1992 Indian stock market scam
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The 1992 Indian stock market scam was a
market manipulation In economics and finance, market manipulation is a type of market abuse where there is a deliberate attempt to interfere with the free and fair operation of the market; the most blatant of cases involve creating false or misleading appearances ...
carried out by Harshad Shantilal Mehta with other bankers and politicians on the
Bombay Stock Exchange BSE Limited, also known as the Bombay Stock Exchange (BSE), is an Indian stock exchange. It is located on Dalal Street in Mumbai. Established in 1875 by cotton merchant Premchand Roychand, a Jain businessman, it is the oldest stock exchange in ...
. The scam caused significant disruption to the stock market of
India India, officially the Republic of India (Hindi: ), is a country in South Asia. It is the seventh-largest country by area, the second-most populous country, and the most populous democracy in the world. Bounded by the Indian Ocean on the so ...
, defrauding investors of over ten million USD. Techniques used by Mehta involved having
corrupt Corruption is a form of dishonesty or a criminal offense which is undertaken by a person or an organization which is entrusted in a position of authority, in order to acquire illicit benefits or abuse power for one's personal gain. Corruption m ...
officials signing fake cheques, misusing market
loopholes A loophole is an ambiguity or inadequacy in a system, such as a law or security, which can be used to circumvent or otherwise avoid the purpose, implied or explicitly stated, of the system. Originally, the word meant an arrowslit, a narrow verti ...
, and fabrication to drive the prices of stocks up to 40 times their original price. Stock traders making good returns as a result of the scam were able to fraudulently obtain
unsecured loan In finance, unsecured debt refers to any type of debt or general obligation that is not protected by a guarantor, or collateralized by a lien on specific assets of the borrower in the case of a bankruptcy or liquidation or failure to meet the t ...
s from banks. When the scam was discovered in April 1992, the Indian stock market collapsed, and the same banks suddenly found themselves holding millions of INR in now useless debt.


1992 Scandal


Overview

The scam was the biggest money market scam ever committed in India, amounting to approximately 5000 crores. The main perpetrator of the scam was a stock and money market broker
Harshad Mehta Harshad Shantilal Mehta (29 July 1954 — 31 December 2001) was an Indian stockbroker and a convicted fraudster. Mehta's involvement in the 1992 Indian securities scam made him infamous as a market manipulator. Of the 27 criminal charges br ...
. It was a systematic stock scam using bank receipts and stamp paper that caused the Indian stock market to crash. The scam exposed the inherent loopholes of the Indian financial systems and resulted in a completely reformed system of stock transactions, including an introduction of online security systems.Varma, J. R. (2002). The Indian financial sector after a decade of reforms. ''Centre for Civil Society, New Delhi''. Security frauds refer to the idea of diversion of funds from the banking system to various stockholders or brokers. 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 committed a scam of over 1  billion from the banking system to buy stocks on the
Bombay Stock Exchange BSE Limited, also known as the Bombay Stock Exchange (BSE), is an Indian stock exchange. It is located on Dalal Street in Mumbai. Established in 1875 by cotton merchant Premchand Roychand, a Jain businessman, it is the oldest stock exchange in ...
. This impacted the entire exchange system as the security system collapsed and investors lost hundreds of thousands of rupees in the exchange system. The scope of the scam was so large that the net value of the stocks was higher than the combined health and education budget of India. The scam was orchestrated in such a way that Mehta secured securities from the
State Bank of India State Bank of India (SBI) is an Indian multinational public sector bank and financial services statutory body headquartered in Mumbai, Maharashtra. SBI is the 49th largest bank in the world by total assets and ranked 221st in the ''Fortune ...
against forged cheques signed by corrupt officials and failed to deliver the securities. Mehta made the prices of the stocks soar high through fictitious practices and sold the stocks that he owned in these companies. The impact of the scam had many consequences, which included the losses incurred by lakhs of families and the immediate crash of the stock market. The index fell from 4500 to 2500 representing a loss of 1000  billion in market capitalization. The 1992 scam raised many questions involving bank officials responsible for being in collusion with Mehta. An interview with
Montek Singh Ahluwalia Montek Singh Ahluwalia (born 24 November 1943) is an Indian economist and civil servant who was the Deputy Chairman of the Planning Commission of India, a position which carried the rank of a Cabinet Minister. He tendered his resignation for t ...
(Secretary, economic affairs at the
Ministry of Finance A ministry of finance is a part of the government in most countries that is responsible for matters related to the finance. Lists of current ministries of finance Named "Ministry" * Ministry of Finance (Afghanistan) * Ministry of Finance and Eco ...
) revealed that many top bank officials were involved.


