Author: Aishani Bhattacharjee, Bishop Cotton Women’s Christian Law College, Bengaluru
To the Point
The 1992 scam case of Harshad Mehta revolves around varied activities that were conducted with different politicians and bankers to manipulate the markets in Bombay Stock Exchange, which ultimately resulted in the 1992 deception of Indian Stock market. The outcome of the scam resulted in duping more than 10 million USD and it adversely affected the stock market. The scam unfolded through Mehta using bank receipts (BRs), which were fake documents that banks issued to facilitate short-terms loans between them. He took advantage of the loopholes in the banking system by having dishonest officials sign false cheques, taking loans by using fake BRs, and then used this activity to artificially inflate stock prices, in companies like ACC, Kimberly Clark and Tata Steel. The scam was a major financial scam in India valued at approximately Rs 4,000 crore (1 billion). This article would delve into how the scam made the Indian stock market crash and how the same banks which contributed directly or indirectly to the scam found themselves holding millions of Indian rupees (INR) in worthless debt.
Use Of Legal Jargon
The 1992 scam case was a case where the main accused Harshad Mehta misappropriated funds from client’s accounts and violated his fiduciary duty towards them. He used those funds for his own personal gains which lead to breach of trust from his part. The Security and Exchange Board of India (SEBI) Act, 1992 was the primary body involved for regulating Harshad Mehta’s stock manipulation activities sections 11, 11B and section 12 of the Act of 1992 was involved to protect the interest of investors, grants power to SEBI to issue directions to prevent market manipulation and fraudulent activities such as those perpetrated by Mehta in stock market and at last section 12 requires brokers and intermediaries to be registered with SEBI, and in this case the accused actions were scrutinized under this laws. Under Prevention of Corruption Act, 1988 section 13(2) deals with criminal misconduct of a public servant. In the present case, this provision was applied to address the role of public servants who were allegedly complicit in the fraudulent activities along with the accused. Several IPC, 1860 provisions like section 420 which deals with cheating and dishonesty including delivery of property, which was one of the major crime in the scam, section 467 criminalize forgery of valuable security, which was part of the scam in creation of fake bank receipts (BRs), section 471 and section 120B this sections punishes anyone who used a forged document as if it were genuine and criminal conspiracy against people who were involved in conspiring with Harshad Mehta. Section 42(1) of Banking Regulation Act, 1949 deals with maintenance of reserve funds by the banks. This act was used as the accused exploited the loopholes of the banking system and issued fake bank receipts for the scam. Statutes like the Foreign Exchange Management Act, 1999 and Negotiable Instruments Act, 1881 was considered in this case to prevent money laundering as a part of cross-border financial operations during the scam and manipulation of bank receipts that acted as negotiable instruments. Lastly section 65 of Indian evidence Act, 1872 which dealt with admissibility of electronic records became crucial in investigation of Mehta’s stock market activities through fraud.
The Proof
The core of the scam involved forging of bank receipts to get funds from several public sector banks, like State Bank of India (SBI), Punjab National Bank (PNB). These receipts were to show transfer of funds between banks, but Mehta manipulated them by creating fake BRs and thereby laundering money. The key person in exposing the scam was Sucheta Dalal in April, 1992 who worked for Times of India, published an article detailing the scam. After this revelation the stock market crashed and whipped out all gains made by others and Mehta. Bank documents which were proof of forged BRS were recovered from Mehta’s office, testimonies of the associates who were involved with the accused, Sucheta Dalal’s journalistic investigation and the financial audits into operations of the involved banks were some of the conclusive proofs of the scam.
Abstract
The 1992 scam was carried out by the stockbroker Harshad Mehta. He was able to illegally get large sums of money through the ‘ready forward’ deal. He channelized the funds to artificially inflate the stock prices and created a ‘Bull Market’. After the scam the SEBI tightened market regulations to give transparency and to combat loopholes in the securities system. The significant impact of the scam was the establishment of National Depository Limited in 1996 which dematerialized securities and screen-based trading on the Bombay Stock Exchange to stop fraud and manipulation of trading in securities and the Stock Broker Association also made stringent rules for brokers which reduced systematic risk in financial disclosure. The article touches on various facets of the scam and the aftermath which followed.
Case Laws
State of Maharashtra v. M.H.George (1965) – This case was relevant to banking fraud and misrepresentation and how banking fraud could be prosecuted and was often cited to analyze fraudulent practices involved in the scam.
R.K. Dalmia v. Delhi Administration (1962) – This case mainly focused on cheating and criminal breach of trust which were the key issues in Mehta’s case. The Supreme court’s decision in this case showed how financial crimes could be prosecuted under criminal law.
K.K Verma v. UOI (1955) – In this case the Supreme court dealt with issues related to violation of statutory provisions and financial regulations, which were necessary to understand the unlawful action of Harshad Mehta.
M/s. SEBI V. Shri P.K. Sinha (1995) – This case mainly revolved around market manipulation, an integral part of the 1992 scam, where stock brokers including brokers like Mehta, were involved in fraudulent activities. This case relates to SEBI power to regulate the stock market.
Conclusion
The Harshad Mehta scam remains one of the biggest financial scandals in India. It exposed severe loopholes in the banking system and stock market regulations. The scam resulted in a massive crash in the Indian stock market, with Bombay Stock Exchange (BSE) Sensex dropping by nearly 50 % in a short span of time. These wiped-out billions of rupees in investor wealth and caused widespread panic. This adversely impacted the trust of retail investors and many small investors lured by Mehta’s success suffered heavy financial loss and thereby became hesitant to invest in the stock market. Harshad Mehta was arrested in April 1992 and faced many charges like fraud, misappropriation and manipulation of stocks. Hence Mehta’s empire which was built on speculation and manipulation eventually collapsed and he spent the rest of his life in legal battles and scrutiny. The scam was a pivotal moment in Indian history . It served as a wake-up call that prompted sweeping reforms to safeguard against future financial frauds. The scam eventually exposed grave loopholes in the banking system in India and stock exchange operations which ultimately resulted in bringing positive measures in the Indian financial system which contributed to its growth in coming years.
FAQS
Was Harshad Mehta ever fully convicted of the scam?
Despite numerous charges, Harshad Mehta was never fully convicted of the scam as the cases against him mostly delayed or not concluded in his lifetime. As the cases were of complex legal nature coupled with delayed proceedings for this reason definitive conviction did not come possible.
What legacy was left behind after the Harshad Mehta Scam?
The scam of 1992 is still remembered as a big turning point of India’s economic history. It led to tighter regulations, reforms in financial markets and mainly investor awareness. While Mehta is still regarded as a controversial figure, the scam highlighted the need for better governance, transparency, and regulatory oversight in the financial markets.
How did the scam affect the Indian public?
The scam resulted in public outcry as many small investors, who trusted Mehta, lost their savings. The scam ultimately led to greater public awareness about financial markets, which in the long run, helped the Indian investors to be more cautious about investments.
Is Harshad Mehta story still relevant today?
Yes, the story continues to be a cautionary tale about risk of market manipulations and the urgent call for transparency in the financial system. Harshad Mehta’s life and actions have become cult classic tales in India which have also been dramatized in media even till date.
Did Harshad Mehta make any personal gains from the 1992 scam?
Yes, through the scam Mehta’s financial prowess increased and he amassed a huge personal fortune including many assets, properties, luxury cars, and other high-value investments. However after disclosure of the scam all his fortune and power collapsed.
