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 35odd 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.

BPL: The Harshad Mehta connection

On July 24, 1998, Finance Minister Yashwant Sinha had responded to a starred
question in Parliament assuring it that suitable action would be taken against those involved in the price manipulations of BPL, Sterlite and Videocon shares, that had resulted in a payment crisis in June 1998. The "suitable" action took place in April 2001 that too only after another larger scam had rocked the market, cheated investors and turned the heat on to the regulator. Sebi had earlier suspended a dozen-odd brokers and sacked the former president and executive director of the Bombay Stock Exchange, as well as the board of trustees of Shriram Mutual Fund -- but the key players remained untouched until recently. When BPL was finally barred last week, from accessing the capital market for four years, many people wondered why Sebi's punishment to BPL was harsher than it was for Videocon and Sterlite. The reason was simple. The punishment was commensurate with the extent of involvement with the former Big Bull. In fact, SEBI's report splits BPL's nexus into two parts -- the first was at the stage when Harshad was planning his price rigging operation and the second was in the context of the cover-up of the broker default. BPL also provided Sebi with plenty of evidence. When Sebi searched Harshad's offices (or the Damayanti group offices at Maker V, Nariman Point, Bombay), they found a letter signed by R Balathandayutham, vice- president of BPL Sanyo Finance Ltd, an associate company of BPL, giving a mandate to Harshad's front company -- Digital Leasing & Finance to buy 500,000 shares of BPL at Rs 100 each. A bill was prepared for the transaction. Further investigations revealed that BPL Ltd itself had made the payment, even though entries were made in the name of BPL Sanyo Finance -- after all a company is not allowed to buy its own shares. Later Digital, the broker, tried to claim that the BPL deal had been cancelled but could not explain why BPL had still paid him Rs 50 million for the purchase and the money was not returned to BPL. Instead, BPL was given fully convertible debentures (1.18 million) and shares (3.8 million) of Money Television from the Damayanti group holdings, which was a Harshad company of dubious value even then. These shares were also transferred from Harshad's front companies such as Rijuta Finvest, Ikshu Finvest, Damayanti Finvest, Stable Constructions and New Prabhav Finvest.

Sebi discovered that the Money Television deal was fictitious because it had the same date and bill number as the earlier one for the cancelled purchase deal for BPL shares. Sebi then found a second payment of Rs 86.2 million and Rs 7.56 million to Digital Finance indicating that a total sum of Rs 93.8 million was given by BPL for market manipulation. The breakthrough was when Digital Finance's director finance stated on affidavit that he received instructions from Harshad Mehta for the transactions and that BPL would transfer the money for the operations. This money was transferred by Digital Finance to 20-odd companies on Harshad Mehta's instructions for further price manipulation. Sebi has also traced extensive telephone calls between the Damayanti group companies and the BPL top brass including those from the direct line of T C Chauhan, a director on several BPL companies. All this information had to be ferreted out through a maze of claims and contradictions by all the parties involved, often under oath. The truth began to emerge when they could not justify monetary payments for transactions claimed to have been done or cancelled by them. BPL also could not explain why no steps had been taken to recover money from the brokers, if the transactions had been cancelled as alleged. This was the first phase of BPL's messy involvement. When the payment crisis occurred in June 1998, the company was again under pressure from BSE office bearers to help cover up the mess. They approached a broking firm called SS Kantilal Ishwarlal Securities Pvt Ltd to negotiate with the BPL group and asked it to bail out the brokers. A deal was worked out where brokers who needed to pay for shares purchased on Harshad Mehta's instructions were told to sell them to two broking firms -- SSKI and Jayantilal Khandwala. Before this, SSKI's intervention led to Rs 470 million being transferred from "entities connected with BPL" in the garb of application money for 15 per cent preferential shares of Monoplan, a loss-making associate company of SSKI. The money was used to transact in shares by synchronising the timing of logging in of trades by buyer and sellers, and bailed out the very same brokers who were dealing for Harshad Mehta's Damayanti group. These are the transactions that were put through in connivance with the BSE president, vice-president and executive director by opening the trading system late in the night of June 17, 1998 and June 19, 1998. The brokers who benefited from

this bail out package were: Mahico Pvt Ltd, R R Mohta, GNH Global Securities, B R Jalan, Sanghvi Brothers Brokerage, N C Jain, Mefcom Securities, SVS Securities, Lalkar Securities, Ramakrishna Sekhsaria, S N Tara, S N Nangalia, S G Mantri, Angel Broking and P R Shah. Sterlite and Videocon: The Harshad link

