Weigh the 'con'fidence before investing
by Vivek Kaul/DNA Money
Zara hatke, zara bachke
Ye hai Bambai, meri jaan
— Lyrics by Majrooh Sultanpuri from the movie CID
From Shree 420, almost 50 years ago to the recent Bluffmaster, financial frauds have been a part of the scripts of Hindi films since time immemorial. Movies, they say, are a reflection of real life. In Mumbai, financial frauds never really stop. And so filmmakers never stop making movies on the same.
The earliest recorded financial fraud in this city was probably the reclamation companies’ scam. The first land reclamation company, the Backbay Reclamation Company, was formed in 1864 and was promoted by Premchand Royachand. The logic, reclaiming land from the sea, was the only way to tackle the growing congestion in the city.
The shares of this company were subscribed at a premium of Rs 21,500 on a face value of Rs 5,000. The city traders were flush with money they had made through the unprecedented rise in the price of cotton. This money went into speculating in the shares of Backbay and other reclmation companies that were floated after its success.
Royachand himself floated a number of such companies. The shares of these companies were sold at a high premium. The share prices of these companies were rigged by their promoters. At its peak, the share price of Backbay was at Rs 55,000 — a record that probably still stands. The investors saw this as an opportunity to earn quick bucks and thus bought these highly overvalued shares.
So, the investors who were entering the stock market later were effectively paying for the profits that the early investors had made.
Due to a civil war in America, Britain had been sourcing cotton from India. This led to a rise in cotton prices. The civil war came to an end and the news reached Mumbai on May 1, 1865. Britain would go back to sourcing cotton from America.
This created a panic in the market and the investors rushed to sell off the shares of the reclamation companies, only to find that there were no buyers.
Almost 130 years later, Harshad Mehta repeated the same thing. Mehta would buy stocks at rock bottom prices. He would then rig up the prices with the help of the spromoters of a few companies and certain close cronies. He would keep buying shares to push up their prices. After a certain price level had been reached, he would sell out.
Towards the turn of the century, Ketan Parekh operated in a similar manner. He bought stocks when he felt their prices were fairly low. He continuously bought and sold shares, trying to drive up the price of the share. When the price had gone up sufficiently, the shares were pledged as collateral with banks to raise more money.
This money would find its way back to the stockmarket and be used for speculation to drive up prices of stocks to higher levels. When Parekh felt that the price had peaked, he would book profits and get out of the stock. And as had happened in Mehta’s case, investors who entered the market later paid for the profits that Parekh made.
In late 90s Ashok Sheregar and Sanjay Agarwal of Hometrade hoodwinked investors with their investment schemes. All these frauds had one thing in common— the investors who entered these schemes later helped redeem the investment of the earlier investors.
The early investors correctly believed that some greater fools could be depended on to enter the scheme after they had and this would give them handsome returns on their investments. Such a type of fraud is known as a Ponzi scheme.
And given the fact that Mumbai has seen it happening over the years makes it clear as to why they keep repeating that French phrase “Plus ca change, plus que c’est la meme chose” (the more things change the more they remain the same).
