In Harshad Mehta's wake

Print edition : January 19, 2002
Harshad Mehta is dead; but the trail goes on.

"DOMAIN for sale", reads a blurb on what used to be Harshad Shantilal Mehta's once-famous website, "prices as low as $6.49". Although unintended, there could be no commentary more sharply ironic on the legacy on the person who became emblematic of all that is wrong with India's financial system. Massive cardiac arrest is believed to have caused Mehta's death on New Year's eve, although the final results of his post-mortem examination were still awaited. The death at the Thane Civil Hospital of the architect of the Rs. 5,000-crore 1992 securities scandal has effected final closure on the legal proceedings against him. But the issues of accountability and justice raised then, and again in the context of repeated scandals over the past decade, remain.

Harshad Mehta, a 1999 photograph.-AFP

It is now just under a decade from April 1992, when news broke that State Bank of India had asked Mehta to return Rs.500 crores he had illegally put to work on the stock markets. By the end of that month, he was accused of having diverted funds from the public sector Maruti Udyog Limited (MUL) to his own accounts, provoking a record 570-point fall in the Sensex. From then until June 1992, when a sustained furore in Parliament led to the formation of a Joint Parliamentary Committee (JPC) to investigate the matter, revelations of misappropriation from banks and public sector units piled up on an almost weekly basis. Mehta, meanwhile, spent 107 days in jail, only to acquire upon his release renewed notoriety by claiming that he had made a Rs.1-crore payoff to former Prime Minister P.V. Narasimha Rao.

While the JPC Report soon provided a comprehensive and coherent picture of both the scale and mechanics of the securities fraud, putting together criminal evidence took much longer. It was only in October 1997 that the Special Court set up to hear the securities scandal-related cases could approve prosecution on 34 charges brought by the Central Bureau of Investigation (CBI). The CBI in all filed 72 sets of charges relating to criminal offences, while 600-odd civil cases proceeded alongside. Of these, so far convictions have been secured only in the case of four. In September 1999, Mehta received a four-year sentence for defrauding MUL, but an appeal is pending. Last April, he secured acquittal in another case. His counterpart in the bear cartel, Hiten Dalal, is the only scam-accused person actually to have received a final sentence, after the Supreme Court dismissed in July 2001 his appeal against a 1999 conviction.

For anyone familiar with the pace at which India's criminal justice system works, it will come as no surprise that Mehta is not the only key securities scandal accused to have passed away over the past decade. Key accused M.J. Pherwani, former Chairman of the National Housing Bank, State Bank of India's Chairman M.N. Goiporia, managing director in charge of investments C.L. Khemani, and chief of vigilance R.L. Kamath, all died before they could give evidence. So too did top scam-tainted firm Fairgrowth Financial Services' top officials B. Ratnakar and K. Dharampal, along with bear cartel top shot Bhupen Dalal's aide, J.P. Gandhi. Now, legal experts say, further delays are certain, since charges will have to be recast to focus on Mehta's associates in the deal, notably his brothers Sudhir and Ashwin.

All this delay seems a little bizarre, given that there was little that was complicated about Mehta's scam. Consider the case of the MUL fraud. In one operation, for example, an MUL employee handed over 35 lakh Unit Trust of India (UTI) units, then valued at Rs.4.99 crores, to Mehta's New Delhi manager, Mohan Khandelwal, on January 23, 1991. The transfer was made in violation of the express orders of MUL's board of directors. The same day, a manager at the Hamam Street branch of UCO Bank in Mumbai, Vinayak Deosthali, forged a letter authorising the transfer of funds from Harshad Mehta through Bank of America to MUL. While the paper trail at Maruti was thus covered over, Khandelwal continued to hold on to the UTI units, leaving Mehta free to use them to raise more money.

ANZ Grindlays bank's (now Standard Chartered Grindlays) Ram Narayan Popli was another key player in the Mehta game. On one occasion in February 1991, he diverted a Canara Bank banker's cheque worth Rs.5.05 crores favouring Grindlays Bank to Mehta's account. On March 18 and April 24 that year, he pulled off the same trick, this time with banker's cheques worth Rs.10.84 crores and Rs.7.62 crores. Thus, MUL was not Mehta's only victim. Both UCO Bank and ANZ Grindlays suffered separately. That a few employees of these banks could routinely siphon off their employer's cash says not a little about the abysmal state of their supervisory apparatus.

Sucheta Dalal, the journalist who broke news of the securities scandal, recently pointed out that the media had not a little to do with Mehta's resurrection in 1997-1998. Some pliant financial writers wrote glowing accounts of his return to the markets, while The Times of India group offered him a print platform of his own. Among his first enterprises in a new round was allegedly helping to rig the prices of Videocon, Sterlite and BPL in association with their promoters. This enterprise, however, collapsed as a result of the Pokhran-II nuclear tests of May 1998, which provoked a precipitous decline in the markets.

The final chapter in the Mehta story began in November 2001, with the arrest of all three brothers on fresh fraud charges. In 1999, Mehta and Ashwin had claimed that they had either lost or misplaced 27 lakh shares in 90-odd companies, valued at over Rs.250 crores. They asked that these shares be restored to them, along with benefits accrued over the years. The CBI, however, rapidly discovered that the Mehtas had laundered the shares, by having them transferred to friends and relatives, who in turn introduced them back into the markets. Investigators found that the Mehtas had been introducing benami shares into the market from as early as 1996. Following their arrest on November 9, 2001, a bail application was rejected, and it was scheduled to be heard again on January 4.

Contrasting the apallingly slow progress in disposing of the 1992 securities fraud cases with experiences elsewhere in the world holds out some interesting lessons. Hours before he left the White House, United States President Bill Clinton pardoned 140 convicts, many of them convicted for financial misconduct. One who failed to obtain a pardon, despite energetic lobbying, and post-conviction charitable contributions of over $100 million was Michael Milken. He had been charged in 1988 by the Securities and Exchange Commission of market manipulation and insider trading that cost investors more than $1 billion.

Milken's rise and fall, documented in Oliver Stone's film Wall Street, was enormously greater in theatrical scale than that of the King of Dalal Street. Milken was for years reputed to be the highest-paid individual in the U.S., and the now-defunct securities firm of Drexel Burnham Lambert paid him a record bonus of $550 million in 1987 alone. Not much later, he pleaded guilty to market manipulation, and was sentenced to 10 years in jail, along with fines in excess of $ 1 billion.

Out of jail on parole after serving 22 months, Milken reneged on a deal he had made never to engage in the security business. In the January 22, 2001 issue of The New Yorker magazine, journalist James Stewart chronicled Milken's "facilitation" of securities transactions. These included a $500 million investment by Rupert Murdoch's News Corporation in New World in 1994, and MCI's 1995 $1 billion investment in News Corporation the next year. Milken reportedly made a neat $42 million for his efforts. Milken refused to accept the Securities and Exchange Commission's assertion that this violated the terms of his 1991 consent. But, rather than face a bruising criminal court confrontation, the businessman settled out of court a $47 million fine.

His ability to evade a longer prison sentence and renewed prosecution shows that in the U.S., as in India, money talks. But 22 months in jail and over a billion dollars in fines is surely better than no justice at all. The sad fact is that Harshad Mehta paid little for his crimes, a lesson his proteges have learned all too well.

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