1992 Indian stock market scam

The 1992 Indian stock market scam was a market manipulation carried out by Harshad Mehta with other bankers and politicians on the Bombay Stock Exchange. The scam caused significant disruption to the stock market of India, defrauding investors of over $15 million.

The techniques used by Mehta involved having corrupt officials sign fake cheques, abusing market loopholes, and using fabrication to drive stock prices up to 40 times their original value. Stock traders making good returns as a result of the scam were able to fraudulently obtain unsecured loans from banks. When the scam was discovered in April 1992, India's stock market crashed, and the same banks suddenly found themselves holding millions of Indian rupees (INR) in useless debt.

1992 Scandal

Overview

This was the biggest money market scam ever committed in India, amounting to approximately ₹ 5,000 crores. The main perpetrator of the scam was a stock and money market broker, Harshad Mehta. It was a systematic stock scam using fake bank receipts and stamp paper that caused the Indian stock market to crash. The scam exposed the inherent loopholes in the Indian financial system and resulted in a completely reformed system of stock transactions, including the introduction of online security systems.[1]

Security fraud refers to the diversion of funds from the banking system to various stockholders or brokers.[2] The 1992 scam was a systematic fraud committed by Mehta in the Indian stock market, which led to the complete collapse of security systems. He siphoned off over ₹1000 crore from the banking system to buy stocks on the Bombay Stock Exchange.[3] This impacted the entire exchange system as the security system collapsed and investors lost hundreds of thousands of rupees.

Exposure, trial and conviction

Exploiting several loopholes in the banking system, Mehta and his associates siphoned off funds from inter-bank transactions and bought shares at a premium across many segments, triggering a rise in the BSE SENSEX. When the scheme was exposed, banks started demanding their money back, causing the collapse. He was later charged with 72 criminal offences, and more than 600 civil action suits were filed against him.[15]

He was arrested and banished from the stock market with investors holding him responsible for causing losses to various entities. Mehta and his brothers were arrested by the CBI on 9 November 1992 for allegedly misappropriating more than 2.8 million shares of about 90 companies through forged share transfer forms. The total value of the shares misappropriation was placed at inr 2500000000.[16] He was found not guilty for any of the cases.

Mehta made a brief comeback as a stock market guru, giving tips on his own website as well as a weekly newspaper column. However, in September 1999, Bombay High Court convicted and sentenced him to five years rigorous imprisonment and a fine of inr 25000.[17]

Impacts

The immediate impact was a drastic fall in share prices and market index, causing a breakdown of the securities control system operation with the commercial banks and the RBI.[20] Around ₹35 billion from the ₹2,500 billion market was withdrawn, causing the share market collapse. The Bombay Stock shares resorted to records tampering in the trading system.[21] It caused panic with the public and banks were severely impacted. Banks like Standard Chartered and ANZ Grindlays were implicated in the scam for bank receipt forgery and transfer of money into Mehta's personal account. The government realized that the fundamental problem with the financial structure of the stock markets was the lack of computerized systems which impacted the whole stock market.[22]

Various bank officers were investigated and implicated in fraudulent charges. The five main accused officials were related to the Financial Fairgrowth Services Limited (FFSL) and Andhra Bank Financial Services Ltd (ABFSL).[23] The chairman of Vijaya Bank committed suicide following the news about the bank receipt scam.

In popular culture

Gafla is a 2006 Indian Hindi-language crime drama film directed by Sameer Hanchate inspired by this incident. The scam was dramatized in the 2020 web series Scam 1992, created by Hansal Mehta, with Pratik Gandhi and Shreya Dhanwanthary playing the roles of Harshad Mehta and Sucheta Dalal respectively. The series was adapted from journalist Sucheta Dalal and Debashish Basu's 1992 book The Scam: Who Won, who Lost, who Got Away.[27] The scam was portrayed in the 2020 Indian webseries, The Bull Of Dalal Street on Ullu. The Big Bull is a 2021 Indian Hindi-language film directed by Kookie Gulati, starring Abhishek Bachchan as Harshad Mehta loosely based on his life and the 1992 scam.[28] In movie Lucky Baskhar, a character named Harsha Mehra was based on Harshad Mehta and related to the securities scam, 1992.

References

Jayanth R Varma. Indian Financial Sector After a Decade of Reforms ccs.in, 2022-08-23, retrieved 2026-01-15^
Samir K Barua, Jayanth R Varma. Securities Scam: Genesis, Mechanics, and Impact Vikalpa: The Journal for Decision Makers, January 1993, retrieved 2019-12-20^
Pravin Palande. Economic Milestone: Stock Market Scam (1992)

Ready forward deal scam

The ready forward deal is a way where a single broker liaisons between two banks. When one bank wants to sell securities, it approaches the broker. This broker goes to another bank and tries to sell the securities and vice versa for buying. Since Mehta was a renowned broker, he issued cheques in his name instead of the bank. When the bank wanted money for the securities, he approached another bank and repeated the same process, and invested the bank money in the stock market.[10] Mehta used the ready forward deal and applied it to the Bank Receipts system of the Indian financial systems. This system was the most flawed system as the Janakiraman Committee restructured the entire Bank Receipts system after the 1992 scam.

Mehta used forged BR's to gain unsecured loans, and used several small banks to issue BRs on demand. Since these banks were small, Mehta held on to the receipts as long as he wanted. The cheques in favour of both the banks were credited into the brokers' accounts which was the account of Mehta. As a result, banks made heavy investments in BOK and MCB as they showed positive signs of growth.[1] Using the BR scam, Mehta took the price of ACC from ₹200 to ₹9000 in a short span of time. This 4400% percent increase was seen in several other stocks and as he sold the stocks, the market crashed.[8]

This went on as long as the stock prices kept going up, and no one had a clue about Mehta's operations. Once the scam was exposed, though, a lot of banks were left holding BRs which did not have any value – the banking system had been swindled of a whopping inr. They knew that they would be accused if their involvement in issuing cheques to Mehta was discovered. Subsequently, it transpired that Citibank brokers like Pallav Sheth and Ajay Kayan, industrialists like Aditya Birla, Hemendra Kothari, a number of politicians, and the RBI Governor S.Venkitaramanan all had played a role in allowing or facilitating Mehta's rigging of the share market.[11]

1992 Indian stock market scam

1992 Scandal

Overview

Exposure, trial and conviction

Impacts

In popular culture

See also

Further reading

References

Bank funds scam

Bank receipt scam

Ready forward deal scam

Realization of scam and market crash

Subsequent reforms

Changes in the financial structure of India