Author: Avni sisodiya, Shri Ram College of law
To the point
The Harshad Mehta scam of 1992 remains one of the most infamous financial frauds in Indian history. Harshad Mehta, once hailed as the “Big Bull” of Dalal Street, manipulated the stock market using loopholes in the banking system and securities transactions. His actions artificially inflated stock prices and created a massive market bubble that eventually burst, causing widespread financial damage.
Mehta exploited the lack of oversight between banks and the stock market. He used fake bank receipts and illegally obtained funds from several banks under the pretense of buying government securities. Instead of purchasing these securities, he invested the money in select stocks, which drove up their prices. This created the illusion of a booming market, encouraging retail investors to pour in money.
At the peak of the scam, Mehta controlled huge sums and had a major influence on the stock market. His flashy lifestyle and media presence added to his larger-than-life image. However, when the fraud was uncovered by journalist Sucheta Dalal, the market crashed, exposing a ₹4,000 crore scam.
The fallout was severe. Thousands of investors lost their savings, and public trust in financial institutions eroded. Several banks and financial entities faced scrutiny, and regulatory reforms soon followed. The Securities and Exchange Board of India (SEBI) was granted more powers to regulate the stock market, and banking procedures were tightened to prevent such misuse.
Harshad Mehta was arrested and faced numerous legal battles until his death in 2001. Though some of the money was never recovered, the scam served as a wake-up call, leading to critical reforms in India’s financial system.
Use of legal jargon
The Harshad Mehta scam of 1992 marked a turning point in India’s financial legal framework. Mehta, a stockbroker, orchestrated a large-scale manipulation of stock prices by exploiting gaps in the banking and securities system. He unlawfully diverted funds from public sector banks using forged Bank Receipts and misused Ready Forward agreements, which are short-term loans secured by government securities.
His actions potentially constituted criminal breach of trust under Section 405 of the Indian Penal Code, along with violations under the Securities Contracts (Regulation) Act, 1956 and the Reserve Bank of India Act, 1934. The manipulation led to an artificial boom in stock values, causing significant financial harm to investors and institutions when the fraud unraveled.
Regulatory bodies, including the Securities and Exchange Board of India (SEBI), initiated inquiries and enforcement actions. The scam led to multiple criminal charges, and Mehta was prosecuted for cheating, forgery, and fraud. His case exposed severe regulatory lapses, prompting legal and institutional reforms.
The Proof
The prosecution in the Harshad Mehta scam relied on a range of documentary and circumstantial evidence to establish the fraudulent transactions. Central to the case were fake Bank Receipts (BRs) issued by smaller banks without actual backing of government securities. These forged BRs were used by Mehta to unlawfully obtain funds from major public sector banks.
Audit trails, bank transaction records, and internal memos from institutions like the State Bank of India and the National Housing Bank highlighted large, unauthorized fund transfers. These documents demonstrated a clear deviation from standard banking procedures, pointing to deliberate manipulation.
Further, stock exchange data showed an unusual surge in the prices of certain shares heavily traded by Mehta, such as ACC, which rose exponentially without any corresponding change in fundamentals—suggesting artificial inflation.
Statements from bank officials, brokers, and other intermediaries corroborated the misuse of the Ready Forward deal mechanism. Additionally, seizure of documents from Mehta’s office and recorded telephone conversations added further weight to the prosecution’s case.
This body of evidence was instrumental in proving Mehta’s involvement in securities fraud, misrepresentation, and illegal fund diversion.
Abstract
The Harshad Mehta scam of 1992 stands as a landmark financial fraud that exposed deep flaws in India’s banking and stock market systems. This article examines the nature, execution, and legal implications of the scam, where Mehta exploited systemic loopholes in the securities transaction process to divert massive funds from public sector banks. By manipulating stock prices through illegal use of Ready Forward deals and counterfeit Bank Receipts, he created an illusion of a booming market. The eventual unraveling of the fraud caused a major financial crisis, leading to significant investor losses and institutional instability. The scam not only triggered widespread legal proceedings against Mehta and his associates but also prompted long-overdue regulatory reforms. Strengthened oversight by the Securities and Exchange Board of India (SEBI), enhanced banking compliance, and legislative amendments followed as corrective measures. This article explores the scam through a legal lens—highlighting the evidence presented, statutory violations involved, and the broader consequences for India’s financial governance. By revisiting this case, we understand how one individual’s actions reshaped the regulatory framework and underscored the need for transparency, accountability, and stronger financial safeguards.
Case Laws
1. Harshad S. Mehta v. Central Bureau of Investigation
Court: Bombay High Court
Key Issue: Bail applications and custodial interrogation
Summary: Harshad Mehta challenged multiple charges and custodial interrogations during the early stages of the investigation. The court examined whether continued custody was necessary and discussed the procedural integrity of the CBI’s investigation.
2. State Bank of India v. National Housing Bank (1993)
Court: Bombay High Court
Citation: AIR 1993 Bom 134
Key Issue: Recovery of ₹600 crore transferred to Harshad Mehta
Summary: SBI filed a case against NHB for recovery of money transferred through fraudulent securities transactions. The court analyzed the legality of the Ready Forward deals and the role of bank officials in facilitating these transactions.
3. Harshad S. Mehta v. SEBI (Securities Appellate Tribunal Decisions)
Tribunal: SAT (various appeals)
Key Issue: Penalties and regulatory action by SEBI
Summary: Mehta contested several SEBI-imposed penalties for market manipulation. The SAT examined whether SEBI’s regulatory orders complied with due process and the SEBI Act.
Conclusion
The Harshad Mehta scam was a turning point in India’s financial and legal history. It exposed significant flaws in the country’s banking system, stock market operations, and regulatory oversight. Mehta’s manipulation of banking instruments and stock prices not only caused massive financial losses but also shattered public confidence in financial institutions.
The legal aftermath of the scam led to landmark cases, regulatory actions, and major reforms. Authorities like SEBI were empowered with greater control to monitor market activities and protect investors. The scam underscored the importance of transparency, accountability, and strict enforcement of financial laws.
Beyond its monetary impact, the scam served as a cautionary tale on the dangers of unchecked power and institutional complacency. It emphasized the need for continuous legal and regulatory vigilance to prevent such abuses in the future. The Harshad Mehta case remains a vital reference point in discussions on corporate fraud, securities regulation, and economic governance in India.
FAQS
1. Who was Harshad Mehta?
Harshad Mehta was a stockbroker who became infamous in the early 1990s for orchestrating one of India’s biggest financial scams by exploiting loopholes in the banking and stock market systems.
2. What was the Harshad Mehta scam about?
The scam involved the illegal diversion of funds from public sector banks using fake bank receipts and Ready Forward deals. Mehta used this money to manipulate stock prices and create an artificial boom in the share market.
3. How much money was involved in the scam?
The total amount involved was estimated to be around ₹4,000 crore at the time, which had a massive impact on the financial markets and public sector banks.
4. What were the legal consequences of the scam?
Harshad Mehta faced numerous criminal charges including cheating, forgery, and breach of trust. Multiple cases were filed under the Indian Penal Code, SEBI Act, and the Banking Regulation Act.
5. What reforms followed the scam?
The scam led to significant financial reforms. SEBI was granted more powers, banking transactions were regulated more strictly, and systems were put in place to prevent such manipulation in the future.
6. What happened to Harshad Mehta?
He was arrested and spent time in custody while facing several legal battles. Harshad Mehta died in 2001 due to a heart attack while still under trial.
