Abstract
1992 sees the Harshad Mehta scam build up one of the largest financial scandals in Indian history. To this date, one of the most-respected lawyers hinted that this was, in fact, the PV NARSIMHA RAO scam because he evidently defended HARSHAD MEHTA. At the time when one might have called him the Big bull of the Indian stock market, Harshad Mehta basically started a fraudulent scheme that exposed huge vurnabilities within India’s financial system. The article deals with the genesis, operations, effects, and consequences of the scam. The legal proceedings after the scam are also analyzed the irregularities at that time on the stock market and regulatory framework within India. The findings hold a view to underscore the immediate need for stronger regulations so that there are no such events in the future.
Introduction
The change in the economy in India for the first time in the early 1990s was to come up with liberalization leading to an active stock market. Within this environment of changing market trends a complex scam was to unfold, which would shake the very foundations of the financial sector. Allegations against the Harshad Mehta scam laid bare weaknesses in the regulatory structure, thus the need of major reform in the Indian banking and stock market systems was necessary. This article intends to provide an overview of the scandal that gave a great lessons and teachings with a very good example of this scam.
Background:
Harshad Mehta: Behind the Scams
Harshad Mehta, born in a middle-class family on July 29, 1960, in Mumbai, India. Having worked first as a mere salesman in a small brokerage firm, he was a stock trader there,due to his great skills and abilities as a good learner he got quick promotions and got many things to learn so as to later apply in his own practice. By the late 80s, early 90s, Mehta had built a reputation as a money wizard in the stock market and had earned the term of “Big Bull” owing to his enormous and steady investments.
The Finance Scenario in Early 1990s India
The shake in the Indian economy was effecting the stock market during the early 1990s and irregularities of financial markets was to be coupled with a market-driven economy in a beyond-the-road-open approach. It was a time when investors were rapidly being attracted into the stock market of their dreams, which only helped further reaching that built environment to make investors more ambitious and fit for manipulation. However, the availability of such changes in environment at that time prevented Mehta from exploiting the system and flowing through it.
The Scam: Untangling the Design
Mechanisms of Fraud
The system of Harshad Mehta scam was very-much-it dealing with stock prices of all companies. Mehta started with a way of “circular trading,” where within such a group of investors, a share was sold and bought amongst them again to build stock prices artificially. Moreover, Mehta would generally use the loopholes in the banking system, especially the ready forward (RF) deals for government securities.
1. Ready Forward (RF) Deals:
The original business trick was invented by Mehta and banks were convinced to join in the trail. In this deal, banks buy securities and agree to sell them at a higher price later on. Banks were completely misled by Mehta, for he had no collateral as induced and Mehta used these bills for his personal business he would usually used the time period of 14 days or more as a loophole for this scam he would use this money in stock market and anyhow multiply it and then return the money with the promised increment and the extra money left would remain always with Mehta only.
2. Pooling of Funds:
By creating artificial demand for particular stocks, even unsuspecting investors were caught into the trap. Once stock prices started climbing high, he liquidated his holdings and earned thousands of crores from here, leaving thousands of investors cursing. He usually did this bull techniques in rising the market by buying the securities he was interested in and then simply selling all those leaving the prices of securities in a dip after making a handsome amount from the securities which he called as profit but for those who were suffering due to this rise and fall it was not less than a curse for them .
3. Absence of Regulatory Control:
The apathetic regulatory environment ensured that Mehta operated under little to no scrutiny. The Securities and Exchange Board of India (SEBI) was established in 1988, but it remained a fledgling organization, ill-equipped to handle the monstrous intricacies of Mehta’s fraud.
4. Other ways :
Other ways like curruption ,red tapism and ill services of government due to government employees who were also greedy for money in this world of cut throat competition and in order to comply with the rat race going on ,and the political and other supporting group which were supporting Mehta due to some of their reasons were also the ways due to which this scam bursted in the society
The Unraveling
In April 1992, the entire scam fell apart as journalist Sucheta Dalal wrote in The Times of India about the anomalies involved in the dealings of Mehta. There followed investigations that revealed the vast scale of the fraud, with consequent misuse and loosing of stock markets.
