Twenty years ago, India was rocked by the first great post-liberalisation scandal. The questioning of Harshad Mehta in April 1992, and his arrest in November that year, had two major effects: it held back the development of India’s bond market, and it pushed India towards major regulatory reform. Harshad Mehta and his associates were working an ingeniously simple scheme; they would siphon off funds from the inter-bank bond market to the stock market, where chosen shares would find their values being pushed up. He would sell high, and then the money that had inflated the share’s value would be returned to the lending banks. However, the moment the shares stopped increasing in value, banks were left holding receipts that had sharply lost value.
Nobody came off looking very good. The Securities and Exchange Board of India was still young at that point. The Mehta scandal was instrumental in the push to give it the powers that a good market regulator needs. However, a degree of paranoia entered the minds of even the most fervent liberalisers, resulting in the persistence of controls on the bond market. All intermediaries were assumed to be Mehta-style manipulators, and their role was discouraged. The liquidity-enhancing value of legalising some transactions was weighed against the constant fear that their manipulation would become “standard market practice”, in the phrase made famous by the Mehta investigation. Today, when monetary policy is struggling to work, when the management of rapidly expanding government debt is becoming a problem, the absence of a sufficiently liquid bond market is a continuing problem for India. Harshad Mehta, who died in jail in 2001, still casts a long shadow on Indian finance.
It is important to note, however, that some things have indeed changed. Back when Harshad Mehta was dominating the Bombay Stock Exchange, pushing up the value of stocks like ACC and Hindalco, adoring profiles called him the “Big Bull”, dwelling on his lavish lifestyle. He became one of the early stars of liberalisation, unabashedly consumerist — almost by his very existence a rejection of the greying Nehruvian licence-raj era. The social and cultural implications of his fall, therefore, should not be underestimated. In spite of his disgrace and exile from the BSE, there was very little doubt that his having flagrantly violated the rules — successfully, for a while — was no bar to his continued celebration by a country still chafing from excessive restrictions and rules. That “so what?” attitude so visible in India’s aggressive early-90s middle class will hardly have reassured those reforming regulation of the maturity of market participants. But, perhaps, the biggest thing that has changed in the 20 years since Harshad Mehta’s meteoric rise and fall is that attitude. Today, there is greater awareness of rules and the need to follow them. This is visible everywhere — in the way corruption and crony capitalism are questioned and in the demands that companies and individuals not be allowed to get away with bending rules because they are well-connected or wealthy. The question that India’s reformers must now ask is: should that old assumption about the immaturity of India’s market participants be junked? And, if so, surely reform of the bond market is overdue.
