Priyanshi Soni, United World School of Law, Karnavati University
To the point
One of the largest stock market scams in India was the Harshad Mehta scandal, which first surfaced in 1992. The focus was on manipulating Ready Forward (RF) arrangements, which are short-term interbank loans secured by government assets, and falsifying bank receipts. At the time, Indian banks had to keep a specific proportion of their funds in government securities as the Statutory Liquidity Ratio (SLR) and the Cash Reserve Ratio (CRR) with the RBI. As a result, banks frequently borrowed money for short periods of time.
By acquiring fictitious bank receipts from institutions such as the Bank of Karad and Metropolitan Co-operative Bank, Harshad Mehta took advantage of this system and presented them as evidence of government securities that had never been transferred. Mehta used the money that these BRs received from other banks to invest in the stock market. He manipulated the values of some blue-chip stocks by making large investments in them. In order to preserve the appearance of authentic transactions, the returns were subsequently cycled back.
Until journalist Sucheta Dalal revealed the swindle in April 1992, it persisted. Subsequent investigations by the RBI, CBI, and a Joint Parliamentary Committee verified the embezzlement of more than ₹4,000 crore. The discovery of this enormous financial scam resulted in extensive regulatory changes and a dramatic shift in the Indian capital market’s structure.
Abstract
The 1992 Harshad Mehta scam is still regarded as one of the biggest financial scams in Indian stock market history. Harshad Mehta, a registered broker at the Bombay Stock Exchange, obtained money from banks fraudulently by taking advantage of systemic banking flaws, particularly the use of phony Bank Receipts (BRs) and Ready Forward transactions. These monies, which was approximately ₹4,000 crore, were used to buy equities in order to artificially raise their prices and make enormous gains. Journalist Sucheta Dalal of The Times of India revealed the scam, which revealed the weakness of India’s financial regulatory framework. This was followed by investigations by the Joint Parliamentary Committee (JPC), the Central Bureau of Investigation (CBI), and the Reserve Bank of India (RBI). Following the scam, the banking industry underwent substantial reforms, SEBI’s position was reinforced, and systemic changes including electronic trading and increased financial transaction transparency were implemented.
The Proof
The Harshad Mehta 1992, one of the largest and the biggest scam in the entire history of the Indian Stock Exchange Market where the scam was in relation to the bank receipts and stamp papers. Harshad Mehta was a registered broker in the Bombay Stock Exchange (BSE) who took advantage of the whole stock exchange market of India in order to manipulate stocks and earn profits. The whole scam was around 4000 Cr.
Prior to the scam there were two important and crucial banking regulations that needs to be follow up by all the banking institutions and these were:
- CRR: It is the Cash Reserve Ratio which the banks have to deposit certain amount of money with the RBI
- SLR: It is the Statutory Liquidity Ratio which the banks have to deposit certain percentage of money with the government securities.
Because of all this banking regulations, a buyer – seller ecosystem was created where because of the CRR, the banks were often in the positions where they have to took the loans from the other banks to meet their short – term borrowings and during that time the banks were engaged in Ready Forward Deal. In this deal, the borrowing banks and the lending banks used to exchange the Bank Receipts (BR) instead of the original physical receipt for their short – term borrowings. But, Mehta took a huge advantage of this whole process and alleged to get the fake Bank Receipts to lend him the money and then he invested that money in the stock market to rise the stocks prices. The profit from all these share where then returned backed to the banks. This whole process continued and he defrauded the banks of nearly Rs 4000 Cr.
When journalist Sucheta Dalal exposed Mehta’s misappropriation of bank cash in an April 1992 piece in The Times of India, the scheme became public knowledge. The widespread fraud was discovered during the Joint Parliamentary Committee’s (JPC), Reserve Bank of India’s (RBI), and Central Bureau of Investigation’s (CBI) following investigation. An investigation into anomalies in bank-to-bank securities transactions was started by the Reserve Bank of India (RBI).
Mehta and his friends were the subject of over 70 criminal proceedings brought by the Central Bureau of Investigation (CBI).
In its report, the Joint Parliamentary Committee (JPC) attested to the fraudulent movement of more than ₹4,000 crore.
Use of Legal Jargons
The legal ramifications of the Harshad Mehta scam, which involved intricate financial fraud, extended across several areas of Indian law, including banking law, securities law, criminal law, and regulatory statutes. An explanation of the important legal vocabulary and concepts that were essential to the investigation and prosecution is provided below:
- Criminal Breach of Trust – Section 409 IPC Definition: When someone who has been entrusted with property or control over it dishonestly misappropriates or utilizes it in violation of a contract, it is considered a criminal breach of trust.
