Author: Ritu raj singh, Bharati Vidyapeeth New Law College Pune
To the Point
The case of Harshad Shantilal Mehta v. Custodian originated under the Special Courts (Trial of Offences Relating to Transactions in Securities) Act, 1992, passed through legislation following the 1992 securities scam. A stockbroker named Harshad Mehta was accused of manipulating the securities market with fraudulent banking instruments and misappropriated funds of various banks. The main legal issue concerned attachment, control, and distribution of properties belonging to Mehta and entities connected with him.
Under the 1992 Act, the Custodian was authorized to attach properties of those persons who were notified by the Central Government for having allegedly been involved in illegal securities transactions. One such “notified person” was Harshad Mehta. The Custodian took possession of his bank accounts, securities, movable and immovable properties for securing repayment to the banks and financial institutions affected.
Here, Mehta had challenged various actions of the Custodian on the grounds that the attachment was excessive and unreasonable, and it violated his property rights, and not all assets were derived from illegal transactions. He further contended that claims for income tax and other statutory liabilities could not be accorded automatic priority over claims of banks.
The Courts, particularly the Supreme Court, explained many legal concepts. The Court explained that on issuance of notice, all properties become immediately attached, without touching the issue whether the same are related to the scam, for an effective recovery mechanism. Similarly, the Custodian is a statutory trustee and is bound to distribute the assets in accordance with the priorities defined under the Act.
A key ruling was that claims of banks and financial institutions, being directly affected by the securities scam, receive first priority over tax authorities and other creditors. This protected the financial system and restored institutional losses. The Court held that notified persons cannot transfer or deal with their assets without permission of the Special Court thereby preventing dissipation.
The judgment also confirmed that the Special Court has exclusive jurisdiction over all civil and criminal matters relating to securities scam transactions, excluding the jurisdiction of ordinary civil courts and tax authorities, so as to ensure a unified and swift disposal of the cases. Ultimately, the Court validated the Custodian’s extensive powers but ordered that these should be transparent, reasoned, and consistent with statutory priorities. The judgment thus reinforced the legal apparatus for dealing with major financial frauds through a delicate balancing of state authority, creditors’ interests, and the rights of the accused.
Use of legal jargon
The litigation in Harshad Shantilal Mehta v. Custodian arose under the Special Courts (Trial of Offences Relating to Transactions in Securities) Act, 1992 (“1992 Act”), enacted as a remedial and regulatory statute following the 1992 securities scam. Harshad Mehta, being a “notified person” under Section 3(2), became subject to statutory attachment of all movable and immovable assets by the Custodian, a quasi-judicial authority vested with plenary supervisory control over properties traceable to alleged illegal securities transactions.
The main legal controversy related to the scope, extent and validity of attachment, priority of claims and exclusive jurisdiction of the Special Court. Mehta contended that the attachment orders passed by the Custodian were ultra vires, arbitrary and violative of proprietary rights under Article 300A. He said that only assets procured through illicit securities dealings could be brought within the “net of attachment” but personal and family properties do not fall within the statutory embargo. He further submitted that tax recovery proceedings, interest computations and penalty impositions by revenue authorities cannot override the statutory scheme of distribution.
The Supreme Court, interpreting the 1992 Act as a special law with overriding effect, held that once a person is notified, all properties stand automatically attached, irrespective of their nexus with the impugned transactions. Attachment operates in rem, precluding alienation, encumbrance, or dissipation of assets. The Custodian is thereby constituted as a statutory trustee, obliged to marshal, preserve and realise assets for equitable distribution.
The Court, while considering the question of priority, applied the doctrine of statutory priority and declared that claims of banks and financial institutions, being directly defrauded through irregular securities transactions and manipulated banking receipts, constituted a first charge over the attached assets. Income tax authorities, though statutory creditors, too, were subordinated in priority as recovery of public revenue could not defeat the compensatory object of the 1992 Act.
The Court further clarified that the Special Court has exclusive and overriding jurisdiction, ousting civil courts, tax tribunals, and other forums. All disputes “arising out of or connected with” securities transactions of notified persons must be adjudicated solely by the Special Court to ensure expeditious adjudication and avoid multiplicity of proceedings. Ultimately, the judgment reinforced the wide amplitude of powers of the Custodian, subject to the requirement to exercise them reasonably, in a bona fide manner and not arbitrarily. The ruling thus reinforced the statutory architecture for restitution, asset realisation, and systemic protection against large-scale financial frauds.
The Proof
The conclusions by the Court in Harshad Shantilal Mehta v. Custodian are founded on a clear evidentiary matrix showing large-scale irregularities relating to securities transactions during the 1992 scam. The “Proof” largely consisted of documentary evidence, banking records, securities transaction trails, and statutory notifications, all of which, taken together, established the basis for attachment and adjudication under the Special Courts Act, 1992.
