Movie: Gafla
Gafla is based on a real life incident. It is inspired by the Stock market scam of 1992
also known as Harshad Mehta Scam. It all started when Mehta joined a stock market
brokerage firm in 1981. He quickly learned the ins and outs of the stock market, made
connections with influential brokers and within three years became a broker with
Bombay Stock Exchange. He also established his own firm.
Mehta was not satisfied and because of his greed for money, he started exploiting
many loopholes in our banking system. At that time Reserve Bank had mandated all the
banks to keep a certain amount of minimum level of funds in the government bonds.
That is the banks had to maintain the SLR ratio. By the end of each week every bank
needed to have a certain level of government bonds else RBI would penalise them.
There were some strong banks and some weak banks. Strong banks had no trouble
keeping the minimum balance of government bonds whereas the weak banks always
struggled to do so. So weak banks always had to borrow the government bonds from
the strong banks and in return they paid some interest. But these bank transactions
were not done directly between both the banks, they were done through brokers. Mehta
was one of the brokers. He approached the weak banks and told them that he would
give them the government bonds they needed and for getting them those bonds the
weak banks would write him a check on his personal name. Mehta would ask for some
time to make the necessary arrangement. After that he approached the strong banks
who had those extra government bonds and promised to give them extra interest in
return. Here also he would ask for extra time and as he was very influential and reputed.
At the end of the promised time, weak banks got government bonds they needed and
strong banks were very happy with the money they made from the interest. Mehta was
making money in the extra time he asked from the banks. During that time he had all
the massive cash in his personal account and he was funneling that money in the stock
market. He would pick shares of the selected companies and kept buying those shares
aggressively. Due to these massive liquidity injections the share prices of these stocks
would go up and because of that other investors would also start buying the stock in
anticipation of more movement. This would raise the stock prices even higher. He was
not just dealing with a whole lot of banks and became very good at rotating the money
from lenders to borrowers and whenever the stocks he pumped ran up a lot he would
liquidate his positions from the stock market and take care of any of his deficits. But he
got more greedy. So he conspired with officials of two banks to issue fake banks
receipts that were not backed by any government bonds. Once these fake bank receipts
were issued, they were passed onto banks and banks in turn would give money to
Mehta assuming that they were lending against government securities. This money
was used to drive the prices of the stock in the stock market. When the time came to
return the money shares would be sold for a profit and the bank receipt was retired. It
went on till the stock prices were going up and no one had a clue about Mehta’s modus
operandi.
He took advantage of loopholes in the banking system. Mehta used two instruments in
this scam: Ready Forward deal and Bank receipts.
An investigative journalist got to know about Mehta’s modus operandi and published
about his scandal. Mehta made the scam of Rs. 4000 crores. As soon as the scandal
broke the market started crashing and the value of Mehta’s shares dropped steeply. He
could not repay the money to banks. ​The securities system collapsed​ as the scam
impacted the entire exchange system. He was arrested for his crime. Thousands of
investors lost their hard earned money.
Data Analysis
Mehta believed in the Bull market due to which he always used to buy shares and
securities to raise the prices of shares in the market. Extensive liquidity gave an
adrenaline shot to the stock market in general and the market began to make major
moves. BSE quadrupled its index in a span of just one year. Mehta’s own portfolio of
stock holdings gained in the value close to 10 times to an estimated of thousand crore
rupees.
As you can see in the table how sensex rose in the 18 months period. One of the
reasons for this to happen is excessive liquidity injection.
One of the stocks he pumped was of ACC. He moved it from Rs 200 to Rs 9000. It
showed how evaluations can get when liquidity is behind the stocks.
The stock market of The United States is strong even if the economy is weak. One of
the reasons is massive injection of liquidity in the market by the Federal reserve. It was
decided in March that the Federal Reserve planned to i​nject $1 trillion more, split
between a three-month operation and a one-month operation and​ ​$1 trillion every
subsequent week.​ It injected to calm the market amid the signs of stress. The index fell
initially in the first three weeks of March as coronavirus started spreading but since then
it has since gained nearly 60% ​to current levels above 28,430​. But the U.S. economy
shrank 31.7% in the April-June quarter. This shows that ​the stock market of the U.S. is
strong even if the economy is weak.
Source: statista