Author: Shalini Singh, Atal Bihari Vajpayee School of Legal Studies, CSJM University, Kanpur
To the Point
There was a record case of financial fraud in India in 1992 that brought to the fore inherent vulnerabilities in its securities and banking system. Charismatic broker Harshad Mehta manipulated share prices by taking advantage of loopholes in the banking system, precisely by misusing bank receipts and ready forward deals. By artificially pushing up share prices and pumping public money into the stock market, Mehta plundered an estimated ₹4,000 crores. The scam did not just bring about a humongous stock market fiasco but also eroded investors’ faith and brought the regulatory machine of the finance system into intense critical examination. The scam was a bitter episode in Indian financial history that brought about sweeping reforms in the operations of SEBI as well as the workings of the stock exchange mechanism. In this section, we will be covering the key events of the fraud, going through the law language employed, examining the point evidence and case laws, and ending with key takeaways and FAQs.
Abstract
An important turning point in India’s history of market and financial regulation was the Harshad Mehta Scam in 1992. The article describes the network of facts surrounding Mehta’s record-breaking share market fraud, including how it took advantage of weaknesses in banking and regulatory systems, why it was possible, the court proceedings involved, the kinds of evidence that made the fraud easier to uncover, and the court rulings that followed. By describing new legal jargon, path-breaking judgments, and the post-fraud scenario, the essay will attempt to provide a general idea of how the actions of one person revealed the loopholes in India’s financial systems and led to some real reform in market governance and regulation.
Use of Legal Jargon
The Harshad Mehta scam employed a variety of financial and legal terminologies which were at the core of the case. Of these, perhaps the most compelling was “fraud.” The definition of fraud is under Section 17 of the Indian Contract Act, 1872, as an act that is performed with the intention to cheat another party. Misrepresentation of securities transaction and manipulation of bank drafts were both firmly within this definition. The second important term is “breach of trust,” which refers to the violation of fiduciary obligation, particularly under the Indian Penal Code (IPC), Section 409 (Now, Section 316 of the BNS, 2023). The misappropriation of public funds by exploitation of interbank operations was a criminal breach of trust. The word “market manipulation” is also the key word for this fraud. Although not defined as such in the IPC, it is addressed under SEBI law where any move to prevent the proper functioning of the stock market is punishable. Second, the scam put the “regulatory oversight” and role of parliamentary bodies such as the Reserve Bank of India (RBI) and the Securities and Exchange Board of India (SEBI) under scrutiny. Their failure to catch the misuse of Ready Forward (RF) agreements and Bank Receipts (BRs) revealed weaknesses in supervision.
The Proof
When reporters and financial investigators noticed odd spikes in share prices and money market volatility, the Harshad Mehta scam began to come to light. The turning point against Mehta was his abuse of Bank Receipts (BRs) and Ready Forward (RF) transactions, which are short-term borrowing facilities among banks. Mehta and his group fabricated or requisitioned BRs without government security backing and subsequently used them to drain cash out of banks. The knock arrived with Times of India reporter Sucheta Dalal revealing Mehta’s role in encasing ₹500 crores from the State Bank of India on such bogus BRs. The Central Bureau of Investigation (CBI) and Joint Parliamentary Committee (JPC) did more digging and revealed exact bank transaction records, account books, and doctored documents showing how cash was routed through a chain of banks to rig share prices of specific companies, mainly ACC, Sterlite, and Videocon. The evidence also appeared through depositions of regulators of the government, brokers, and bankers. The papers authenticated systemic banking and market mechanism manipulation. RBI inspections and audits supplied further documentary evidence of malpractices, which resulted in different Indian Penal Code, Prevention of Corruption Act, and allied SEBI regulations charges.
Case Laws
CBI v. Harshad Mehta & Ors.
The Central Bureau of Investigation launched a major criminal prosecution against Harshad Mehta and a number of other conspirators following the disclosure of the 1992 securities scam. The charges were for cheating, criminal conspiracy, and criminal breach of trust under the Indian Penal Code, and offences under the Prevention of Corruption Act. The scam included Bank Receipts (BRs) and manipulation of Ready Forward deals, which helped Mehta to channel giant sums of money from banks into shares. The CBI collected massive evidence, which included falsified documents, remittances, and bank official statements, thus making it one of the most spectacular finance trials in India. At the same time, Harshad Mehta and his co accused also made a series of petitions challenging the legality of the steps taken against them. Mehta himself challenged the grounds for his arrest, invoking Article 21 of the Constitution to safeguard constitutional protection in Harshad Mehta v. State of Maharashtra. In a similar vein, he contested SEBI’s regulatory actions, such as blocking accounts and impounding property, in instances like Harshad Mehta & Ors. v. SEBI. While the CBI case was a criminal case initiated by the State, these cases were Mehta’s defense in law against enforcement proceedings. Although brought from opposing sides, all these cases were closely connected, arising from the same fraud and concurrently tried by the Special Court under the Trial of Offences Relating to Transactions in Securities Act, 1992. Findings in one proceeding would habitually predispose the findings in others, hence constituting an integral part of a broader legal battle surrounding the 1992 fraud.
