Introduction to the Harshad Mehta Scam
The Harshad Mehta scam, also known as the 1992 stock market scam, was one of the largest financial frauds in India’s history. It involved embezzlement of approximately ₹1,439 crores (equivalent to nearly $3 billion at that time), leading to a drastic crash in the Indian stock market and wiping out life savings worth ₹3,542 crores ($7 billion). Harshad Mehta, a stockbroker who rose to prominence with his flamboyant success in the Bombay Stock Exchange (BSE), exploited systemic loopholes in the banking system and manipulated stock prices for personal gain.
Understanding the Harshad Mehta Scam
In the early 1990s, India underwent a significant economic transformation by introducing Liberalization, Privatization, and Globalization (LPG) reforms. Mehta took advantage of the fragile financial system and weak regulatory framework during this period to orchestrate a massive stock market fraud.
How the Scam Worked
- Bank Receipts (BRs) and Ready Forward Deals (RFs)
- Mehta exploited the practice of banks issuing Bank Receipts (BRs) as collateral for short-term loans, known as Ready Forward deals.
- He convinced banks to issue fake BRs, which were then used to obtain funds from other banks.
- The funds obtained were diverted into the stock market, causing artificial inflation in stock prices, particularly for Associated Cement Company (ACC), whose price rose from ₹200 to ₹9,000.
- Market Manipulation
- Mehta's stock investment caused a market frenzy, with many retail investors unthinkingly following his choices.
- This artificially induced bull run helped Mehta make significant profits by selling stocks at sky-high prices.
- Exposure and Downfall
- Journalist Sucheta Dalal exposed the scam through articles in The Times of India in 1992.
- When the scam was exposed, the market bubble burst, leading to a major market crash, loss of investor wealth, and Mehta's arrest.
- Mehta was charged with 23 criminal cases and 70 civil suits but was convicted in only four instances before he died in 2001.
Impact of the Harshad Mehta Scam
On the Stock Market
- The stock market crashed by over 40%, leading to severe wealth erosion for retail and institutional investors.
- Investor confidence was severely shaken, leading to a very conservative approach to equity investments for years to come.
On the Banking System
- The scam exposed serious weaknesses in the Indian banking system, including poor oversight, poor internal controls, and ineffective risk management practices.
- Several small cooperative banks suffered heavy losses due to their exposure to fake BRs.
On Regulatory Reforms
- The scam prompted significant reforms in India’s financial and regulatory systems:
- The establishment of SEBI as an apex body regulating India's capital markets with much greater powers than its present ones.
- Tightened rules governing operations in stock markets; better vigilance and risk-mitigation mechanisms
- Greater emphasis on greater transparency and accountability in banking and financial transactions.
Key Takeaways
- Web Series and Renewed Public Interest
The release of the web series “Scam 1992: The Harshad Mehta Story” on SonyLIV in 2020 brought renewed public interest. Based on the book “The Scam” by Sucheta Dalal and Debashis Basu, the series was widely acclaimed for its detailed portrayal of the events. - Legal Proceedings
Even after three decades, several cases related to the scam are still pending in courts. Banks and investors continue to pursue recovery of funds lost during the fraud. - Impact on Popular Culture
The scam has become a part of India’s financial folklore, serving as a case study in financial management courses and business schools.
