Author: Cheshta Singh, Agra College, Faculty of Law
Abstract
The Harshad Mehta Securities Scam of 1992 remains one of the most significant financial frauds in the history of independent India. The scam exposed deep-rooted structural deficiencies in the Indian banking system, loopholes in securities trading mechanisms, and lack of effective regulatory oversight. By illegally diverting funds from public sector banks into the stock market through fraudulent bank receipts, Harshad Shantilal Mehta orchestrated a massive market manipulation scheme involving thousands of crores of rupees. The exposure of this scam resulted in a stock market crash, erosion of public confidence, and far-reaching legal and institutional reforms. This article critically examines the factual background, modus operandi, legal provisions involved, judicial interpretation, and the long-term impact of the scam on India’s financial regulatory framework.
To the Point
The Harshad Mehta Scam was a classic example of white-collar crime where systemic weaknesses were exploited for personal financial gain. The scam revolved around misuse of the Ready Forward (RF) deal mechanism and issuance of fake Bank Receipts (BRs) to unlawfully obtain bank funds. These funds were subsequently used to inflate stock prices, misleading investors and destabilizing the capital market. The case led to multiple criminal prosecutions, civil recovery proceedings, enactment of special legislation, and a paradigm shift in securities regulation in India.
Use of Legal Jargon
The scam constituted offences of cheating under Section 420 of the Indian Penal Code, criminal breach of trust under Section 409 IPC, forgery and use of forged documents under Sections 467 and 471 IPC, and criminal conspiracy under Section 120B IPC. It also involved violations of the Banking Regulation Act, 1949, Securities and Exchange Board of India Act, 1992, and principles of fiduciary duty and due diligence. The adjudication process invoked special jurisdiction, attachment of properties, custodial management, and quasi-judicial powers of regulatory authorities.
The Proof
During the late 1980s and early 1990s, the Indian stock market was undergoing a transitional phase with limited technological infrastructure and weak regulatory supervision. Harshad Mehta, a stockbroker by profession, rose rapidly in prominence and earned the title of “Big Bull” for his aggressive stock market strategies.
At the heart of the scam was the Ready Forward (RF) deal, a short-term money market transaction between banks involving government securities. In a legitimate RF deal, one bank sells securities to another with an agreement to repurchase them at a later date. Bank Receipts (BRs) were issued as proof that securities were held in custody.
Harshad Mehta exploited this system by colluding with certain bank officials to issue fake and unsupported Bank Receipts without actual government securities backing them. Using these BRs, banks released large sums of money to him, believing the transactions to be secured.
Instead of deploying these funds for legitimate inter-bank purposes, Mehta diverted the money into the stock market. He invested heavily in select blue-chip stocks such as ACC, driving their prices artificially high. This created an illusion of a bullish market and attracted unsuspecting retail investors.
The scam came to light in April 1992 when financial journalist Sucheta Dalal exposed irregularities in banking transactions. Once banks demanded repayment, Mehta was unable to return the funds, leading to a stock market crash and massive financial losses.
The estimated amount involved in the scam was around ₹4,000 crores, making it one of the largest financial scams of that era.
Case Laws
1. Harshad S. Mehta v. Custodian (1998)
The Supreme Court upheld the constitutional validity of the Special Court Act and ruled that attachment of properties was necessary to safeguard public funds.
2. CBI v. Harshad S. Mehta (2001)
The Court confirmed that fraudulent banking transactions and market manipulation attract criminal liability under the IPC.
3. R. K. Dalmia v. Delhi Administration (1962)
This case was relied upon to establish that breach of trust involving public money constitutes a grave offence.
4. SEBI v. Ajay Agarwal (2010)
The Court reaffirmed strict penalties for market manipulation and insider trading, drawing principles from the Harshad Mehta Scam.
5. State of Gujarat v. Mohanlal Jitamalji Porwal (1987)
The Supreme Court emphasized that economic offences are committed with deliberate design and require stringent punishment.
Conclusion
The Harshad Mehta Scam stands as a watershed moment in Indian legal and financial history. It exposed systemic vulnerabilities and highlighted the devastating consequences of regulatory failure. From a legal standpoint, the case reinforced the principle that white-collar crimes are as serious as conventional crimes, if not more.
The judicial response, legislative intervention, and regulatory overhaul that followed the scam have significantly strengthened India’s financial system. Even today, the case serves as a cautionary tale and a guiding precedent for dealing with economic offences. It underscores the need for vigilance, transparency, and accountability in financial governance.
FAQS
Q1. What was the Harshad Mehta Scam?
It was a securities scam involving illegal diversion of bank funds to manipulate stock prices.
Q2. Which laws were violated?
IPC, Banking Regulation Act, SEBI Act, and Prevention of Corruption Act.
Q3. Why was a special court established?
To ensure speedy trial of complex securities-related offences.
Q4. What was the role of SEBI after the scam?
SEBI was empowered to regulate and monitor the securities market effectively.
Q5. Why is this case important for law students?
It illustrates the application of criminal law, banking law, and securities regulation in economic offences.
