Harshad Mehta Scam of 1992



Author: Aarchi Mewara
Sophia Girls’ College (Autonomous), Ajmer

Abstract

The Harshad Mehta Scam of 1992, a significant financial scandal in India after independence, involved complex manipulation’s to the stock market and banking systems by stockbroker Harshad Mehta. The scandal, characterized by large – scale fraud and market manipulation, led to a major shake – up in the India’s financial regulatory framework. This article provides a detailed analysis of the scandal, including its background, evidence, legal proceedings, and the resultant impact on financial regulation.

Introduction

The Harshad Mehta Scam, also known as the “Securities Scam of 1992”,  one of the most notorious financial frauds in Indian history, involved intricate schemes of stock market manipulation and banking fraud. Harshad Mehta, a prominent stockbroker, orchestrated a massive deception that exploited loopholes in the financial system, leading to widespread financial loss and a significant market crash. This article explores the intricacies of the scam, the evidence presented, and the legal consequences that followed, highlighting its profound impact on India’s financial regulatory environment.

Harshad Mehta Scam : Background and Aftermath

Harshad Mehta, known as the “Big Bull” was prominent stockbroker based in Mumbai. Mehta came from a modest family background. His father was a small-time trader, and mehta’s early life was marked by financial struggles. He grew up in a middle-class environment, which shaped his ambition and career trajectory.
Mehta graduated with a Bachelor of Commerce degree from Lala Lajpat Rai College in Mumbai. His educational qualifications were relatively modest, but he displayed a keen interest in finance and business from an early age.

Career Beginnings : Harshad Mehta started his career in the stock market as a sum-broker at the Bombay Stock Exchange (BSE). His early years were spent learning the intricacies of trading and building connections with the financial community. By the late 1980s and early 1990s, Mehta had established himself as a successful stockbroker. He became known for his aggressive trading strategies and his ability to manipulate stock prices.

The Rise of Harshad Mehta:

Mehta’s success was driven by his aggressive trading strategies and his ability to influence stock prices. He was known for taking large positions in the market and creating artificial demand for certain stocks, which drove up their prices. He used various financial instruments and techniques to inflate stock prices. He employed a method called “circular trading”, where stocks were bought and sold among a network of brokers to create the illusion of high trading volumes and rising prices. 
During the peak of his career, Mehta enjoyed lavish lifestyle, which included luxury cars, high- profile real estate investments, and a prominent social presence. His wealth and influence in the stock market made him a significant significant figure in the Indian financial world.

The 1992 scam
Manipulation Techniques : Mehta used a combination of fictitious Transactions, fraudulent financial instruments and manipulative trading practices to inflate the prices of certain stocks artificially. He exploited the “ready-forward” system of inter-bank lending to divert funds for market manipulation. The scam involved exploiting banking practices to secure large amounts of money without proper documentation or approval. This included taking advantages of short-term loans and leveraging finds to buy and sell stocks, thus manipulating their prices.

Exposure of the Scam:

The scam came to light in 1992 when Sucheta Dalal, a journalist for the Times of India, published a series of reports revealing discrepancies and fraudulent activities in the stock market. Her investigations highlighted the depth of Mehta’s manipulation and its impact on the financial system. The exposure of the scam led to a dramatic crash in the stock market, The revelations led to a massive market crash, eroding investor confidence and exposing significant weaknesses in India’s financial regulatory framework.

The Proof, Documentary Evidence:  ‘Bank Statements and Financial Records’

1) Investigation revealed: discrepancies in banking transactions, including large, undocumented transfers and fictitious loan agreements. Documents showing fake transactions and unauthorized fund transfers were crucial in establishing the scale of the fraud.

2) Stock Market Data: Analysis of the stock prices and trading volumes demonstrated artificial inflation of stock values, supporting claims of market manipulation. Evidence showed significant discrepancies between reported and actual market conditions.

3) Bank Official and Stockbroker: Testimonies from bank officials and other stockbrokers provided insights into the fraudulent activities and the methods used by mehta to orchestrate the scam. Witnesses described how Mehta manipulated financial instruments and exploited banking practices.