Bank funds scam

In the early 70 s, banks in India were not allowed to invest in the
equity markets A stock market, equity market, or share market is the aggregation of buyers and sellers of stocks (also called shares), which represent ownership claims on businesses; these may include ''securities'' listed on a public stock exchange, as ...
. However, they were expected to post profits and to retain a certain ratio (threshold) of their assets in government fixed interest bonds. Mehta squeezed capital out of the banking system to address this requirement of banks and pumped this money into the share market. He promised the banks higher rates of interest, while asking them to transfer the money into his personal account, under the guise of buying securities for them from other banks. At that time, a bank had to go through a broker to buy securities and forward bonds from other banks. Mehta used this money temporarily in his account to buy shares, hike up demand of certain shares (such as that of
ACC ACC most often refers to: * Atlantic Coast Conference, an NCAA Division I collegiate athletic conference located in the US *American College of Cardiology, A US-based nonprofit medical association that bestows credentials upon cardiovascular spec ...
,
Sterlite Industries Sterlite Copper is a subsidiary of Sterlite industries, a company owned by Vedanta Limited. History It was originally incorporated as Rainbow Investments in 1975, the name of the company was changed to Sterlite Cables in 1976. It was later r ...
, and
Videocon Videocon Industries Limited is an Indian multinational conglomerate, headquartered in Mumbai. The group had 17 manufacturing sites in India and plants in Mainland China, Poland, Italy and Mexico. It was the third largest picture tube manufact ...
) dramatically, sell them off, pass on a part of the proceeds to the bank and keep the rest for himself. This resulted in stocks like ACC, which was trading in 1991 for ₹200/share, catapult to nearly ₹9,000 in just 3 months.


Bank receipt scam

Another major instrument was the bank receipt (BR). In a ready forward deal, securities were not moved back and forth in actuality. Instead, the borrower, i.e. the seller of securities, gave the buyer of the securities a BR. The BR serves as a receipt from the selling bank, and also promises that the buyer will receive the securities they have paid for at the end of the term. Having figured this out, Mehta needed banks, which could issue fake BRs, or BRs not backed by any government securities. Once these fake BRs were issued, they were passed on to other banks and the banks in turn gave money to Mehta, plainly assuming that they were lending against government securities when this was not really the case. He took the price of ACC from ₹200 to ₹9,000. That was an increase of 4,400%. Since he had to book profits in the end, the day he sold was the day when the markets crashed.


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 got cheques issued 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. 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
cheque A cheque, or check (American English; see spelling differences) is a document that orders a bank (or credit union) to pay a specific amount of money from a person's account to the person in whose name the cheque has been issued. The pers ...
s 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. 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. 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 . They knew that they would be accused if their involvement in issuing cheques to Mehta was discovered. Subsequently, it transpired that
Citibank Citibank, N. A. (N. A. stands for " National Association") is the primary U.S. banking subsidiary of financial services multinational Citigroup. Citibank was founded in 1812 as the City Bank of New York, and later became First National City ...
, brokers like Pallav Sheth and Ajay Kayan, industrialists like
Aditya Birla Aditya Vikram Birla (14 November 1943 – 1 October 1995) was an Indian industrialist. Born into one of the largest business families of India, he oversaw the diversification of his group into textiles, petrochemicals and telecommunications. ...
, 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.