The foundational proof was the Central Government Notification under Section 3(2), declaring Harshad Mehta a “notified person.” This notification, in turn, was issued after prima facie evidence from multiple investigative agencies—CBI, RBI, and JPC—showed his involvement in irregular securities dealings. The notification itself served as statutory proof triggering automatic attachment of all assets.
Banking documents produced by the authorities showed fraudulent use of Bankers’ Receipts, diversion of funds from public sector banks, and misuse of Ready Forward transactions. These records clearly showed that Mehta had arranged for transactions without corresponding securities to back them up, leaving an open trail of misappropriation.
Audit reports and inspection findings carried out by the Reserve Bank of India became conclusive proof that the investment accounts of many banks had been manipulated to show settlement mismatches, securities that were fictitious, and irregular credit flows related to Mehta-controlled entities. This established that the funds routed through his accounts were not legitimate trading gains but unauthorized bank money.
Evidence also included ledger entries, bank statements, receipts, and SEBI reports connecting Mehta with huge volumes of securities purchased that were disproportionate to the disclosed income. These records constituted proof of unexplained asset accumulation, thus justifying attachment of properties by the Custodian irrespective of direct nexus.
The CBI charge-sheets and statements of bank officials provided testimonial proof of the modus operandi-use of forged BRs, siphoning of funds, and circular trading. These statements corroborated the documentary trail and confirmed the involvement of Mehta as the principal actor.
The court treated as secondary proof supporting the quantum of recoveries required to compensate the affected banks the Custodian’s inventory of attached properties, valuation reports, and transactional summaries. The statutory scheme provided that the Court could invoke presumptive proof that all assets of a notified person were available for restitution, unless he could rebut it with credible evidence, which Mehta failed to provide. Therefore, “The Proof” comprised documented financial trails, regulatory findings, statutory notifications, and corroborative witness evidence, which taken together, justified the decisions of the Court on attachment, priority of claims, and jurisdiction of the Special Court.
Abstract
The case of Harshad Shantilal Mehta v. Custodian represents a landmark judicial decision interpreting the Special Courts (Trial of Offences Relating to Transactions in Securities) Act, 1992, that was enacted to meet the challenges posed by the unprecedented securities scam of 1992. The abstract essence of the case revolves around the legal validity of attachment, the scope of statutory powers conferred upon the Custodian, and the jurisdictional supremacy of the Special Court created under the Act.
The controversy originated when the Central Government issued a notification declaring Harshad Mehta a “notified person” under Section 3(2), thus attracting automatic statutory attachment of all movable and immovable properties. This naturally opened Pandora’s box on the fundamental questions of the reach of the Act, the nature of attached properties, rights of creditors, and the balance between state control and individual property rights. Mehta contended that this attachment was essentially very draconian in nature because only such assets which were directly related to the identified fraudulent transactions would be attachable. He further contended that peripheral or personal assets, family holdings, and properties not specifically linked with the scam should be excluded.
The Court, however, interpreted the Act to be a special legislation with overriding effect, intended to secure public interest, maintain financial discipline, and restore public confidence in the banking and securities market. It held that the attachment of assets operates in rem, extending to the entire estate of the notified person unless expressly exempted by the Special Court. This approach made certain that there would be a comprehensive pool of assets from which restitution could be made to affected banks and institutions.
A recurring theme in the judgment was the priority of claims. The Court confirmed that banks and financial institutions, which had suffered direct financial injury, had the first charge over the attached assets. Claims by income tax authorities and other creditors were subordinated, with a view to reinforcing the compensatory purpose of the statute
The Court further explained that, by virtue of Section 11, the Special Court would have exclusive jurisdiction over all civil, criminal, and incidental proceedings relating to the securities scam and thus avoid conflicts of jurisdiction for ensuring expeditious adjudication. The extent of the powers of the Custodian was held to be wide, though not untrammeled, and such exercise ought to be in conformity with the requirement of legality, non-arbitrariness, and due process. Put simply, the case crystallized the regulatory philosophy of strict oversight, asset preservation, and restitution on a priority basis in cases involving systemic fraud in the financial markets. It remains a landmark precedent in securities law, financial regulation, and statutory interpretation.
Case Laws
Canara Bank v. Nuclear Power Corporation of India Ltd. (1995)
The instant case explained the legal nature of BRs, the central subject of the Mehta scam. The Supreme Court held that BRs cannot replace actual securities unless backed by genuine transactions underlying them. This judgment reinforced the reasoning of the Court that the utilization by Mehta of forged and unsupported BRs was a fraudulent action, which justified Custodian’s actions of attachment.
