HARSHAD Mehta 1992 Scam

Author- Aditya Sharma, 5th year Law student of Chandigarh University

Introduction

This Harshad Mehta 1992 financial fraud scam is considered the biggest financial scam in the history of India. Some of them are in favour of this scam and mostly are against this scam. Those who are in favour are those whose lives Harshad Mehta have made through this scam, and this scam has also taken the lives of the people who could not cope with the loss in the financial market. In the 90s, he was considered a king of the financial market as he used to find the loopholes in the system and used them in a malafide way to perform this financial scam on a large scale. He came up with only 40 rupees in his pocket when he first visited Mumbai with his family to settle here. He belonged to a lower-middle-class family, his father worked in the handloom industry, and he was the eldest of his parents with one younger brother. He recklessly manipulated the stock market and gained profit in a fraudulent way. He became a renowned stockbroker in a very short period and used the stock market for his own use. His strategy was to give forged security as collateral to the bank and use that money in buying big stocks of the company. Also, he was involved in manipulating the prices of shares of companies through insider trading. This created a hike in the price of shares of the company, and he sold the shares at a high price in the market. He was known as the big bull in the market as he used to uplift the market through his fraudulent activities, and he was the reason for the boom in the Indian stock market. However, his assets were increasing, as was his wealth. In 1992, his activity of doing this fraudulent activity came to light when SBI discovered that the bank receipt given to SBI as collateral was fake and that the bank receipt was around 500 crore rupees. This created a lot of ruckus in the market; many investors backed out and pulled out their investments after this news came to light, resulting in a drastic fall in the prices. This Harshad Mehta scam lifted the Indian market and suggested to the Indian government to regulate and bring out some changes in the administration and stock market to avoid further scams like this. With this scam, SEBI (Securities and Exchange Board of India) got statutory body rights as earlier SEBI was only a subsidiary of RBI. The National Stock Exchange was also formed amid this scam and got its own regulations but under SEBI. Mehta had his research and asset management firm named Grow More. He held many shares in ACC (Associated Cement Company). He pulled the prices of this company so high in the 90s market that after the crash of the market, people could not handle the loss. He was involved in market manipulation, exploiting the banking system. He was convicted of several crimes, and he died of a heart attack while he was in police custody.

Insight View of This Scam

As we all know, middlemen considered Harshad Mehta as a god as due to his fraudulent activities, he made up the lives of middlemen through his profits, and his illegitimate ideas were famous in the stock market. It is the biggest financial scam in the history of India, and its impact can be felt today also in the stock market. The scam recalled several loopholes or weaknesses in the banking system or financial market. At that time, there were no stricter laws that governed monetary transactions. Locating a minimum transaction required a huge amount of time and machinery. The scam is very important in today’s time as it led to several reforms in the stock market and the introduction of several statutory bodies in India that regulate the financial market in a positive way and avoid such kinds of scams. Several reforms include the introduction of SEBI as a regulatory body and the introduction of the National Stock Exchange, which strengthened banking regulation to keep a detailed check on transactions related to high-volume transactions. This scam suggested more transparency and accountability in the financial market. It also showed the ethical way of dealing in the Indian banking system or financial market through the guidelines of SEBI and RBI. As Harshad Mehta became a renowned broker in a very short period, his wealth doubled easily as he was using the system and tweaking the loopholes in the financial market as per his convenience. As India was leading toward a financial crisis in 1992, Mehta came forward as a breaker in the system and used the flaws of the system to boost the market. His first mistake came to light in 1992 when he defrauded the largest bank in the country, the State Bank of India, by giving a fraudulent bank receipt to the bank as collateral, and the amount was approximately around 500 crore rupees. This was first published by the reporter Sucheta Dalal, a column reporter in the Times of India. At that time, she wrote much about the wealthiest persons of that time. Her role in exposing this scam is quite big as she used to gather facts through her sources and publish them in her column in the Times of India. After this reading, people changed their perspective about the Indian financial market and became a little conscious about investing in the stock market, as people were afraid of the losses in the market. This whole scam is a wake-up call for investors, the government, and the regulatory bodies as well to make some strict reforms in the market to prevent such scams in the future. This scam served as a reminder for ethical conduct in the financial market and dealing in the stock market.

