Author: Roqaiya Fatma, Aligarh Muslim University
Linkedin Profile: https://www.linkedin.com/in/roqaiya-zafar-674a84329?utm_source=share&utm_campaign=share_via&utm_content=profile&utm_medium=android_app
To The Point
The Harshad Mehta Securities Scam of the 1992, adapted by the stockbroker Harshad Mehta,who involved in the fraudulent manipulation of the banking instruments and the stock prices, leading to a market crash and exposing the systemic vulnerabilities in the India’s financial framework.His Often called the “Big Bull” for his aggressive trading style and the sudden rise in the stock market, Harshad Mehta was able to manipulate the prices of market shares and the divert vast amounts of the funds using loopholes in the banking system.
At the time, the Indian economy was just opening up, and financial regulations were still catching up.
The lack of cooperation between banks and the regulatory bodies was exploited by Harshad Mehta. Without the required paperwork, he would borrow huge large bank loans,transfer the funds to the stock market, and enlarge the share prices of the specific firms. These rising prices created market frenzy, and also attracted more and more investors who believed in the seemingly unbeatable boom. But the entire system was built on the borrowed money and fragile lies.When the scam was eventually discovered in 1992, it revealed the serious deficiency in the India’s financial system & regulations .The fallout was severe and the banks were forced to compete to the account for their missing money, investors lost crores rupees, and the banks were left scrambling to the account for their missing funds.
This case also served as the wake-up call for the country. India learned the high cost of weak oversight, blind trust, and unchecked financial ambition.However, it also brought about significant changes to the banking and securities industries, expanding the authority and the power of organizations like the Securities and Exchange Board of India (SEBI). The Harshad Mehta scam is still remembered as a significant case in Indian history because of its scope and boldness as well as the way it changed the country’s point of view on financial accountability and regulation.
Use of legal jargon
To understand the legal side of Harshad Mehta’s scam, we need to explain the main terms used in the case in simple words. Harshad Mehta was charged with crimes like, cheating and criminal conspiracy, which means he was accused of deceiving others and planning fraud with the others involved. He also committed a breach of trust. He took money that didn’t belong to him and spent it on things he should not have.
He also broke the several rules which under the Banking Regulation Act and the Securities Contracts (Regulation) Act , these are laws that control the how banks and stock markets should function safely and fairly. Mehta created fake documents called bank receipts to show fake promises of money being transferred, which falls under forgery and fraudulent misrepresentation. At that time, Securities and Exchange Board Of India (SEBI) India’s financial market watchdog that didn’t have the full powers to stop these scams. But this case showed the why India’s needed a stronger and more independent regulator. After the scam, laws were changed to give SEBI more authority to investigate and prevent stock market frauds.
In short, Harshad Mehta’s scam touched almost every corner of financial and criminal law from the misusing public funds, to manipulating the stock prices, to faking documents.
The proof
The scam did not stay hidden for long. When the journalist Sucheta Dalal wrote a long article in The Times of India in April 1992 about Harshad Mehta’s shady actions then the cracks began to appear. This report showed that Harshad Mehta was shifting huge amounts of money from one bank to another by using fake papers called bank receipts. These papers wrongly said that one bank had to pay money to another bank. The banks believed these fake documents and gave out money, which Mehta then used to buy shares in the stock market. When this fraud was caught, more investigations started. Authorities discovered that Mehta had illegally obtained over Rs. 4,000 crores as an enormous amount at the time and used that to manipulate the stock market & shares .In this both CBI (Central Bureau of Investigation) and SEBI got involved .
Investigators followed the flow of money and found clear proof of cheating, misuse of funds, and illegal stock market activities. Harshad Mehta himself admitted some things, and there were paper records showing fake documents, unauthorized bank receipts, and secret deals in the stock market. The biggest proof was that there were no real government securities behind the bank receipts, even though the banks believed there were.
This means Harshad Mehta got money for deals that were never real. These fake deals made share prices go up, so he could sell them and earn huge profits. But in the end, the banks and investors faced big losses. Finally, Harshad Mehta was arrested and charged in many cases.Even though he died in 2001, the investigation and court cases went on for many years. Many other people involved in this case were punished, and this case became an important example for handling financial crimes in India.
