Economics II

SEMESTER: 2

SUBJECT: ECONOMICS II

A PROJECT ON:

HARSHAD MEHTA vs UNION OF INDIA (SCAM 1992):

AN ECONOMIC ANALYSIS

SUBMITTED TO: GANESH MUNNORCODE

SUBMITTED BY: SARTHAK JAIN

Batch: BA LLB Division A

Roll Number: A038

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Economics II

Table of Contents
ABSTRACT........................................................................................................................................ 3
INTRODUCTION......................................................................................................................4
EXPLANATION OF RESEARCH QUESTION.......................................................................9
DETAILS OF THE SCAM......................................................................................................13
FINDINGS...............................................................................................................................17
SUGGESTION.........................................................................................................................17
CONCLUSION........................................................................................................................18
BIBLIOGRAPHY....................................................................................................................19

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ABSTRACT

Since initiation, the development of the Indian securities exchange has been compelled
through exploitative, unlawful and self-actualised exercises of chic people engaged with
various limits on the lookout. Examinations in the greater part cases have demonstrated the
inclusion of the great positioning officials of the organizations in the wrongdoing,
sophistically alluded to as "middle class wrongdoing". It antagonistically affects the
development and supportability of the offer market. Under the light of the above issue, this
paper attempts to examine the effect of Harshad Mehta trick on the offer market. It centres
around the system behind the insider-exchanging, its effect on the offer market and the
controller’s oversight on the issue. At long last, ideas have been given which will contribute
towards the fantasy of each Indian-a cheat free offer market centring towards the general
advancement of the country.1

1
R Sreekumar International Journal of Business Ethics(2014)

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INTRODUCTION

Harshad iMehta iwas iregularly ialluded ito ias ithe i'Big iBull' iof iDalal iStreet ior ithe i'Amitabh
i Bachchan' iof ithe iIndian istock imarket. iHe icontrolled istocks iby iwrongfully igetting icash ifrom ia
i few ibanks iutilizing icounterfeit ibank ireceipts. iHe imade ia ipattern iof imisrepresentation
i including ilarge ibanks ilike ithe iState iBank iof iIndia i(SBI) iand ithe iNational iHousing iBank
i (NHB). iChasing iafter ithe imisrepresentation iof iRs i4,000 icrore, i'Securities iScam', ithe
i Securities iLaws i(Amendments) iAct iwas ipassed iin i1995, iwhich ibroadened ithe iward iof ithe
i Securities iand iExchange iBoard iof iIndia. iIt ipermitted iSEBI ito icontrol idepositories, iFIIs,
i venture icapital ifunds, iand icredit irating iagencies. iWith ithe idisclosure ithat ihe imay ihave
i hoodwinked ithe iState iBank iof iIndia iof i₹500 icrore, ithings ichanged ifor ihim. iMehta iwas ifound
i guilty iof i74 icriminal ioffences iby ithe iBombay iHigh iCourt iand ithe iSupreme iCourt. iHis ilegal
i battles idragged ion iuntil i2001, iwhen ihe idied iof iheart ifailure iin ijail. iHe iwas i47 iyears iold iat ithe
i time. iThe isize iof ithe iruse iwas icalculated iby ithe iJanakiraman iCommittee ito ibe iRs i4024 icrore.

1. Objectives of the study.

i. To know the mechanism behind insider trading.
ii. To know how the share market is being affected.
iii. To consider how investors are influenced.
iv. To know the SEBI’s strategies to curb such illegal malpractices.

2. Research Questions
i. What are the 5 ways Indian stock market changed after 1992?
ii. How were the BRs misused?
iii. Effect of scam on the economy?
iv. Was Harshad Mehta the mastermind or fall guy of securities scam?
v. What was the tussle between Harshad Mehta and bear cartel?

3. Aim of the topic

The aim of the topic is to know how the is the scam done by Harshad Shantilal Mehta and
how it affects the economy and how does the share market was crashed after it. And in
what way the scam effects common people.

4. Limitations of the research

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 Economics II

The research relies solely on secondary data from books, journals, newspaper articles, and
blogs, which may be a drawback.

5. Scope of the topic

This project aims to learn how Harshad Shantilal Mehta's scandal affects the stock market,
economy, and how the market crash affects the common people of India, as well as to
learn how the scandal was perpetrated by him and who was involved.