Videocon and Sterlite are two other companies barred for three and two years
respectively for colluding with Harshad Mehta's price rigging in 1998. Harshad's manipulation took Videocon up from Rs 51 to Rs 168 (a 232 per cent rise) between April and June 1998 at a time when the BSE Sensex dropped 11 per cent. In the same period, Sterlite moved from Rs 272 to Rs 385. The trigger for the Videocon price manipulation was the audacious creeping acquisition offer to retail investors, which was made by the company at twice its market price. Market sources say this too was Harshad's brainchild and it immediately kicked up the scrip. Sterlite's manipulation began just prior to its daring takeover bid for Indian Aluminium and is seen as an attempt to put the scrip into play and attract attention. Sterlite Sebi's investigation again establishes the nexus between Harshad Mehta's Damayanti group and the Sterlite management, in cornering the shares as well as the bailout that followed the June crash. Sterlite's shares manipulation, which began prior to its bid for Indal, was later dictated by the frequent upward revisions of its bid, when Indal decided to make a fight for it and announced a counter-offer. Sterlite's first offer for Indal was at Rs 90 a share in February 1998; and was slowly revised up to a hefty Rs 221, which was part cash and part optionally convertible redeemable preference shares. It also rashly promised a minimum conversion price of Rs 350 to Indal shareholders and was forced to rig up the Sterlite price to that level by April 1998, in order to make its offer credible and attractive. That the price collapsed to Rs 175 after the bid failed only proves the price rigging, says Sebi. Sebi investigators found that Harshad Mehta's Damayanti Group had cornered a large chunk of Sterlite's floating stock. It found direct evidence from Harshad's handwritten note at his office at 1208, Maker Chambers V which led Sebi to El Dorado Finance, a stock broking firm which had purchased 300,000 shares of

Sterlite with funds provided by the Sterlite management as a loan routed through its associate company Madras Aluminium. El Dorado bought Sterlite shares as a negotiated deal, but could not provide names of sellers. Sebi, however, traced the sellers as brokers who held positions for Harshad's Damayanti Group. Some of these brokers sold shares to Dil Vikas Finance, an associate of El Dorado. After the role that it played during the price rigging, Sterlite was naturally called upon to fund the bailout of the brokers trapped in the collapse of the Damayanti group. Again, it was El Dorado and Dil Vikas who were roped in to buy these shares through a deal on the BSE on an 'all-or-none basis' at midnight on June 12, 1998. Sebi also found that BSE office bearers, who were clearly aware of Harshad's manipulations, had approached Sterlite to bail out brokers. Though the deals were done by Dil Vikas/El Dorado Finance, Sebi discovered that the shares were delivered to Sterlite's associate Madras Aluminium which had also provided Rs 117.5 million for their purchase. The brokers bailed out were the same listed earlier -- R R Mohta, Lalkar Securities, GNH Global, SVS Securities, Sanghvi Brokers, S N Nanglia, KNC Shares & Securities, J H Patel, TCP Stock Brokers, M N Agarwal and P R Shah. The fact that only brokers connected with the Damayanti Group were bailed out only corroborates the nexus between Harshad, the Sterlite management and the El Dorado/Dil Vikas companies, says Sebi. The price at which transactions were to be entered and the names of brokers to be bailed out were also provided by Harshad Mehta. Videocon In 1998, Videocon promoters made a big splash by offering to buy two per cent of its outstanding shares at Rs 140 against a market price was Rs 62. A few days later, as the scrip started to soar, they revised the offer and offered and even higher Rs 165 per share. At that time Sebi took the view that it would not interfere in a legitimate creeping acquisition even though the high offer price was distorting the market price of the share. The illiquid Videocon GDR also soared from $ 1.45 to $ 2.66 and electrified the stockmarket. Sebi investigations later showed that Videocon International had given Rs 100 million to the Damayanti group to mop up the floating stock.