Harshad Mehta v. State of Maharashtra (1992)
When Harshad Mehta was arrested on charges relating to the 1992 securities scam, he questioned the illegality of the arrest as well as the procedure adopted by the authorities. He argued that his constitutional right under Article 21, which guarantees protection of life and personal liberty, had been infringed. Mehta argued that he had not been accorded due process and that the arrest was made without cause and without publicity. This petition was attached directly to the trial on criminal charges pending in CBI v. Harshad Mehta & Ors., wherein Mehta was one of the main accused in a financial scam of gigantic proportion. As the CBI case concerned establishing criminal negligence so as to loot public money, this constitutional challenge Page 1 of 3 formed part of Mehta’s defense strategy for relief from coercive measures by the authorities. Both cases were leading on legal implications of the scam and were adjourned together.
SEBI v. Harshad Mehta & Others
When the 1992 scam came to light, SEBI accused Harshad Mehta and his associates of violating stock market regulations. Insider trading, price manipulation, and flouting of norms of stockbroking were the main accusations in the case. While SEBI probed how Mehta used the loopholes in the system to artificially drive up share prices, it was directly linked to the scam. SEBI case was focused on the regulatory offenses against securities laws, while the CBI investigated the criminal aspect.
RBI v. Harshad Mehta (Bank Receipts Legality Case)
This was a matter of misutilization of Bank Receipts (BRs), which were utilized by Harshad Mehta as substitutes for true government securities to facilitate banks to withdraw money. The genuineness of these transactions was questioned by the Reserve Bank of India (RBI), stating that these BRs were illegal and unconventional banking practices. The case involved the question of whether such documents would be legally valid when utilized for inter-bank transactions and whether their misuse qualified as fraud. It is immediately related to the Harshad Mehta scam in so far as one of the major means through which Mehta diverted enormous amounts of money into the stock market was by availing of BRs illegally. The ruling in the case determined the legal status of BRs and emphasized the lack of proper controls in India’s financial system at the time.
Conclusion
The biggest money-scandal to ever strike India was the Harshad Mehta scam in 1992. It exposed the loopholes of bank and stock market dealings, like misuse of Bank Receipts (BRs) and manipulation of Ready Forward (RF) transactions to sweep away public money. Mehta’s dealings created a colossus market meltdown and shook investor confidence, and resulted in a nation-wide outcry for legal and fiscal reform. The cheat provided landmark court rulings in the history of Indian courts. Harshad Mehta and his colleagues were charged with criminal conspiracy, cheating, and corruption under Indian law provisions in CBI v. Harshad Mehta & Others. In Harshad Mehta v. State of Maharashtra (1992), Harshad Mehta alleged that his arrest violated his Article 21 rights. The legitimacy of the bank documents used to conduct the scam, like as bank receipts, was at issue in RBI v. Harshad Mehta. Union of India v. R. Basu also supported actions to empower SEBI and strengthen its capacity to combat market misconduct. These rulings not only pleaded on behalf of personal accountability but even introduced more transparency along with an efficient financial Page 2 of 3 regulatory system. The scam is an excellent illustration of how judicial accountability and institutional reform may have been brought about by financial crises.
FAQS
1. Who was Harshad Mehta and why is he significant?
Harshad Mehta was a share broker who became the central figure of the 1992 share price rigging. He fixed up share prices by obtaining illicit funds from banks, which caused havoc in the Indian share market.
2. What was the key technique used in the scam?
The core activity of the scam involved manipulating Bank Receipts (BRs) and Ready Forward (RF) transactions that are generally used for temporary borrowing between banks. Unbacked or fabricated BRs were used by Harshad Mehta to fraudulently borrow money from banks. These moneyed funds were invested in particular stocks, pushing their prices artificially high and misleading investors.
3. What effect did the scam have on the Indian financial system?
The scam shook India’s financial system to its foundation, unveiling loopholes in banking procedures and poor regulatory management. It severely damaged investor confidence and caused a market crash. To stem the tide, the government declared emergency measures to improve market surveillance and transparency.
4. What were the reforms implemented following the scam?
After the scam, the government gave SEBI enhanced regulatory powers, enhanced monitoring of stock deals, and established the Special Court under the 1992 Act to expedite securities fraud litigation.
Q5. Was Harshad Mehta convicted?
Even though several cases were pending when he passed away in 2001, Mehta was convicted in one case in 1999 for stealing ₹5 crore of State Bank of India and was sentenced to a five-year prison sentence and fine.