Legal Proceedings
Investigation and Arrest
The Central Bureau of Investigation (CBI) got into action following the discoveries about the involvement of Harshad Mehta and co. in the this scam and registered many cases on HARSHAD MEHTA. Following his arrest in November 1992. The media went in a sheep trick for portraying Mehta as the lone protagonist in a never-ending history of financial crisis. Which was not a complete truth many big politicians not only supported him but also were involved in the scam, which convinced many Indians at that time not to invest in stock market. The authorities seized documents and records that were evident about the vastness of Mehta’s manipulations that covered a net of numerous banks and financial institutions.
Court Proceedings
All legal proceedings that ensued after the scam were quite long and tortuous and were rested on a charge of cheating, forgery, misappropriation , manipulation,abattement etc . Harshad Mehta was charged with 72 criminal offenses and was involved in a stock market scam in India it was only due to the loopholes and failure of the system.
Conviction
After years of protracted legal battle, Mehta was convicted in 2002 under several charges, including conspiracy and fraud, which resulted in his incarceration. He was made liable for the massive losses that the investors had to incur and the systemic failure that it caused to the Indian financial ecosystem as determined in the verdict of the court.
Appeals and later developments:
Mehta went on to file appeals after his conviction, but most of the charges against him were upheld by the courts. He, unfortunately, passed away in 2001 from a heart attack before the legal processes could see a conclusive finish.
Financial Impact of Reforms
Harshad Mehta’s scam acted as a catalyst for India’s regulatory system. Summed in the aftermath were significant alterations in the regulation of the financial markets and banking sectors.
1. SEBI Reforms: The Securities and Exchange Board of India (SEBI) has strengthened its powers and brought in new policies to improve and increase the transparency of stock trading transactions. Apart from that, more stringent procedures were established for the market transactions.
2. Banking Policy: The scam gave more vulnerabilities in banking operations so that a number of changes were made in policies concerning risk management and much better regulation of inter-banking transactions.
3. Investor Awareness: The breadth of understanding among the masses relating to investments in the stock market grew considerably after the scam. Retail investors had much more caution and were supposed to be more knowledgeable regarding their investment decisions, thus making an informed approach toward trading.
4. Technological Advancement: It made the shift towards introducing technology for trading and supervision. Established electronic trading systems decreased the possible incidence of manual manipulation.
Conclusion:
The 1992 Harshad Mehta scam comes as a shivering reminder of what happens in the financial markets without oversight. They show that it is imperative to have sharp regulatory frameworks along with good practices on the part of participants in the market. From the case of Harshad Mehta, we learn about the balances in financial systems with respect to the cost of manipulation and greed.
Above all, looking at the values of this controversy, one cannot ignore that the advancement of the Indian financial landscape with a promise of transparency, integrity, and education of the investor will guarantee that interests are secured for stakeholders and that a robust economy is built to withstand similar shocks in the future.
FAQs
1. Who was Harshad Mehta?
Harshad Mehta was a prominent Indian stockbroker involved in a massive financial scam that exploited loopholes in the banking system and led to a stock market crash in 1992.
2. How much money was involved in the Harshad Mehta scam?
The scam involved approximately ₹4,000 crores, which resulted in significant financial losses for investors and financial institutions.
3. What were the main tactics used by Harshad Mehta?
Mehta employed tactics such as falsifying bank receipts, manipulating stock prices, engaging in ‘ready forward’ deals, and colluding with bank officials to execute his scheme.
4. What happened after the scam was exposed?
After the scam was exposed, investigations were launched, leading to the arrest of Harshad Mehta and several others. The incident resulted in significant reforms in India’s financial regulations.
5. Did Harshad Mehta face legal consequences?
Yes, after a lengthy trial process, Harshad Mehta was convicted of several charges, including fraud and conspiracy, and was sentenced to prison. He p
assed away in 2001 before all legal proceedings could be concluded.
References
Om Srivastava
B.com. LL.B.
Teerthanker Mahaveer University
