Author: Rani Prajapat, Ideal Institute of Management and Technology, School of Law
Abstract
One of the most notorious financial scams in Indian history is the Harshad Mehta scam of 1992. Popularly known as the “Big Bull” of Dalal Street, Mehta masterminded a giant securities scam that shook not only the Bombay Stock Exchange (BSE) but also revealed basic flaws in India’s financial and regulatory systems. By manipulating banking instruments and stock markets, Mehta had diverted funds amounting to over ₹4000 crores. This article provides a comprehensive legal examination of the scam, covering the modus operandi, legal implications, landmark judgements, as well as the resultant reforms launched by Indian legislators and regulators. It also delves into the legal void that enabled such a scam to develop and the institutional reforms made to guarantee such white-collar offenses are not repeated.
To the Point
Main Accused: Harshad Shantilal Mehta
Crime: Securities Fraud, Criminal Conspiracy, Misappropriation of Public Funds
Year of Scam: 1991–1992
Amount Involved: Approx. ₹4000–₹5000 crore
Investigating Bodies: CBI, Income Tax Department, Joint Parliamentary Committee (JPC), SEBI
Legal Proceedings: Multiple civil and criminal cases, with one conviction; many cases remained pending until his death in 2001
Key Laws Involved: IPC (Sections 120B, 409, 420, 468, 471), SEBI Act, Banking Regulation Act, RBI Guidelines
Use of Legal Jargon
Securities Fraud: False representation in dealing with securities with the intention of cheating.
Bank Receipts (BRs): Inter-bank receipts evidencing custody of securities.
Ready Forward (RF) Deals: Short term loans secured by sale and repurchase of government securities.
Criminal Breach of Trust (Section 409 IPC): Misuse of property entrusted in dishonorable manner.
Cheating (Section 420 IPC): Cheating and inducing to deliver property.
Forgery (Sections 468, 471 IPC): Creating fictitious documents to cheat.
Intermediary Liability: Judicial accountability of middlemen and brokers within the financial market.
Benami Transactions: Transactions done in someone else’s name to conceal the real beneficiary.
Misappropriation of Funds: Unauthorized utilization of someone else’s funds for individual benefit.
The Proof — Modus Operandi
1. Exploiting the Banking System
The cornerstone of the Mehta fraud was the Ready Forward (RF) transaction, a legitimate financial vehicle representing short-term sale and repurchase by two banks of government securities. Mehta was a middleman, bringing about such transactions. In principle, there was no cash movement to him directly, but Mehta exploited the weak controls.
He received false Bank Receipts (BRs) from some banks such as the Bank of Karad (BOK) and Metropolitan Co-operative Bank. They misrepresented that securities were sold or held in custody. Actually, they did not have any securities. Mehta utilized those false BRs in order to receive funds from other banks. Those banks believed that they were making a secured transaction.
2. Channeling Funds into the Share Market
The siphoned money was channeled to the stock market, which enabled Mehta to purchase huge quantities of shares—particularly of firms such as ACC, Sterlite Industries, and Videocon—thus artificially inflating prices to a great extent. The price of ACC’s share rose from ₹200 to ₹9,000 in months. He gained this nickname “The Big Bull” for this bull run manipulation.
3. Profiting from the Boom
As prices went skyrocketing because of the artificially created demand, Mehta sold the shares at top prices and made huge profits. But the initial money from the banks was never returned, and when the scam was exposed, the market crashed and investors and banks suffered huge losses.
Legal Proceedings and Case Laws
Initial Legal Actions
In April 1992, journalist Sucheta Dalal uncovered Mehta’s forgery in The Times of India.
State Bank of India (SBI) initiated a lawsuit when it found that ₹600 crore was lost due to counterfeit BRs.
CBI filed more than 70 criminal cases against Mehta and his accomplices.
The Income Tax Department imposed tax demands of more than ₹11,000 crore on Mehta and his relatives.
Bombay High Court Orders
Mehta’s assets were frozen.
His property was attached to recover arrears due to banks.
Courts recognized that Mehta had rigged up share prices by employing fraudulent financial instruments.