6. Review of Literature

i. (Sanjay Pugalia)- Harshad Mehta was pitted against well-entrenched market lords, who
were supported by some of Mumbai's most powerful businessmen, as well as ineffective
regulators. What happened after that is public knowledge. During a press conference in
Mumbai, Mehta, with the aid of Ram Jethmalani, made the most sensational accusation.
He had carried Rs 1 crore in cash to the house of then-Prime Minister Narasimha Rao.
Everything went to hell, and the investigation became heavily politicised. Things became
even more complicated when Mr Madhavan was excluded from the inquiry.

ii. (Paronjoy Guha Thakurta (The Pioneer), Sabina Inderjit)- The goal of our cartel was to
maximise its news gathering efforts by meeting MPs after the JPC ended and sharing our
notes for regular stories. We'd compete ferociously for our own exclusives, too – there'd
be no cartel there. Ram Niwas Mirdha, a Congress veteran, led the JPC. It summoned all
of the world's most influential corporations, regulators, and investigative agencies as
witnesses. Many hoped that the investigation would not only uncover the scam, but also
track down all ill-gotten gains and prosecute wrongdoers. The system as a whole will be
cleansed. Some were arrested and released on bail, while those who should have been
arrested never there.

iii. (Santosh Nair)- Harshad began investing in the stock market in the early 1980s, but there
was no such thing as long-term investing at the time. Most of what passed for analysis
was actually trading based on knowledge that a few people had access to. This was a
common practise at the time, and that was how most major brokers made their money.
With the exception of a few, most of the companies on which Harshad Mehta was bullish
are no longer in business. Harshad suggested the replacement cost principle, which states

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that a manufacturing company's stock should be priced at the cost of building a similar
factory. This hypothesis was widely accepted, and shares of even the most questionable
corporations skyrocketed to absurdly high levels.

iv. (Joint Parliamentary Report)- In several ways, the securities fraud, which exposed
anomalies in bank and financial company securities transactions in the second quarter of
1992, was unprecedented. Individuals and organisations were involved in a number of
ways, resulting in a large amount of data. International banks, financial and other
public/private sector companies, the major stock exchanges, select traders, and people in
high-ranking positions are all included.

v. (Meenu Katariya)- Harshad Mehta was the king of the stock markets in the early 1990s,
as shown by the nicknames he received. From the stock market's Amitabh Bachchan to
the Big Bull, he was nothing short of a superstar for his clients and investors. Millions of
people put their confidence in Harshad and put their money in the stock market at the
time. Not only did the stock market plummet after the fraud was revealed, but so did
people's faith in him. Harshad maintained that the way this case was conducted was unfair
from the beginning to the end of the investigation. When asked whether he had faced
discrimination, he said that his family was also interested in the situation.

vi. (Nikunj Savaliya)- The willpower and dedication with which one must live one's life are
universal. When greed is applied to the equation, however, anyone can be led down a
dark road, and Harshad was no exception. Harshad Mehta's love affair with money slowly
spiralled out of control, despite the effort he put into building his business, Growmore
Research and Asset Management, from the ground up. Determination, on the other hand,
was not a quality that only Harshad possessed. Sucheta Dalal and Debashis Basu, both
journalists, were overflowing with it. They were the ones who followed his storey and
revealed his dubious business practises.

vii. (Navdeep Yadav)- The Harshad Mehta Story chronicles the stockbroker Harshad Mehta's
meteoric rise and fall. It's the true storey of one of the largest financial frauds in Indian
history, which shocked the Indian stock market in 1992 and forced the market regulator to

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adjust the rules of the game on Dalal Street. Harshad Mehta, a licenced broker, and his
associates were accused of using loopholes in the banking system to participate in major
market manipulation on India's largest stock exchange, the BSE, in 1992.

viii. (Anil Prerna)- Growmore Research and Assets Management, Mehta's business, took up
an entire floor in Maker Chambers V in Nariman Point, India's most expensive real estate
at the time. Mehta, who was known for his extravagant lifestyle, lived in a swanky
penthouse in Worli Seaface, a trendy Mumbai neighbourhood, and owned a fleet of
luxury cars. Mehta had financed his opulent lifestyle by syphoning bank funds through
inter-bank transactions and aggressively investing in a few stocks that soared to dizzying
heights, igniting a stock market boom. He was later convicted and barred from investing
in the stock market after being charged with more than 70 criminal offences. The Central
Bureau of Investigation (CBI) arrested Mehta and his brothers in November 1992 for
allegedly misappropriating more than 2.8 million shares of about 90 companies via forged
share transfer forms, including Associated Cement Companies and Hindalco.

