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HARSHAD MEHTA SCAM CASE

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Author – DEBOSMITA DAS , AMITY UNIVERSITY KOLKATA 

ABSTRACT: 

The largest financial and stock market con artist in India is Harshad Mehta. This man’s scam has hurt a lot of affluent people, and some of them have killed themselves as a result of his manipulation. His activities caused several banks to incur losses and eventually file for bankruptcy. He was an astute and well-versed individual when it came to deceiving others on stocks and financial markets. He rose to prominence in India during the first part of 1991–1992 due to his knowledge of shares and financial markets. These days, it’s easy, and people are more conscientious about researching their share markets online and checking them out. Due to the lack of popularity of the internet in 1991–1992, such was not the case. Comparing himself to other affluent professions and actors, Harshad was the richest man in the country during 1991 and 1992. This guy is notorious for pulling off a lot of con tricks. He has deceived several affluent people and even had political backing. He was twice taken into custody. He conned banks, stole money, and conned share brokers to live a lavish lifestyle in India. He knew everything there was to know about financial and share marketing. He worked as a financial broker, arranging deals between institutions.

INTRODUCTION : 

Harshad Mehta used a tactic known as “circular trading” to influence stock prices. He took advantage of the Ready Forward (RF) arrangement, a financial loophole. Government securities are concurrently traded and bought in RF agreements, providing the parties with rapid cash flow.Mehta cleverly engineered these RF transactions to artificially drive up the value of particular equities. He plotted with banks and other brokers to establish a network that would enable him to direct enormous sums of money into particular equities, inflating their values to unimaginable heights. This method is referred to as “pump and dump.”The fraud’s scope was astounding. Mehta defrauded the Indian stock market of around INR 5,000 crores in 1992. The deceptive actions Mehta planned resulted in a substantial increase in stock prices, which quickly led to a meteoric surge in the Bombay Stock Exchange’s (BSE) Sensex. The market was enthralled by this extraordinary bull run, and investors poured in large sums of money to profit from the trend that seemed to go on forever.

Mehta’s strategy involves boosting particular stocks artificially, which had an effect on the stock market. Here’s a quick rundown of how he accomplished it:

Cashier’s Checks (CCs): In India, banks are mandated to keep a specific amount of cash on hand. In order to keep this equilibrium, banks frequently lend to and borrow from one another. A Bank Receipt (BR), which serves as a short-term IOU backed by securities, is issued by the borrowing bank to the lending bank when it extends credit.

The Fraud: The Scam: These BRs were first forged by Harshad Mehta and his friends. They used these faked BRs to persuade banks to grant loans. Mehta purchased stocks with the money that was meant to be used to purchase assets.

Stock Market Inflation: Using the borrowed funds, Mehta began amassing substantial holdings in particular equities. Due to the increased demand, the prices of such stocks rose. For example, during this time, the share price of ACC (Associated Cement Company) increased from about INR 200 to about INR 9,000.

Selling the Stocks: Mehta sold the stocks and reimbursed the banks once the stock prices rose. His profit was the difference between the selling and purchasing prices.

The Bubble Pops: This approach was effectiveas long as the value of stocks continued to rise. But finally, the stock market plummeted, and Mehta was unable to pay the banks back, which is how the scheme was uncovered.

FACTS ABOUT THE HARSHAD MEHTA SCAM OF  1992: 

Up until the early 1990s, banks could trade on the stock exchange. Because of his connections to bank officials, Harshad was able to offer the banks a higher interest rate in return for allowing the money to go directly into his personal bank account. Additionally, the banks issued fictitious financial receipts under his name. Once he had obtained funds from banks through fraud, he used the enormous amount of money to buy a few chosen shares, which raised the price of those shares. This would incentivise other investors to purchase those particular shares, resulting in a sharp increase in their price. Then, in order to keep the large profit, he would covertly sell his shares.

For instance, Harshad began purchasing Associated Cement Company shares in 1991 and raised their worth in less than three months, from Rs. 200 to Rs. 9,000. A lot of people disapproved of Harshad’s extravagant lifestyle, but investigative journalist Sucheta Dalal went one step further and investigated how Harshad came to be so wealthy so quickly. On April 23, 1992, Sucheta released an article in the Times of India exposing Mehta’s dishonest tactics for manipulating stock prices, which ultimately brought a stop to the Harshad Mehta scam. She claims that Harshad Mehta created an SGL receipt that vanished in order to defraud the State Bank of India out of Rs. 5 billion. 

After that, people had begun to search for Harshad. The tax institution searched on February 28, 1992. The Janakiraman Committee was established by the RBI. He was found guilty and accused of 74 crimes. The Central Bureau of Investigation put him and his brothers in jail in November 1992 after they collaborated in the operation’s planning and execution. The scandal has resulted in many changes to India’s financial regulatory framework. In 1995, the Securities Laws Amendments Act was passed. Following their three months in jail, Harshad and his brothers were granted parole. A few weeks later, he and his attorney, Ram Jethmalani, publicly declared that Harshad had handed Prime Minister PV Narasimha Rao Rs 1 crore as payment for his involvement in the Congress only to “off the hook” him.Upon Mehta’s release, he was warmly received by several stock market participants. After that, he reappeared time and again as a “new age” stock market guru. By 1997, he even had his own website and newspaper column where he gave readers stock recommendations. A new piece of illegal evidence was brought forth against Mehta. Of the 72 accusations filed by the CBI against Mehta in October 1997, only 34 were accepted by the Special Court, which was set up to investigate issues related to the securities scam. He and three other defendants were sentenced to five years in jail by the Bombay High Court in September 1999 for their deception in the Rs. 380.97 million Maruti Udyog Ltd fraud proceedings, which were part of a greater securities fraud.

