Authored By – Sushmita Patra, Sister Nivedita University 

A) INTRODUCTION

Harshad Shantilal Mehta was a businessman and stockbroker from India who was found guilty of fraud. He was nicknamed the “Big Bull of Dalal Street.” In 1992, he was involved in the Indian securities scam, with 27 criminal charges against him, although he was found guilty of only four. He was on trial for nine years before passing away in 2001 at the age of 47 due to a fatal heart attack. The fraudulent activities he engaged in with other bankers and politicians on the Bombay Stock Exchange included:

• Securities Scam (1992)
• Bribery and Corruption
• Bank Receipt (BR) Scam
• Falsification of Documents

In the 1990s, India implemented liberalization, globalization, and privatization, leading to a dramatic economic transformation. Mehta planned a massive stock market scam during this period, exploiting a weak regulatory framework that led to widespread stock market fraud. The Bombay High Court and the Supreme Court of India convicted him for financial fraud involving the Bombay Stock Exchange (BSE).

Keywords:

Big Bull, Stock Market, Bombay Stock Exchange, Ready Forward

B) ALLEGATIONS AGAINST HARSHAD MEHTA

1. False Bank Receipt (BR) Scam

A bank receipt is a document used by a bank as proof that they will deliver securities later. The bank promises that at the end of the deal, the buyer will receive the securities. In Mehta’s case, he used fake bank receipts from banks willing to issue fraudulent receipts. These fake receipts were given to other banks in exchange for money.

The banks believed they were lending money against real government securities, but in reality, they were deceived. Mehta invested this money in the stock market, manipulated stock prices by purchasing large amounts of shares artificially, and increased their price. To gain profit, he had to sell the stock, which caused prices to crash as they had been inflated artificially. Eventually, banks realized they held fake bank receipts and no real securities, leading to huge financial losses.

2. Misuse of Bank Funds

In the 1970s, Indian banks were prohibited from directly investing in the stock market and were required to keep a portion of their assets in safe, low-return government bonds. Mehta found a way to bypass these rules.

• He approached banks, promising them higher interest rates than they were receiving from government bonds.
• He falsely assured banks that he was purchasing securities on their behalf.
• Banks transferred money into his personal account, believing it was for security purchases.
• Instead of buying securities, Mehta invested the funds into stocks to manipulate market prices.

3. Violation of RBI Guidelines

The Reserve Bank of India (RBI) had strict rules ensuring banks operated safely. These rules prohibited loans without proper security and imposed strict guidelines on dealing with government securities.

• Mehta exploited loopholes in the system by creating fake bank documents to convince banks to lend him money.
• His actions disrupted the integrity of the banking sector and led to financial instability.

4. Breach of Trust

• Mehta misled banks into transferring huge sums of money without proper documentation.
• Instead of using the money for legal transactions, he pumped it into the stock market, causing artificial price inflation.
• Banks were unaware that their funds were being misused, and when the scam was exposed, they suffered severe financial losses.

5. Fraudulent Transactions

Mehta tricked banks into believing he was conducting legitimate transactions in government securities.

• He used bank money to manipulate stock prices instead of investing it in actual government securities.
• His actions created artificial demand, misleading public investors into believing that stock prices were rising naturally.
• When the scam was uncovered, stock prices crashed, and banks suffered huge losses due to fraudulent investments.

6. Stock Price Manipulation

• In April 1992, it was discovered that Mehta’s investments were illegal and that stock prices had been artificially inflated.
• When investors realized this, it led to a massive financial crisis.
• Banks that had lent large sums to Mehta were left with huge unpaid debts.
• The Indian stock market collapsed, stock prices fell by 40%, and the market entered a bear phase lasting two years.

C) RELEVANT PROVISIONS & STATUTES

1. The Indian Penal Code, 1860 (IPC)

• Section 120B (Criminal Conspiracy): Conspiring with bank officials and others to commit fraud.
• Section 406 (Criminal Breach of Trust): Punishment of up to three years imprisonment, fine, or both for breach of trust.
• Section 420 (Cheating & Dishonestly Inducing Delivery of Property): Punishment of up to seven years imprisonment and fine for deceiving individuals into delivering property.
• Section 409 (Criminal Breach of Trust by a Public Servant, Banker, or Agent): Punishment of up to ten years imprisonment or life imprisonment with a fine.

2. The Banking Regulation Act, 1949

Mehta violated this act by:

• Using bank funds for illegal stock market trading instead of legitimate purposes.
• Convincing bank officials to lend money in violation of banking regulations.

3. The Securities and Exchange Board of India Act, 1992 (SEBI Act)

• Engaged in fraudulent trade practices and market manipulation.
• Inflated stock prices artificially, misleading investors and disrupting market integrity.

4. The Reserve Bank of India Act, 1934

• Violated RBI guidelines by manipulating transactions in government securities.
• His actions disrupted the banking sector’s stability and highlighted gaps in financial regulations.

D) IMPACT ON THE INDIAN STOCK MARKET

1. Stock Market Crash:

   • The BSE Sensex fell sharply from 4467 points in April 1992 to 2529 points in August 1992.
   • Many investors suffered huge financial losses.

2. Losses to Retail Investors:

   • Many ordinary investors lost their life savings, taking years to recover financially.

3. Regulatory Reforms:

   • The Reserve Bank of India (RBI) tightened rules for banks, preventing future fraud.

4. Modernization of Trading:

   • Before the scam, stock trading was manual, which made fraud easier.
   • The scam accelerated the shift to electronic trading.

5. Corporate Governance Improvements:

   • The scandal highlighted the need for better financial transparency and corporate accountability.

6. Market Maturity:

   • Despite the initial damage, the scam led to stronger financial regulations and a more reliable stock market.

E) CONCLUSION & COMMENTS

Harshad Shantilal Mehta was a businessman and stockbroker who committed one of India’s biggest financial frauds. The 1992 securities scam involved bribery, corruption, fake bank receipts, and document falsification.

• The BSE Sensex crashed, causing investors to suffer heavy losses.
• The RBI imposed stricter regulations, preventing future financial fraud.
• The Supreme Court ordered Mehta’s family to pay ₹11,174 crore in dues to banks and investors.
• Even after Mehta’s death in 2001, legal proceedings continued against his family and associates.

His scam exposed major loopholes in India’s financial system, leading to reforms that strengthened banking regulations, stock market transparency, and financial security.

F) REFERENCES

1. Online Articles/Sources Referred

• Indian Kanoon
• Live Law
• Supreme Court of India
• Wikipedia

2. Statutes Referred

• The Indian Penal Code, 1860 (IPC) (Sections 120B, 406, 420, 409)
• The Banking Regulation Act, 1949
• The Securities and Exchange Board of India Act, 1992 (SEBI Act)
• The Reserve Bank of India Act, 1934