ix. (Kaveri Bamzi)- According to Ravi Mantri, Harshad Mehta's fraud created a need for
capital market regulation in India. The Securities and Exchange Board of India [SEBI]
was founded in 1992, despite the fact that India had functioning public stock markets for
decades before that. Mantri sees similarities between the capital markets sector at the time
and the current formalisation-driven real estate shakeout. According to Maira, those who
have maximised shareholder capital and personal wealth are honoured as smart people
who should be emulated. Mehta epitomises India's obsession with wealth, especially
among those who are left out of the system. Others thought of him as nothing more than a
cheat. Those who served in the ‘share industry' were known as gamblers and hustlers by
the wider business community. A resurgence of interest in studying India's awkward
relationship with wealth signals a resurgence of interest in studying India's uneasy
relationship with wealth.

x. (Aron Almedia)- In 1992, the Dalal Street bear market was triggered by the Harshad
Mehta scam. Despite having only Rs. 40 in his wallet, he was able to have such a
significant impact on the world. The year 1991 marks the beginning of India's economic
liberalisation. The public sector was pressured to compete more vigorously and was under
pressure to show profitability. The banks were pressed to take advantage of the situation

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Economics II

in order to boost their profits. This news was welcomed by the private sector, as it meant
more funds would be available from international investors. The private sector was also
happy with the latest legislation because it now has access to new business sectors. In the
1990s, the banks were required to maintain a minimum bond level of 38.5 percent. The
Statutory Liquidity Ratio is the minimum percentage that banks must hold in the form of
bonds or other liquid assets. Banks, on the other hand, were banned from trading on the
stock exchange. Banks may experience temporary spikes in Net Demand and Time
Liabilities from time to time. Banks will be expected to increase their bond holdings in
such circumstances.

7. Research Methodology
Keeping in mind the nature of the topic and subsequent research questions, the researcher
used the method of a secondary research. The researcher took the help of various articles
available at large on the Internet, books written by various renowned authors, on the basis
of that an article was written.

8. Hypothesis
To decide whether Harshad Shantital Mehta was the true perpetrator of the fraud or merely a
fall person.

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EXPLANATION OF RESEARCH QUESTION

1. What are the 5 ways Indian stock market changed after 1992?

The five ways in the Indian stock markets are.

 Settlement cycle is the time inside which representatives need to pay full cash and
take conveyance of stocks or convey stocks whenever sold. In 1992 the cycle was 14
days. Presently, it is two days, and SEBI is alluding to a 1-day cycle soon.

 In 1992, there was no standard over support of least equilibrium that a client needs to
guarantee to purchase stocks. Presently, a client can't accept stocks without the base
equilibrium in the record or sell without stocks in their Demat account.

 Before 1992, every one of the exchanges were put through sellers and subsequently
they conveyed a tremendous execution hazard. Presently, the vast majority of the
exchanges are executed by clients all alone.

 Before 1992, settlement of exchanges was done through paper, making counter-party
hazard clear. Presently, all exchanges are electronic and all settlement of exchanges
occurs through clearing organizations.
 In 1992, clients paid at any rate 1% as business for value conveyance exchanges. No
charges are imposed at this point.

2. How were the BRs misused?

After a series of breaches, BRs were accepted currency and were exchanged as shares, with
the underlying securities seldom changing hands.

a. Even though RBI rules prohibited it, banks began issuing BRs for transactions in
government securities.
b. Since banks buying securities did not insist on delivery within the 90-day period, BRs
became indefinitely valid.

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Economics II

c. A bank that holds a BR but has not yet received delivery of the underlying securities will
sell those securities to a third bank and issue another BR. In effect, instead of shares, BRs
were being issued with BRs as the underlying.
d. Some banks began issuing BRs despite the fact that they lacked the underlying securities.

