Author – Sara Paresh Shah, University of Mumbai Thane sub-Campus

To the points

Harshad Mehta was an Indian stockbroker and businessman who carried out a major securities fraud in 1992, causing the Indian stock market to collapse.

Harshad Mehta, a stockbroker known as the “Big Bull,” was the mastermind behind India’s 1992 Securities Scam. He illegally took money from banks by using fake Bank Receipts and manipulated the stock market. The scam shook India’s financial system, revealed serious gaps in banking practices, caused a huge stock market crash, and led to important reforms like giving more power to SEBI, setting up NSDL, and modernizing trading methods.

ABSTRACT

Harshad Mehta was a well-known Indian stockbroker nicknamed the “Big Bull of Dalal Street” for pushing share prices up in the early 1990s. In 1992, he became involved in one of India’s largest financial scams by exploiting gaps in the banking system. He used fake Bank Receipts (BRs) to illegally borrow huge sums from banks. Instead of using the money to buy government securities, he funneled it into the stock market, artificially inflating share prices and earning huge profits. Once the fraud came to light, the stock market crashed, many investors lost money, and the government launched significant financial reforms. Mehta’s scam exposed serious flaws in India’s banking and financial systems. He passed away in 2001 while facing several legal cases.

USE OF LEGAL JARGON

Fraud – Deceiving banks to gain money illegally. Forgery – Making false Bank Receipts (BRs).

Misappropriation of funds – The money borrowed from banks was used in the stock market instead of buying government securities.

Cheating – Banks were misled into believing the transactions were legitimate. Criminal Breach of Trust – The funds borrowed were not used for their intended purpose.

Insider Trading – Mehta’s access and influence helped him benefit unfairly.

Violation of SEBI guidelines – Mehta’s transactions went beyond what was allowed.

When the scam came to light, it caused the entire stock market to crash.

THE PROOF

The Harshad Mehta securities scam took place during 1991–1992 and revealed one of the most significant financial frauds in India’s history. Mehta, a stockbroker, manipulated the stock market by unlawfully diverting funds from several banks through the use of fake Bank Receipts (BRs) and by exploiting weaknesses in Ready Forward (RF) securities transactions.

Several major banks, including the State Bank of India (SBI), National Housing Bank (NHB), UCO Bank, Andhra Bank, and Bank of Karad, were deceived through forged documents created by Mehta and his associates, which included brokers like Hiten Dalal and Bhupen Dalal.

Instead of utilizing the borrowed funds to invest in government securities as mandated, Mehta channeled thousands of crores of rupees into the stock market. This caused an artificial increase in the prices of particular shares such as Associated Cement Company (ACC), Sterlite Industries, Videocon, and Tata Iron & Steel.

When the fraudulent activities came to light in April 1992, the stock market experienced a severe crash. This collapse led to substantial financial losses for the banks involved and wiped out considerable investor wealth. The fallout triggered a series of criminal, civil, and regulatory actions against Mehta and others involved in the scam.

Key issues raised –

Did Harshad Mehta illegally divert bank funds using fake Bank Receipts to manipulate the stock market?

Did the banks fail to follow mandatory RBI guidelines under the Public Debt Office (PDO) system and lack proper internal controls?

Did these transactions amount to crimes like cheating, conspiracy, breach of trust, and forgery as defined under the Indian Penal Code?

Did Mehta’s actions violate laws such as the SEBI Act of 1992 and the Banking Regulation Act of 1949?

Is Harshad Mehta solely responsible for repaying the money, or do the banks and other intermediaries involved also share some liability?

The legal proceedings related to the 1992 securities scam,

Special Court under the Trial of Offences Relating to Transactions in Securities Act, 1992

A special court was set up specifically to handle cases connected to this scam. The bench initially included Justice S.N. Variava, followed by Justice M.S. Rane, and later Justice A.M. Khanwilkar handled related matters.

Key Findings of the Special Court:

• Harshad Mehta was found criminally responsible for diverting funds and cheating banks.
• The Bank Receipts (BRs) issued by Bank of Karad (BoK) and Metropolitan Co-operative Bank were declared to be fake and fraudulent.
• Mehta was convicted under multiple sections of the Indian Penal Code (IPC), including Sections 420 (cheating), 467 (forgery), 468 (forgery for cheating), 471 (using forged documents), 409 (criminal breach of trust), and 120B (criminal conspiracy).
• Civil liability was established, confirming Mehta’s responsibility to repay thousands of crores of rupees.
• The court ordered that Mehta’s assets be seized and sold to recover the banks’ losses.

