Harshad Mehta Stock Market Scam: A Financial Earthquake in Indian History

Author: Samridhi Singh, Shri Ramswaroop Memorial University


To the Point
The Harshad Mehta Scam of 1992 remains one of the most sensational and influential financial frauds in the history of India It exposed the systemic loopholes in the Indian banking and financial system and led to a stock market crash, evaporating the savings of countless investors. The case revolved around manipulation of banking instruments and securities transactions, culminating in a scam worth over ₹4,000 crores. This article dissects the scam from a legal, financial, and systemic point of view, using relevant statutes and judgments to understand its gravity and aftermath.

Use of Legal Jargon
This case involved breaches under the Indian Penal Code (IPC), Companies Act, Securities Contracts (Regulation) Act (SCRA), 1956, Banking Regulation Act, 1949, and Reserve Bank of India Act, 1934. Harshad Mehta and his associates were charged with criminal breach of trust, cheating, forgery, and criminal conspiracy under Sections 120B, 409, 420, 467, 468, and 471 of the IPC. The scam also led to the invocation of regulatory mechanisms under the newly formed Securities and Exchange Board of India (SEBI).

The Proof: Anatomy of the Scam
Harshad Mehta, a charismatic stockbroker, manipulated the stock market by exploiting loopholes in the banking system. His modus operandi was the misappropriation of funds from the banking sector using fraudulent Bank Receipts (BRs).
Key Components of the Scam:
Ready Forward Deals (RF Deals):
RF deals were short-term loans between banks against government securities. While the borrower bank sold securities with a promise to repurchase them later, the lender bank kept the securities as collateral.
Mehta acted as a broker between these banks and manipulated the process by either delivering fake BRs or diverting funds for personal use.
Bank Receipts (BRs): Acknowledgements that securities are held by the selling bank and will be delivered later.
Mehta took advantage of banks like the Bank of Karad and Metropolitan Co-operative Bank, which issued fake BRs without backing them with securities.
These BRs were used to raise money from other banks.

Diversion into Stock Market:

The money raised fraudulently was used to manipulate share prices of select stocks such as ACC, Sterlite, and Tata Iron and Steel Company (TISCO).
The ACC share, for instance, rose from ₹200 to ₹9,000 within months due to artificial demand created by Mehta.

Triggering the Collapse:

Once the scam was exposed in April 1992 by journalist Sucheta Dalal, panic spread.
Banks demanded their money back. As Mehta couldn’t return the funds, a financial crisis ensued.
The BSE Sensex crashed drastically, eroding investor wealth.

Abstract
The Harshad Mehta scam of 1992 was a watershed moment in the history of Indian financial markets. It exposed the inadequacy of regulatory mechanisms, particularly concerning interbank transactions and the role of stock brokers. The scam highlighted the absence of coordination between the RBI, commercial banks, and the stock exchanges. The scam led to the loss of confidence in financial institutions and prompted the formation of a more robust regulatory framework, including the strengthening of SEBI’s role. The legal battle that followed stretched over decades, and although Mehta was convicted in some cases, justice was protracted and partial.

Case Laws and Legal Proceedings
1. Harshad S. Mehta v. Central Bureau of Investigation (CBI)
The CBI filed multiple cases against Mehta under IPC and other economic offences.
Mehta was convicted in a few cases, including the ₹600 crore SBI funds misappropriation case.

2. Anil Kumar v. Union of India, 1993
This public interest litigation raised issues about investor protection and the government’s failure in regulatory oversight.
The Supreme Court directed several interim measures and facilitated SEBI’s growth into a powerful watchdog.

3. State Bank of India v. Harshad Mehta & Ors.
SBI filed civil suits for the recovery of defrauded money.
Civil and criminal proceedings were launched simultaneously.

4. Harshad Mehta & Ors. v. SEBI, 1998
SEBI barred Mehta and his associates from trading in securities.The case was instrumental in establishing SEBI’s powers over brokers and intermediaries.

Conclusion
The Harshad Mehta scam  taught regulators, policymakers, and investors the importance of transparency, accountability, and timely auditing. The scam led to systemic reforms like online trading, real-time gross settlement systems, dematerialization of shares, and greater powers for SEBI. However, despite these improvements, financial scams have recurred, proving that eternal vigilance is the price of market integrity.
The saga of Harshad Mehta serves as a stark reminder: when greed collides with weak regulation, the result is not just monetary loss—it is the erosion of public trust in financial institutions.

Frequently Asked Questions (FAQ)

Q1. Who was Harshad Mehta?
Harshad Mehta was a stockbroker and chartered accountant who became infamous for orchestrating the 1992 stock market scam involving securities fraud worth over ₹4,000 crores.

Q2. Which companies’ stock prices were manipulated by Harshad Mehta?
Stocks like ACC, Sterlite Industries, and Tata Iron and Steel Company (TISCO) were heavily manipulated.

Q3. What legal charges were filed against Harshad Mehta? 
He was charged under multiple sections of the IPC (including 420, 467, 468, 471, 120B), the Banking Regulation Act, and the SCRA. Over 70 criminal cases and more than 600 civil suits were filed.

Q4 What reforms were brought in after the scam?
Establishment of SEBI as a statutory authority.
Introduction of online and dematerialized trading.
Stringent auditing norms.
Surveillance mechanisms in stock exchanges.

Q5. How did the scam affect investors?
The stock market crash caused by the scam wiped out investor wealth and led to a long period of investor distrust and market volatility.

Q6. Are there any films or series based on this scam?
Yes, the popular web series “Scam 1992: The Harshad Mehta Story”, based on the book by Sucheta Dalal and Debashis Basu, portrays the rise and fall of Harshad Mehta in detail.

Q7. Was any bank penalized in the scam?
Yes, several banks faced penalties. Some cooperative banks were liquidated. RBI introduced stricter norms for interbank deals.

Q8. What was the long-term impact of the scam on India’s financial sector?
It prompted a paradigm shift in financial regulation, catalyzed market reforms, and established a vigilant and empowered SEBI
Q9: What was the total amount involved in the scam?
Around ₹4,000 crores were illegally siphoned from banks.
Q10: Was Harshad Mehta ever convicted?
A: Multiple cases were pending against him, but he died in 2001 before full conviction in many.
Q11: What is the significance of this case legally?
A: It remains a landmark financial fraud case that led to several legal and regulatory changes in India.

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