Abstract
In 1992, India faced a big financial fraud by a famous stockbroker named Harshad Mehta. The scam was worth more than Rs.4,000 crores (which would be many billions today). It showed the major problems in India’s banking system and also the stock market rules.The main part of the fraud involved in the government securities. Harshad Mehta and others used fake bank receipts took money without permission, and wrongly used the public funds to carry out the scam.This article provides a detailed analysis of how the scam unfolded and the key players involved in this case the loopholes exploited, the legal battles that followed, and the long-term impact on financial legislation and investor confidence in India. It argues that the scam acted as a wake-up call that led to the modernization of the financial regulation and the governance in India.
Case Laws
1.Ramalinga Raju v. State (2015) : The Special Court convicted Raju under the cheating and forgery action ,which emphasized the need for independent audits and corporate transparency.
2. PNB v. Nirav Modi (2018): In 2018, a huge banking scam came to light in which involving Punjab National Bank (PNB) and Nirav Modi, a famous diamond businessman. Nirav Modi and his uncle Mehul Choksi cheated PNB by fraudulently getting unauthorized Letters of Undertaking (LoUs) from the bank to get loans from the foreign banks.
The scam amount was over Rs.13,000 crore which makes it one of India’s biggest banking frauds. Once the fraud was exposed, both Nirav Modi and Mehul Choksi fled India. The case led to the strict changes in the banking rules and also initiated major investigations by agencies like the CBI and the ED (Enforcement Directorate).
3.SEBI v. Sahara India Real Estate Corp. Ltd. & Ors. (2012) This case was about a different type of financial wrongdoing. Sahara had collected money from investors without proper permission. The Supreme Court said that Sahara was not allowed to raise money because it did not follow SEBI’s rules. This decision made SEBI’s control stronger, just like what people wanted after the Harshad Mehta scam. The underlying principle was the same in this case protecting the common investor from manipulation and unlawful fundraising strategies and all. Although this case was not directly related to Mehta’s case, both support the same idea of financial honesty and protecting investors. Together, these cases show that the courts in India believe in making people responsible for their actions, keeping discipline in the market, and having strong rules for the financial and stock markets.
Conclusion
In 1992, Harshad Mehta’s scam rocked India’s financial system.He used to fake bank documents and manipulated the stock prices, which led to causing a massive market crash that cost billions and also shattered the trust of all people’s trust. But from the ashes came a stronger India , Securities Exchange Board Of India (SEBI) got the superpowers, the National Stock Exchange (NSE) was born, and banks tightened up. Cases like SBI v. Harshad Mehta and new laws like the SEBI Act, 1992, made sure this kind of chaos wouldn’t happen again. Harshad Mehta’s risky actions showed India the need to strengthen its markets and better protect investors.
FAQS
1.Who was Harshad Mehta and why is he so famous?
Harshad Mehta was a stockbroker in the 1990s period, who became famous for manipulating the Indian stock market through using fake bank receipts. He created a false image of success that made stock prices rise unnaturally, which later became one of India’s biggest financial scams.
2.How much money was involved in the scam?
The scam was worth around Rs.4,000 crores at that time , which was a huge amount for the early 1990s. It involved funds illegally moved from one banks to another and invested in the stock market to inflate the prices and manipulate them.
3. What laws did Harshad Mehta break?
He was charged with cheating, making fake documents, planning a criminal conspiracy, and breaking trust. He also broke rules under the Banking Regulation Act and the Securities Contracts (Regulation) Act.
4.What was the role of banks in the scam?
Some banks, without knowing the truth, helped Harshad Mehta by giving or accepting fake Bank Receipts (BRs) without checking if real securities were behind them. These fake papers were used to move money between banks in an illegal way.
5.What did the government do after the scam was exposed?
After the scam, the government set up the Special Court to handle the massive number of legal cases. It also gave more powers to SEBI (Securities and Exchange Board of India) and the stock market regulator, to prevent and detect such frauds in the future.
