The year 1992 holds a significant place in the history of scams in India because, for the first time, India witnessed a security scam of Rs 4,000 crores, which is among the biggest frauds perpetrated on the Indian stock market to date.
Harshad Mehta is a well-known broker who manipulated the Bombay Stock Exchange (BSE) by taking advantage of the loophole in the banking system. He executed this master plan with the help of his partners and manipulated the bank receipts which ultimately crashed the whole market. The scam shook the whole country, leading Dalal Street to change the rules.
Here’s how he executed this plan
- Harsad allegedly plotted the bank employees to issue fake bank receipts (BRs). These fake receipts were used to get money from the other banks, under the impression that they are lending money against government securities (G-Secs).
- Once receiving the amount from the bank, Harshad used to invest it in the stock market, which increased the share prices up to 4,400 per cent.
- As the prices hiked, he sold the shares at a significant profit and returned the principal amount to the banks
- By this method, Mehta managed to manipulate the market and defrauded the banks of nearly Rs 4,000 crore. However, this trick could not last long as the bank caught him soon when they realized that the BRs in their possession had no value
- After this incident, the ‘bull market’ touched new highs – BSE Sensex rose from the 2,000- mark in January to 4,000-mark in March 1992, and many retail investors followed the path of Harshad and ended up investing substantial amounts the same stocks
- After the scam was highlighted, Mehta was raided by the tax department on February 28, 1992, and his documents along with the share certificates were seized.
- Afterwards, CBI carried out a search on Mehta on June 4, 1992, and rejected the tax return filed by Mehta for the assessment year 1992-1993. Subsequently, Mehta was sent to jail in 1992.
- In 1992, the Reserve Bank of India formed a new committee known as the ‘Janakiraman Committee’ to analyze this scam in a more precise manner.
- Then in 1993, the government constituted a joint parliamentary committee (JPC) to probe the irregularities in securities and banking transactions caused by the Harshad Mehta scam.
- As a result, both the Bombay High Court and the Supreme Court convicted Mehta and charged him with 74 criminal offenses. He fought the legal battle till 2001 and passed away in jail at the age of 47 due to cardiac arrest.
Also Read: Want to Go Electric? Top 10 Electric Scooters in India 2021
