Author :Suktika Bhattacharyya, Jogesh Chandra Chaudhuri Law College, University of Calcutta
Abstract
Harshad Shantilal Mehta, a prominent stockbroker, orchestrated one of India’s largest financial frauds in the early 1990s by exploiting loopholes in the banking and securities regulations. His manipulation of bank receipts and ready- forward deals enabled him to siphon off huge sums from public sector banks into the stock market, inflating stock prices and triggering an artificial market boom. The scam, exposed by journalist Sucheta Dalal in 1992, led to a dramatic crash in the BSE Sensex, causing massive financial losses to investors and a temporary market shutdown. Mehta faced multiple criminal charges including conspiracy, cheating, forgery, and corruption, resulting in convictions before he died in 2001. The scandal prompted significant regulatory reforms, including the strengthening of SEBI’s powers, amendments to the Companies Act, and enhanced banking oversight, establishing stronger corporate governance and investor protection mechanisms. The Harshad Mehta case remains a pivotal lesson on the necessity of transparency, ethical conduct, and vigilant regulation to safeguard financial markets and economic stability.
To the point
Harshad Shantilal Mehta a stockbroker, businessman, uppermost one of the most infamous figures in financial history, once gave a wakeup call to Indian regulators by the exploitation of India’s financial loopholes. From working as a salesperson in the Mumbai office of New India Assurance Company Limited (NIACL) the disciple of broker Prasann Pranjivandas became the portion of prominence in the Indian Industry. By early 1990 at time he began trading heavily in the shares of Associated Cement Company the media started to portray him as the Amitabh Bachchan of the share market & the Big Bull with the depiction of his wealthy lifestyle. In 1992 Mehta’s involvement in the Indian Securities Scam (about ₹30,000 crore (equivalent to ₹2.3 trillion or US$27 billion in 2023)) led him to gain infamy for market manipulation and led him to face a huge no. of criminal cases among which he was convicted of four before his death (by sudden heart attack) at age 47 in 2001.
Background & the Proof
The Merriam-Webster dictionary says ‘when the unlawful act is done, which is not only within the awareness of the administration but which the administration not only encourages but also nurtures’, then it is called ‘scam’. A capital market scam which aims to deceive investors or exploit financial loopholes to gain illegal financial profit, involves the fraudulent or manipulative activity within the capital markets related to the buy and selling of securities like stocks, bonds, and other financial instruments. The Harshad Mehta scam was more of a bank scam rather than a securities scam as banking institutions lost thousands of crores.
The beginning was traced back to the early 1990s when Mehta offset manipulated trading pressure to fund his uprising market activities. By exploiting regulatory loopholes in the banking system, he transferred huge monetary assets from the public sector bank (PSU) into the stock market. Back then investment in stocks was not permitted the banks in India, and buying government security from RBI was costly too. Therefore, banks opted to purchase Government security through a short-term loan i.e. Ready Forward Deals. As proof of holding securities banks used BRs (bank security). Meanwhile, brokers were only there to propagate counterparties and earn a commission. Mehta by manipulating this process got access to huge sum temporarily to invest in his stocks. The fraud was escalated further due to the issuance of cheques without transferring actual securities, violation of RBI norms, and issuing BRs over 1000 crores which were accepted by institutions like Standard Chartered Bank. Similarly, Metropolitan Cooperative Bank. A notable case was the soaring of stock from 200/- to 1000/- per share in ACC ltd, manipulated by Mehta in the name of Replacement Cost Theory. The artificial boom caused the BSE Sensex to soar from around 2,000 in January 1992 to nearly 4,500 in April 1992. Through this massive price rigging, Mehta made substantial profits—he even paid ₹28 crores in advance income tax for FY 1991–92—before the scam was exposed.
Mr. Mehta is also prominently known to have offered a bribe of rupees one crore to the then Prime Minister P. V. Narasimha Rao to hush up all the cases against him. He also advised the Prime Minister to appoint him as the finance minister in the interest of the nation. In April 2001, the SEBI debarred Mr. Mehta from dealing in securities for life.