Impact and Aftermath of the Scam

As we all know, the details of this scam were exposed by the journalist Sucheta Dalal, who wrote several articles on Harshad Mehta and his business dealings. In April 1992, she exposed him by publishing how he manipulated the banking system for approximately 4000 crore rupees. This news caused a market crash, and many investors backed out of the business, leading to huge losses. The scam led to the arrest of Harshad Mehta, and several charges were framed against him, including forgery, cheating, fraud, and criminal conspiracy. While he was in custody, he made a very controversial statement that he bribed the Prime Minister of India, Mr. P.V. Narasimha Rao, during the election times. This scam affected the financial sector in a negative way, and its effects can still be seen today. It showed the flaws in the financial market and the mis regulation in banks. In response to this, the government of India made several reforms and introduced regulatory bodies to keep a check on these kinds of frauds and inform RBI in any case of discrepancy in the banking system. The Securities and Exchange Board of India (SEBI) was given a special status as a regulatory body as earlier it was just a subsidiary of RBI. Its main objective was to regulate the market and register the stock exchanges in a rightful manner. The role of the Reserve Bank of India got stronger to punish any culprit who used the system for their own purpose. This scam also led to the establishment of the National Stock Exchange (NSE), which primarily introduced electronic trading to improve transparency and accountability in the financial market. Investors suffered huge losses in business, some due to the fall of the market and the fall of prices of shares in the stock market. This scam still reminds us of the uncertainty and unpredictability of the market. It severely affected the market and the volatility of the financial market. This scam broke public trust and made investors more cautious. It took a long time for people to regain trust in the market and for the market to rise again. This was only possible due to certain reforms introduced by the government. This scam led to investor awareness and market education, emphasizing that people should be educated before investing in the market. It serves as a wake-up call for investors to educate themselves on how to deal with dynamic risks in the market. This decreased the risk of similar scams in the market as literacy and awareness increased among people. This scam also increased accountability in the market, ensuring that transactions are transparent in nature to reduce these kinds of scams

Role of Brokers in the 90s Financial Market

Brokers were the most important part of the market, providing liquidity and helping people with their investment options. Brokers also acted as intermediaries between banks and private institutions. They were supposed to act for the commission, and their work ended after receiving the commission. Their main aim was to get the best deal for their client and earn a high amount of commission. They also arranged ready forward deals for their business potential clients. Stock brokers provided liquidity with an easy way to get profits for their clients in a short period of time. Loans served as a high liquidity option within a short span of time. Stock brokers maintained a term of secrecy between the borrower, bank, and lender. Disclosing such information publicly would be inappropriate and unethical for their profession, so it was impossible for lending banks to find out the terms of the deal or the source of cash flow. On the other side, the borrowing bank also did not know the source of the money. All these deals were done only by brokers. The creditworthiness of the broker played a key role in the deal, as the transaction depended on the creditworthiness of the borrowing bank and the trust in the broker. If any broker had a good creditworthiness value in the market, the borrowing bank would get money regardless of their creditworthiness. Harshad Mehta was a renowned broker at that time and managed to convince the bank to draw money in his name, which he deposited in his account in the stock market, taking advantage of the reckless system to carry out the scam. Normally, in a ready forward deal, money is drawn in the name of the broker, and only two banks are involved. However, in Harshad Mehta’s case, he catered to several banks in the name of RF deals. Banks were aware of Harshad Mehta’s illegal system, but they were getting high returns, making them reluctant and silent about the scam. He used to transfer a huge amount of money to banks, helping them maintain profitability.

Conclusion

Many experts believe that Harshad Mehta did not commit a scam but only misused the loopholes in the system. He provided a huge number of profits out of these loopholes and created strong wealth for many people. At that time, the stock market was under the control of Harshad Mehta. When he went to jail, there was a huge crisis in the stock market, as it fell drastically, causing many people to suffer huge losses. Another perspective of this scam is that some powerful politicians made him a scapegoat, benefiting from the profits earned by Harshad Mehta. When this scam came to light, those politicians disowned Mr. Mehta and denied any knowledge of him or the scam, but deep down, they were also part of this 1992 scam.

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