Harshad mehta scam Case 

Author: Syed Tauheed 4th yr BA LLB Vidyavardhaka law college ,

ABSTRACT :  The 1992 securities scam, also known by the name Harshad Mehta shares case, was a significant financial scandal that rocked India’s financial markets. Stockbroker Harshad Mehta manipulated stock prices, particularly for the Bombay Stock Exchange (BSE), by taking advantage of weaknesses in the banking system. Mehta created the appearance of thriving markets by inflating stock prices with money taken from public sector banks. Mehta and his colleagues made enormous gains as a result of this dishonest behavior going undiscovered for a number of years. However, the market crashed as a result of the scam’s exposure in April 1992, wiping out billions of dollars in investor capital. The case brought to light significant flaws in the Indian banking industry, such as a lack of transparency, inadequate risk management, and lax regulatory monitoring.

INTRODUCTION : One of the biggest financial controversies in Indian history, the Harshad Mehta stock exchange case, surfaced in the first decade of the 1990s and revealed substantial weaknesses in the nation’s banking and financial infrastructure. Stockbroker Harshad Mehta created an artificial market boom by manipulating the value of shares on the Bombay Share Exchange (BSE) by taking advantage of weaknesses in the banking industry. He made enormous profits by unlawfully taking cash from banks in the public sector and inflating stock values, especially in blue-chip companies. For a number of years, his strategies remained undiscovered, and Mehta rose to prominence in the financial industry, gaining the nickname “Big Bull.” But when reporters and authorities discovered the fraudulent operations in April 1992, the deception came to an end and the market crashed. In order to stop future financial manipulations, the scandal’s aftermath resulted in significant changes to India’s financial legislation, such as the creation of stronger regulatory frameworks and enhanced market surveillance.

CASE BACKGROUND : 

This complex scheme was orchestrated by Mumbai stockbroker Harshad Mehta, who used money that had been embezzled from the banking industry to manipulate stock prices. Mehta rose to fame in the 1980s after beginning a career as a modest trader. He established a wide range of connections in the stock sector, especially with the Bombay Securities Exchange (BSE). Mehta’s plan was to take advantage of the system’s lax restrictions and lack of transparency. He found a weakness in the financial system that allowed him to fraudulently withdraw money from public sector institutions. Mehta used these funds to purchase large volumes of shares, particularly in blue-chip companies, boosting their prices and giving the impression that the market was flourishing. In addition to making him personally wealthy, this caused a stock market bubble. Mehta persisted in manipulating stock prices for years, and as his power increased, investors flocked to markets in an attempt to capitalize on his achievements. Both institutional and individual investors were drawn to him because of his reputation as a financial genius. But when a journalist named Sucheta Dalal revealed the deception in 1992, his plan started to fall apart. It was discovered that Mehta was actually embezzling bank funds through the creation of fictitious bank receipts (BRs), which he then utilized to finance his stock acquisitions. The scam caused a huge market fall and wiped out billion of rupees in shareholder money, with an estimated value of ₹5,000 crore. Widespread financial sector reforms in India were brought about by the scandal, including stricter rules and the creation from the Securities and Exchange Board of India (SEBI) for oversight of the stock markets.

LEGAL ISSUE : 

A number of important legal concerns pertaining to market manipulation, financial fraud, and infractions of financial and securities laws were raised in the Harshad Mehta case. These problems brought to light the weaknesses in the financial and regulatory frameworks of India in the 1990s.

They are : 

  • Bank Fraud and Misappropriation Of Funds : Harshad Mehta’s misuse in the banking system was the main component of the scam. Mehta transferred money from public sector institutions, namely the banking system of Karad, into his securities dealings by using false bank receipts (BRs). Around ₹5,000 crore in funds were stolen, in violation of banking regulations, namely those pertaining to the unapproved use and transfer of public funds.
  • Stock Market Manipulation : Another significant legal concern was Mehta’s manipulation influencing stock prices within the Bombay Stock Exchange (BSE). Mehta fabricated a phony market bubble by driving up the prices of equities, particularly blue-chip stocks. Securities rules, which are designed to guarantee honest and open trading activities, were broken by this type of market manipulation.
  • Forgery and Falsication of Documents : In order to conceal the illegal nature of transactions and enable the unlawful transfer of monies between banks, Mehta and his friends falsified documentation, including banking receipts and fake securities. According to Indian law, these acts amounted to forging, a serious criminal violation.
  • Violation of SEBI Regulations : At the time of the scandal, the Securities and Exchanges Board of India (SEBI), which regulates the market for securities, had inadequate oversight. Mehta’s actions broke several SEBI Act rules pertaining to insider trading, the spread of misleading information, and stock price manipulation. As a result of the case, SEBI strengthened its rules to stop such manipulations.

