Author: Priyanshi Bansal, Meerut College
To the Point
“Economy has frequently nothing whatever to do with the amount of money being spent, but with the wisdom used in spending it.” – Henry Ford
The quote of Henry Ford throws some light on the perspective that drives the wheels of economy. The economy of any country determines the real stability of that nation, worldwide. It is the mind expressions of humans that drive the car of any nation’s economy. In the 21st century, the nations are moving towards the open economy whereby the economy is driven by the new model of liberalization, privatization and globalization. The conceptualization of a liberal and globalized economy is the step for the New Economic Policy that suggests to the government to relax their strict legislations and rules to develop international trade and competition. In the year 1990, a new economic policy was introduced as LPG in India. This turned out to be the New Economic Policy of India which was introduced to balance the financial crisis. The terms are so interconnected that the ease of doing business was the real motto of the policy.
Some of the markets encountered huge losses. Moreover, there was an increase in foreign investments that negatively affected the ongoing Indian market. Nonetheless, one of the notable loopholes was in the banking sector, which in accordance with the stock market left a gloomy incident in the Indian economy. The unforgettable fraud of 1992 shook the Indian policy of global trading. The 1992 scam revealed the loopholes in the trading market that reshaped the financial market of India. This is one of the indelible scams of the Indian economy that unfolded in the initial stage of Indian Economic Policy, 1990.
Use of Legal Jargon
Bank Receipts are an evidential document that is drafted by the banks to serve as proof of a financial transaction done with the other bank. In general words, bank receipts are the receipts of a transaction that is done in exchange for the government securities that are held by the bank issuing the receipt to the other bank. It is evident in nature because it provides the details of transactions done and the involvement of the party. They are the record-keeping books that assist in resolving the financial dispute.
Share Rigging, a deceptive practice, stands for manipulating prices of the stock market by deceitful means. This practice is also known as the pump and dump practice which implies the circulation of false information and inaccurate data in the market about any company for increase and decrease of share prices. In this process, the innocent buyers are supplied with deceptive information about the active working of the stock market.
Ready Forward Deal is the secured transaction between the two banks. The banks are also secured with government securities which are often used for short-term lending. In this process, a bank through their government securities borrows the money from another bank, in a promise to return the amount within 15 days (approx). The lending is done through the medium of a stock broker. In this process, the amount is transacted through the broker’s account.
Diverting of Funds is one of the sources that makes the broker to misappropriate the entrusted funds. The funds are generally diverted for some other purposes.
Bear Cartel is the group of investors that invest in a particular stock with the purpose to fluctuate the prices of shares. The group works for a common purpose i.e. to attain the profits and not to compete.
The Proof
The mind that shaken the financial market was of the man who was nicknamed as “Big Bull” of Dalal Street. He was none other than Harshad Mehta, a renowned stock broker who understood market strategies and took advantage of loopholes of New Economic Policy, which was not regulated by strict regulations. Moreover, there were no electronic means of trading in the share. Mehta, taking advantage of this sophisticated system, manipulated the share prices by using his creative strategies to pierce into the bank funds and utilizing them to inflate the share market, artificially. Due to these activities, there was a surge in the share market from 1000 points to 4500 points as well as a sudden crash.
Harshad Mehta engaged the two little known banks (Bank of Karad and Metropolitan Co-operative Bank) for issuing fake BRs to the well known banks of India. In pursuance of New Economic regimes that promoted LPG, the banks threw themselves into the Ready Forward Deal with another bank whereby they regarding the issued BRs lend the funds to the borrower banks. These transactions were done through the broker, Harshad Mehta and his company, without knowing the real fact that the money was not transacted to the borrower bank rather than being misappropriated by investing in the stock market. Mehta drew the forged BRs to the banks like SBI, UCO, Andhra Group Bank etc. and diverted the exorbitant sums received from the latter to the purchasing of shares of predetermined companies. This investment surged the demand in the stock market and increased the prices of particular shares. When the prices of that particular stock shook, the bear cartel suddenly sold out all the shares, leading to a crash. One of the examples of surge was the stock price of ACC Ltd. that shook from ₹200- ₹9000 (approx) within a time period of a month. This nonetheless affected the finance market and innocent shareholders. This process of earning profits escalated the financial capital of Mehta.
The scam was unveiled in the year 1992 when there was failure to repay the amount in pursuance of RF deals. Furthermore, a hush- hush investigation by Ms. Suscheta Dalal (Journalist of TOI) reported the anomalies in the government securities. This activated the regulatory authorities such as RBI, CBI AND SEBI to investigate the real status. In June 1992, raids were conducted at the locations related to Harshad Mehta. In this inspection, a bundle of files, a number of shares and securities, and books of accounts were seized. This investigation revealed the collusion of senior bankers, investors, politicians, bureaucrats etc. Moreover, it was observed that there was no involvement of black money in the whole process. The money transacted from the banks that were misappropriated in the stock market.
Eventually, a plethora of cases were filed against the ‘Big Bull’. In Harshad Mehta v Custodian, a special court was formed to try the special case in nexus to securities under Crpc and The Special Court (Trial of Offences Relating to Transactions in Securities) Act, 1992. Therefore, through this case a special court was granted with all the powers of an original jurisdiction and through this a special power is acknowledged for deciding the financial fraud cases which lie outside the permit of regular trial court. In another case, SEBI v Harshad Mehta, the stock exchange board cancelled the trading licence of Mehta and highlighted the need for proper and strict surveillance in the stock market. In the case that was held under the jurisdiction of IT Dept concluded the tax evasion by fraud [UOI v Harshad Mehta ( Income Tax Case)]. Lastly, in the case of Harshad Mehta v CBI, the proper criminal proceedings were concluded and the gravity of white collar crimes was discussed. The court in this case rejected the bail application of Mehta and demanded for the strict custodial investigation.
