Author: Shobha Tiwari, City Group Of Colleges, Lucknow
Mehta v/s Central bureau of investigation (1992)
To the Point
The Mehta v. CBI (1992) was the biggest scam of the stock market in the Indian history.
Case reinforced to scope of judicial intervention in the criminal justice system, particularly in matters involving public interest and corruption.
Arising in the wake of the infamous 1992 securities scam involving stockbroker Harshad Mehta, this case contributed to a domino effect of legal, regulatory, and institutional reforms, especially in strengthening the role and framework of SEBI (Securities and Exchange Board of India).
Use of Legal Jargon
The case is marked by extensive use of constitutional and administrative law doctrines like locus standi, suo motu jurisdiction, judicial review, and public interest litigation. Post-scam reforms introduced statutory recognition, insider trading restrictions, disclosure-based regulatory frameworks, and enhanced compliance obligations under SEBI guidelines.
The Proof
Unmasking the Scam
The unraveling of the Harshad Mehta scam began with an investigative news report, but the real proof lay in the paper trail left behind by illegal financial transactions between banks and brokers. Mehta had exploited a loophole in the Indian banking system, particularly the Ready Forward (RF) Deal mechanism—a short-term loan arrangement between banks involving government securities. Mehta, instead of acting merely as a broker, began receiving funds in his personal accounts under the guise of RF deals. He diverted these funds to artificially inflate stock prices on the Bombay Stock Exchange (BSE).
The first concrete proof emerged in April 1992, when journalist Sucheta Dalal, in her column for The Times of India, exposed Mehta’s manipulation of the banking system. The article pointed out that Mehta had used ₹500 crore from the State Bank of India (SBI) to rig the stock market—an amount that was never meant to leave the banking system. This triggered a full-scale investigation.
Abstract
The Mehta v. CBI (1992) decision, though primarily a PIL for enforcing accountability in corruption cases, coincided with the exposure of massive systemic failures in India’s financial system during the Harshad Mehta securities scam. While the judiciary took unprecedented steps in supervising ongoing criminal investigations, Parliament and regulatory bodies responded by empowering SEBI to act as a more authoritative and independent capital market regulator. These regulatory and legal reforms—driven by both judicial pressure and economic necessity—strengthened investor protection and financial transparency, which continue to shape Indian securities law today.
Case Laws
1. Vineet Narain & Others v. Union of India (1996) 2 SCC 199
A continuation of judicial activism initiated in Mehta v. CBI, this case institutionalized the autonomy of CBI, requiring mandatory procedures for appointment and supervision to insulate the agency from political interference.
2. SEBI v. Ajay Agarwal (2010) 3 SCC 765
This case demonstrated the now-strengthened powers of SEBI post-1992, upholding the regulator’s ability to act against insider trading and market manipulation.
3. State of West Bengal v. Committee for Protection of Democratic Rights (2010) 3 SCC 571
Reiterated the constitutional authority of the judiciary to direct federal investigative agencies to act, a principle that originated in the Mehta and Vineet Narain cases.
Post-Scam Regulatory Reforms by SEBI
When the 1992 scam was exposed there was deep regulatory gaps . That time SEBI have limited powers and it was a non- statutory body .
1. SEBI Given Statutory Powers (1992)
After this Act , it take major reforms and SEBI become a fully empowered statutory regulator.
It was granted quasi-legislative, quasi-judicial, and quasi-executive powers.
2. Ban on Illegal Forward Trading
Forward trading and badla (carry-forward system) were abolished to prevent artificial price inflation.
3. Introduction of Disclosure-Based Regulation
Replaced the previous merit-based system with a disclosure-based framework.
Companies were required to disclose full and fair information before issuing securities.
4. Insider Trading Regulations
The SEBI (Insider Trading) Regulations, 1992 were enacted after the scam 1992, and in 2015 it followed major stronger framework.
Prohibited trading on the basis of unpublished price-sensitive information (UPSI).
5. Establishment of the National Stock Exchange (NSE)
NSE was established in 1992 for the more transparency and digital trading platform.
Replaced the opaque practices of the Bombay Stock Exchange.
6. Depositories Act, 1996
The depositories act was enacted for the dematerialisation of share and debentures ,means the process of converting of physical shares and securities into digital or electronic form.
And NSDL and CDSL established to prevent the fake and duplicate share certificate in the market.
7. Strengthening of Audit and Compliance
SEBI enforced mandatory disclosures, audit committees, and independent directors under the revamped Listing Obligations and Disclosure Requirements (LODR).
Conclusion
The Mehta v. CBI (1992) case is not just a legal milestone—it is a symbol of the judiciary stepping in to protect public trust in both governance and financial institutions. While the court catalyzed the autonomy of investigative agencies, the legislative response via SEBI reform and other financial regulatory upgrades was equally transformative.
Together, these judicial and legislative actions signaled a new era in accountability, transparency, and investor protection in India. The Harshad Mehta scam, and the litigation it prompted, serve as a reminder that systemic reform often begins with public outrage—but succeeds through principled, institutional change.
FAQS
Q1. Was Harshad Mehta involved in the Mehta v. CBI case directly?
A: Not directly. The case addressed broader concerns about corruption and CBI’s inaction, but it arose in the context of the 1992 scam that Mehta was central to.
Q2. What role did SEBI play before the 1992 scam?
A: SEBI existed but lacked statutory powers. It had little authority to regulate or investigate market manipulation effectively.
Q3. What was the most significant reform after the scam?
A: Granting SEBI statutory status in 1992 under the SEBI Act was the most impactful, enabling it to regulate the capital market effectively.
Q4. How did the judiciary ensure CBI’s independence?
A: The Supreme Court, in continuation of the Mehta case, directed the government to frame procedures that insulated the CBI from political influence.
Q5. How did this case impact future PILs?
A: It expanded the scope of Public Interest Litigation, affirming that citizens could seek judicial intervention in matters of national importance involving administrative failure.
