From Raj to Rafale 2 : The Thug of Bombay

EVERY scandal needs a villain, rather a hero-turned-rogue. In fact, what a scintillating scam requires is an anti-hero, who combines the traits of an idol and a scoundrel. The Securities Scam of the early 1990s had Harshad Mehta. In the 1950s, another stock-speculator, Haridas Mundhra defrauded the state-owned LIC. Sanjay Gandhi, and his brother, Rajiv, were involved in the Maruti Scandal and Bofors Bribes, respectively. In recent times, Nirav Modi engineered the Punjab National Bank swindle.

In the 1860s, the man behind possibly the country’s first multi-market rip-off was Bombay’s Roychand Premchand. With his fingers dug deep in several markets – commodities, bullion, stocks, real estate, and banking – his rise and fall over a decade marked the commercial rise of Bombay, and its near-ruination. He was initially the God of Mammon. He was indicted as a demon, and his stature was reduced to that of Goddess Penia (Poverty). But, like a Phoenix, he rose from the ashes of his previous riches.

A speculator by instinct, Premchand was a master manipulator of markets. He used money to gain immense power. By 1865, he controlled Bombay. He influenced the British policy-makers, pressurised businessmen, controlled commodity and stock traders and, like a Pied Piper of Paper Money, swayed the masses to massive madness. His word was the law in the money markets; his actions were cues for blind following. He led people to an ocean of promises, in which they, including Premchand, drowned. According to one of his biographers, he was young (early 30s in 1860s), dapper, devout Jain, fair-complexion, “lithe of limb and sweet of temper”, and “carried a most clever financial head on his shoulders”. Even the Bank of Bombay Commission, which censured and condemned him, admitted that Premchand was “much trusted and knew everybody”, and became the “great dispenser of allotments (patronage), which he judiciously distributed” to bankers, promoters, friends, even policy-makers.

Once, when Premchand applied for a Rs. 25 lakh loan, he offered jewels as securities, and maintained that they were worth Rs. 15-20 lakh… Later, an auctioneer and two “large and wellknown” jewellers insisted that their worth was only around Rs. 5 lakh

The journey began with intense speculation in commodities – legal deals in cotton, and illegal ones in opium, which was exported to China. However, the wealth multiplied because of the events thousands of miles away from Bombay. The American Civil War, which started in April 1861, pitched the slave-oriented and cotton exports-based southern states against the northern ones in the US. It immediately cut off the supply of cotton to the textile mills in Britain’s Lancashire and Manchester areas.

SHOCKED by the snap in supplies, the British mills sought alternative sources. India, despite being a producer of low-quality short-staple cotton, emerged as a critical supplier. As Dinshaw Wacha wrote, “King Cotton was the great deity (in India) at whose shrine… the merchant and the trader, the rich and the poor, high and low, master and servant, all paid pooja.” Risk-takers like Premchand became super-rich Richie Richs overnight. Cotton prices jumped by 5-8 times, and exports to Britain vaulted by 8-9 times.

Even the poor took part in this fantastical creation of wealth. Wacha, who observed the events closely, felt that anyone who had a few hundred rupees “was anxious to buy the raw material and dispose it off at a profit locally or ship it”. Such was the mania that even old cotton mattresses were ripped apart to sell the cotton; new beds were made out of coir fibre. People pounced upon “any kind of cotton, even rubbish”.

Rising Indian exports had a huge impact on the bullion market. Britain paid its colony either in gold or silver. Bullion imports shot up. Between 1861 and 1865, India received over Rs. 30.75 crore worth of gold, and over Rs. 54 crore worth of silver. Of the combined total of nearly Rs. 85 crore, the share of the Bombay Presidency was nearly Rs. 52 crore, or over 61 percent. Despite this, there was a huge shortage of currency.

The reason was simple. Although paper notes began to be issued in 1862, their use was limited and restricted. The majority preferred payment in silver coins and gold. Both the yellow and white metals were prone to do the vanishing trick and go out of circulation, as people hoarded them. An observer wrote that the bullion was immediately “forwarded inland, where it disappeared mostly underground or appeared visibly in ornaments and domestic utensils, and even wheel-tyres”.

A shortage of silver coins, a silver famine so to say, alarmed the mercantile community and policy-makers. The British business community wrote to Lord John Lawrence, Viceroy and Governor General, that the silver shortage in the country “could derange, if not actually destroy, the silver currency of all other nations”. The logic: America had exhausted its surplus, French had no metal to spare, and global production sources seemed limited.

PREMCHAND’S personal pot of gold kept overflowing because of increased speculation in both cotton and bullion. The profits spurred him to take more risks, and expand to stocks. With wealth came unlimited influence and power in political, business, and social circles. He became the ultimate powerbroker in Bombay. His writ reigned supreme, and he was the wizard who commandeered the widening and ever-expansive unholy nexus between banks, financial institutions, and real estate companies.

He devised, fuelled, and accelerated the speculative modus operandi, which sent the stock markets soaring to stratospheric heights. “First came the public ‘floatation’ of banks, followed by the launching of ‘financial companies’. These in turn were followed by even more formidable and ambitious class of concerns known as khado, or (land) reclamation companies,” wrote an observer. The nexus was interconnected and omnipresent – most of the banks floated their own financial concerns, which then promoted the real estate entities.