In April 1992, a veteran journalist Sucheta Dalal showed the absence of 600 crores from SBI to the nation accusing Mr. Mehta of misusing it. This exposure caused BSE Sensex to crash from ‘rupees four thousand five hundred to rupees two thousand five hundred causing a loss of around rupees one lakh crores in market capitalisation’, resulting in the process of making many innocent investors bankrupt overnight. Additionally, it led to the closure of the stock market for a prolonged one month. In November Mr. Mehta was arrested by CBI and charged with 72 criminal cases and about 600 civil suits under the Prevention of Corruption Act, 1988(Section 11 – Public servant obtaining valuable thing without consideration, Section 12 – Punishment for abetment of offenses, Section 13(1)(d) – Misuse of position to obtain undue advantage) and the Indian Penal Code, 1860 (Section 120B- Criminal conspiracy, Sections 463, 465, 467- Forgery, Section 171E- Bribery, Section 420- Cheating). He was also known to offer to bribe the then Prime Minister, P.V Narashima Rao and advised him to make the former the finance minister for the benevolence of the countrymen.
Harshad Mehta was convicted and sentenced to five years of rigorous imprisonment along with a ₹25,000 fine for his role in the fraudulent schemes using fake Bank Receipts and plotting manipulative securities transactions. Proceedings in pending Mehta died on 31st December 2001 which led to the to effectively consider the matter closed on grounds of abatement due to his death.
Case Laws
The case laws, mentioned during the trail of Harshad S. Mehta & Ors. Vs. The State of Maharashtrawere
1. Directorate of Enforcement v. Deepak Mahajan & Anr. ((1994) 1 SCR 445) (Para 54)
2. A.R. Antulay v. Ramdas Sriniwas Nayak & Anr. ((1984) 2 SCC 500) (Para 22)
3. S.P.Gupta & Ors. etc. etc. v. Union of India & Ors. etc.etc. (AIR 1982 SC 149) (Para 32)
4. Harcharan Singh v. Smt.Shivrani & Ors. ((1981) 2 SCC 535) (Para 32)
5. State of Tamil Nadu v. V. Krishnnaswami Naidu & Anr. ((1979) 3 SCR 928) (Para 25)
6. The Commissioner of Sales Tax, U.P., Lucknow v. M/s. Parson Tools and Plants, Kanpur ((1975) 4 SCC 22) (Para 32)
7. State of U.P. v. Kailash Nath Agarwal & Ors. ((1973) 1 SCC 751) (Para 37)
8. Lt. Commander Pascal Fernandes v. The State of Maharashtra & Ors. ((1968) 1 SCR 695) (Para 24)
9. J.K.Cotton Spinning and Weaving Mills Co.Ltd. v. State of U.P. & Ors. (AIR 1961 SC 1170) (Para 47)
10. Willie (William) Slaney v. State of Madhya Pradesh (AIR 1956 SC 116) (Para 47)
11. Harihar Sinha & Ors. v. Emperor (AIR 1936 Calcutta 356) (Para 58)
12. Abdul Majid v. Emperor (60 Cal. 652) (Para 59)
13. Ram Narain Poply v. Central Bureau of Investigation (Para 11)
These cases helped interpret the procedural and jurisdictional powers of Special Courts, the legality of pardon provisions, and the scope of criminal liability under complex financial crimes.
Additionally, Lord Howard De Walden v. Inland Revenue Commissioners (1948 (2) All E.R 825) (Para 32), Johnson & Anr. v. Moreton (1978 (3) All E.R. 37) (Para 32) these two foreign cases were also mentioned.
Aftermath of this case
In the aftermath of this scam, Indian government made several changes to the legal and regulatory framework to strengthen corporate governance standards and prevent fraudulent activities.
