Author: Manaswini Shetty from NIMS University, Rajasthan
To the Point
In order to influence stock prices on the Bombay Stock Exchange, more than ₹4,000 crores (now worth more than ₹24,000 crores in today’s economy) was illegally diverted from Indian banks in the 1992 stock market scam involving Harshad Mehta. By using fictitious bank receipts and abusing the ready-forward deal mechanism, Harshad Mehta took advantage of weaknesses in the banking system to artificially raise stock prices, especially for companies like ACC, whose shares increased from ₹200 to over ₹9,000. A market meltdown, widespread investor panic, and numerous legal and regulatory inquiries followed the scam’s discovery. The scandal’s aftermath revealed the lack of integration between financial institutions and authorities, led to the prosecution of Harshad Mehta and multiple bankers, and brought about important changes to the Indian financial system, SEBI’s function, and securities trading regulations.
Abstract
One of the most dramatic and significant events in the history of Indian finance and law is the Harshad Mehta Stock Market Scam of 1992. It revealed the weaknesses of India’s financial and banking systems as well as how institutional carelessness, regulatory gaps, and unbridled ambition could result in a multi-crore scam that rocked the Bombay Stock Exchange and damaged public confidence in financial institutions. Mehta took advantage of structural flaws in capital markets and banking laws to syphon off enormous sums of money via a convoluted web of phony securities transactions and bank receipts. Investigative journalism and a subsequent regulatory investigation exposed the scam, which not only caused share and stock prices and confidence in the markets to plummet but also set off a chain of judicial, legislative, and regulatory reactions intended to improve India’s financial governance systems. In post-liberalization India, the Harshad Mehta scam continues to be a compelling case study on financial crime, regulatory supervision, and the interaction of law and economics. In order to guarantee transparency and accountability in the financial system, it emphasized the vital need for greater oversight, transparency, and legal safeguards.
Use of Legal Jargon
In addition to putting India’s financial system to the test, the scam involving Harshad Mehta popularized a wide range of legal concepts and terminology, many of which were essential to the judicial and regulatory reactions to the scandal. The term “securities fraud,” which describes a variety of dishonest tactics in stocks or commodities markets which lead investors to base their decisions to buy or sell on inaccurate information, was one of the most well-known ideas. The scam gave the term new meaning in Indian law, especially in regard to the Securities Contracts (Regulation) Act of 1956 and the SEBI Act of 1992. The legal significance of the fiduciary duty doctrine increased as banks and other financial organizations that were stewards of public funds failed to fulfill their responsibilities, betraying the confidence that shareholders and depositors had placed in them. Fake Bank Receipts (BRs), a legal document intended to verify the trade of government securities in a ready-forward transaction, were issued as part of Harshad Mehta’s fraudulent stock market manipulation. However, the abuse of BRs without underlying securities violated a number of statutory provisions, such as Sections 120B, 409, 420, and 468 of the Indian Penal Code (IPC), which address forgery, cheating, criminal conspiracy, and criminal breach of trust, respectively.
Since Mehta transferred money from the banking system into the stock market for his own and other investors’ personal benefit, “misappropriation of funds” was another important legal idea that was brought to light in this case. Additionally, the phrase “round-tripping” gained traction, signifying a type of financial manipulation that is frequently used to hide scams or inflate stock prices. It involves moving money through multiple channels before returning it to its original source in a veiled form. The fraud further exposed both the banking and capital market industries’ lack of efficient “regulatory compliance” systems. It revealed the systematic disregard for auditing standards, Know Your Customer (KYC) guidelines, and due diligence—all of which are now firmly established legal protections. Both civil and criminal liabilities were carefully considered throughout the court proceedings. While the criminal allegations centered on fraud, conspiracy, counterfeiting, and breach of trust, Mehta’s actions were deemed to have infringed civil laws pertaining to financial disclosures and securities contracts.
A major legal concern has been the Securities and Exchange Board of India’s (SEBI) function, specifically its responsibility to oversee, monitor, and prosecute financial crimes. The fraud sparked SEBI’s transformation from a feeble advisory organization to a strong legal regulator with quasi-judicial authority. Furthermore, the Reserve Bank of India (RBI) guidelines and the Banking Regulation Act, 1949 were examined, particularly with regard to their inability to stop variations in interbank transactions and their tardiness in responding to internal audits’ warning signs. Since both private and public financial institutions were discovered to be deficient in moral and procedural accountability, the incident also spurred the implementation of corporate governance standards, in modifications to company law, like the 2013 Companies Act’s more robust provisions. As a result, the Harshad Mehta case was not just a financial transgression but also a turning point in Indian legal history that broadened the application of regulatory enforcement, compliance standards, and financial jurisprudence.
