HARSHAD MEHTA VS CBI: The Rise and Fall of a Financial Tycoon

 HARSHAD MEHTA VS CBI: The Rise and Fall of a Financial Tycoon

ABSTRACT:

The Harshad Mehta Securities scam, a landmark event in India’s financial history during the early 1990s, unearthed deep-rooted flaws in the banking and financial systems. The article mainly focuses on the scam and how it completely flips out the banking and financial system in India by wealthy businessman and their individuals. This abstract provides a concise overview of the key elements surrounding the case. This article gives a clear understanding of how the scam has affected many people’s lives due to the stock market and their shares got thrashed out and very huge amount of loss occurred. The case itself concludes and serves as a cautionary tale and a catalyst for ongoing efforts to maintain the integrity of India’s financial markets.

INTRODUCTION:

The Harshad Mehta securities scam of the early 1990s stands as one of the most infamous episodes in India’s financial history. Harshad Mehta a stockbroker and a prominent figure in the Bombay stock exchange is a poor man who becomes a wealthy businessman through this stock market and completely turns his life by using some loopholes also some people feel this incident is an intellectual talent of Harshad Mehta and some people treat him as a scammer and cheater of frauds done by him in a very skillfully and exploited the banking, financial institutions and the people who had invested in those stock markets and share investors for trading. The backdrop of a booming stock market revealed the dark underbelly of financial manipulation. In this case, we are exploring the events leading up to the scam, the modus operandi employed, the aftermath, and the enduring impact on India’s financial sector.

BACKGROUND:

In the late 1980s and early 1990s, Harshad Mehta rose to fame in the Indian financial market. He became a stockbroker and a well-known figure in the Bombay Stock Exchange (BSE), orchestrating a massive securities fraud. Mehta and his brother Ashwin Mehta created a consultancy later and started knowing about the stocks and analyzed every product and predicted in a very calculated way and moved forward to take the investment from the corporate gentlemen. And many clients take their consultancy as a guide and put their investment and Harshad Mehta used to tell them when to buy those shares. Often referred to as the “Big Bull” for his bullish market strategies and providing 60 to 70 per cent of profits to his investors from different sources. Many people tried to spoil his reputation during his consultancy services, which was clearly shown in the web series “Scam 1992 The Harshad Mehta Story”. He took advantage of the banking system’s willingness to engage in Ready Forward (RF) transactions, a mechanism for banks to lend to each other. 

One of the key elements of the scam was the creation of Bank Receipts (BRs). He misused these documents to secure massive loans and invest in the stock market. Due to this the stock of various companies, especially in the cement and steel sectors, witnessed unprecedented gains. It played a role in the overall boom in the stock market, which eventually led to a sharp crash in April 1992. India’s stock market index got a significant drop. Journalist Suchetha Dalal and her husband Debashish Basu exposed irregularities in their articles. Then the government took the initiative to investigate Mehta’s financial dealings. He exploited loopholes in the Banking system to siphon off funds and manipulate stock prices, leading to a meteoric rise in the Bombay Stock Exchange. Because of this he faced legal action and was arrested for his scam and financial crimes done by him and he went through various legal proceedings and was convicted for several cases related to the scam. And he was barred from trading in the stock markets as he was doing before in the Stock Markets. These are the core elements involved in his background and let us see how the legal scam was done in the Stock Market.

THE SCAM UNVEILED:

The scam was revealed step by step after Harshad Mehta’s marketing plan was changing and it was exposed in the year 1992. These are the scams revealed in the investigation step by step:

• The scam came to light in 1992 when journalist Sucheta Dalal exposed irregularities in Mehta’s financial dealings. Before the Reserve Bank of India (RBI) set guidelines he used all his strategies and set up meetings with all the local banks, he played a money market after the share market without ending up in the share market. He used to manage both the markets. And initiated trading and investing in government securities and started as a broker in demand and supply. 
• When the Reserve Bank of India (RBI) gave strict guidelines, and they had chained the whole system with its guidelines, many brokers did not go for the security business he then changed his marketing plan and Mehta cleverly used the banking system and used the PMS Schemes and started investing the money directly and indirectly in the share market of  Bombay Stock Exchange (BSE) by this now he got the source of money which nobody could have imagined and started getting invested in the bank PMSs directly and to secure massive funds, engaging in a technique known as “circular trading” to inflate stock prices artificially.
•  Even in 1991, the government was dissolved due to an economic crisis and a new government was formed even at that time the share market was not impacted. Harshad Mehta took the BSE index to astronomical heights.
• Now, there was no one to stop his bull run His activities led to a significant bull run in the stock market, with the Sensex reaching unprecedented heights.
• Even when the economic crisis got into existence the stock Market remained stable and it was still stable. So, the journalist researched and investigated all the theories behind him. And write an article addressing the irregularities in the money market.
• Later one by one, from Harshad Mehta’s scam many of the leading big shots were trying to make him down for their individuality, in this process RBI Governor slowly gave a point in his speech about the share market in the insider market itself they got doubt on his account in SBI then everyone with the instructions of Reserve Bank of India (RBI) started investing on his account later with 500 Crores if amount was not matched according to their securities and worried about the amount and but later Mehta cleared issue but everyone raised the doubt about how he got that amount.
• Then many legal queries came into existence multiple investigations were initiated from 1992 and legal battles were begun.

