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{{short description|Scam on the Bombay Stock Exchange}}
{{Financial risk types}}
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 [[Corruption in India|corrupt]] officials [[Cheque forgery|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 loan]]s from banks. When the scam was discovered in April 1992, India's [[Stock market crash|stock market crashed]], and the same banks suddenly found themselves holding millions of [[Indian rupee]]s (INR) in useless debt.

== 1992 Scandal ==
=== Overview ===
This was the biggest [[money market]] scam ever committed in India, amounting to approximately {{INR}} 5,000 [[crore]]s. 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 (disambiguation)|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.<ref name=":1">{{Cite web |last=Varma |first=Jayanth R |date=2022-08-23 |title=Indian Financial Sector After a Decade of Reforms |url=https://ccs.in/sites/default/files/2022-08/viewpoint3.pdf |url-status=live |archive-url=https://web.archive.org/web/20260115191728/https://ccs.in/sites/default/files/2022-08/viewpoint3.pdf |archive-date=2026-01-15 |access-date=2026-01-15 |website=ccs.in}}</ref>

Security fraud refers to the diversion of funds from the banking system to various stockholders or brokers.<ref name=":0">{{Cite journal|last1=Barua|first1=Samir K|last2=Varma|first2=Jayanth R|date=January 1993|title=Securities Scam: Genesis, Mechanics, and Impact|url=https://web.iima.ac.in/assets/snippets/workingpaperpdf/1992-09-01jrvarma.pdf|journal=Vikalpa: The Journal for Decision Makers|language=en|volume=18|issue=1|pages=3–14|doi=10.1177/0256090919930101|s2cid=115119893|issn=0256-0909|access-date=2019-12-20}}</ref> 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.<ref>{{Cite web |last=Palande |first=Pravin |date=2014-08-20 |title=Economic Milestone: Stock Market Scam (1992) |url=http://www.forbesindia.com/article/independence-day-special/economic-milestone-stock-market-scam-(1992)/38457/1 |url-status=live |archive-url=https://web.archive.org/web/20250419022311/https://www.forbesindia.com/article/independence-day-special/economic-milestone-stock-market-scam-(1992)/38457/1 |archive-date=2025-04-19 |access-date=2019-11-13 |website=Forbes India |language=en}}</ref> This impacted the entire exchange system as the security system collapsed and investors lost hundreds of thousands of rupees. 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]] against forged cheques signed by corrupt officials and failed to deliver the securities. Mehta inflated stock prices through fictitious practices and sold the stocks he owned in these companies.<ref>{{Cite book|last=Basu|first=Debashis|title=The scam: who won, who lost, who got away: from Harshad Mehta to Ketan Parekh|date=2001|publisher=KenSource Information Services|isbn=8188154008|oclc=49618646}}</ref> The impact of the scam had many consequences, including 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 {{INR}} 1000 billion in market capitalization.<ref name=":0" /> The 1992 scam raised many questions about bank officials responsible for colluding with Mehta. An interview with [[Montek Singh Ahluwalia]] (Secretary, economic affairs at the [[Ministry of Finance (India)|Ministry of Finance]]) revealed that many top bank officials were involved.<ref>{{Cite web|date=June 14, 2013|first1=Lekha|last1=Rattanani|first2=Daksesh|last2=Parikh|title=Securities scam: Harshad Mehta throws banking system, stock-markets into turmoil|url=https://www.indiatoday.in/magazine/cover-story/story/19920531-securities-scam-harshad-mehta-throws-banking-system-stock-markets-into-turmoil-766377-2013-06-14|access-date=2019-11-21|website=India Today|language=en}}</ref>

=== Bank funds scam ===
In the early 60's and 70's, banks in India were not allowed to invest in the [[Stock market|equity markets]]. 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 [[Associated Cement Companies|ACC]], [[Sterlite Industries]], and [[Videocon]]) 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.<ref name="dalal">{{cite book|last1=Dalal|first1=Sucheta|title=The Scam: from Harshad Mehta to Ketan Parekh Also includes JPC Fiasco & Global Trust Bank Scam|last2=Basu|first2=Debashis|date=29 July 2014|publisher=Kensource publications|edition=8th|location=Mumbai}}</ref>

=== 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.<ref>{{cite web|last1=Dalal|first1=Sucheta|title=Revisiting 1992: The chickens come home to roost|url=http://www.suchetadalal.com/?id=41c3cfbe-bba7-f153-492e829722c5&base=sub_sections_content&f|accessdate=22 May 2018|website=Official website of Sucheta Dalal|publisher=Sucheta Dalal}}</ref> 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.<ref name="IT">{{cite news|last1=Pathak|first1=Rahul|date=2 January 2013|title=Securities scandal: Investigators haul in more people, discover ever-widening net|publisher=India Today|url=https://www.indiatoday.in/magazine/economy/story/19920715-securities-scandal-investigators-haul-in-more-people-discover-ever-widening-net-766548-2013-01-03|accessdate=22 May 2018}}</ref><ref>{{Cite web|title=Scam 1992: Was Harshad Mehta the mastermind or fall guy of securities scam? A bit of both|url=https://www.cnbctv18.com/market/scam-1992-was-harshad-mehta-the-mastermind-or-victim-of-securities-scam-a-bit-of-both-7296211.htm|access-date=2020-10-27|website=cnbctv18.com|date=25 October 2020 |language=en-US}}</ref>

