By Yashika Patel


The year 1992 made history by witnessing the biggest scam committed in the stock market of  India the main malefactor was Harshad Mehta who was known as the big bull of the stock market. The scam was done in a systematic way by making fake bank receipts which crashed the stock market, the scam did not start from making fake receipt it was much earlier than this when there was so much speculation in the stock market where no one paid attention as everyone was satisfied with the profit and refund they were getting Harshad Mehta was able to pull over this scam any years but Sucheta Dalal exposed him in one of his articles where she declared all the money used in the scam belongs to the people of India, Harshad  Mehta was able to do this scam as that time there was lack of securities, no online technology was used. One of the greatest scams that history has noted in Indian finance was non other than scam 1992, Harshad Mehta was born in 1954 in a Gujarati- Jain family spent his childhood in Mumbai. In 1976 Harshad Mehta completed his graduation from LalaLajpatrai Collage in Mumbai after completing his graduation he did many sales jobs due to these sales job he got his interest in the stock market in the early 1980s where he worked with any brokers, in 1984 he himself taken broking license from BOMBAY STOCK EXCHANGE (BSE) from where he started his own company named Grow more Research and Asset Management after forming his company in 1984 Harshad Mehta started his trading actively in BSE this was the time when the stock market has seen its fluctuation but no one took any interest in the fluctuation as the returns were in great amount. After this Harshad Mehta’s popularity was on peek he was in media like a star where he was given many names such as the Big Bull, Radiating Bull, the Amitabh Bachan of the stock market.

 Badla system whose basic meaning is getting something in return this system involves the buying of stocks with the borrowed money, this exchange act as an intermediary at the interest rate, and the maturity of this exchange is not more than 70 days, this is also known as forwarding Trading which deals with two kind of views- bullish view and bearish view. In Bullish view, if someone wants to make his position in the stock market so he will no more take any delivery of stock but if after 15days the stock value gets high so he will sell off the stock and have his profit but on the other hand if he suffers a loss which means stocks value gets low so he didn’t invest in stock this whole scenario explains that a person with low capital can invest and get a high profit. In Bearish view, if a person had a bearish view so similarly, he can do short selling without investing high capital.

But in 1969 forward trading was banned after which every stock exchange amended their laws because of which this badla system came into light and in some stocks this trading was allowed and these stocks were big in size so these stocks were known as specified shares these were categorized as group A shares where badla system was allowed. There were some shares in which badla system was not allowed which were known as non-specified shares, group B shares where badla system was not allowed.

Badla system was fully exploited by Harshad Mehta for price rigging as there was low use of capital and he was able to speculate more and in December 1993 badla system was also prohibited by the government. After banning and exploiting lack in the supervision of RBI were seen where RBI allowed NON –BANKING FINANCIAL COMPANY (NBFC) this was engaged in the business of loans and advances, and NATIONAL HOUSING BANK  these two companies were working without any regulations. Foreign banks were also allowed to operate in India in fact in the peak time of scam that is April 1991 to May 1992 maximum of 56% of irregular transactions were done by the foreign bank due to which CITI BANK, BANK OF AMERICA, AMERICAN EXPRESS, ANZ GRINDLAYS  had to earn their maximum profit.

There were no such regulations made for stockbrokers as there was a minimum capital requirement, there was no audit on their accounts they were doing one kind of transaction in one account whether if the transactions are related to brokerage or unity.


As earlier, it gets to know that Banks Non-Profit Assets were increasing on that time requirement of SLR and CRR were high. SLR stands for Statuary Liquidity Ratio which has to be maintained by banks in the ways of reserves or in the form of government securities, there was a huge percentage change in SLR as it was 34%in the year 1980-81 but after the starting of the scam SLR were 38.5% in the year 1990-91. CRR which stands for Cash Reserve Ratio which has to be maintained by banks which ensures the security amount makes it readily available for the customers when they want their deposit back. The most shocking percentage was seen in CRR that is from 6% in 1980-81 it took a jump to 25% in 1990-91.

If we try to calculate SLR and CRR which will result in 63.5% which means this much percent of funds are blocked in the banks for the lending purpose that is the bank can give only 36.5%and not only this total 40% will be given to priority sector lending that is 14.6% and 60% of 36.5 % will be available for commercial lending.

Priority sector lending was given to agriculture, small business, professional, small scale industries, so in all these sectors there was a big default did by banks as they were poor quality of assets and many political influences were involved such as loan waiver, because of all these political influences banks profitability were declining thus in late 80s bank started emerging NBFCS.

The advantage of emerging NBFCS was there was no need for SLR and CRR, no priority or lending requirement. They were allowed to make their independent decision on investment, these NBFCS stated there many portfolios schemes so that all the money came from this scheme can be invested in the stock market.

BANKS and PSUS started their investment in the stock market because they wanted a good return which resulted in the diversion of funds from PSUS in the stock market. PSUs were receiving all the funds from the government budget and after some time in 1985-86 PSUS were allowed to float bonds in markets and raise their funds. from all this, we can say BANKS, NBFCS, and PSUS all were in a race for a good amount of funds in return from the stock market for this they needed brokers and brokers were already in the need of funds.