JUDGEMENT : 

One of India’s biggest financial scandals, namely Harshad Mehta case, led to drawn-out and complicated court cases. Mehta was detained in 1992 as a stockbroker who unlawfully transferred money from public banking institutions using fictitious bank receipts (BRs) in order to manipulate the Bombay Securities Exchange (BSE). Cheating, fraud, conspiracy, unlawful violation of trust, and theft of cash were among the charges against him. A special court found him guilty of manipulating the Bank of Karad in 2002 and convicted him to a total of five years in imprisonment and penalties. But the verdict was not final; following a protracted legal struggle, the High Court of Bombay cleared him of most allegations in 2014 on the grounds that there was not enough proof, particularly regarding stock manipulation and the use of phony BRs. Even though he was found guilty in a few criminal cases, the entire extent of his legal responsibility for the scam was never fully understood because many cases were still pending in court, with many appeals and civil lawsuits. Along with the criminal proceedings, Mehta and other market participants were subject to fines and more stringent rules from the Securities and Exchange Board of India (SEBI). Additionally, the scandal sparked civil lawsuits from investors and financial companies who wanted compensation for the money they had lost as a result of the swindle. However, there was a protracted period of legal ambiguity as a result of the case’s complexity and the delay in rendering a definitive verdict. Significant changes were made to India’s banking and stock market as a result of the case, including more monitoring, better laws, and increased transparency to stop future financial manipulations. Even though Harshad Mehta was ultimately found not guilty of the majority of his accusations, his activities had a long-lasting effect upon the Indian financial system.

SIMILAR CASE LAWS :

  • Ketan Parekh Scam (2001) : 

Another stockbroker who was a part of a scam akin to Harshad Mehta’s was Ketan Parekh. Parekh’s trading had a significant impact on stock prices, which he manipulated mostly in the referred to as “K-10” stocks. Similar to Mehta, Parekh created a market bubble by inflating stock values through a mix of margin finance and bank loans. When the hoax was discovered in 2001, investors suffered large losses, and the market crashed. The Securities and Exchange Board of India (SEBI) banned Parekh from dealing in the securities market and issued other sanctions after he was detained.

  • Satyam Computer Services Scandal (2009) :

One of India’s largest corporate scams, the Satyam scam, came to light in 2009 after Ramalinga Raju, the founder of the business, acknowledged that he had fabricated the company’s financial statements to the tune of more than ₹7,000 crore. The case is comparable to the Harshad Mehta scam in that it involves financial fraud, falsification, and misleading investors, even if it has nothing to do with stock market manipulation. Raju inflated balance sheets and earnings by dishonest accounting techniques, which ultimately caused Satyam to fail and leave shareholders with significant losses. Raju and other employees received prison sentences after being found guilty.

  • NSLE Scam (2013) :

In the National Spot Exchange Limited (NSEL) scam, fictitious contracts were exchanged in order to manipulate commodities trading. When it was discovered that NSEL, the spot trading a platform, had permitted traders to enter into contracts that were not supported by the actual delivery of commodities, the scam was made public in 2013. Investors lost ₹5,500 crore as a result. Despite not being a case of stock market manipulation, this scam shared characteristics with the Harshad Mehta case, including financial manipulation, misappropriation of cash, and a lack of regulatory monitoring. Numerous people and businesses were looked at, and the case resulted in important changes to the laws governing commodity trading.

CONCLUSION : One of the biggest financial scandals in Indian history, the Harshad Mehta case revealed serious flaws in the nation’s stock market and banking systems. By utilizing fictitious bank receipts to transfer funds through public sector banks, stockbroker Mehta fraudulently manipulated stock prices. This resulted in a market bubble that finally burst, forcing investors to suffer enormous losses and setting off a catastrophic market crisis in 1992. It also caused an artificial inflating of stock valuations.
The difficulties in pursuing fraudulent activities of this magnitude are highlighted by the fact that Mehta got away with it in some cases despite his arrest and found guilty in others due to a lack of solid evidence. The scam’s aftermath exposed how inadequate India’s financial regulatory system was at the time. However, the case served as a trigger for important financial market changes in India. It resulted in the adoption of computerized trading, enhanced market surveillance, and the fortification of the securities and exchange boards of India (SEBI). The fraud also highlighted the need for increased accountability and transparency in the securities and banking industries. In summary, the Harshad Mehta case shaped the development of India’s contemporary financial landscape by highlighting the significance of a strong regulatory framework to safeguard investors and maintain the transparency of the financial markets.

FAQ 

  • What was Harshad Mehta Case ? 

The 1992 securities scam is known as the Harshad Mehta case, in which stockbroker Harshad Mehta manipulated stock prices by taking advantage of weaknesses in the Indian financial and stock market systems. By utilizing fake bank receipts to steal cash from public sector banks, he was able to artificially increase stock values. Investors suffered large financial losses as a result of the market meltdown caused by the hoax.

  • How did Harshad Metha Manipulate the Stock Market ?

Harshad Mehta diverted substantial quantities of cash from banks in the public sector in order to manipulate the stock market. He obtained money through the use of false bank receipts (BRs), which he subsequently utilized to buy stocks, especially in blue-chip businesses. This resulted in a fictitious market boom by inflating stock prices.

REFRENCES 

BOOKS 

  • “The Scam: Who Won, Who Lost, Who Got Away” by Sucheta Dalal and Debashis Basu
  • “The Big Bull of Dalal Street: The Harshad Mehta Story” by Anil Jaggia

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