===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.<ref>{{Cite web|title=Harshad Mehta Scam|url=https://www.indianmirror.com/indian-industries/indian-scams/harshadmehta.html|access-date=2019-11-22|website=www.indianmirror.com}}</ref> 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.<ref name=":2" />

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]]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.<ref name=":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.<ref name="IT" />

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 {{INRConvert|4,000|c|lk=on|year=1992}}. 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|S.Venkitaramanan]] all had played a role in allowing or facilitating Mehta's rigging of the share market.<ref name="Indiatoday">{{cite news|last1=Chakravarti|first1=Sudeep|date=15 April 1993|title=Book review: Debashis Basu's 'The Scam: Who Won, Who Lost, Who Got Away'|publisher=India Today|url=https://www.indiatoday.in/magazine/society-the-arts/books/story/19930415-book-review-debashis-basu-the-scam-who-won-who-lost-who-got-away-810966-1993-04-15|accessdate=30 January 2018}}</ref>

=== 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.<ref>{{Cite news|last=Gargan|first=Edward A.|date=1992-06-09|title=Huge Financial Scandal Shakes Indian Politics (Published 1992)|language=en-US|work=The New York Times|url=https://www.nytimes.com/1992/06/09/business/huge-financial-scandal-shakes-indian-politics.html|access-date=2020-11-08|issn=0362-4331}}</ref> Stocks eventually dropped 72%, and a [[Bear Market|bear market]] lasted for about 2 years.<ref>{{Cite web|title=Economic Milestone: Stock Market Scam (1992)|url=https://www.forbesindia.com/article/independence-day-special/economic-milestone-stock-market-scam-(1992)/38457/1|access-date=2020-11-08|website=Forbes India|language=en}}</ref>

This table illustrates the extent of money certain banks lost.<ref name=":2">Narayanan, S. (2004). Financial Market Regulation-Security Scams in India with historical evidence and the role of corporate governance.</ref>
{| class="wikitable"
! Name of Bank
! ₹ in crores
|-
|[[National Housing Bank]] (NHB)
|1,199.39
|-
|[[State Bank of Saurashtra|State Bank Of Saurashtra]]
|175.04
|-
|[[SBI Capital Markets|SBI Capital Markets Ltd]] (SBI Caps)
|121.23
|-
|[[Standard Chartered|Standard Chartered Bank]]
|300.00
|-
|'''Total'''
|1,795.66
|}

== 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 offence]]s, and more than 600 civil action suits were filed against him.<ref name="Flame">{{cite news|title=Harshad Mehta's Scam|publisher=Flame.org|url=http://flame.org.in/knowledgecenter/scam.aspx|accessdate=20 April 2012|archive-date=26 September 2018|archive-url=https://web.archive.org/web/20180926210529/http://flame.org.in/knowledgecenter/scam.aspx|url-status=dead}}</ref>

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 [[Central Bureau of Investigation|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 {{INRConvert|250|c|lk=|year=1992}}.<ref name="obit">{{cite news|last1=Pandya|first1=Haresh|date=15 January 2002|title=Harshad Mehta|work=The Guardian|url=https://www.theguardian.com/news/2002/jan/15/guardianobituaries1}}</ref> 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 {{INRConvert|25000}}.<ref name="Harshad Mehta sentenced to five years' RI">{{cite news|date=28 September 1999|title=Harshad Mehta sentenced to five years' RI|newspaper=Rediff.com|url=http://www.rediff.com/business/1999/sep/28mehta.htm|accessdate=14 October 2012}}</ref> On 14 January 2003, The [[Supreme Court of India]] confirmed High Court's judgement in a 2–1 decision. While Justice [[B. N. Agrawal|B.N. Agrawal]] and Justice [[Arijit Pasayat]] upheld his conviction, Justice M.B. Shah voted to [[acquit]] him.<ref name="SC upholds Harshad Mehta's conviction">{{cite news|date=14 January 2003|title=SC upholds Harshad Mehta's conviction|url=https://timesofindia.indiatimes.com/india/SC-upholds-Harshad-Mehtas-conviction/articleshow/34396288.cms|archive-url=https://web.archive.org/web/20131023061215/http://articles.timesofindia.indiatimes.com/2003-01-14/india/27279459_1_securities-scam-conviction-mehta-and-two|url-status=live|archive-date=23 October 2013|newspaper=[[The Times of India]]|access-date=14 October 2012}}</ref>

While serving his prison sentence in a [[Thane]] prison in December 2001, Mehta complained of chest pain late at night and was admitted to the Thane Civil Hospital. He died following a brief heart ailment, at the age of 47, on 31 December 2001, with several litigations pending against him.<ref>{{cite news |url=http://articles.economictimes.indiatimes.com/2001-12-31/news/27469847_1_harshad-mehta-madhuli-ashwin-and-sudhir |title=Harshad Mehta Cremated |work=Economic Times}}</ref>