Although he was given bail in every case once again, he was convicted in 2001 of embezzling Rs. 2.5 billion from 2.7 million “missing shares” owned by 90 prestigious corporations. This time, he was denied bail, and on December 31, 2001, at the age of 47, he passed away in Tihar jail after a heart attack. His appeal was turned down after his passing in 2003. The remaining criminal cases against him were dropped after his death, but his money recovery civil litigation went on.

CRIMES COMITTED BY HARSHAD MEHTA : 

A capital market scam known as fraud occurs when facts are manipulated with the intention of inflating earnings. This con contains four main characteristics.

Money that should be going to brokers to fund their stock market activities is diverted from the banking system. 

The fundamental plan was to buy large amounts of certain stocks early in the day, which caused the price to spike, and then sell them off at the end of the day in order to profit handsomely. 

A ready forward loan is a quick loan, often lasting no more than 15 days, that is given from one bank to another. It’s equivalent to one bank selling securities to another with the promise that they would be bought back at a specific amount. Early in the 1990s, Indian banks had to maintain a certain proportion of their deposits, as determined by the Statutory Liquidity Ratio (SLR), in the form of government securities. The brokers were aware of the two parties involved and managed the entire bond buying and selling procedure. The identity of the other party was unknown to each bank during the transaction. This procedure consists of three steps:

The transacting banks pay each other and directly transmit the securities to each other as part of the standard settlement procedure for government securities. In this settlement procedure, payments are made through the broker and securities are delivered. The securities are then sent by the seller to the broker, who forwards them to the buyer. The broker acts as a middleman in payments. gives the vendor the money. It’s possible that neither the seller nor the buyer are aware of the identity of the other party they’ve interacted with—only the broker is aware of this.

Through a broker-to-bank transfer, the broker was able to hold onto the cheque while it moved from one bank to another. Despite the fact that the check was signed in the bank’s favour and had a crossed account payee, the problem at hand was crediting it to the broker’s account. Brokers said they would pay the other party directly, so they asked banks to write checks in their own names. Consequently, the broker has to obtain an RBI cheque made payable to his bank, which will accept the money and forward it the same day, to the broker’s account. As a result, the brokers were able to get payment as soon as the transaction was finalised, which they used to make stock market investments.

Bank Receipts (BR) were another tool used in this scam. The lending bank usually issues a bank receipt in lieu of receiving the actual securities. Three reasons are served by bank receipts:

It is an acknowledgement of a sale of securities.

assures the consumer that the securities will be delivered. It states that the securities are held in trust by the seller on behalf of the buyer.

serves as a receipt for the funds being sold by the bank.

Brokers were so adept at creating BRs during the forgeries that they were able to get unsecured loans from many banks in order to create BRs, which they then used to execute RF transactions with other banks. Many banks consequently gave these banks substantial unsecured loans and gave brokers credit.

The Indian Penal Code, 1860’s Sections 465 and 467 on forgery apply to the aforementioned financial offences.

PUNISHMENTS FOR THE CRIME COMMITED : 

  1. FROGGERY – Section 465 addresses forgeries. A person is deemed to be a forger if they fabricate a document or false electronic record with the intention of deceiving the public or any individual, establishing a claim or title, entering into a contract, or harbouring the possibility of deceit.

Section 465 penalises forgeries, stating that offenders face penalties of up to Rs. 11.95 lakh in addition to a maximum sentence of six months to four years in jail. 

Section 467 addresses the forgery of wills, critical security papers, and other documents. Anybody who forges a document purporting to be important authorisation, security, or intent to adopt a son, or who asserts that he has the power to provide anybody the ability to create or transfer any kind of valuable security, to receive the principle, interest, or dividends, or to receive or deliver any cash or moveable property, faces a maximum sentence of ten years in prison and a fine.

  1. BRIBERY-

Section 171E addresses the penalty for bribery. Bribery is a criminal violation that carries a maximum one-year jail sentence, a fine, or both.

  1. BELITTLING

deceitfully and dishonestly encouraging the transfer of assets protected by Section 420.  Anyone who misleads and deceitfully incites the victim to transfer property to another individual or to create, modify, or destroy all or a portion of a valuable everything that can be signed, sealed, and turned into valuable security is considered security and is subject to a fine and a maximum seven-year jail sentence.

  1. CRIMINAL COLLUSION

The criminal conspiracy punishment is covered in Section 120B, which stipulates that anybody found guilty of participating in a criminal conspiracy to commit an offence faces the possibility of execution, life in prison, or severe imprisonment for a term of two years.

  1. FABRICATION OF REPORTS

Section 477A addresses the falsification of accounting. When working as a clerk, officer, or servant, anybody who knowingly and intentionally tampers, destroys, modifies, mutilates, or fabricates any important security or account that is owned by or received by him on behalf of his employer, or knowingly and with the purpose to deceive, assists or condones the making of any false entry, or omits or modifies any information in an accounting book or electronic record, will be penalised with a maximum sentence of seven years in jail, a fine, or both.

CONCLUSION : 

 Though Harshad Mehta had lofty goals and was a bright man, he chose the incorrect route to achieve them. This course ultimately resulted in his demise. One of the vulnerabilities exposed by the fraud was the total lack of transparency in the financial industry. All types of irregularities were so common that relatively few questions were asked about even extremely irregular transactions. This is the perfect environment for a fraud to start and grow to potentially harmful proportions. The worst and most widely reported financial scandal to have hit India was the Harshad Mehta affair. Numerous people had passed away, and some had even killed themselves. The rich people were all exhausted, both physically and mentally, as a consequence of the con. Naturally, he became an adventurous stock broker, knowledgeable about the flaws in the financial system as well as how to profit from them.

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