3. Effects of scam on the economy

Successively, the BSE Sensex mark from 2,000-mark in January to 4,000-mark in March
1992. The effect of the trick had numerous results, which incorporated the deficiency of cash
to lakhs of families and the quick accident of the securities exchange. The list tumbled from
4500 to 2500 addressing a deficiency of Rs. 1000 billion in market capitalisation. He
submitted an extortion of more than 1 billion from the financial framework to purchase stocks
on the Bombay Stock Exchange. This affected the whole trade framework as the security
framework collapse and financial backers lost great many rupees in the trade framework. The
extent of the trick was huge to the point that the net estimation of the stocks was higher than
the wellbeing spending plan and instruction financial plan of India. The trick was
choregraphed so that Mehta got protections from the State Bank of India against produced
checks endorsed by degenerate authorities and neglected to convey the protections. Mehta
made the costs of the stocks take off high through manufactured practices and sell the stocks
that he possessed in these organizations. The effect of the trick had numerous results, which
incorporated the deficiency of cash to lakhs of families and the prompt accident of the
financial exchange. The list tumbled from 4500 to 2500 addressing a deficiency of Rs.1000
billion in market capitalisation. The 1992 trick brought up numerous issues including bank
authorities answerable for being in conspiracy with Mehta. In the time frame between April
1991 and April 1992, the Sensex went into an unrest and returned 274%, moving from 1,194
focuses to 4,467. That is the most elevated yearly return for the list. The trick became
exposed when the State Bank of India announced a shortage in government protections. That
prompted an examination that later showed that Mehta had controlled around Rs 3,500 crore
in the framework. On August 6, 1992, after the trick was uncovered, the business sectors
smashed by 72% prompting probably the greatest fall and a bearish stage that went on for a
very long time.

4. Was Harshad Mehta the mastermind or fall guy of securities scam?

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Harshad Mehta had begun putting resources into the financial exchange from the mid
80s, yet there was no understanding of long haul contributing back. Quite a bit of what
made look like exploration was just exchanging on the premise on data accessible to a
couple. This was a typical practice and most enormous representatives of that time made
their fortune along these lines. Excepting a modest bunch, a large portion of the
organizations that he was bullish on, are not, at this point in presence. ACC, SPIC and
Apollo Tires are among those which endure yet none of them has been fabulous
abundance makers over the long haul. He concocted the substitution cost hypothesis,
whereby the load of an assembling organization ought to be esteemed at what it would
cost to set up a comparative plant. This hypothesis discovered numerous takers and sent
portions of even the most questionable organizations taking off to soak levels. The
substitution cost hypothesis was not a unique one, then again, actually he figured out
how to sell it well. He figured out how to persuade monetary establishments to purchase
the stocks he was bullish on. He may have had some smart thoughts, yet it can't be
rejected that the establishments' help for Harshad likewise had to do with his bang in the
hallways of force in Delhi and the journey for brisk benefits, instead of their confidence
in his stock-picking abilities. He figured out how to redirect huge entireties from the
financial framework to the securities exchange, by sick utilizing the escape clauses in
the framework. However, unfamiliar banks and their picked handles excessively had
been playing with the framework much before he discovered the provisos. RBI knew
however given India's problematic forex saves position and the intermittent reliance on
unfamiliar banks decided to deliberately ignore. The solitary distinction among Harshad
and the unfamiliar banks in this matter was that the unfamiliar banks and their
representatives were not foolish enough to redirect huge totals into the financial
exchange to control share costs. This could be one explanation that they never
associated him with financing his stock buys with bank reserves. All things considered;
it was a hazardous system given the unpredictable idea of the securities exchange. 2

5. What was the tussle between Harshad Mehta and bear cartel?

A people group of intermediaries, for the most part Harshad's opponents, had short sold
countless offers, accepting that the securities exchange's elation was unsupported by basics

2
Bulls, Bears and Other Beasts - A story of the Indian stock market(Santosh Nair) 2016

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and that the assembly would not last. Harshad had the option to convey forward his purchase
positions and drive costs considerably higher because of the financial assets available to him.
Harshad's rivals were hurt monetarily as costs kept on expanding. They needed to purchase
stock on the open market to cover their short positions, which fuelled the meeting and set
them back more cash. Normally, they were in an unsafe circumstance and gambled failing if
stock costs kept on rising.3

3
Joint Parliamentary report(January 1992)

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DETAILS OF THE SCAM

Mechanism behind Insider trading

Insider itrading iis ithe iact iof ibuying iand iselling ia icompany’s istock ion ithe ibasis iof i‘inside’
i information iabout ithe icompany. iThe i“inside” ior i“insider” iinformation iof ia icompany iis
i proprietary iinformation iwhich iis inot iavailable ito ithe igeneral ipublic ioutside ithe icompany, ibut
i whose iavailability iwould ihave ia imaterial ior isignificant iimpact ion ithe iprice iof ithe icompany’s
i stock. iInsider itrading iis inot ionly iillegal, iit iis iunethical itoo. iThe iperson, iwho itrades ion iinsider
i information, iin ieffect i“steals” iinformation iand ithereby igains ian iunfair iadvantage iover ithe
i general ipublic. iMany ipeople iargue ithat iinsider itrading iis isocially ibeneficial iand, ion iutilitarian
i grounds, iit ishould inot ibe iprohibited ibut iencouraged. iInsider itrading iis ihighly idiscouraged iby
i the iSEBI ito ipromote ifair.

