Author: Khyathi priya Nukavarapu, a student of KL university
To the Point
The Harshad Mehta scam of 1992 is one of the most sensational financial frauds in Indian history. It exposed deep-rooted systemic flaws in the banking and stock market operations, where Mehta exploited loopholes in the securities transaction system to siphon off over ₹4,000 crores. The aftermath led to the overhaul of market regulations and the creation of the Securities and Exchange Board of India (SEBI) as a powerful watchdog. The scam brought to light the urgent need for transparency, accountability, and legal reform in India’s financial infrastructure.
Use of Legal Jargon
The scam involved misappropriation of public funds, manipulation of government securities, and breach of fiduciary duty by banks and brokers. Legal terms such as fraudulent misrepresentation, criminal breach of trust, insider trading, money laundering, and market manipulation define the core legal violations. The scam also involved violations of the Reserve Bank of India Act, 1934, Securities Contracts (Regulation) Act, 1956, and Indian Penal Code, besides leading to litigation under civil and criminal laws.
The Proof
Scam Value: Estimated at over ₹4,000 crores
Modus Operandi: Use of Ready Forward (RF) deals, misappropriated Bank Receipts (BRs), and false securities trading
Timeframe: 1991–1992
Main Accused: Harshad Mehta, known as the “Big Bull”
Legal Prosecution: Over 70 criminal cases and 600 civil cases were filed
Regulatory Fallout: Strengthening of SEBI’s regulatory framework and transformation of stock market practices
Abstract
The Harshad Mehta scam represents a critical moment in India’s financial and legal history. Harshad Mehta, a stockbroker, manipulated the stock market by illegally obtaining funds from banks using fictitious securities transactions. He then used this money to drive up stock prices and profit from the artificial inflation. Once the scam was exposed by journalist Sucheta Dalal, panic ensued, leading to a stock market crash and a major financial crisis. The scandal shook investor confidence, exposed regulatory gaps, and eventually catalyzed reform in financial laws and institutions, leading to the empowerment of SEBI and modernization of the Indian capital market.
Case Laws
1. CBI v. Harshad Mehta & Ors. (1992–2001)
The Central Bureau of Investigation (CBI) filed multiple cases under the IPC and the Prevention of Corruption Act, leading to Mehta’s arrest. Though the prosecution secured some convictions, many cases were still pending at the time of his death in 2001.
2. SEBI v. Harshad Mehta (1992)
SEBI, under its new powers post-scam, barred Mehta and his associates from trading in the securities market and conducted thorough investigations into market manipulation.
3. Canbank Financial Services Ltd. v. UTI (1994)
This case dealt with the legality and ownership of Bank Receipts (BRs) and highlighted issues related to delivery obligations and inter-bank trust.
4. Standard Chartered Bank v. Andhra Bank Financial Services Ltd.
This civil case touched on forged BRs and responsibilities of banks in ensuring due diligence in RF deals.
Detailed Analysis
Background and Context
The Indian stock market in the early 1990s was largely unregulated. Stock trading was governed by the Bombay Stock Exchange (BSE), while the money market was overseen by the Reserve Bank of India (RBI). However, coordination and regulation were poor. Harshad Mehta, once a humble clerk, rose to fame by exploiting the weak oversight mechanisms through market manipulation.
Modus Operandi: How the Scam Worked
1. Ready Forward (RF) Deals
RF deals were essentially short-term loans between banks, secured by government securities. Mehta used these deals to his advantage by acting as a broker between two banks. He would collect money from one bank but fail to deliver the securities to the other, instead diverting the funds to stock markets.
2. Bank Receipts (BRs)
BRs acted as a proof of securities held. Mehta obtained fake BRs from banks like the Bank of Karad and Metropolitan Co-operative Bank. These BRs were used to convince other banks that securities existed, when in fact, they did not.
3. Stock Price Manipulation
The illegally acquired funds were then used to inflate the prices of select stocks, notably ACC, whose price shot up from ₹200 to ₹9,000. This attracted other investors, creating a bubble. Mehta sold his shares at the peak and made massive profits.
4. Use of Political Connections
It is believed that Mehta had access to high-level political circles which may have enabled his transactions to go unnoticed initially.
