Can a scam like the Harshad Mehta stock scam happen again? Has history taught its lessons well so that we do not see a repeat of it? Though the times have changed and the financial markets and regulations have significantly improved, the answer is ‘Yes’ — such scams can and, probably, do still happen. Corruption, greed and sheer hubris that were ingredients of the Harshad Mehta scam are still integral part of human nature and will rise its ugly head again, and again.
While Mehta’s was the name by which it went, there were many people who were involved in it — perhaps the lax system was itself the culprit.
Also, arguably, the Harshad Mehta scam was relatively less of a stock market scam and more of a securities and banking scam. It was more about raising huge sums of monies illicitly from these other areas and diverting them for stock market speculation and fuelling the boom. Of course, there was rampant price rigging too and assorted other scams. ‘The Scam’ by Debashis Basu and Sucheta Dalal brilliantly narrates the story.
So the question is whether large quantity of funds can be made available today through scrupulous or unscrupulous means? If yes, this can happen again since price rise would then be a simple matter of demand and supply. In such an atmosphere, manipulative rigging of prices too would happen.
Indeed, serious stock market scams have continued to happen. Promoters have financed stock brokers/operators (often using corporate funds) to ensure manipulative rise in price of shares of their companies so that they can raise more funds or even offload some of their shares at high prices. Operators have manipulated prices of companies to make them rise by heavy and fraudulent trading, false publicity and rumours to generate investor interest and then offloading them, again at higher prices.
However, the regulatory atmosphere has considerably changed. Today, it is far more difficult to obtain finance for rampant stock market speculation or even investment, particularly from banks and NBFCs. Stock exchanges are corporatised and are no more private clubs of stock brokers. They even have stiff competition and very wide reach.
The physical records of those times are now computerised and shares and securities dematerialised. Sharp price movements are monitored in almost real time by exchanges/SEBI, and particularly if the fundamentals do not support them, investigation by SEBI may follow. There are speed breakers for rapid price rise/fall.
While in the early years of SEBI, there was a lot of delay in taking enforcement action, now there is action often in months. There is a fairly healthy jurisprudence of securities laws with elaborate provisions for fraudulent/manipulative activities. There are a variety of penal powers available to SEBI including debarment, disgorgement, suspension/cancellation of license, stiff penalties and even prosecution. There is a system of corporate governance put in effect and even if it is still without much depth and substance, there is benefit of some oversight and check.
Yet, for all this, a bubble can inflate anytime. The charm of stock markets as source for quick and easy money remains intact. SEBI can interfere when the price rise is evidently artificial and manipulative. However, if large amount of monies chase operating companies to prices far, far higher than their fundamentals would justify, it can hardly do anything. Stock markets by definition are forward looking and one person’s view of the future may sharply differ from that of the other’s. Hubris and greed would easily grip individuals, then groups and then the herd.
Also, stock markets have always attracted literate, sophisticated scamsters and such sophistication has only risen over the years. Technology may have helped the regulator to detect frauds but it has helped the unscrupulous even more. Algorithmic trading and unscrupulous activities such as those under the alleged NSE co-location scam are so technically complex that even fairly literate players may find them difficult to comprehend. Insider trading is said to remain rampant, despite elaborate set of regulations.
SEBI has often displayed energetic initiative and used some sophisticated means. Yet, often, the impression that one gets is that it is amateurs who have got caught. In recent cases, SEBI has analysed social media, WhatsApp chats and even matrimonial sites to uncover connections and conspiracies and this may sound interesting at first impression. However, they are matters that the more sophisticated may avoid but many of such ‘evidence’ may not eventually hold up in law if used as primary basis. With stakes higher than ever, the sophisticated scamster may not only get away with the fraud but, as for example in case of co-location, the victims may not even realise that they have been scammed.
Serious market disruption may be caused by the scrupulous too. A person or persons with deep pockets, whatever may be their source of funds, is still susceptible as ever to develop over-confidence in their views. Like the proverbial bull, he could flung its victim – the markets - high in the air, with yet again the public following him with admiration and hero worship, as they did with the Big Bull of 1992.
Jayant Thakur is a chartered accountant. Views are personal.
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