Insight of scam and market crash

The trick initially got apparent in late April 1992, when it turned out to be evident that
Harshad Mehta was an irregularly enormous financial backer in government protections. At
that point, he was accomplishing in excess of a third base of the all-out protections business
in India. At the point when the public understood that his ventures were prohibited and that
his stocks were likely useless, it set off a selling disturbance of Mehta's stocks. The banks
that had lent cash to he was abruptly holding many millions in unstable credits. The mix of
the selling unrest and the way that various banks been hoodwinked slammed the Indian
financial exchange, with costs dropping 40% right away. Stocks ultimately dropped 72%, and
a bear market went on for around 2 years.

This table clarifies the amount of money certain banks lost.

Name of Bank ₹ in crores

National Housing Bank(NHB) 1199.39

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Economics II

State Bank of Saurashtra 175.04

SBI Capital Markets Ltd (SBI Caps) 121.23
Standard Chartered Bank 300.00
Total 1795.66

The prompt effect was a radical fall in share costs and market list, causing a breakdown of the
securities control framework activity with the business banks and the RBI. Around ₹35
billion from the ₹2,500 billion market was removed, causing the offer market breakdown.
The Bombay Stock Exchange turned to records altering in the exchanging framework. It
caused alarm with general society and banks were seriously affected. Banks like Standard
Chartered and ANZ Grindlays were ensnared in the trick for bank receipt imitation and move
of cash into Mehta's own record. The public authority understood that the imperative issue
with the monetary construction of the securities exchanges was the absence of cutting edge
frameworks which affected the entire financial exchange. Different bank officials were
examined and ensnared in fake charges. The five principle charged authorities were identified
with the Financial Fairgrowth Services Limited (FFSL) and Andhra Bank Financial Services
Ltd (ABFSL). The director of Vijaya Bank ended it all after the report about the bank receipt
trick. The trick prompted the renunciation of P. Chidambaram who was blamed for claiming
shell organizations associated with Mehta. Mehta was indicted by the Bombay High Court
and the Supreme Court of India as far as it matters for him in the monetary embarrassment
esteemed at ₹49.99 billion (USD $740 million). Different bank authorities were captured,
prompting a total breakdown of banking frameworks.4

Changes in the financial structure of India

The 1992 trick contracted the Indian securities exchange; around 40% of the market esteem
or ₹1,000 billion was cleared out. It drove the specialists to rethink winning monetary
frameworks and rearrange it. The main underlying change was to record instalments made for
buying interests in reconciliated Bank Receipts and Subsidiary General Ledgers to forestall
fake exchanges. On the warning of the Janakiraman Committee, a council was set up to
administer the Securities and Exchange Board of India. The essential proposal of the council
was limit prepared forward and twofold prepared forward arrangements to government
protections as it were. All banks were made upholders than chiefs in exchanges. Banks were
4
Damachis Bill (June 1994)

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to have a different review framework for portfolios, and it were to be observed by the
Reserve Bank of India (RBI).5

Rules regarding BRs

BRs could not be issued for government securities and could only be issued when PSU bonds
or mutual fund units were exchanged, to name a few examples. The RBI's Public Debt Office
kept track of government securities owned by banks in what was known as the Securities
General Ledger (SGL). When a bank decided to sell government securities, it had to go
through a process. The buyer would hand the transfer form over to the PDO, who would
credit the securities to the buyer's account while debiting the seller's securities account.
Another important rule was that BRs could only be used for 90 days.