∙ Establishment of SEBI: To observe the securities market i.e. market manipulation (Sec 12A), in India SEBI (The Securities and Exchange Board of India) was established. Additionally, it prohibits trading based on unpublished price-sensitive information (Section 15G), as Mehta breached this provision by misusing his insider access leading to the manipulation of stock prices and outlaws fraudulent trade practices (Section-24)
∙ Amendment of Companies Act and More: The amendment related to this Act promulgated stricter regulation related to the mandatory appointment of auditors and the preparation of audited financial statementsby strengthening the accounting standards. Additionally, the concept of independent directors to the board of directors of the companies was introduced to secure an impartial observation, via The Companies Act, 2013. To observe company’s financial reporting and monitor adherence to the accounting standards Audit committee was established by listed companies. Further, it implemented the class action lawsuits, mandating shareholders to file a lawsuit against any company for any fraudulent activities or breach of fiduciary duties. It also interprets the CSR (corporate social responsibility) making mandatory for companies to invest a certain percentage of profit in CSR.
Apart from this on the advice of the Janakiraman Committee, a committee was established to oversee the Securities and Exchange Board of India. Banks were to have a separate audit system for portfolios, and they were to be monitored by the Reserve Bank of India (RBI).
Conclusion
This scam was a watershed moment in India’s corporate and regulatory history. Upon reflection, the Harshad Mehta case serves as a critical lesson in the importance of transparency, ethical conduct, and robust regulatory mechanisms in financial markets. Strictly mentionable that it worked as a reminder that due to unchecked ambition and fabricated oversight can destabilize the entire economy of the nation and to that that continuous vigilance, reform, and accountability are essential to maintaining the integrity of the financial system.
FAQs
1. Who was Harshad Mehta and why is he infamous?
Ans-Harshad Mehta was a stockbroker known as the “Big Bull” who manipulated the Indian stock market in the early 1990s, causing a ₹30,000 crore financial scam and massive losses to banks and investors.
2. How did Harshad Mehta execute the scam?
Ans-He exploited banking loopholes, using fake Bank Receipts and Ready Forward Deals to temporarily divert public sector bank funds into the stock market, artificially inflating share prices before the market crashed.
3. How was the scam exposed and what happened next?
Ans-Journalist Sucheta Dalal revealed ₹600 crores missing from SBI in 1992, triggering a stock market crash that wiped out ₹1 lakh crore in market value, bankrupting many investors and shutting the market for nearly a month.
4. What legal actions were taken against Mehta?
Ans-Mehta was arrested, charged with 72 criminal cases including conspiracy and forgery, convicted in four cases, and sentenced to five years rigorous imprisonment with a fine, but died in 2001 before all proceedings concluded.
5. What reforms followed the scam?
Ans-India strengthened financial regulation by empowering SEBI, amending the Companies Act for better auditing and governance, mandating CSR, improving RBI’s bank oversight, and implementing systemic reforms to prevent such frauds.
Reference
1 Harshad Mehta Scandal: Case Study in Corporate Governance
2 Harshad Mehta – Wikipedia
3 Harshad Mehta – Wikipedia
4 SEBI | Action against Harshad Mehta, Videocon, BPL and Sterlite
5 https:/suntextreviews.org/doi/pdf/10.51737 /2766-4600.2023
6 https:/suntextreviews.org/doi/pdf/10.51737 /2766-4600.2023
7 https:/suntextreviews.org/doi/pdf/10.51737 /2766-4600.2023
8 https:/suntextreviews.org/doi/pdf/10.51737 /2766-4600.2023
9 https:/suntextreviews.org/doi/pdf/10.51737 /2766-4600.2022
10 1992 Indian stock market scam – Wikipedia
11https://timesofindia.indiatimes.com/india/26-ye ars-after-securities-scam-court-acquits-brother-of-harshad-mehta/articleshow/66518247.cms
12 Appeal (crl.) 319-320 of 1996
13 Harshad S. Mehta & Ors. Vs. The State of Maharashtra – Court Verdict
14 IJRAR23A2961.pdf
https://ijrar.org/papers/IJRAR23A2961
15 IJRAR23A2961.pdf
https://ijrar.org/papers/IJRAR23A2961
16https://en.wikipedia.org/wiki/1992_Indian_stock _market_scam?