Videocon International, says Sebi, routed the funds to the Damayanti Group through 'a myriad transactions and several bank accounts' through group companies such as Videocon Petroleum, Dombell Investments, Chambal Investments Pvt Ltd, Balganga Investments, Rajbal Investments, Joy Holdings, Equity Investments, Gandak Investments. Incidentally, Joy Holdings is not a Videocon company, belonged to its finance chief S K Shelgikar and is located at a Videocon address. The modus operandi was simple. Videocon group companies purchased illiquid shares in 'spot deals' and each time the counterparty supplying the shares was the Damayanti Group. The transactions were not reported to the stock exchange. There was no genuine purchase of shares and the cheques from Videocon group entities were issued without specifying the payee. Sebi says this arrangement was clearly meant to create an alibi for transfer of funds to Damayanti Group entities. Videocon's top officials -- its financial controller S M Hegde and S K Shelgikar who are authorised signatories for Videocon and some other entities -- signed the cheques. All the routing transactions took place almost on the same day. Both Hegde and Shelgikar told Sebi they did not know the brokers and had acted on the instructions of Venugopal Dhoot, managing director of Videocon International. Dhoot in turn also denied knowledge about the brokers. The documentation of these deals was obviously not perfect and Sebi found instances where brokers acting for Damayanti had sold shares to some Videocon group companies, but payments for the shares were made to some other brokers. All this was again under instructions from the Damayanti Group. When the bubble burst, several brokers acting for Damayanti could not meet their liabilities and were bailed out through the infamous arrangements supported by the BSE top brass. In the Videocon case, the bailout came from a group of brokers -- Madhukar Sheth & Co, Jaysukhlal Jagjivan, Springfield Securities and Ventura Securities. This was again done by opening the trading system late in the night and synchronising the buyer-seller deals on an all-or-none basis at pre-determined rates. Again, Sebi discovered that Videocon itself had provided Rs 200 million for the purchase of these shares through Joy Holdings, one of its group companies named above. The money was routed through a complicated web of entities. These included an inter-corporate deposit of Rs 100 million sanctioned to Darshan Mehta of Integrated Finance Ltd who then operated through two of his finance companies, Sangath Investments and Sheth Integrated Finance.

Joy Holdings ostensibly gave loans and inter-corporate deposits to brokers to fund the purchase of its shares. It had a buyback arrangement with the brokers at a stipulated price. Significantly, Joy Holdings kept custody of the shares. Sebi concludes this was a ruse to circumvent Section 77 of the Companies Act, which prohibits a company from buying its shares. In another action, Sebi initiated its harshest ever crackdown in the June crisis investigations against Shriram Mutual Fund, which had also purchased Videocon shares at well above market prices, with a buyback arrangement with the brokers. Sebi has asked for the entire board of trustees to be changed and also asked the fund to pay up Rs 2.5 million to make up losses to investors on account of its deals with the brokers. It was further revealed that Springfield Securities, a Shriram group company, agreed to purchase 500,000 shares of Videocon to accommodate some BSE brokers who had large carry forward positions in this scrip. There was also documentary evidence of a memorandum of understanding between Joy Holdings and Shriram Investment Services and associates of the Shriram group at Rs 130 a share. It also said that Videocon Leasing & Industrial Finance would recover Rs 36.8 million from Shriram Transport Finance Co. and Shriram Investment would not insist on recovery of the amount till the transaction between Joy Holdings and Shriram Investment was not completed. This agreement was signed by D A Gadgil, the fund manager of Shriram Asset Management, and Shelgikar of Videocon. There were many other indicators of the nexus between Videocon and the Shriram group promoters. The dealings only prove, says Sebi, that 'The promoters/company first connived with Harshad Mehta to build up large positions in the shares of Videocon, which facilitated market manipulation and later provided an exit route when the artificial increase in price was not sustained and some brokers belonging to the Damayanti group got trapped.'