Harshad Mehta Scam 1992 – The Security Scam

Harshad Mehta better known as the ‘big bull’ of those times, pulled off the biggest scams that India has ever seen in the stock market. A registered and famous broker managed to manipulate the Bombay Stock Market (BSE). He was able to do this with the help of his partners and loopholes in the banking system.

About Scam

  • Harshad Mehta colluded with bank employees and was able to get fake Bank Receipts (BRs) issued. Then he made use of these BRs to borrow money from other banks, All this while, banks believed that it was government securities (G-Secs) they were lending against.
  • Mehta used this money in the Stock Market to escalate share prices by up to a whopping 4,400%. He then sold it at a huge profit and the principal amount was smartly paid back to these banks.
  • In doing so, he managed to dupe the banks of around INR 4,000 crore. After the investigation was carried out bank got to know that what they possess is nothing but fake BRs with no value.
  • Because of this scam, BSE Sensex rose from the 2,000 mark in January to the 4,000 mark in March 1992. Many people have started to invest big in the stocks that he had bought then. Mostly, these were retail investors who went gung-ho in stocks!
  • When the scam was exposed, the tax department carried out a number of raids on the Mehtas, starting from February 28, 1992, and seized documents and certificates related to shares.
  • It was on June 4, 1992, that the CBI did a search on Mehtas and tax returns filed by Harshad Mehta were rejected for the year 1992-93. He went to imprisonment in the same year, and the Reserve Bank of India formed Jankiraman Committee in 1992 to bring clarity to the scam. Further, a Joint Parliamentary Committee (JPC) was formed too in 1993 to investigate the irregularities in securities and banking transactions post-Harshad Mehta Scam.
  • Post the investigation, Mehta was booked with 74 Criminal Offences by both the Bombay High Court and Supreme Court. The ‘Big Bull’ was accused and then convicted for moving money from Public Sector Maruti Udyog Limited (MUL) to his own accounts, which led to his repeated arrest in 2001.
  • Harshad Mehta died in custody from Cardiac Arrest at the age of 47, while the cases were still pending.
  • During the investigation, Harshad Mehta made sensational claims, where he claimed that he had the backing of powerful people in the government. Mehta named Prime Minister PV Narasimha Rao and said that he had paid INR 1 crore to him, which was never proven.
Biggest Stock Market Scams In India

Role Foreign Banks Played in the Scam

A few foreign banks came under scrutiny as well during the investigation of Scam 1992, these were Standard Chartered, ANZ Grindlays, Bank of America, and Citibank. They constituted about 56 percent of all securities transactions by banks between April 1991 and May 1992.

However, RBI’s hands were tied as India’s foreign exchange was not in a good shape and depended on loans and credit from foreign banks in the international market.

Changes Introduced Post Scam

Harshad Mehta Scam led to many alterations in India’s financial regulatory system, fixing many loopholes. One consequence was the Securities Laws (Amendments) Act, which was passed by the judiciary in 1995. This allowed SEBI’s jurisdiction to expand and allowed the body to regulate FIIs, venture capital funds, depositories, and credit-rating agencies. Another development from these reforms was that Sebi could now make it compulsory for companies issuing securities to make full disclosures to secure investor interest.

Reduction of the settlement cycle, minimum balance, and online transactions measures were taken as well by the authorities. Another aspect that triggered this scam is the irregularities in bill discounting by banks. Several banks had ignored RBI guidelines on bill discounting, and advanced funds to corporates and NBFCs, though these bills were not real and abided by RBI rules.

Many Other Scams Followed

There were a few other scams since then that have hit the stock market and led to its meltdown. Ketan Parekh was one name that came into the limelight for manipulating stocks and getting funds from banks easily by using inflated stocks in the year 2000.

Punjab National Bank (PNB) fraud case in 2018 brought the issues with banks again to the national picture. The cases involved diamantaire Nirav Modi and Mehul Choksi, who managed to defraud the bank due to a lack of regulatory oversight. Before the fraud was exposed, they had already left the country.

Two other instances involving bank frauds were exposed afterward, these were Yes Bank and PMC Bank.

Indian Stock Market has never been the same since then, though, there have been stock market scams that have cost dearly investors and regulatory bodies were left clueless, however, the Harshad Mehta Scam stays on a different trajectory all. It is something that can be used as a reminder for both investors and regulators to be skeptical and do thorough research on all stock market dealings.

Facts of Harshad Mehta Scam

Harshad Mehta Scam 1992
  • Harshad Mehta and Co Manipulated BSE in 1992 by taking advantage of flaws in the banking system.
  • The ‘Security Scam’ was estimated at around INR 2,000-4,000 crore.
  • Mehta teamed up with bank employees for fake bank receipts.
  • He then used this money to raise share prices to a whopping 4,400%.
  • Mehta then managed to sell these shares at significant profits.
  • Raids were conducted by Tax Dept in February 1992.
  • RBI formed Janakiraman Committee, and later Mehta was convicted and charged with 74 criminal offenses.
  • At the age of 47, he passed away due to a cardiac arrest.
  • After the scam, many changes were made to India’s Financial Regulatory System.
  • Securities Laws (Amendments) Act 1995 was introduced and brought in.

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