Architect of chaos: Harshad Mehta and the price of reform

Prompted by charismatic brokers who seemed to possess a Midas touch, first-time investors, including taxi drivers, paan wallahs, salaried employees, and shopkeepers, poured their life savings into stocks.

Harshad Mehta was the poster child for this new India. But all too soon, he also became its cautionary tale.

Bear to bull

Born into modest circumstances in Gujarat in 1954, Mehta cycled through odd jobs, including selling hosiery, cement, and insurance, before finding his calling on the Bombay Stock Exchange (BSE) floor in the early 1980s. What distinguished him was an ability to read market psychology and exploit information asymmetries that were, at the time, perfectly legal.

His transformation from a bear to a bull also marked the transition of the Indian markets from the old order to the new. In 1986, veteran bear operator Manu Manek (aka the Black Cobra) and his cartel targeted Mehta by heavily short-selling shares of SPIC—a company Mehta was heavily invested in—driving its price down. Rumours spread that Mehta owed over a crore to the exchange and was going bankrupt. To protect his reputation, Mehta paid off all his dues 14 days early, taking a personal loss of ₹1.5 crore in the process. By the late 1980s, he had become the Big Bull, his very interest in a stock enough to send its price soaring.

With the opening of the economy and his growing reputation, Mehta could have chosen the path of other one-time bears like the late Rakesh Jhunjunwala and Radhakishan Damani—pick stocks that would benefit from the new liberalized economy and realize gains by holding on patiently. But Mehta was a man in a hurry. He chose to exploit the system rather than work with it.

The actual mechanics of his fraud were simple. Banks, which were required to maintain strict ratios of their assets in government securities but weren't allowed to invest in equities, operated a ready forward market—short-term lending using bank receipts as collateral for government securities. Mehta inserted himself as broker and counterparty, convincing banks to issue him BRs for securities that didn't exist or were never delivered. He then used this phantom capital to artificially hyper-inflate select stocks.

Playing the system

When journalist Sucheta Dalal exposed Mehta's fraudulent use of bank receipts in April 1992, the entire edifice collapsed. The Sensex crashed from 4,467 points in April 1992 to 2,529 points by August 1992.

What made this crash possible wasn't the absence of rules but fragmented enforcement. The Securities and Exchange Board of India (Sebi) had been established in 1988 but received statutory powers only in January 1992, mere months before the scam's exposure. Mehta walked through doors left ajar by a system transitioning from state control to market freedom without building the necessary guardrails.

The total scam amount was estimated at ₹4,000-5,000 crore, a figure that threatened to destabilize the entire banking sector. More significantly, it wiped out life savings of first-time investors, many of whom never returned. This thinning matters profoundly: In the US, 62% of adults own stocks, while in India, even today, participation stands at a mere 7%. Research confirms that wider participation creates healthier, more resilient markets.

Mehta spent his final years fighting dozens of criminal charges and civil suits. He was convicted in four cases before dying of a cardiac arrest at Thane Civil Hospital in custody on 31 December 2001, at age 47. By then he had shown that determined manipulators, in collusion with others who are part of the system, will always find the cracks.

Naively, the reformers of 1991 assumed market discipline would naturally punish such operators. Consequently, the pattern was repeated with depressing regularity. Ketan Parekh in 2001 and Abdul Karim Telgi in 200 brought home the fact that in free market systems, weak enforcement of existing laws and gaps in regulatory supervision enable fraud. Freer markets demand more vigilance, not less.

The real lesson isn't that free markets are inherently corrupt, or that government control is preferable. It's that the architecture of economic freedom is itself a complex engineering challenge. Every market is a designed system, and bad design invites bad actors. In 1992, Harshad Mehta didn't break India's nascent capitalism; he revealed that the work of building it had barely begun.

For more such stories, read The Enterprising Indian: Stories From India Inc News.