The Proof
In April 1992, journalist Sucheta Dalal’s investigative report exposed the Harshad Mehta scam, revealing that Mehta had used fictitious Bank Receipts (BRs) to fraudulently divert over ₹4,000 crores via Indian banks. These BRs were issued despite any real securities backing them, despite the fact that they were intended to verify the purchase of government securities in the interbank market ready forward deals. Mehta created an artificial bull run by using these forged documents to obtain huge amounts of money from banks and then investing them in specific stocks. Large-scale irregularities were later confirmed by audits conducted by organizations such as the State Bank of India, National Housing Bank, and the Reserve Bank of India which revealed notable discrepancies between fund transfers and actual securities.
The most obvious evidence of manipulation was observed in increases in stock prices, such as ACC’s sharp increase from ₹200 to ₹9,000 without an obvious shift in the company’s worth. In Mehta’s company, GrowMore, investigators found circular trading patterns, post-dated checks, and falsified transaction records, all of which suggested that stock prices had been artificially inflated. Incriminating documents, such as payment vouchers and forged trading slips, were taken from Mehta’s property during income tax raids. Later, bank officials and staff testified about their involvement in enabling or failing to notice these fraudulent transactions. These pieces of evidence, along with the Joint Parliamentary Committee’s report and RBI’s own findings, unequivocally demonstrated that Mehta was responsible for one of the most intricate financial scams in Indian history.
Case Laws
CBI v. Harshad Mehta & Others (1992)
In CBI v. Harshad Mehta & Others, one of the most well-known and early court cases, the Central Bureau of Investigation charged Harshad Mehta and his associates with violating several sections of the Indian Penal Code, including Sections 120B for criminal conspiracy, 409 for unlawful breach of trust, 420 for cheating, and 477A for falsification of accounts. Sections of the Banking Regulation Act of 1949 and the Prevention of Corruption Act of 1988 were also cited by the CBI. Forged bank receipts, bank officials’ statements, and accounting irregularities were among the evidence used in this case, which set the stage for later prosecutions.
Harshad S. Mehta v. Union of India (1992)
Mehta and his team contested the constitutionality of the Special Court Act, 1992, in Harshad S. Mehta v. Union of India, which reached the Supreme Court. They claimed that Articles 14 and 21 of the Indian Constitution were violated by the establishment of a distinct tribunal. However, the Supreme Court maintained the Act’s legality, ruling that the legislature had the power to establish special courts for the sake of public justice, especially when it came to crimes with such serious financial consequences. Large-scale or massive economic offenses could be treated differently from regular criminal cases thanks to the legal framework established by the case’s landmark decision in support of legislative competence.
SEBI v. Harshad Mehta (1992)
Another noteworthy case was SEBI v. Harshad Mehta, in which the Securities and Exchange Board of India filed an enforcement action against Mehta for breaking the SEBI Act, 1992, which included using broker status improperly and engaging in manipulative trading. According to SEBI’s findings, Mehta had manipulated stock prices, participated in circular trading, and abused the stock exchange system for his own financial gain. SEBI prohibited Mehta and his companies from trading on the stock exchanges as a result of its investigation. The development of SEBI’s function as an efficient regulator underwent a sea change as a result of this case, which also strengthened its enforcement capabilities.
Conclusion
he 1992 Harshad Mehta Stock Market Scam marked a significant turning point in India’s legal and financial history. It made clear how easily one person, with the help of institutional carelessness, could influence the economy by exposing serious weaknesses in the financial sector, regulatory supervision, and stock market operations. In addition to undermining investor confidence, Mehta’s extensive fund diversion and abuse of fictitious bank receipts brought attention to the pressing need for legislative and regulatory change.
The government responded by enacting the Special Court Act and granting SEBI more authority to oversee and control the capital markets. India’s financial landscape was drastically altered by these actions, which increased accountability for banks and brokers as well as transparency and enforced stronger compliance standards.
The scam severely damaged public trust outside of the courtroom. The credibility of financial institutions was highly scrutinized and thousands of individual investors lost their savings. Despite becoming a symbol of controversy and ambition, Mehta’s actions compelled India to fortify its regulatory bodies and economic laws. In the end, the fraud was a hard-learned lesson that made sure financial systems changed to safeguard the public interest and respect the law.
FAQS
Why is Harshad Mehta linked to the 1992 stock market scam, and who was he?
In 1992, stockbroker Harshad Mehta gained notoriety for masterminding a huge financial scam. By using fraudulent bank receipts and embezzled bank funds, he took advantage of weaknesses in the Indian banking system to manipulate the stock market, resulting in a brief surge before the market crashed.
What was the main technique Harshad Mehta employed to carry out the fraud?
By using fake bank receipts, Mehta was able to obtain substantial sums of money from banks. The purchase of government securities, that had been never transferred, was fraudulently reported on these receipts. He created a fake market boom by inflating stock prices with this money.
How much money did the fraud committed by Harshad Mehta involve?
Approximately ₹4,000 crore was involved in the scam, but investor losses and market repercussions were much larger. Because of this, it was at the time one of the biggest financial scams in Indian history.
What impact did the scam have on the Indian banking and stock markets?
Investor confidence was damaged by the scam, which resulted in a significant stock market crash. Along with exposing significant flaws in the banking system, it also resulted in stricter regulations, changes to interbank transactions, and increased authority for SEBI to regulate.