CBI v. Harshad Mehta (1999)
Harshad Mehta was found guilty under IPC Sections 420 (cheating) and 120B (criminal conspiracy) in a case out of several pending.
Sentenced to five years of rigorous imprisonment and a fine.
The other cases were under trial when Mehta passed away in Thane jail on 31 December 2001 because of a cardiac arrest.
Income Tax Tribunal and Tax Claims
Mehta’s family challenged tax claims after his death.
Numerous appeals are pending.
The Supreme Court-appointed Custodian was directed to sell Mehta’s assets to pay out creditors.
SEBI v. Harshad Mehta
SEBI prohibited Mehta from trading in securities.
Enforced stricter regulations on brokers, intermediaries, and transparency standards.
Legal Analysis
Offences under Criminal Law
IPC Section 420: Mehta was accused of cheating banks by presenting fictitious BRs with false representations.
IPC Section 409: Being a financial intermediary, he owed a fiduciary relationship, which he violated.
Section 468 and 471 IPC: Pertaining to forgery of BRs and presenting forged documents as original.
Failure in Regulation
SEBI was yet in its nascent stage and did not have effective regulatory teeth.
Reserve Bank of India (RBI) did not regulate interbank transactions adequately.
Dematerialisation was absent: Shares remained in physical form, thereby making it easy to track them.
Judicial Innovation:
Government enacted the Special Court (Trial of Offences Relating to Transactions in Securities) Act, 1992 for speedy disposal of these cases related to financial frauds.
A Special Court and Custodian were appointed to deal with the scam-related litigation and recovery.
Corporate and Banking Law Gaps
There were no definite laws then regarding the broker-banker relationship in those days.
Lack of a centralised system facilitated manipulation.
Benami Transactions (Prohibition) Act, 1988 was weakly enforced.
Aftermath and Reforms
The Harshad Mehta scam brought gigantic changes to India’s financial landscape
1. Institutional Reforms
SEBI Act amended in 1995: Provided inbuilt statutory powers to SEBI.
NSE launched in 1994: Digital and transparent stock exchange.
Demat accounts introduced: Put an end to duplicate and fake shares.
T+2 settlement cycle: Narrowed window for speculation.
2. Banking Reforms
RBI tightened its control on interbank transactions.
Use of Bank Receipts controlled strictly.
Implementation of core banking solutions.
3. Legal and Judicial Reforms
Depositories Act, 1996 passed.
Introduction of Special Courts for financial frauds.
Focus on corporate governance, independence of auditors, and intermediary accountability
Conclusion
The Harshad Mehta financial scam is a milestone in the legal and economic history of India. It was a wake-up call that revealed how systemic loopholes and lax enforcement could cause financial havoc. The judicial process after the scam, slow and partial though it was, set the stage for regulatory and judicial reforms. The emergence of online trading platforms, capable regulatory authorities, and modern banking checks can all be traced back to the lessons that were learnt from the scam. Mehta, who was once worshiped and later vilified, has left a legacy that compelled the Indian judicial system to transform and change according to the paradigm of white-collar financial crime.
Frequently Asked Questions (FAQs)
Q1. How much money was involved in the scam?
The scam involved more than ₹4000 crores, although some put it at around ₹5000 crores when considering accrued interest and attached liabilities.
Q2. How did Harshad Mehta utilize Bank Receipts?
He utilized fictitious BRs to raise money from banks in the name of Ready Forward transactions. No underlying securities were attached to these BRs, and they were thus fraudulent.
Q3. Was Harshad Mehta convicted?
Yes, he was convicted in a single case on the charge of Sections 120B and 420 of the IPC in 1999. He was in prison when he died in 2001.
Q4. What significant legal changes were made after the scam?
* Statutory powers to SEBI
* NSE was set up
* Dematerialisation of shares
* T+2 rolling settlement
* Establishment of Special Courts for financial crimes
Q5. Why did the judiciary take so long to dispose of the cases?
Complexity of financial frauds, procedural lag, multiplicity of cases, and Mehta’s death resulted in slow judicial proceedings. Additionally, such cases needed technical financial insight, which resulted in the delay.