LEGAL BATTLES BEGIN:

• After the scam was exposed Harshad Mehta experienced multiple legal battles and his illegal inventions were destroyed through this after all, through the article written by Sucheta Dalal the journalist the case went deep and an investigation was taken out by Central Bureau of Investigation (CBI). 
• Then The CBI swung into action, charging Harshad Mehta with multiple offences, including cheating, forgery, and fraud. The Legal battle was fierce, and Mehta, known as the “ Big Bull”, vehemently defended his actions, claiming that he was just exploiting the loopholes in the system.

IMPORTANT SECTIONS INVOLVED:

Under the Harshad Mehtas case many sections and cases are applied, let us know what the sections involved under certain Acts:

• Section 420 – Cheating This section of the Indian Penal Code(IPC) deals with the offence of cheating and dishonestly inducing the delivery of property.
• Section 467 and 468 – Forgery of valuable security, will, etc;

                                     Forgery for cheating 

Were applied for Mehta’s transactions, charges under this section may have been applied.

• Section 471- Using as genuine a forged document or electronic record for involvement in using forged documents in financial transactions.
• SEBI Act, 1992 – he faced charges related to violations of regulations set by the Securities and Exchange Board of India (SEBI). 
• Prevention of Corruption Act – involves his bribery, provisions of this act also might have been involved.
• Other sections of IPCA involved under section 120B were offences related to public servants.

LIFE IN EXILE:

Due to his fraudulent acts and securities fraud, the share market was around the life of Harshad engaged in manipulative illegal acts. Exploited the Ready Forward transactions, and created fake bank receipts to deceive banks and financial institutions, leading them to believe they had made substantial investments. In this, his life was in exile and his case received extensive media coverage, bringing public attention to intricate details of the securities scam. The word SCAM became very popular after this case.

As the investigations intensified, Harshad Mehta’s empire crumbled. In 1992, the Securities and Exchange Board of India (SEBI) prohibited him from trading in the stock market. Subsequently, Mehta faced a barrage of civil and criminal cases. Fearing arrest, he spent time on the run and even sought refuge in London. 

ARREST AND TRIALS:

Harshad Mehta was finally arrested in 1992 and faced multiple trials. The legal proceedings continued for years, and Mehta remained a controversial figure throughout. His defence centred on portraying himself as a scapegoat for systemic flaws in the financial and banking sectors.

Then again, he was arrested a second time in the year 2001 for the offences and couldn’t get any bail.

LEGACY AND SOCIETY IMPACT:

• Harshad Mehta’s saga exposed the inadequacies in India’s financial regulations and banking practices. The aftermath of the scam led to significant reforms in the country’s stock market and banking systems. The case had a lasting impact on investor sentiment, prompting a more cautious approach to stock market investments. 
• Loss of trust in financial institutions was built among the people, Case garnered extensive media coverage, leading to public discourse on financial ethics and the role of media in exposing such scams.
• It emphasized the importance of ethical practices in the financial sector. The media played a crucial role in disseminating information and shaping public opinion.

CONCLUSION:

Even though the case was still going to courts by this time we can understand how the case remained. In conclusion, the Harshad Mehta case stands as a watershed moment in the history of Indian finance, revealing the vulnerabilities within the banking sector and financial systems. Harshad Mehta’s ingenious manipulation of the loopholes exposed the need for robust regulatory frameworks and oversight. Due to his ingenious thoughts, many banking institutions and financial markets completely collapsed, and many common people’s lives were spoilt by him. Many of them were led to the road it just turned into a rollercoaster ride. But one positive thing is that many security procedures were changed and rules became strict. compared to before technology involvement was there to avoid certain frauds but as well we know that scammers and ingenious fellows can easily change this can repeat and this would be a good lesson for especially white collar crimes. But this is a story everyone must know. How the episode prompted a reevaluation of risk management practices, highlighting the importance of transparency, accountability, and ethical conduct in financial dealings.

While the Harshad Mehta case exposed the darker side of financial markets, it also catalyzed a catalyst for positive change. The regulatory enhancements that followed aimed at fortifying the system against potential abuses, ensuring a more resilient and secure financial environment for investors. As the lessons from this episode continue to reverberate, the financial landscape in India has evolved, emphasizing the imperative for vigilance and adherence to ethics to maintain the high integrity of the financial markets. The potential for positive contributions had Mehta used his talents differently, remains a reflection of the consequences of his choices.

Author(s) : BOKKI HARIKA, a Student of Sri Padmavati  Mahila Viswavidyalayam, Tirupati