4) Journalistic Investigations: Reports by Sucheta Dalal and other journalists played a critical role in uncovering the fraud. Their findings included detailed accounts of Mehta’s fraudulent activities and their impact on the financial markets.

5) Securities and Exchange Board of India (SEBI) Report: SEBI conducted an extensive investigation into the scam, producing a detailed report that outlined the manipulation techniques used by Mehta and the regulatory failures that allowed the scam to persist.

6) Government Inquiry: The Indian Government established committees and inquiry commission to investigate the scam, providing additional evidence and recommendations for regulatory reforms.
Securities Fraud: This refers to illegal activities related to the manipulation of stock prices or the misuse of confidential information. In this case, Harshad Mehta used fraudulent means to manipulate stock prices.

False Trading: This involves creating artificial trading volumes to influence stock prices. Mehta engaged in false trading practices to drive up the prices of stocks he was involved in.

Collusion: This involves secret or illegal cooperation between parties to deceive or defraud others. Mehta was found to have colluded with bank officials and other intermediaries to execute his scam.
Financial Manipulation: This term encompasses various illegal activities designed to distort financial statements or market behavior. Mehta’s manipulation of the stock market involved several forms of financial manipulation.

Case Law

1) Charges and Convictions

• Fraud and Embezzlement: Harshad Mehta faced multiple charges, including fraud, embezzlement, and market manipulation. The legal proceedings involved extensive examination of evidence and testimonies to establish Mehta’s culpability.

• Court Proceedings: The case saw prolonged legal battles, with Mehta’s defense challenging the evidence and legal interpretations. The courts examined the complex financial transactions and the roles of various parties involved in the scam.

2) Legal Precedent

• Financial Regulation : The case set important legal precedent for financial regulation in India, highlighting the need for stringent oversight and transparency in financial transactions. It influenced the development of laws and regulations governing stock market operations and banking practices.

• Corporate Governance: The legal proceedings underscored the importance of corporate governance and internal controls in preventing financial fraud. The case prompted reforms aimed at improving accountability and transparency in financial institutions.

Conclusion

The Harshad Mehta scam of 1992 was a landmark event in Indian financial history, exposing critical  weaknesses in the stock market and banking systems. The scandal’s exposure led to significant regulatory reforms and changes in financial practices, including the strengthening of oversight mechanisms and the establishment of the securities and Exchange Board of India (SEBI) as a robust regulatory authority. The case remains a powerful reminder of the need for vigilance and integrity in financial markets, and its legacy continues to influence India’s financial regulatory landscape.

FAQS

1)How did the scam come to light?
The scam was exposed when journalist Sucheta Dalal wrote an article in The Times of India highlighting the irregularities in the stock market and banking practices. This led to an investigation by regulatory authorities, which uncovered the full extent of the scam.

2) What were the consequences for Harshad Mehta?
Harshad Mehta was arrested and charged with multiple counts of fraud and financial crimes. He faced legal battles and was convicted on several charges. He spent time in prison but continued to maintain his innocence until his death in 2001.

3) What was the impact of the scam on the Indian financial system?
The scam had a profound impact, leading to:
Regulatory Reforms: The introduction of stricter regulations and oversight mechanisms in the stock market and banking sectors.
Market Crash: A significant crash in the Indian stock market, leading to financial losses for many investors.
Institutional Changes: Increased scrutiny and changes in financial practices to prevent similar frauds in the future.

4) Were there any significant regulatory changes following the scam?
Yes, the scam led to several important reforms, including:
Establishment of the Securities and Exchange Board of India (SEBI) as a more powerful regulatory body.
Introduction of stricter disclosure norms and auditing requirements for companies and financial institutions.
Improved transparency and oversight in financial transactions and stock market operations.

5) What happened to the banks involved in the scam?
Several banks that were part of the scam faced scrutiny and legal action. They were required to improve their internal controls and compliance mechanisms. Some banks also had to deal with financial losses and reputational damage.

6) How did the scam affect investors?
Investors suffered significant financial losses due to the manipulated stock prices and the subsequent market crash. Many small investors were particularly hard-hit, and the scam led to a loss of trust in the stock market and financial institutions

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