Hence, this case involved a number of departments that recognised the criminal nature of Mehta’s act, that not only shook the economic strata but also the legislative surveillance.
Abstract
The 1992 scam, also known as Big Bull Scam is the crucial case that shook the Indian New Economic Policy at its initial stage. The scam opened up about the role of diplomacy where Mehta, just by using two simple strategies (BRs and Ready Forward Deal), defrauded the whole Indian financial market. He manipulated the lacunas of the Indian Banking system and misappropriated the bank money for multiplying the prices of stock market. This affected the whole Indian economy when the scam was unveiled. Therefore, the scam was a manifested lesson to the parliamentarians and investors that transparency, trust and vigilance are the pillars to the economy of India as they take the charge of confidence. India strengthened the trading platform by introducing computerized trading because it sustains the transparency in the market. Moreover, the role of the vigilance committee also increased after investigating the matter. Global frauds were also taken into consideration to understand the further challenges. This case was indeed a turning point for Indian New Economic Policy.
Case Laws
Harshad Mehta & ors v Custodian (1998)
In this case, the Bombay High Court and Special Court of CBI inquired about the allegations of Criminal Breach of Trust, Misappropriation of Money and Conspiracy in the criminal laws of India.The judiciary took a strict view in this case in regard to white collar crimes.
Fodder Scam (1996)
This was a scandal that originated in the ministry of animal husbandry of the state of Bihar where the government officials withdrew and misappropriated the funds from government treasuries for about Rs. 950 crore. The scam was done in the name of livestock. This case was in the limelight because it involved the then CM of Bihar. The Hon’ble SC after concluding the CBI investigation sentenced the offenders involved in the scam.
Ketan Parekh (2001)
This financial swiddle is an example of ‘insider trading’ and ‘pump & dump’ system whereby Ketan Patekh, like his mentor Harshad Mehta, illegally raised the finances from two banks by bribing their officials to grant loans against shares and approx ₹900 crores were sanctioned. Moreover, he joined hands with the promoter of many companies and made them believe to raise the funds. Ultimately, Sucheta Dalal uncovered the fraud as well as BOI exposed the fraud of ₹137 crores. Therefore, he was involved in insider trading in company law. He was also convicted for rigging shares and was banned till 2017. Henceforth, Ketan, like Mehta, became a victim of his own hunger.
Satyam Computers Scandal (2006-2008)
The confession by the founding chairman Mr. Ramalinga Raju via emails to SEBI and stock exchange market about the deceit in the accounting records of worth ₹7,000 crore, brought the case to limelight. The chairman admitted the company has overstated the balance by almost 94% of its total assets. The negligence of the auditing company was also reported as it failed to discover and report the company’s long going fraud. This distressed the US finance market and left a destructive path for the investors, projects, employees and who not. Therefore, to overcome the loss and interest of investors and almost 5,000 employees, it was taken over by Tech Mahindra. This fraud constructed a way for solid governance and accounting standards by amending Companies Act and SEBI Regulations.
Conclusion
‘Big Bull’ scam turned out to be the reformative regime in the new economic era of the Indian financial market . The scam was a lesson to the initial steps of Indian economic policy. It manifested the ambiguities in banking rules and regulations. There was a need of an hour to have stringent laws and effective vigilance committees. Financial structure is deemed to be established on pillars of trust, transparency and vigilance. The study determines the importance of check and balance in the government structure. This scam illustrates the need for investor’s awareness and independent journalism. Therefore, independent journalism of India is applauded as it unveiled the unreported fraud in the financial segment. In the end of study, it can be stated that legislation in the law and vigilance in the execution need to work together for a sound financial system.
FAQS
What does the term ‘LPG’ stand for?
LPG stands for Liberalisation, Privatisation and Globalisation. These terms are associated with open economy. When the government of any nation relaxes their rules and regulations of trade for the purpose of the nation’s growth, it is determined as ‘liberalisation’. Moreover, when there is change of ownership of property from government to private entities then it is stated as ‘privatisation’. ‘Globalisation’ on the other hand, is the subsequent aspect where the government opens up the nation’s economy for foreign trade and investment.
Thus, these are the founding pillars for the New Economic Policy that aims to compete and assist the world economy.
What directed the unfolding of the scam of Harshad Mehta?
In April 1992, when there was fluctuation in the stock market, one of the financial journalists Ms. Sucheta Dalal along with her husband reported about the illegal and fraudulent activities of Big Bull. Other than that, the reporting of the shortfall in the securities of State Bank of India, unveiled the manipulation of bank funds.
How was it possible for Harshad Mehta to execute the scam of ₹4,000 (approx)?
These were the loopholes in the financial system and lack of vigilance that Mehta used as his trump card. The greed to earn more money promoted the cartel to bluff the money.
What effect did this cause to the New Economic Policy?
One of the biggest losses was related to confidence of the investors. This scam shook the confidence of the investors in the share market. Moreover, this had a long run impact on the New Economic Policy as the banking reforms were introduced by the legislature. The focus was shifted to corporate governance for transparent working. And, the auditing companies were asked to be more vigilant.
