an existence all of their own, quite independent of the quantum of underlying securities that they are in theory supposed to represent. Not much different from the IOUs that, goldsmiths generated before the advent of paper currency. It was only to be expected that the surplus liquidity thus created should be sucked in by the stock market that was starved of liquidity. Throw in a weak back office system in the banks themselves for reconciling transactions between government securities and BRs of such securities, and for good measure, rope in pliable junior officers in these banks, we have all the ingredients for creating a permanent source of additional cash which is what someone like Harshad Mehta needed, to spark off a bull rally.

Truth to tell, this by itself was not enough. The system needed the resources of public sector banks. And for public sector banks to get into this in a big way, one needed the element of competition with MNC banks, which were shown to be making money hand over fist by leveraging their holdings of government securities. The likes of Harshad Mehta did just that. They were able to show that MNC banks were resorting to `sale' and `repurchase' transactions (REPOs) in government securities where the `repurchase' leg of the transaction was to be completed before the `Reporting Friday' - the alternate Fridays of the month when banks confirm to the RBI, that their holdings in government securities are within its stipulated norms. A REPO transaction entered into on the Monday following a `Reporting Friday' with the `repurchase' fixed for the next `Reporting Friday' effectively gave a bank extra cash to lend at a profit. These banks were under a compulsion to create and lend money thus as devoid of a branch network their scope for increasing lendable resources was severely constrained but expectations of higher profits from overseas principals did not show any signs of abating.

It so happened that some of these transactions involving actual government securities were squared off by offering BRs in substitution. The stage had been set for a complex web of transactions involving government securities, BRs and unreconciled transactions in these instruments etc. that amounted to a substantial war chest for playing the market. To this, what has already become a complex jig saw puzzle, another piece was added by introducing the phenomenon of pliable and financially weak co-operative banks whose management operations had been hijacked by entities connected with stock-brokers. They introduced into the market, BRs far in excess of securities possessed by them.

The engine of speculative excesses had been suitably been primed. But the real thrust was provided the economic reforms of 1991. The freedom that the Indian industry had been conferred, so all of a sudden, engendered a sense of optimism among entrepreneurs and investors, alike. The promoters were getting ready to tap the market and so were indulging in a bit of speculation purchases themselves with a view to boosting up the stock prices. There was also the promise of overseas money coming in. The vast army of Indian investors had thus been suitably motivated to believe that the Indian stock market's day under the sun has arrived.

To the community of investors desperately looking for avenues to invest their own and borrowed capital in the stock market, Harshad Mehta quite obligingly pointed the way to the scrips that he himself was promoting with sums abstracted from the money market.

Of course, the thing had to collapse as it was built on a combination of fictitious BRs and unreconciled balances in securities ledger accounts. When the unreconciled balances in the books of State Bank of India came to light, speculators entered the scene. They correctly anticipated that the massive rise in equity prices was due for a correction. Not content with that they also helped the process along by indulging in a bit of short selling themselves, compounding the problem for Harshad Mehta whose salvation now lay in stemming immediately the fresh flow of excess stock of equity that bear operators were causing. Suddenly the Great Indian Stock Bazaar like a village shandy had folded tent and ceased to exist.

Did Harshad Mehta conceive this all on his own? That seems improbable. History would perhaps judge him as someone who happened to be at the right place, at the right time and more importantly, was smart enough to sense a profit opportunity in it and rode it for all it was worth before coming a cropper in the giant wheel of fortune. Harshad Mehta had staged a comeback more than once, in the stock market. But there is going to be comebacks for him, this time around.

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