A.G. Ferro Cement Ltd. v. Custodian (1997)
The Supreme Court interpreted the scope of attachment under the Special Courts Act in this case. It held that, once a person is notified, every asset—whatever be its origin—stands statutorily attached. This case fortified the principle applied in Mehta’s matter that the Custodian need not prove a direct nexus between each asset and the scam.
Fairgrowth Investments Ltd. v. Custodian (2004)
Here, the Court explained the first priority of claims emanating from Section 11 of the 1992 Act. It explained that banks and financial institutions affected by the scam enjoy first priority, even over and above tax authorities. This directly governed the distribution of Mehta’s attached assets and became a cornerstone precedent in scam-related restitution.
Hitesh Mehta v. Union of India (1997)
This case involved the family members of Harshad Mehta challenging the attachment of personal and joint properties. The Court held that the presumption of taint, in the case of the properties of a notified person, applies in case there is no rebuttal by way of credible proof. The judgment thus perpetuated the position taken in Mehta’s own case on the width of the sweep of attachment.
Conclusion
The decision in Harshad Shantilal Mehta v. Custodian stands as a definitive judicial affirmation of the governance framework created under the Special Courts (Trial of Offences Relating to Transactions in Securities) Act, 1992. The conclusion drawn by the Court is a balanced but firm approach in an attempt to tackle systemic financial fraud, retain people’s confidence in banking institutions, and facilitate fair restitution. The judgment has emphasized the fact that the 1992 Act constitutes special, overriding, and remedial legislation in response to extraordinary financial mischief and serving extraordinary statutory protection.
The Court held that the moment a person is notified under Section 3(2), there is an automatic, complete attachment of all assets—movable and immovable—belonging to the notified person. No asset is excluded merely because no direct link has been established between such asset and fraudulent transactions. The statutory presumption is operative to create a single pool of assets to prevent dissipation, concealment, or diversion during investigation and restitution, pending determination of actual ownership and liability. This was held to be constitutionally valid, proportionate, and necessary in cases involving financial crimes of unprecedented proportions
The Court also held that the priority of claims shall necessarily be in accordance with Section 11 of the Act. The victimised banks and financial institutions, having directly incurred a pecuniary loss, would be at the top in the rung of priority. The claims of the Income Tax Department too do not precede the compensatory rights of the defrauded bank. This is a policy choice to restore financial stability with less rigidity in the enforcement of revenue claims.
The judgment also drew attention to the fact that the Special Court has exclusive jurisdiction to try all civil, criminal, incidental, and consequential matters arising from the scam. This exclusivity ensures the avoidance of a conflict of jurisdiction, multiplicity of litigation, and facilitatesexpeditious adjudication. Centrally consolidating all disputes, the Court enhanced the integrity and speed of this recovery process.
FAQs
Who was Harshad Shantilal Mehta, and why was he involved in this case?
Harshad Mehta was a stock broker involved in the 1992 securities scam. He had been accused of manipulating the banking–securities market through fraudulent Bankers’ Receipts and irregular Ready Forward transactions. He became a “notified person” under the Special Courts Act, thereby making his assets subject to statutory attachment.
What is the Special Courts Act, 1992, and why is it important here?
The Act was enacted to specifically investigate, prosecute, and recover funds relating to securities scam offenses. It created Special Courts and a Custodian with extraordinary powers to attach, control, and distribute assets of persons involved in the scam. This Act provides the legal framework for Mehta’s case.
What is a “notified person”?
A “notified person” means a person declared by the Central Government under Section 3(2) of the Act as being connected with securities scam transactions. Once notified, all properties of that person automatically stand attached.
Why were Harshad Mehta’s assets attached?
His assets were attached on the ground that the investigation had revealed prima facie involvement in fraudulent securities transactions. The attachment ensured that assets could not be transferred or concealed and were preserved for repayment to affected banks.
Are only scam-related properties attached?
No. The Court held that all properties—whether or not directly linked with the scam—get attached once a person is notified. The underlying reasoning is to consolidate a pool of assets for restitution unless the person notified proves certain properties are not linked.
Who has priority in the recovery of money over attached properties?
First priority under Section 11 goes to banks and financial institutions defrauded in the scam. Income tax authorities and other creditors come later. This is in order to ensure that direct victims of financial loss are compensated first.
Can ordinary civil courts or tax authorities intervene?
No. The Special Court has exclusive jurisdiction over all matters relating to the scam—civil, criminal, and ancillary. This avoids conflicting rulings and speeds up adjudication.
8 What powers does the Custodian have? It enables the Custodian to attach, administer, conserve, and sell properties belonging to notified persons. A Custodian is a statutory trustee and operates within the priority scheme laid down by law under the guidance of the courts.
