Author name: Mishti jain, BA.LLB 4th year, at Jigyasa University (formerly Himgiri Zee University) Dehradun
Introduction
The 1992 Harshad Mehta scam is etched in Indian financial history as a turning point, revealing the vulnerabilities of the country’s banking and stock market systems. This financial scandal, led by Harshad Mehta, not only exposed systemic flaws but also highlighted the dangers of unchecked greed and manipulation.
The Man Behind the Scam: Harshad Mehta
Harshad Mehta was born in a middle-class family in Gujarat. He moved to Mumbai to carve out a career. He worked in various jobs before entering the stock market in the early 1980s. With a sharp understanding of market trends and an uncanny ability to predict stock movements, Mehta quickly rose to prominence as the “Big Bull.” His charm and confidence caught the fancy of investors and his ability to deliver humongous returns made him a darling of the markets. By the early 1990s, Mehta had established a lavish lifestyle that was representative of his success—an opulent sea-facing apartment in Mumbai, a fleet of luxury cars, and a high-profile image. This success, however, rested on a foundation of deceit, exploiting loopholes in India’s banking and financial systems.
The Mechanics of the Scam
At the heart of the scam was Harshad Mehta’s brilliant manipulation of the banking system. He used the misuse of Ready Forward (RF) deals and Bank Receipts (BRs) to divert funds into the stock market.
1. Ready Forward Deals:
RF deals were essentially short-term loans between banks, where government securities served as collateral. In these transactions: A bank lent money to another bank on security. The borrowing bank would repay the loan with an interest rate and retrieve securities. Mehta brokered such deals on the behalf of banks. This system he exploited.
2. Fake Bank Receipts:
Instead of issuing real government securities, Mehta managed to convince the banks to issue false Bank Receipts (BRs), which claimed the existence of government securities. The BRs were used as collateral to raise funds from other banks.
3. Market Manipulation:
The money thus siphoned through such fake BRs was pumped into the stock market. Mehta chose to invest selectively in stocks, which gave them an artificial boost from speculative demand. For example, shares of companies such as ACC (Associated Cement Company) rose meteorically from ₹200 to as high as ₹9,000 in a matter of months.
4. Circular Transactions:
Through these web-circles, Mehta operated, creating money borrowed by one bank in order to settle the same with another, thereby conjuring the illusion of both liquidity and solvency.
The Scale of the Fraud
The scam was unprecedented in its magnitude, involving a staggering ₹4,000 crores (approximately $1 billion at the time). This money was siphoned from the banking system, leading to a ripple effect across India’s financial markets and economy.
Exposure of the Scam
The scam was exposed in April 1992 by Sucheta Dalal, a financial editor with The Times of India. Dalal’s exposé revealed Mehta’s fraudulent practices, particularly his misuse of fake BRs. Her exposé revealed how a single individual exploited systemic loopholes to manipulate the stock market and siphon massive amounts of money from the banking system. After the expose, regulatory authorities and law enforcement agencies swung into action. The Reserve Bank of India (RBI) launched an investigation, and Mehta was arrested on charges of fraud and financial misappropriation.
Aftermath of the Scam
The after-effect of the scam was widespread and had its impact on different stakeholders, thereby changing the financial scenario of India to a great extent.
1. Losses of Investors:
After the scam had been exposed, the stock market, which was at unprecedented high due to Mehta’s manipulation, crashed. The retail investors who had placed their trust in the stock market under Mehta’s bullish vision lost thousands of dollars on their life savings.
2. Banking Sector Crisis:
Many banks were left in financial disarray due to the involvement of fraudulent transactions. Public confidence in the banking system took a hit and some banks could not get back on their feet.
3. Economic Consequences:
The scam had a temporary loss of faith in India’s financial markets, resulting in foreign investments and a slowdown in economic growth.
4. Legal and Regulatory Modifications:
More powers to the regulation of the stock market were bestowed upon the Securities and Exchange Board of India (SEBI), which had already been in existence since 1988. The banking transactions came to be subjected to more rigid norms, and BRs were also curtailed. Deposity systems became a part of the business, thus reducing dependence on physical share certificates.
Legal Battles and Consequences for Mehta
He was hit with more than 70 criminal cases and over 600 civil suits following the exposure of the scam. Harshad Mehta, who was so flamboyant in public, found it very difficult to defend himself in the court. In 1992, he was convicted in a case related to the misappropriation of ₹500 crores from the State Bank of India. He was sentenced to prison but continued to fight legal battles for years.
Mehta’s Demise and its Legacy
Even as he continued to attend trials, in 2001, Harshad Mehta suffered a cardiac arrest in Tihar Jail, New Delhi. Death put an end to what was one of India’s most sensational financial scandals of all time but it leaves behind quite a few lessons from that episode.
Lessons from the Scam
The Harshad Mehta scam is a lesson for all of us, a lesson about the dangers of greed, the importance of regulatory oversight, and the need for transparency in financial systems. The key takeaways are:
Strengthening Regulatory Frameworks:
The scam highlighted the need for strong regulatory mechanisms to check market manipulation and fraud.
2. Investor Awareness:
Retail investors were reminded of the risks of blindly following market trends or charismatic figures.
3. Ethics in Finance:
The scandal highlighted the ethical responsibilities of financial professionals in maintaining the integrity of the system.
The Legacy of the Harshad Mehta Scam
The 1992 scam left a permanent mark on India’s financial landscape. It has been extensively analyzed, discussed in documentaries, and chronicled in books. A good book on the scandal has been written by Sucheta Dalal and Debashis Basu called The Scam: Who Won, Who Lost, Who Got Away. In recent years, the story of Harshad Mehta was brought to life in the critically acclaimed web series Scam 1992: The Harshad Mehta Story, which captured the public imagination and reignited discussions about the man and his methods.
Conclusion
The Harshad Mehta scam of 1992 was not just a financial fraud but a wake-up call for India’s banking and financial systems. While it caused immense damage to investors and institutions, it also paved the way for critical reforms that have made India’s financial markets more robust and transparent. It remains a complex tale of ambition, ingenuity, and the devastating consequences of crossing ethical boundaries in the pursuit of wealth.
FAQS
Who was Harshad Mehta?
In India, Harshad Mehta was a stockbroker who rose to fame for his role in the 1992 film. Indian securities scam. By using illegal tactics, he earned huge profits by manipulating stock prices, earning him the nickname “Big Bull”.
2. What was the 1992 scam?
It was a scheme in which money from banks was stolen to artificially increase stock prices. Money was diverted to the stock market by Mehta who exploited banking loopholes.
3. How did the scam work?
Bank Receipts (BRs):
The money was obtained by Mehta through counterfeit BRs from banks.
Stock Market Manipulation: He utilized the funds to make substantial investments in certain stocks, resulting in higher prices. A).
Profit Booking: He sold these overpriced stocks to earn substantial profits while repaying the banks later.
4. How was the scam exposed?
Journalist Sucheta Dalal exposed the scam in the Times of India. Mehta was able to use banking loopholes to invest in stocks, as she revealed.
5. What happened to Harshad Mehta?
Multiple financial offenses led to Mehta’s imprisonment. He died in custody in 2001 after suffering a heart attack.