Supreme Court and High Court Proceedings

While there was no single landmark “Harshad Mehta Judgment” from the Supreme Court, various related cases were heard and decided.

Key Judges Involved in Supreme Court Cases:

Justice S.P. Bharucha, Justice B.N. Kirpal, Justice Kuldip Singh, Justice R.M. Sahai, and Justice S.C. Agrawal sat on benches hearing appeals concerning the National Housing Bank (NHB), State Bank of India (SBI), brokers, and issues regarding liability for the fake BRs.

Important Observations Made by the Courts:

• The scam exposed serious systemic failures in the banking sector.
• It highlighted the lack of strong, effective securities regulation at the time.
• The Supreme Court directed SEBI to tighten oversight and controls over the stock market.
• RBI was instructed to improve its supervisory guidelines and strengthen the Public Debt Office (PDO) system.

Final Outcome:

Harshad Mehta was arrested and spent several periods in custody. More than 70 criminal cases were filed against him.

SEBI imposed a lifetime ban on him from trading securities. He faced massive tax demands as well.

Mehta died in prison in December 2001 while still undergoing trial. Lawyers Involved in the Case:

For the Prosecution / Government / Banks

• Goolam E. Vahanvati, Advocate General of Maharashtra, argued in the Special Court.
• R.A. Sharma, lead counsel for the Central Bureau of Investigation (CBI).
• R.K. Dewan, prosecutor for banking-related cases.
• K.K. Singhvi, represented the Reserve Bank of India (RBI) in some associated matters.
• T.R. Andhyarujina, appeared in related banking proceedings. For Harshad Mehta
• Ram Jethmalani, Senior Advocate, served as the lead counsel.
• Mahesh Jethmalani, participated in several proceedings.
• S.D. Israni, specialist in securities law.
• Yogesh Thakkar, represented Mehta’s family in civil cases.

This comprehensive legal process helped uncover the depth of the scam, led to accountability, and contributed to reforms designed to prevent similar frauds in the future.

CASE LAWS

Related case laws

1. Standard Chartered Bank v. State of Maharashtra (2016)
2. Ketan Parekh Scam Case (2001); CBI v. Ketan Parekh
3. Punjab National Bank Fraud Case; CBI v. Nirav Modi & Mehul Choksi (2018)
4. National Housing Bank v. ANZ Grindlays Bank (1997)
5. SEBI v. Ramalinga Raju (Satyam Scam, 2009)

CONCLUSION

The Harshad Mehta scam of 1992 marked a significant turning point in India’s financial history, revealing serious weaknesses in the stock market and banking systems. Mehta manipulated fictitious bank receipts to divert large sums of money from public sector banks, which he used to artificially inflate stock prices on the Bombay Stock Exchange. When the scam was uncovered, the stock market crashed, causing heavy losses for investors and damaging public trust. The State of Maharashtra, along with investigative agencies like the CBI, prosecuted Mehta under various sections of the Indian Penal Code for cheating, forgery, and criminal conspiracy, as well as violations of banking laws, leading to his conviction and imprisonment.

The case exposed the dangers of inadequate regulation and led to important reforms. The Securities and Exchange Board of India (SEBI) was given stronger powers to regulate the market, steps were taken to introduce electronic share transactions to prevent fraud, and settlement systems were overhauled. The inquiry into the scam also recommended greater transparency in bank transactions and tighter financial controls to prevent similar abuses.

The Harshad Mehta case stands as a lasting reminder of the importance of strong financial oversight and ethical conduct in markets. It demonstrated the necessity of holding individuals accountable for financial crimes and led to changes that have helped make India’s financial markets more secure and reliable. These reforms continue to protect investors and support market stability today.

FAQs

1. What was the Harshad Mehta Scam?

Harshad Mehta used fake bank receipts to borrow money from banks and buy stocks, pushing up prices artificially.

2. How did the scam get exposed?

A bank audit found missing funds, and journalist Sucheta Dalal reported it, leading to a market crash.

3. Which laws were violated in the scam?

Sections of the Indian Penal Code (420, 467, 120B), the Banking Regulation Act, 1949, and securities laws were violated.

4. Action taken against Harshad Mehta?

Harshad Mehta was arrested by the CBI and charged in more than 70 criminal cases related to fraud, forgery, and cheating in the 1992 securities scam. SEBI banned him from trading for life, and his assets were seized to help repay the money owed to banks. He stayed under trial until he passed away in 2001.

5. Who investigated the case?

The case was investigated by CBI and RBI with the trials in the Maharashtra Court.