Realization of scam and market crash

The scam first became apparent in late April 1992, when it became clear that Mehta was a disproportionately large investor in government securities. At the time, Mehta was doing more than a third of the total securities business in India. When the public realized that Mehta's investments were illegitimate and that his stocks were likely worthless, it set off a selling frenzy of Mehta's stocks. The banks that had loaned money to Mehta were suddenly holding hundreds of millions in unsecured loans. The combination of the selling frenzy and the fact that numerous banks been defrauded crashed the Indian stock market, with prices dropping 40% immediately. Stocks eventually dropped 72%, and a
bear market A market trend is a perceived tendency of financial markets to move in a particular direction over time. Analysts classify these trends as ''secular'' for long time-frames, ''primary'' for medium time-frames, and ''secondary'' for short time-fram ...
lasted for about 2 years. This table illustrates the extent of money certain banks lost.Narayanan, S. (2004). Financial Market Regulation-Security Scams in India with historical evidence and the role of corporate governance.


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 The BSE SENSEX (also known as the S&P Bombay Stock Exchange Sensitive Index or simply SENSEX) is a free-float market-weighted stock market index of 30 well-established and financially sound companies listed on the Bombay Stock Exchange. The 30 ...
. When the scheme was exposed, banks started demanding their money back, causing the collapse. He was later charged with 72
criminal offence In ordinary language, a crime is an unlawful act punishable by a state or other authority. The term ''crime'' does not, in modern criminal law, have any simple and universally accepted definition,Farmer, Lindsay: "Crime, definitions of", in Can ...
s, and more than 600 civil action suits were filed against him. 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 . 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 The High Court of Bombay is the high court of the states of Maharashtra and Goa in India, and the union territory of Dadra and Nagar Haveli and Daman and Diu. It is seated primarily at Mumbai (formerly known as Bombay), and is one of the ol ...
convicted and sentenced him to five years rigorous imprisonment and a fine of . On 14 January 2003, The
Supreme Court of India The Supreme Court of India ( IAST: ) is the supreme judicial authority of India and is the highest court of the Republic of India under the constitution. It is the most senior constitutional court, has the final decision in all legal matters ...
confirmed High Court's judgement in a 2–1 decision. While Justice B.N. Agrawal and Justice
Arijit Pasayat Arijit Pasayat (born 10 May 1944) is a former judge of the Supreme Court of India. He hails from Orissa, where he practised in matters relating to taxation and constitutional affairs before the Orissa High Court. Career Pasayat started his car ...
upheld his conviction, Justice M.B. Shah voted to
acquit In common law jurisdictions, an acquittal certifies that the accused is free from the charge of an offense, as far as criminal law is concerned. The finality of an acquittal is dependent on the jurisdiction. In some countries, such as the ...
him.


Allegations of payment of bribe to India's prime minister

Mehta raised a furore on announcing that he had paid ₹10 million to the then
Congress A congress is a formal meeting of the representatives of different countries, constituent states, organizations, trade unions, political parties, or other groups. The term originated in Late Middle English to denote an encounter (meeting of a ...
President and
Prime Minister A prime minister, premier or chief of cabinet is the head of the cabinet and the leader of the ministers in the executive branch of government, often in a parliamentary or semi-presidential system. Under those systems, a prime minister is not ...
,
P.V. Narasimha Rao Pamulaparthi Venkata Narasimha Rao (28 June 1921 – 23 December 2004) was an Indian lawyer, statesman and politician who served as the 9th prime minister of India from 1991 to 1996. He is known for introducing various liberal reforms to Ind ...
, as a donation to the party, for getting him off the scandal case.


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. 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. 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. 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). The chairman of
Vijaya Bank Vijaya Bank was a PSU bank which was merged with Bank of Baroda on 1 April 2019 with its head office in Bangalore, Karnataka, India. It was one of the nationalised banks in India. The bank offered a wide range of financial products and service ...
committed suicide following the news about the bank receipt scam. The scam led to the resignation of
P. Chidambaram Palaniappan Chidambaram (born 16 September 1945), better known as P. Chidambaram, is an Indian politician and lawyer who currently serves as Member of Parliament, Rajya Sabha. He served as the Chairman of the Parliamentary Standing Committee ...
who was accused of owning shell companies connected to Mehta. Mehta was convicted by the Bombay High Court and the Supreme Court of India for his part in the financial scandal valued at ₹49.99 billion (US$740 million). Various bank officials were arrested, leading to a complete breakdown of banking systems