The Discovery
Journalist Sucheta Dalal exposed the scam through her article in The Times of India on April 23, 1992. The publication led to a chain reaction. The RBI conducted an internal investigation and confirmed the misappropriation of securities and funds. The Bombay Stock Exchange crashed by over 570 points in a single day—its biggest fall at the time.
Legal and Institutional Reactions
CBI and Criminal Charges
The CBI arrested Harshad Mehta and filed multiple FIRs under:
- Sections 120B, 409, 420 IPC – Criminal conspiracy, criminal breach of trust, cheating
- Prevention of Corruption Act
- Benami Transactions (Prohibition) Act
- Customs and Excise laws
SEBI’s Role
At the time of the scam, SEBI lacked statutory powers. Post-scam, it was given legal teeth through the SEBI Act, 1992. SEBI introduced:
Mandatory disclosures by listed companies and brokers
Electronic trading and dematerialization
T+2 rolling settlement system
Ban on BRs and RF deals by brokers
Judiciary’s Stand
The judiciary played a balancing role, ensuring due process while supporting regulatory reforms. While many cases were delayed, the verdicts gradually established accountability for various market intermediaries.
Impact on Financial System
1. Banking Regulations
The scam exposed the lack of oversight in inter-bank transactions. It led to stricter RBI guidelines for bank investments and treasury operations.
2. Stock Market Reforms
- Automation of trading
- Creation of National Stock Exchange (NSE) in 1994
- Introduction of demat accounts
- Strengthening of broker registration and surveillance
3. Legislative Reforms
SEBI Act, 1992
Depositories Act, 1996
Amendments in Companies Act and Income Tax Act
4. Investor Education
The scam served as a wake-up call for investors and encouraged more informed participation and demand for transparency.
Controversies and Post-Scam Developments
Harshad Mehta claimed he had paid ₹1 crore as a bribe to then Prime Minister P.V. Narasimha Rao, a charge that remained unproven.
Mehta continued to fight his legal battles until his death in 2001 due to cardiac arrest.
His family, particularly his wife Jyoti and brother Ashwin Mehta, have continued to contest various legal claims in court.
A web series and several books have been made, chronicling the rise and fall of the “Big Bull.”
Conclusion
The Harshad Mehta scam was not merely a financial scandal—it was a mirror to the systemic weaknesses in India’s economic governance. It brought about a revolution in financial regulation and market practices. While the scam tarnished the image of the Indian financial market briefly, the reforms that followed laid the groundwork for a more robust and transparent capital market. It stands today as a vital lesson in legal accountability, regulatory oversight, and the importance of ethical conduct in financial services.
FAQs
Q1. Who was Harshad Mehta?
A stockbroker who orchestrated the 1992 securities scam by manipulating stock prices using illicitly obtained bank funds.
Q2. What was the amount involved in the scam?
Approximately ₹4,000 crore was fraudulently diverted from the banking system into the stock market.
Q3. What were the key legal violations?
Criminal breach of trust, cheating, conspiracy, and violations under the IPC, RBI Act, and SEBI regulations.
Q4. What is a Bank Receipt (BR)?
A document issued by a bank acknowledging receipt of securities, often used in Ready Forward deals. Mehta used fake BRs to siphon funds.
Q5. How did SEBI change after the scam?
SEBI was granted statutory powers under the SEBI Act, 1992, making it a powerful regulatory authority for the securities market.
Q6. What is the legacy of the Harshad Mehta scam?
The scam led to major reforms in banking and stock markets, increased transparency, and educated investors about market risks.
Q7. Is the Harshad Mehta case still ongoing?
Some legal proceedings related to asset recovery and tax disputes involving his family are still active.
Q8. Was Harshad Mehta ever convicted?
He was convicted in a few cases but died in 2001 before many were resolved.
Q9. How did the scam affect ordinary investors?
Thousands of investors lost their savings as the stock market crashed post-exposure of the scam.
Q10. What reforms followed the scam?
Introduction of NSE, dematerialized trading, T+2 settlement, ban on BRs, and strengthening of SEBI’s regulatory powers.