==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.<ref>Sharma, M. P. Impact of Securities and Financial Scams on Regulatory Framework.</ref> 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.<ref>Shah, A., & Thomas, S. (2001). The evolution of the securities markets in India in the 1990s. ''Indian Council For Research On International Economic Relations, New Delhi''.</ref> 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.<ref>{{Cite journal|last=Damachis|first=Bill|date=June 1994|title=The Bombay Securities Scam of 1992: The Systemic and Structural Origins|journal=Policy, Organisation and Society|language=en|volume=7|issue=1|pages=40–45|doi=10.1080/10349952.1994.11876795|issn=1034-9952}}</ref>

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).<ref>{{Cite news|url=https://timesofindia.indiatimes.com/business/india-business/1992-securities-scam-senior-bank-officials-among-5-sentenced/articleshow/64894815.cms|title=1992 securities scam: Senior bank officials among 5 sentenced - Times of India|website=The Times of India|date=7 July 2018 |access-date=2019-11-13}}</ref> The chairman of [[Vijaya Bank]] committed suicide following the news about the bank receipt scam. The scam led to the resignation of [[P. Chidambaram]] 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.<ref>{{Cite web|url=https://tetofficial.com/the-story-of-a-scam-harshad-mehta-1992/|title=The Story of a Scam: Harshad Mehta, 1992|date=2017-02-07|website=The Economic Transcript|language=en|access-date=2021-06-22}}</ref>

===Subsequent reforms===
The first reform was the formation of the [[National Stock Exchange of India]] (NSE). It was followed by the development of the CII Code for Desirable Corporate Governance by [[Rahul Bajaj]]. The CII Code commanded the formation of two major committees headed by [[Kumar Mangalam Birla]] and [[N. R. Narayana Murthy]], and overseen by the [[Securities and Exchange Board of India]] (SEBI). The objective was to monitor corporate governance and prevent future scams.<ref>Allen, F., Chakrabarti, R., & De, S. (2007). India's financial system. ''Available at SSRN 1261244''.</ref> 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.<ref>{{Cite book|last=Patnaik|first=Ila|title=Reforming India's financial system|oclc=913427732}}</ref> 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).<ref name=":1" />

===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).<ref name=":2" />

==In popular culture==
{{See also|Harshad Mehta#In popular culture}}

''[[Gafla]]'' is a [[List of Bollywood films of 2006|2006]] Indian [[Hindi cinema|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''.<ref>{{cite news|url=https://www.indiatoday.in/binge-watch/story/scam-1992-trailer-out-pratik-gandhi-stars-as-harshad-mehta-in-the-f-1727301-2020-10-01|title=Scam 1992: Pratik Gandhi plays infamous stockbroker Harshad Mehta in trailer of Hansal Mehta's web series|last=Keshri|first=Shweta|work=India Today|date=1 October 2020|accessdate=2 October 2020}}</ref> 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.<ref>{{cite news |url=https://indianexpress.com/article/entertainment/bollywood/abhishek-bachchan-replies-as-scam-1992-fan-asks-why-should-he-watch-the-big-bull-7259505/ |title=Abhishek Bachchan replies as Scam 1992 fan asks why he should watch The Big Bull, Saiyami Kher says 'very cool' |date=6 April 2021 |work=[[The Indian Express]]}}</ref>
In movie ''[[Lucky Baskhar]]'', a character named Harsha Mehra was based on [[Harshad Mehta]] and related to the securities scam, 1992.

==See also==

*[[Bombay Stock Exchange]]
*[[Ketan Parekh]]
*[[Abdul Karim Telgi]]
*[[Ramalinga Raju]]
*[[Hasan Ali Khan]]
*[[List of scandals in India]]
*[[National Stock Exchange of India]]

== References ==
{{Reflist|30em}}

==Further reading==
* {{cite book|title=Discourses on Corruption: Interdisciplinary and Intercultural Perspectives|last1=Kannabiran|first1= K.|last2= Hollstein|first2= B.|last3= Hoffmann|first3= F.F.|isbn=9789354790140|url=https://books.google.com/books?id=7spSEAAAQBAJ|year=2021| publisher=Sage}}

{{Alleged scams in India}}
{{Corporate scandals}}
{{Corruption in India}}
{{Financial services in India}}

[[Category:1992 scandals]]
[[Category:1992 in Indian economy]]
[[Category:1992 in Indian politics]]
[[Category:Corporate crime]]
[[Category:Corporate scandals]]
[[Category:Criminal investigation]]
[[Category:Confidence tricks]]
[[Category:Stock market crashes]]
[[Category:Deception]]
[[Category:Financial scandals]]
[[Category:Finance fraud]]
[[Category:Crime in Maharashtra]]
[[Category:Scandals in India]]
[[Category:Cover-ups]]

1992 Indian stock market scam - Revision history

MarianaCone66 at 17:20, 13 March 2026