A stock obsession became widespread as the banks gave loans to surge the buying pressure in the shares of their financial companies, and the two then deliberately bulled the rise in the prices of the land reclamation firms. What aided and abetted the process were “time-bargain” sales, i.e. transactions based on forward delivery of the shares at a certain fixed future date. It was an early form of futures trading.

Premchand’s personal pot of gold kept overflowing because of increased speculation in both cotton and bullion. The profits spurred him to take more risks, and expand to stocks. With wealth came unlimited influence and power in political, business, and social circles

It created a gigantic multiplier effect, an early form of over-leveraged sales. A would future-contract to buy shares in C from B, say five shares at a value of Rs. 10,000 per share to be delivered after a few months. Since, there was a bull market in progress, and stock prices rose every day, A would immediately sell the same shares to D at higher prices. Then A would use the paper profits it earned to agree to buy more shares in C, or some other company, which too would be promptly sold to E.

Both D and E too would agree to sell their shares at further future dates at higher prices. They would use the yet-to-be-earned money to buy more shares.

The profitable cycle continued as long as the prices of the several shares kept going up, and so they did in the first half of the 1860s. Everyone made money in the bargain, and they were pure-play “gambling transactions”. All the investments and profits were in up in the air, and only on paper. By the time of the actual deliveries of the shares, they were sold 10-20-30 times by the various buyers, who bought more.

As Wacha noted, “Imagine the sale of the two identical shares to half-a-dozen persons or institutions. Imagine that fifty financial concerns did the same, and the reader will get some idea not only of the colossal character of the fictitious paper transactions conducted by the several mushroom concerns, but of the mad folly of the men of the times who rushed into the vortex of the feverish speculation to shake the pagoda-like tree and enrich themselves beyond the dreams of avarice.” Hence, the market value of the shares zoomed. Companies that were a few weeks and few months old were quoted at 5-10 times their face values.

Typical of most bull markets is the craze for new issues, or the passion to buy shares of newly-formed firms. As the existing listed stocks are over-priced, though their prices keep zooming, people tend to flock to buy fresh shares, which too are issued at premiums, but whose list prices are invariably higher than those of the initial offerings. In 1865, 25 banks, 39 financial associations, seven land and reclamation firms, and 30 miscellaneous ones had a total paid-up capital of nearly Rs. 30 crore. The overall premium paid on them was almost Rs. 38 crore.

PREMCHAND was at the epicentre of this frenzy. He held the power to muscle the banks and financial associations to lend money to himself, father, Deepchund, friends, loyalists, supporters, and sundry others. The money was used to buy and sell shares, and mostly the same shares sold several times over. He promoted some of the companies. When he wasn’t a part-owner of a company, he either received a large allotment of shares in it, or was consulted on who should be given the shares. The Bank of Bombay Commission said that “his name and influence were considered essential to the safe launching of the ephemeral schemes of the day”.

Wacha felt that Premchand was the “very incarnation of a hundred Mammons, rolled into one. He was the one Chemiagar (Master Alchemist), who could turn dust into the yellow metal, the unrivalled magician, who could by his magic wand transmute the sands of Back Bay (reclamation) into solid nuggets of gold where with to pave the way to Paradise.” Wherever you went in the city of Bombay, there was a singular cry from morning until evening, “There is but one Golden God and his prophet is Premchand. Premchand, Premchand, Premchand!”

Let’s take a look at specifics. For example, Premchand, who was a director in the Bank of Bombay, an Imperial bank, obtained huge loans from it “from time to time for himself, the amount culminating in a debt of (Rs) 42 lakh and upwards… obtained loans for other persons, who applied the money in the purchase of shares for himself to the amount of Rs. 66,90,000 of which Rs. 43,45,478 has been irrecoverably lost. He also procured from the Bank, for his partners in speculation and for his own purposes Rs. 29,58,938 of which Rs. 13,02,408 have never been repaid.”

MOST of these loans, including a debt of nearly Rs. 20 lakh to Asiatic Banking Corporation, which was promoted by the bank, were against worthless and over-inflated securities, or without collateral and against “personal security, or “promissory note” signed by the borrowers. The first of such loans was given to Roychand Deepchand, “the broker of the bank and the father of Roychand Premchand”. Such advances became the rule, rather than the exception, as bankers turned imprudent.

Even when adequate collateral was insisted upon, the borrower’s word was taken as the gospel truth. Once, when Premchand applied for a Rs. 25 lakh loan, he offered jewels as securities, and maintained that they were worth Rs. 15-20 lakh. This assessment was produced in the form of a statement written with a pencil. Later, an auctioneer and two “large and well-known” jewellers insisted that their worth was only around Rs. 5 lakh.

There were several reasons why the Bank of Bombay acted like Premchand’s personal bank. The latter was a renowned director in the bank, and had a towering stature in the city’s financial circles, which was backed by ever-growing wealth. He had followers, loyalists and supporters in all the sections of the society, including the masses. Who had the gall to refuse Premchand when he put in a request?

