1991 Liberalization and Big Bull Mayhem on Indian Bombay Stock Exchange(BSE)

The govt. which came to power did not have an absolute majority and was dependent on other parties with divergent views on the economy and its upliftment. Indian National Congress bagged 244 seats and it needed outside support of like-minded parties to get the magic figure of 272 to form the govt. at center. The Indian economy was going through a very bad phase at the start of the early nineties, and we were facing severe financial stress due to the Balance of Payment crisis. In such a case the opening of the Indian economy to foreign investors was a herculean task and convincing the supporting parties was even harder. The then Prime Minister Sh. P.V. Narasimha Rao took the bold decision to go for liberalizing and Dr. Manmohan Singh was given the responsibility to do this as Finance Minister. A lot of decisions were taken like reducing tariffs on imports, deregulating markets, reducing taxes to name a few which was perceived that it would lead to the inflow of foreign investment and high economic growth. Before the liberalization which started in 1991, the Indian economy was closed for the outside world, Indian currency rupee was not convertible. Licenses were needed in most of the products which culminated in a license raj regime. Bureaucracy was a major obstacle with corruption taking deep roots and one needed to pass through 70 to 80 stages before a license to manufacture or produce a product got the govt. nod.
The govt was determined to open the Indian economy in a lot of areas so that growth picks pace, also there was pressure from international financial institutions to do so, hence the team of PM and FM took these decisions. One of the reforms included the stock market reforms which paved the way for the entry of private sector banks in the Indian economy and IndusInd, Axis, ICICI, and HDFC bank were given nod to do banking operation in India. In automobiles – Ford and Toyota came, electronics- Sony and Samsung, telecom – Nokia, entertainment – Times Network and Star Plus entered the Indian market.
Since banks were allowed to keep deposits with other banks for short periods of 14 days and banking receipts (BR) were issued. Harshad Mehta colluded with the bank officials and politicians to get fake BRs issued. Then these BRs were used to get other banks to lend him the money where the lending banks thought that they were lending against govt. securities (G- Secs). He invested this money in the stock market and the prices were juiced and hiked up as he controlled them. He sold these shares and returned the bank’s principle. He also colluded with company officials to get insider information and started giving tips of buying and selling to his investors which made a lot of people rich and virtually everybody started investing as per his/her capacity and made money. Insider trading was not a crime at that time as there was no law pertaining to it. It is on record that he took the value of ACC share from Rs 200 per share to Rs 9000 per share. He also did this with a tire company and the prices skyrocketed. Within three months from Jan to March 1992 the BSE Sensex rose from 2000 to 4000. By this time Harshad Mehta had put the figure of scam at Rs 5000 crores and a lot of small investors had invested in the stock market on the tip of this man. Mehta had also raised a furor when he claimed that he paid Rs 10 million to Congress president and PM Narasimha Rao as a donation. A journalist Sucheta Dalal who was the financial editor of Times of India smelt something and was of the view that the prices of the shares are inflated and not rose because of any stupendous performances of annual results and pursued the story which finally led to IT raids on Harshad Mehta and then the issue was raised in the parliament and finally a JPC was constituted to probe. Harshad Mehta and his brother Ashwin Mehta had 70 criminal cases against them and none other than Ram Jethmalani was hired as a lawyer. With the expose of the scam, the stock markets fell sharply, and a lot of people lost money. Harshad Mehta was convicted in four cases by 2001 and had still 27 cases pending against him and was on trial for 9 years when he died of a heart attack on 31st Dec 2001 at the age of 48.

-Dhruv Sharma

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