Abstract
This article presents a comprehensive case study of the 1992 Indian securities scam, orchestrated by stockbroker Harshad Mehta.
It deconstructs the methodology of the fraud, which exploited systemic loopholes within the Indian banking and financial systems.
The study outlines the core facts of the case, from the manipulation of Bank Receipts (BRs) to the diversion of funds into the stock market, creating an unprecedented and artificial bull run.
It examines the critical legal and regulatory issues, including violations of banking norms and inadequate market oversight.
The article also analyzes the role of regulatory authorities, subsequent judicial actions under specially enacted legislation, and the far-reaching impact on India’s legal and policy landscape.
The analysis concludes that the Harshad Mehta scam, while a major blemish on India’s financial history, acted as a catalyst for reforms that led to the modern, transparent, and regulated securities market we see today.
Index of Content
- Introduction
- The Factual Matrix: Anatomy of the Scam
- Core Legal and Regulatory Fault Lines
- Role of Authorities and Judicial Action
- The Aftermath: Impact on Law and Policy
- Conclusion
- References
1. Introduction
The early 1990s marked a period of transition for the Indian economy.
As the country stood on the cusp of liberalization, financial markets were still governed by archaic rules and lacked transparency.
It was in this environment that Harshad Mehta, a charismatic stockbroker, rose to prominence, earning the moniker “The Big Bull.”
He engineered a stock market boom of a scale never seen before, creating immense wealth for investors and himself.
However, this spectacular rise was built on a foundation of systemic fraud that siphoned thousands of crores from the banking system into the equity market.
The exposure of this securities scam in 1992 sent shockwaves through the nation, leading to a market crash, collapse of financial institutions, and a profound crisis of confidence.
This case study dissects the facts, legal issues, and the legacy of the Harshad Mehta scam, a watershed moment that reshaped India’s financial architecture.
2. The Factual Matrix: Anatomy of the Scam
The genius of Harshad Mehta’s scam lay in exploiting vulnerabilities within the inter-bank securities market.
Key Instruments Used
- Ready Forward Deal (RFD): A short-term loan from one bank to another, collateralized by government securities.
- Bank Receipt (BR): Confirmation from the borrowing bank that it holds and will deliver securities on the lender’s behalf.
In practice, the actual securities were not always transferred, relying entirely on trust between banks.
Harshad Mehta, colluding with officials from banks such as Bank of Karad and the Metropolitan Co-operative Bank, began issuing counterfeit BRs — BRs without actual government securities backing them.
He used these fake BRs to secure short-term loans from larger banks. These funds were criminally diverted into the Bombay Stock Exchange.
With endless capital, Mehta went on a buying spree, targeting a few select stocks like ACC (Associated Cement Company).
- ACC’s price soared from ~200 rupees to nearly 9,000 rupees, creating a speculative bubble.
- Retail investors blindly followed his stock picks, driven by the hype.
The scam was exposed in April 1992 by journalist Sucheta Dalal, whose investigative reporting led to an immediate market collapse.
3. Core Legal and Regulatory Fault Lines
The scam exposed several deep legal and regulatory failures:
- Violation of RBI Guidelines: Securities transactions and RFDs were manipulated.
- Lack of Verification: No central registry existed to ensure BRs were backed by actual securities.
- Blurring of Roles: Banks’ proprietary trading and stockbrokers’ operations were not clearly separated.
- Criminal Acts: Forgery and criminal conspiracy fell under the Indian Penal Code, 1860.
- Weak Capital Market Oversight: SEBI, established in 1988, was non-statutory and lacked enforcement powers.
This allowed Mehta and others to operate with near impunity.
4. Role of Authorities and Judicial Action
Initially, authorities like the RBI and Ministry of Finance were slow to respond due to the scam’s complexity.
Once exposed, decisive actions were taken:
- Central Bureau of Investigation (CBI): Tasked with the criminal investigation, leading to arrests.
- Joint Parliamentary Committee (JPC): Conducted an in-depth inquiry into the scam.
To handle the flood of cases, Parliament enacted the Special Court (Trial of Offences Relating to Transactions in Securities) Act, 1992, which:
- Established a Special Court for speedy trials and recovery of misappropriated funds.
- Empowered a Custodian to attach and dispose of the accused’s assets to repay banks.
Harshad Mehta faced numerous civil and criminal cases, and though convicted in one, he passed away in 2001 while many trials were still ongoing.
5. The Aftermath: Impact on Law and Policy
The Harshad Mehta scam led to transformative reforms in India’s financial system:
- Empowerment of SEBI: The SEBI Act, 1992 gave statutory powers to regulate stock exchanges, brokers, and intermediaries.
- Modern Market Infrastructure:
- National Stock Exchange (NSE) introduced nationwide, transparent, screen-based trading.
- Floor-based trading of BSE, dominated by broker cartels, was phased out.
- Dematerialization of Shares: The Depositories Act, 1996 allowed electronic holding of securities, reducing fraud and forgery.
- RBI Oversight: Banks’ treasury operations and stock market exposure were strictly monitored.
6. Conclusion
The 1992 securities scam is a defining chapter in modern India’s financial history.
It highlighted the dangers of individual greed and systemic institutional weaknesses.
While the scam caused financial loss and eroded public trust, its aftermath was transformative:
- Empowerment of SEBI
- Establishment of NSE
- Introduction of dematerialized shares
These reforms laid the foundation for a safer, more transparent, and globally respected capital market.
The collapse of the “Big Bull’s” empire ultimately became the building block for a resilient financial India.
7. References
Statutes
- Special Court (Trial of Offences Relating to Transactions in Securities) Act, 1992
- Securities and Exchange Board of India Act, 1992
- Depositories Act, 1996
- Indian Penal Code, 1860
Reports and Publications
- Report of the Joint Parliamentary Committee on the 1992 Securities Scam
- Reserve Bank of India, Annual Reports (1992-1994)
- Dalal, Sucheta, and Debashis Basu. The Scam: Who Won, Who Lost, Who Got Away
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