INDIA : Brashness Backfires for Bombay’s Favorite Broker

Here in India’s bustling financial capital--where new stocks are advertised on billboards and buses, and the latest securities applications are sold from parked cars and street kiosks--Harshad Mehta had no equal.

The brash young broker lived like a modern maharajah, with 29 cars and a 7,000-square-foot white-marble apartment overlooking the Arabian Sea. His pudgy, boyish face grinned from magazine covers and TV sets. He was, said one journalist here, “bigger than the biggest film star and more visible than the prime minister.”

The reason? Mehta’s eagerly followed stock tips and picks helped the Bombay stock market, Asia’s oldest, triple in value in one year. Somehow, everything this modern Midas touched turned to gold. The “Big Bull,” as Mehta was called, boasted that he’d made $350 million in a year. His followers made millions more.

“I was going at very high speed,” Mehta, 39, said modestly over a recent breakfast of vegetable sandwiches and green chilis in his apartment.

Until it all came crashing down. In April, Mehta was arrested and jailed for four months pending trial for bribery, fraud and other charges. Huge stock transactions were declared void. The market plunged 43%, and hundreds of thousands of people went bankrupt. And that was just the beginning.

Today, Mehta is at the center of a $1.26-billion banking and securities scandal that officials call the largest in India’s history. The fallout has threatened Prime Minister P. V. Narasimha Rao’s plans to reform India’s socialist economy and attract foreign investors.

A widening series of investigations has led to the arrest of a Cabinet minister for bribery and the resignations under fire of both the attorney general and the chief investigator of the still-growing scandal. The chairmen of several banks have been forced to resign, and one committed suicide.

Regulators say banks lent hundreds of millions of dollars to Mehta and other top traders in unsecured loans or on the basis of forged documents. In some cases, banks issued receipts for securities they did not have, and brokers used the receipts to raise money from other banks. “They created money from thin air,” said one official.

The scandal reflects the collision of India’s socialist past and its move toward a free-market future. Financial analysts say that because stiff regulations limited ways to make money legally, banks were tempted to speculate secretly in stocks. Moreover, the stock market was so poorly run and regulated that it was relatively simple to manipulate prices and profits, officials said.

“Here insider trading is the name of the game,” one prominent broker said. “And it’s legal. There’s no law against it.”

Mehta insists he broke no law. “I’ve simply been following the market practices,” he said, adding, “I thought making money in this country was not a crime.”

His philosophy, he said, was simple: “Capital creation was looked on as evil. That was the socialist approach. I was trying to say capital creation was not evil. I was trying to spread the equity cult.”

And despite his legal troubles, Mehta has few regrets. During the months he spent sleeping on a concrete floor in jail, he examined his conscience. “I realized what I was doing was right,” he said. “The method was OK. It was the speed. I tried to rush.”