The Harshad Mehta scam, which came to light in 1992, is one of the most infamous financial

scandals in Indian history. It involved a series of stock market manipulations and banking frauds
orchestrated by Harshad Mehta, a prominent stockbroker at the time. The scam not only exposed
loopholes in India’s banking system but also led to widespread public outrage and significant reforms
in financial regulations.

Key Elements of the Harshad Mehta Scam:

1. Background:

 Harshad Mehta, often referred to as the "Big Bull" of the Indian stock market, was a
stockbroker who gained prominence for his ability to drive up stock prices. He was
particularly influential during the late 1980s and early 1990s, and his investment strategies
led to a massive bull run in the stock market.

 Mehta was known for manipulating the prices of certain stocks, such as Associated Cement
Company (ACC), by creating artificial demand, causing prices to skyrocket.

2. Modus Operandi:

The scam centered around exploiting a loophole in the banking system and the stock market
through a method involving fraudulent transactions in bank receipts (BRs).

 Bank Receipts (BRs): In interbank transactions, banks lend money to each other through
government securities. Instead of transferring the actual securities, they would issue Bank
Receipts (BRs) as a promise to deliver the securities.

 Harshad Mehta exploited this system by obtaining fake BRs from small banks, especially Bank
of Karad and Metropolitan Co-operative Bank, which did not actually have the securities
they were claiming to have. He then used these fake BRs to get huge amounts of money
from other banks.

 Mehta took the funds obtained from these fraudulent transactions and invested them in the
stock market, driving up the prices of certain stocks like ACC, Reliance, Tata Iron and Steel
Company (TISCO), and State Bank of India (SBI).

With rising stock prices, he created a massive bull market, inflating the stock market index
significantly. He would then sell the inflated stocks at a high price, making a substantial profit, and
pay back the banks before they realized the fraud. This cycle allowed him to manipulate the market
repeatedly.

3. The Bubble Bursts:

 The scam began unraveling when journalists and some banking officials noticed
discrepancies in the transactions, particularly the absence of the actual securities behind the
Bank Receipts.

 Sucheta Dalal, a financial journalist for The Times of India, exposed the scam in an article on
April 23, 1992, after observing Mehta’s unusual financial activities and the movement of
large sums of money.

Once the scam was exposed, the market crashed, wiping out billions of rupees in investor wealth.
Stocks that had been artificially inflated saw their prices plummet, causing massive losses to
investors.
4. Size of the Scam:

 The scam was valued at approximately ₹4,000 crores (about $1.3 billion) in 1992, which was
an enormous sum at that time. Mehta’s manipulation of the banking system and stock
market caused a massive ripple effect in India’s financial markets.

 Several major banks, including the State Bank of India (SBI), suffered huge losses as they had
unknowingly lent funds to Mehta based on fraudulent BRs.

5. Legal Proceedings and Arrest:

 Harshad Mehta was arrested in 1992 and charged with several criminal offenses, including
fraud, forgery, and misappropriation of public funds.

 Multiple legal cases were filed against him, and the Securities and Exchange Board of India
(SEBI) began investigating the scam.

 In 1999, Mehta was convicted in one of the cases involving the misappropriation of ₹500
crore from the State Bank of India and sentenced to five years in prison.

 He died in 2001 while in custody, before many of the cases against him could be fully
resolved.

6. Impact and Aftermath:

 The Harshad Mehta scam had a profound impact on India's financial system. The crash that
followed the scam wiped out significant amounts of investor wealth, especially small
investors who had followed the stock market boom driven by Mehta.

 Several banks, particularly those involved in issuing fraudulent Bank Receipts, faced severe
financial difficulties. Some banks collapsed or had to be bailed out.

Systemic Reforms: The scam exposed serious loopholes in India's banking and stock market systems,
leading to several important reforms:

 Strengthening of SEBI: The role of the Securities and Exchange Board of India (SEBI) was
significantly enhanced. SEBI introduced stricter regulations on stock market transactions,
ensuring better transparency and governance in the market.

 Introduction of Digital Trading: The scam highlighted the flaws of the manual system,
leading to the digitization of stock trading and the eventual rise of the National Stock
Exchange (NSE), which introduced electronic trading systems.

 Reform in Banking Practices: The government and the Reserve Bank of India (RBI)
introduced new regulations in the banking sector, particularly around interbank lending and
the issuance of securities. Banks were now required to hold actual securities rather than rely
on Bank Receipts.

7. Cultural Impact:

 Harshad Mehta’s rise and fall became a symbol of both ambition and greed in India’s rapidly
liberalizing economy.
  His story inspired movies, documentaries, and TV shows, including the widely popular "Scam
1992: The Harshad Mehta Story," which was based on the book “The Scam” by journalists
Sucheta Dalal and Debashis Basu.

In Summary:

The Harshad Mehta scam of 1992 involved the manipulation of the stock market using fraudulent
means to siphon money from banks. It resulted in a market crash, exposed weaknesses in the
financial system, and led to significant regulatory reforms in India's banking and stock market sectors.
The legacy of the scam continues to be felt in the evolution of India's financial markets and the
regulatory landscape that followed.