 Firstly we should know about the major events which happened in the scam which held between the period of April 1991 to May 1992 it was seen in the year 1991 the value of Sensex was 1250 but in 1992 the value was not only doubled it was more than double value that is 4467 which is only one year Sensex value was four times more from this much growth of market it was understood that stock market was not running on fundamentals there were speculations the stocks where Harshad and his accompanies were trading there value was increasing those stocks were ACC(Associated Cement Companies), Appollotyres, Reliance, Videocon, Tisco and BPL. The high value of stocks was explained by Harshad Mehta by giving the theory of Replacement Cost which means the amount paid for replacing the existing property with the new one which has some utility. Execution of scam started when SLR  requirement where the bank was required to take some funds under government securities as all the funds used to get locked for maintaining liquidity for which they had ready forward deal which is derived as a short term loan which is typically given for 15days, these deals were done to secure loans against government securities.  For example, Bank A is a leading bank and Bank B is a borrowing Bank, now Bank A will lend Rs 100cr to Bank B in favor of which Bank  B will sell its government securities to Bank A only for 15 days. After 15days Bank B will pay off the loan with interest to Bank A and Bank A will give back the securities to Bank B. These transactions were very simple and easy to do between the banks but in the year 1991-92, these transactions were done on the daily basis due to which banks have many transactions and entries related to them could not be maintained this was one of the drawbacks.

Bank receipt concept came in the banks where if any bank is in the need of funds then they can ask Bank A for funds by providing them Bank receipt instead of securities but there was an issue that how will lend ing bank will get know which bank is in need of fund and vice versa there also broker played an important role.

Harshad Mehta deal phase 1- The Bank receipt has an easy way of running the borrowing Bank and the lending bank had a broker in between where lending bank use to give funds to brokers account and then the broker use to give those funds to borrowing Bank and taken BR to the other bank it was a legal transaction. But in case of Harshad Mehta, he use to take bank receipt from borrowing Bank and find a bank which is ready to pay the funds and give the Bank receipt but now the funds will not be given to the borrowing Bank but it will be invested in the stock market which will result in speculation of stock from where profit will be earned

Harshad Mehta deal phase 2- Now Harshad started building his connections with the borrowing banks specifically with Bank of Kared and Metropolitan Cooperative Banks from this bank he uses to issue fake bank receipt which means these banks have no security and this fake receipt was given to banks who in favor provides with the funding those funds were invested in the stock market and the profit made out of them were given to investors and actually needed funds were given to the bank in need. But the lending bank had huge losses these banks were SBI, ABI CAPS, NHB, and many more but there were some banks who earned a good profit in this bull run these banks were basically foreign banks such as CITI BANKS, BANK OF AMERICA, etc.

This does not last for forever as it could be seen fundamentals were not strong the stock prices were artificially increasing but the question arises when the stock market was increasing which meant that a lot of money was invested in artificial increasing.  On 23rd April 1992 Times of India published an article by SuchetaDalal which unfolded all the folded pages where things get to know about the irregular transactions after the release of this scam Sensex came to a path where he was losing all his wealth stocks were Rs 4467cr which declined to Rs 3000 in May 1992 and Rs 2500 in August 1992.

On 30th April 1992first investigation team was formed named as JANKIRAMAN COMMITTEE, as Jankiraman was the Deputy Governor of RBI motive of the committee was to know about the loss of financial institutions which resulted in Rs 4024cr loss happened to Banks and Financial institutions, after the result of the committee it was said that Rs 4024cr loss happened but what about the money losses by PSUs which worth Rs5746cr and many foreign banks had profit because of irregular transactions. Due to this Parliament had many discussions regarding this committee and opposition was asking for further losses in respect of this in August 1992 JOINT PARLIAMENTARY COMMITTEE was made with the motive to know about the involvement.JPC continued its investigation for 17 months in December 1993, Harshad Mehta was arrested on 9th November 1992where he was banned by SEBI  72 criminal charges and 600 civil lawsuits were filed, the investigation pointed out many loopholes

  1. The scam started in 1985 where there was the involvement of RBI top officials, Ministry of Finance, Banks, NBFC Ministry involved.
  2. Jankiraman, the deputy Governor of RBI was also blamed for this as he was in charge of the Public Debt office who is in charge of Government securities where all the SGL Accounts was maintained all this scam happened inside Government securities.

After all the names came in the report of JPC SBI chairman was given leave, NATIONAL HOUSING BANK(NHB) chairman was made resigned UCO bank chairman was arrested P.chidambaramwho was the minister of commerce also given his resignation on the basis of moral responsibilities. Inter-Disciplinary Group(IDG) was made in December 1993 whose part was CBI, RBI, Income-tax department and Directorate of Enforcement, in December 1995 IDG given his report where they told the endues of the money but this investigation was a time consuming where they asked for more time in the investigation but after all these investigations it was sealed, in September 1999 Harshad Mehta was jailed for 5 years. In 1992 SEBI became the statutory authority with a separate legal entity, after which SEBI made several changes in regard to the security shares

SEBI Guidelines after the scam 1992 :

  1. Strict norms were introduced that are full disclosure in respect of the material facts, risk factors, etc.
  2. Listing agreements were introduced by SEBI where the company has no confusion regarding the set of rules to be followed.
  3. A code of conduct was introduced where it was made mandatory for all the companies to make a disclosure about the investors for the purchase of the securities.
  4. There was an introduction of online, screen-based that is electronic trading was introduced in the National Stock Exchange and Bombay Stock Exchange.
  5. Badla system was replaced by carrying forward system.

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