Subsequent reforms

The first reform was the formation of the
National Stock Exchange of India National Stock Exchange of India Limited (NSE) is the leading stock exchange under the ownership of various group of domestic and global financial institutions, public and privately owned entities and individuals. It is located in Mumbai, Mah ...
(NSE). It was followed by the development of the CII Code for Desirable Corporate Governance by
Rahul Bajaj Rahul is a popular male name in India and has a variety of meanings. The earliest meaning found in the Upanishads is "conqueror of all miseries." Later use of the word is attributed to the Buddha, who named his son '' Rahula'' as he felt that fa ...
. The CII Code commanded the formation of two major committees headed by
Kumar Mangalam Birla Kumar Mangalam Birla (born 14 June 1967) is an Indian billionaire industrialist, philanthropist, Chartered Accountant and the chairman of the Aditya Birla Group, one of the largest global conglomerates in India. He is also the chancellor of t ...
and N. R. Narayana Murthy, and overseen by the
Securities and Exchange Board of India The Securities and Exchange Board of India (SEBI) is the regulatory body for securities and commodity market in India under the ownership of Ministry of Finance within the Government of India. It was established on 12 April 1988 as an executive ...
(SEBI). The objective was to monitor corporate governance and prevent future scams. The SEBI were to monitor the NSE and the National Securities Depository. For the equity market, the government introduced ten acts of parliament and one constitutional amendment based upon the principles of economic reform and legislative changes. The introduction of online trading by NSE changed the dynamics of stock buying and selling. The financial market opened up nationally rather than being confined to Bombay (now, Mumbai).


Changes in the financial structure of India

The 1992 scam collapsed the Indian stock market; around 40% of the market value or ₹1,000 billion was wiped out. It led the authorities to reconsider existing financial systems and restructure it. The first structural change was to record payments made for purchasing investments in reconciled bank receipts and subsidiary general ledgers to prevent fraudulent transactions. On the advice of the Janakiraman Committee, a committee was established to oversee the Securities and Exchange Board of India. The primary recommendation of the committee was to limit ready forward and double ready forward deals to government securities only. All banks were made custodians rather than principals in transactions. Banks were to have a separate audit system for portfolios, and it were to be monitored by the Reserve Bank of India (RBI).


