Author: Akash Dey Bhowmick; a student of St. Xavier’s University, Kolkata
ABSTRACT:
India has witnessed some of the biggest legal scams which have left deep wounds of deceit and financial loss which are still bleeding even today. Even though India is a fast-growing economy, there continues to be a significant influx of money in and out of the country which has while allowing the economy to develop at one hand had also left loopholes in the financial system which have been exploited by certain individuals to their ill-motived advantages.
These individuals have been able to materialise their plans through cleverly devised fraudulent projects which have left the investors for dead.
In the “Harshad Mehta Scam Case”, the backdrop is the stock market which serves as a crucial aspect in India’s financial landscape. What unfolded here was a gross manipulation that affected the trust of many investors.
Such instances of like nature have just grown in number and severity due to unchecked financial missteps and dealings which makes a closer scrutiny the need of the hour.
INTRODUCTION:
Harshad Shantilal Mehta was the perpetrator of this financial-legal scam where an embezzlement of INR 1439 crores that is an approximate amount of $3 billion took place from the Indian stock market scene. This triggered a drastic loss of life savings wealth of many investors which in turn amounted to a staggering figure of INR 3452 crores equivalent to a whooping $7 billion amount.
Although Harshad Mehta was the perpetrator herein, it is important to note that he further got framed as a victim due to the involvement of significant political alliances and prominent governmental figures who in order to keep themselves out of the bad light scapegoated Harshad Mehta. However, there remains no doubt in regards to the fact that Mehta did manoeuvre the existent loopholes in the stock market to his advantage for attaining personal gains while manipulating other investors and indulging in banking frauds.
At the very initial level what needs to be recognised is that this scam took place in India at a time when the country was broken under major political and policy based economic reforms due to the liberalisation, privatisation and globalisation (LPG) process that was ongoing at that time to open its economy to the world at large.
Harshad Mehta owned shares of Associated Cement Company (ACC) which saw an outstanding surge in price from a mere INR 200 to INR 9000 which came as an anomaly to other shareholders and stockbrokers.
FACTUAL ANALYSIS:
In 1986, Harshad Mehta established his own brokerage firm to sell and buy shares from the public in a certain company’s market to widen the horizon of his own company. He selected some static firms which at that time were not of any particular use or did not even exist in reality. The public acquired the shares which were directed by Harshad Mehta without doing any double checking out of their sheer trust in his potency given his brilliant standing and knowledge in stock market dealings. The strategy followed by Harshad Mehta was to portray the companies highlighted by him to his clients as extremely profitable ones carrying immense potential for generating benefits for the shareholders. A ponzi scheme outlay was being implemented by him behind the scenes. With no internet back in those days, Harshad Mehta found it even easier to fool the public at large who in turn fell victim to their lack of correct information, awareness and analysis. This was the constituting elements of the first scam which he did.
Later on, he started posing as broker for banks in the financial market too. Harshad Mehta succeeded in diverting the deposit of funds from the lending banks into his personal account from which he transferred money to the receiving bank. This led to many such unlawful fund transfers from various well-known banks such as the State Bank of India, the UCO bank with the utilisation of forged bank receipts.
He appropriately credited such funds to the banks and then he gradually scammed these banks by crediting the funds to his own personal account without any bank securities which saw him make additional money in crores. In order to get rid of these additional amounts made and not to leave any traces of the same, he used to invest the amounts made by him fraudulently in small businesses to make profits.
What actually unfolded through this chain of fraudulent conducts was that the general public at large lost their money due to fund mismanagement wherein the banks who held their money for safety and security could not protect them due to lack of effective fund management. To keep a lid on this growing swindling and to foolproof the same, Harshad Mehta offered money to the wealthy people to not open his scam so as to let him continue expanding the malicious scheme.
It was not until the efforts made by a journalist named Sucheta Dalal who took cognizance of this alarming situation and looked into its peculiarity to ultimately set the RBI on their toes to investigate and look into Harshad’s fraudulent schemes.
Finally, the commission of the $1 billion scam to purchase stocks from the Bombay Stock Exchange by Harshad Mehta which triggered an insurmountable loss of Rs. 3500-4000 crores to the Indian financial system as a whole served as the final nail in his coffin, famously, coming to be known as “The Scam, 1992”.
Harshad Mehta went on to be accused of 74 criminal cases and later got charged with financial crimes too.
A LOOK INTO THE FINANCIAL-LEGAL CRIMES COMMITTED:
Frauds are mostly capital market scams. In this particular scam, an amalgamation of ‘diversion of funds’, ‘intra-day trading’ and ‘misuse of ready forward loan to maintain statutory liquidity ratio’ was cleverly used by the perpetrator Harshad Mehta.
Harshad Mehta followed the basic strategy of significantly and consistently investing in select stocks from the day beginning to ultimately increase the stock price so as to eventually sell the same at day-end to earn big profits. This is how he committed the crime of intra-day trading.
Another notable fraudulent instrument which was used by Harshad Mehta was fake Bank Receipts i.e. BRs.
Harshad Mehta committed these crimes by taking to the ill measure or practice of diversion of funds. He took large amounts of cash from government securities over a short time period to infuse the same into his stock market with the motive to inject the money into certain carefully chosen assets to increase their price by an exorbitant level. He defrauded the banks by instructing them to pay directly to his personal account while seemingly posing as a broker.
The offences committed by Harshad Mehta came under Chapter 18 of the Indian Penal Code, 1860. The offence specifically fell under Section 463 of the IPC along with the penalty falling under Sections 465 and 467 dealing with forgery offences and forgeries of securities, wills and other documents respectively which included the likes of bribery (Section 171E), cheating (Section 420), criminal conspiracy (Section 120B) and account falsification (Section 477A).
CONCLUSION:
While it is undeniable that Harshad Mehta was a brave stock broker who had a natural brilliance in banking system and techniques to accrue maximum benefits out of them, what is also unquestionable is that he used all these abilities of his for commission of multiple fraudulent activities. Therefore, the ‘Harshad Mehta Scam of 1992’ brought into light the complete absence of clarity that was resident in the financial market at that time. It depicted that the irregularities existent at that time was so deep-rooted that any highly suspicious transactions raised very little to almost no inquiry. All these in unison set the ideal backdrop for a financial-legal scam of such an apocalyptic stature to happen at the first place that shook and revolutionised the entire stock market scene in India from thereon.
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