However, there was an additional, and an insidious, motivation for the senior-most bank managers. Premchand procured attractive allotment of shares of upcoming companies for the managers, and along with his father, loaned them the money to buy the stock. He also “bought and sold shares” for them, “entered into joint speculation”, and “never charged” them “a rupee for brokerage”. Hence, the “bank became Premchand’s”.

All this money that was floating around was overleveraged, as explained earlier, in several ways to speculate on shares, especially those of the land reclamation companies. Most of this was at the behest and direction of Premchand, his family, friends, and other supporters. As the prices of the stocks zoomed, the public got attracted to them, like bees to honey. Premchand possessed “an Open Sesame, which might have been envied by the romantic Ali Baba of Arabian Nights’ tale”.

Take the case of Bombay Reclamation Company, which was promoted by Asiatic Banking which, in turn, was promoted by Bank of Bombay. Shortage of funds with the Indian government, and the refusal of the Railways to take up the project forced the Bombay government to offer the Back Bay reclamation “concession” to a private firm. The government even refused to have a stake in the real estate entity, popularly known as Back Bay.

When it received the concession in 1864, Back Bay’ paid-up capital was Rs. 1 crore, which comprised 2,000 shares on which Rs. 5,000 of the face value of Rs. 10,000 was paid. It had another Rs. 1 crore in the premium account, which was collected through the sale of 400 shares that were originally reserved for the government, but were sold to the public at higher prices through an auction. The government transferred land – Elephanta Island (140 acre) and Andheri Hill (66 acre) – free of charge to Back Bay.

The deal was simple: the company had to reclaim 1,500 acre, and hand over 300 acre or a fifth of the total, free of charge to the government. Later, thanks to the delays because of the financial crisis and other external factors, the figures were respectively reduced to 600 and 120 acres. The period for the completion of the project was also extended. At its peak, within a few months of the “concession”, the Back Bay stock traded at Rs. 55,000, or 11 times the paid-up value of Rs. 5,000.

IN the end, it didn’t matter. Everyone, along with their reputation, was deluged. The crash came unexpectedly; no one was prepared for it. And, as the boom had begun, the roots of the downward slide lay thousands of miles away – in the US. The whole world thought that the American Civil War would be a long-drawn-out one. In May 1865, or after four years, it ended abruptly when General Robert E Lee of the Confederacy (Southern States) surrendered to General Ulysses S Grant of the Union (Northern States, which was followed by several similar surrenders.

A speculator by instinct, Premchand was a master manipulator of markets… By 1865, he controlled Bombay. He influenced the British policy-makers, pressurised businessmen, controlled commodity and stock traders and, like a Pied Piper of Paper Money, swayed the masses to massive madness

King Cotton was the first to be beheaded as prices slumped. Large traders, including BH Cama, the largest shipper of cotton, were unable meet the “re-drafts from banks” against their consignments. The total loss in the cotton market was estimated at Rs. 3 crore, and the news “spread like wildfire in the city”. Panic gripped the stock market, and share prices, even of the so-called gilt-edged and attractive securities, fell every day.

The bottom of the trough, or the nadir, was witnessed on July 1, 1865. This was the day when hundreds of the so-called “time-bargain” with aggregate value of Rs. 7-8 crore were due for delivery. Unfortunately, prices had tumbled to an extent that there were no buyers. The Back Bay time-bargains, which were earlier sold for delivery at Rs. 55,000, were unsellable at even the paid-up value of Rs. 5,000. Bank of Bombay shares, whose price tag was Rs. 2,900, could not be sold for Rs. 500 each.

“Merchant after merchant and trader after trader failed, some vesting their estates and effects in trustees under deeds of private composition, and some filing their schedules in the insolvency court,” wrote Wacha. The ‘Black Day’, July 1, became the end of the road for the poor, middle class, and even the high-flyers and elite. No one was spared. Everyone lost money, and most their shirts and trousers.
Roychand Premchand was bankrupt.

Postscript: Shockingly, there emerged a few beneficiaries of the crash and hundreds of insolvencies and bankruptcies.

• Blackmailers, who threatened and verbally abused the directors of insolvent firms, were quietly paid so that the insolvency procedures went on smoothly. Such blackmailers went to stormy shareholders’ meetings, and hurled chairs, books of accounts, and other papers at the directors and managers to show their strength.

• Machiavellian promoters inflated their insolvencies by showing that they had purchased the shares at much-higher prices and, hence, incurred higher-than-actual losses. Since insolvencies affected at “mere fraction of a rupee”, say four anna, or even less, to 16 anna, the higher losses helped these fraudulent promoters.

• In the case of Back Bay, the government got “all the land for nothing”, and this was “in consideration of releasing the Company from all its engagements”. The shareholders got back Rs. 2,361 per share, on which they paid Rs. 5,200 (including Rs. 200 as separate call money), but which quoted, some time not too long ago, at Rs. 55,000.

The bankrupt Premchand rebuilt his empire, and his wealth. But this time, he didn’t behave like a financial emperor; he was more involved in philanthropic and community services.