In popular culture

''
Gafla ''Gafla'' is a 2006 Indian Hindi-language crime drama film directed by Sameer Hanchate. It is a film inspired from the stock market scam of 1992 which mainly involved Harshad Mehta that rocked the Indian economy and changed lives of thousand ...
'' is a
2006 File:2006 Events Collage V1.png, From top left, clockwise: The 2006 Winter Olympics open in Turin; Twitter is founded and launched by Jack Dorsey; The Nintendo Wii is released; Montenegro 2006 Montenegrin independence referendum, votes to declare ...
Indian
Hindi Hindi (Devanāgarī: or , ), or more precisely Modern Standard Hindi (Devanagari: ), is an Indo-Aryan language spoken chiefly in the Hindi Belt region encompassing parts of northern, central, eastern, and western India. Hindi has been de ...
-language crime drama film directed by Sameer Hanchate inspired by this incident. The scam was dramatized in the 2020 web series ''
Scam 1992 ''Scam 1992: The Harshad Mehta Story'' is an Indian Hindi-language biographical financial thriller streaming television series on SonyLIV directed by Hansal Mehta, with Jai Mehta serving as the co-director. Based on the 1992 Indian stock market ...
'', created by
Hansal Mehta Hansal Mehta (born 29 April 1968) is an Indian filmmaker. He started his career with television show ''Khana Khazana'' (1993–2000) and later moved on to directing films like ''Dil Pe Mat Le Yaar!!'' (2000), ''Yeh Kya Ho Raha Hai?'' (2002) and ...
, with
Pratik Gandhi Pratik Gandhi is an Indian actor. He worked in Gujarati theatre before entering Gujarati cinema. He received wide acclaim for portraying Harshad Mehta in Sony LIV series ''Scam 1992''. He acted in several Hindi films thereafter. Early life Ga ...
and
Shreya Dhanwanthary Shreya Dhanwanthary (born 29 August 1988) is an Indian actress. She got her big break in 2019 as she played Zoya in the Amazon Prime Video web series ''The Family Man (Indian TV series), The Family Man'' and later gained widespread critical acc ...
playing the roles of
Harshad Mehta Harshad Shantilal Mehta (29 July 1954 — 31 December 2001) was an Indian stockbroker and a convicted fraudster. Mehta's involvement in the 1992 Indian securities scam made him infamous as a market manipulator. Of the 27 criminal charges br ...
and
Sucheta Dalal Sucheta Dalal (born 1962) is an Indian business journalist and author. She has been a journalist for over two decades and was awarded a Padma Shri for journalism in 2006. She was the Financial Editor for the ''Times of India'' until 1998 when ...
respectively. The series was adapted from journalist Sucheta Dalal and Debashish Basu's 1992 book ''The Scam: Who Won, who Lost, who Got Away''. The scam was portrayed in the 2020 Indian webseries, ''The Bull Of Dalal Street'' on
Ullu Ullu is an Over-The-Top media streaming platform, owned and maintained by Vibhu Agarwal, founder and group CEO of Ullu and Atrangii. It is currently available for Android and iOS. Shows Web series Short films Controversy and Legal action ...
. ''
The Big Bull ''The Big Bull'' is a 2021 Indian Hindi-language financial thriller film directed and written by Kookie Gulati, based on stockbroker Harshad Mehta who was involved in financial crimes over a period of 10 years during 1980–1990. The film stars ...
'' is a 2021 Indian Hindi-language film directed by Kookie Gulati, starring
Abhishek Bachchan Abhishek Bachchan (born 5 February 1976) is an Indian actor and film producer known for his work in Hindi films. Part of the Bachchan family, he is the son of actors Amitabh Bachchan and Jaya Bachchan and the grandson of poet Harivansh Rai Bach ...
as Harshad Mehta loosely based on his life and the 1992 scam.


See also

*
Bombay Stock Exchange BSE Limited, also known as the Bombay Stock Exchange (BSE), is an Indian stock exchange. It is located on Dalal Street in Mumbai. Established in 1875 by cotton merchant Premchand Roychand, a Jain businessman, it is the oldest stock exchange in ...
*
Ketan Parekh Ketan Parekh is a former stockbroker from Mumbai, who was convicted in 2008 for involvement in the Indian stock market manipulation scam that occurred from late 1998 to 2001. During this period, Parekh artificially rigged prices of certain chos ...
*
Abdul Karim Telgi Abdul Karim Telgi (1961-2017) was a convicted Indian counterfeiter. He earned money by printing counterfeit stamp paper in India. Early life Telgi's mother was Shariefabee Ladsaab Telgi, and his father was an employee of Indian Railways. His ...
*
Ramalinga Raju Byrraju Ramalinga Raju (born 16 September 1954) is an Indian businessman. He is the founder of Satyam Computer Services and served as its chairman and CEO from 1987 until 2009. Raju stepped down following his admission to embezzlement from the ...
*
Hasan Ali Khan Hasan Ali Khan ( – 23 February 2023) was an Indian businessman. In 2007, Indian authorities began investigating Khan on suspicion of money laundering. He had a Swiss bank account with $8 billion in deposits. He allegedly stashed away billion ...
*
List of scandals in India The following is a ''list of proven scandals in India'' since independence, including political, financial and corporate scandals. The year, or decade, is when the scandal was first reported. 1940s * 1947 - INA treasure chest disappearance * ...
*
National Stock Exchange of India National Stock Exchange of India Limited (NSE) is the leading stock exchange under the ownership of various group of domestic and global financial institutions, public and privately owned entities and individuals. It is located in Mumbai, Mah ...


References

{{DEFAULTSORT:The 1992 Stock Market Scam 20th-century scandals Cover-ups 1992 in India Corporate crime Corporate scandals Criminal investigation Confidence tricks Stock market crashes Deception Financial scandals Finance fraud Economic history of India (1947–present) 1992 in Indian economy 1992 in Indian politics 1992 scandals Crime in Maharashtra Scandals in India