Mehta was given the duty of serving as a go-between for two banks. He violated the banks’ trust by transferring the money intended for transactions involving government assets into his personal account for speculative stock trading. The Indian Penal Code (IPC), 1860, Section 409, addresses specifically breach of trust by bankers, merchants, or agents and imposes severe penalties. - Cheating is defined as deceitfully persuading someone to transfer property or consent to its retention, resulting in unjust gain for one party and loss for another under Section 420 of the Indian Penal Code.
Mehta deceived banks by using fictitious bank receipts to persuade them to give payments. He had no right to utilize the money he obtained via deceit to invest in stocks. - Sections 468 and 471 of the Indian Penal Code define forgery as the production of a fraudulent document with the intention of misleading. Forgery for the purpose of defrauding is covered under Section 468 IPC and the use of a falsified document as authentic is covered by Section 471 IPC.
Mehta utilized either fraudulent or unapproved Bank Receipts (BRs).
The purpose of these BRs was to trick banks into thinking that securities had been moved. - The SEBI Act of 1992: This Act created SEBI as the Indian securities market’s regulator. The authority to oversee and regulate merchant bankers, stockbrokers, and other market intermediaries was granted to SEBI. The Act also gave SEBI the authority to look into and punish people and organizations involved in price manipulation, insider trading, and other stock market misconduct.
- The 1992 Securities Scam and the JPC’s ensuing investigation: The JPC was established to look into the Harshad Mehta scam and suggest ways to stop similar scams in the future. After the JPC’s 1993 report was delivered, the Indian stock market saw a number of reforms, including the creation of the NSE and the advent of electronic trading.
- The RBI used the Banking Regulation Act of 1949 to look into and punish banks that had given Harshad Mehta and his friends loans without the required collateral. In order to stop such lending practices in the future, the RBI further strengthened its rules governing banks.
In conclusion, the Harshad Mehta scandal resulted in notable modifications to the Indian stock market’s regulatory structure. To stop such frauds in the future, the government and regulatory bodies put in place a number of steps, such as tightening regulations and creating new organizations like SEBI and NSE.
Case Laws
- MC Mehta v Union of India: The government was instructed to establish a special court to hear matters pertaining to securities scams in this case. Additionally, the court ordered SEBI to take the required actions to stop similar scams in the future.
- CBI v Harshad Mehta: Under certain provisions of the Banking Regulation Act and the Indian Penal Code, a number of chargesheets were submitted against Harshad Mehta and others.
To sum up, the legal response to the Harshad Mehta scam was crucial in both prosecuting the offenders and establishing a standard for similar instances in India in the future. The Indian financial system is still governed by the values set forth in the Harshad Mehta trials, which include the significance of regulatory supervision, rigorous adherence to legal requirements, judicial responsibility, openness and disclosure, and investor protection.
Conclusion
The financial and regulatory organizations in India were awakened to the Harshad Mehta scandal. It not only exposed the pervasive carelessness and corruption in banks and brokerage houses, but it also demonstrated how a lack of supervision might cause a systemic breakdown. The scam led to the introduction of significant institutional and legislative reforms, such as tightening standards for banking operations and interbank securities transactions, establishing electronic trading through the NSE, and enhancing the role of SEBI. In addition, special tribunals were established to expedite securities fraud trials, demonstrating the judiciary’s understanding of how urgent financial discipline is. In order to safeguard investor interests and maintain the integrity of financial markets, the scam turned into a landmark case in Indian legal and economic history, highlighting the significance of openness, responsibility, and strong regulatory frameworks.
FAQs
- What was the concept of Harshad Mehta scam?
Harshad Mehta was the registered broker with BSE who manipulated the stocks price in order to earn the profit. He fraudulently alleged with the fake bank receipts (BR) in order to lend him the money and then he invested that money in the stock market to rise the stocks prices.
- How did the scam come to light?
Journalist Sucheta Dalal exposed Mehta’s misappropriation of bank cash in an April 1992 piece in The Times of India, the scheme became public knowledge. The widespread fraud was discovered during the Joint Parliamentary Committee’s (JPC), Reserve Bank of India’s (RBI), and Central Bureau of Investigation’s (CBI) following investigation.
- What were the legal consequences faced by Harshad Mehta?
Harshad Mehta faced over 70 criminal charges including cheating, criminal breach of trust, forgery, violation under the SEBI Act 1992 and breaching of all the banking regulations.
- How much money was involved in the scam?
The Harshad Mehta scam involve the fraud of approximately Rs 4000 Cr.