Effect of the scam on the share market

The pinnacle of the 1991-92 bull rally. The BSE-Sensex hit another high of 4,467. Be that as
it may, what followed next was among the most obscure days of the Indian financial
exchanges. The BSE Sensex smashed 12.8% after the episode of the Harshad Mehta outrage.
This is the greatest single-day Sensex crash till date. Throughout the following one year, the
Sensex tumbled more than half. Everybody lost cash. The little financial backers were the
most exceedingly awful hit. They lost cash incredibly, intensely. In any case, it wasn't just
cash that got cleared out. Financial backers lost confidence in the Indian securities exchanges.
Be that as it may, as it's been said, the breaking point is not long before the first light. The
huge securities exchange embarrassment that was based on misrepresentation, control, and
contemptibility additionally planted the seeds for a counter development towards trust and
straightforwardness. It started with the introduction of the National Stock Exchange of India
Ltd (NSE) in November 1992, which initiated tasks in 1994. The NSE was set up to carry
straightforwardness to the business sectors. It was the first stock trade in Quite a while to give
an advanced, completely robotized screen-based electronic exchanging framework. Furnished
with innovation and a dream, the NSE made a level battleground for representatives and
financial backers. This was a major upset for the financial exchanges. Putting resources into
stocks turned out to be simple, available, and straightforward. Yet, that was simply a large

5
 Financial Market Regulation-Security Scams in India with historical evidence and the role of corporate
governance (Narayanan, S.) 2004.

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portion of the fight. There was as yet a major vacuum that should have been filled. The
conventional business arrangement had bombed appallingly. Furthermore, consumed huge
loads of financial backer cash. It fizzled on the grounds that the interests of dealers clashed
with those of financial backers. This required an autonomous stage that financial backers
could believe that could hand-hold financial backers on their excursion of abundance
creation.

Creation of SEBI

SEBI istands ifor iSecurities iand iexchange iBoard iof iIndia iwas isetup iin i1988 ito iregulate ithe
i functions iof isecurities imarket. iSEBI ipromotes iorderly iand ihealthy idevelopment iin ithe istock
i market ibut iinitially iSEBI iwas inot iable ito iexercise icomplete icontrol iover ithe istock imarket
i transactions. iIt ileft ias ia iwatch idog ito iobserve ithe iactivities ibut iwas ifound iineffective iin
i regulating iand icontrolling ithem. iAs ia iresult, iin iMay i1922 idue ito ithe iscam iand iloss isuffered iby
i common ipeople, iSEBI iwas igranted ilegal istatus. iSEBI iis ia ibody icorporate ihaving ia idifferent
i legitimate ipresence iand iunending iprogression. iWith ithe idevelopment iin ithe idealings iof ithe
i Stock ibusiness isectors, iparcel iof iacts iof ineglect iadditionally ibegan iin isecurities iexchanges, ifor
i example, ivalue ifixing, i' iinformal ipremium ion inew iissue, idelay iin iconveyance iof ioffers,
i infringement iof irules iand iguidelines iof istock itrade iand iposting iprerequisites. iBecause iof ithese
i misbehaviours ithe iclients ibegan ilosing icertainty iand iconfidence iin isecurities iexchange. iThe
i sham iimpacts iof ithe itrick iprompted ithe irise iof ia isolid icontroller, iSecurities, iand iExchange
i Board iof iIndia i(SEBI) i(which iwas iset iup iin iI988) ibeing iengaged iby ithe ipublic iauthority, ias
i indicated iby ilegal iforces iwith ithe ideath iof iSEBI iAct i1992.6

6
i SEBI iListing iObligations iand iDisclosure iRequirements(Dr. iK.R iChandratte, i2020)

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FINDINGS

i. The iHarshad iMehta iscam isparked imany ichanges iin iIndia's ifinancial iregulatory isystem.
i The iSecurities iLaws i(Amendments) iAct iwas ipassed iin i1995, iwidening iSEBIs
i authority iand iallowing iit ito iregulate idepositories, iFIIs, iventure icapital ifunds iand
i credit-rating iagencies. iTo isecure iinvestor iinterest, iSEBI icould ialso imake iit imandatory
i for icompanies iissuing isecurities ito imake idisclosures.
ii. The money market instruments are at the core of the scam, so we wanted to clarify a
few points, such as how shorting works and what BR (Bank Receipts) and SGL
(Subsidiary General Ledger).
iii. The Indian stock market collapsed as a result of a systemic stock scam involving bank
receipts and stamp paper. The scam revealed the fundamental flaws in Indian
financial systems, leading to a fully overhauled stock-trading system that included the
implementation of online security systems.
iv. Harshad Mehta defrauded the financial system of over $1 billion to buy stocks on the
Bombay Stock Exchange. The entire exchange system suffered as a result of this, as
the security system failed and investors lost thousands of rupees in the exchange
system. The size of the fraud was so high that the stock market's net worth surpassed
India's health and education budgets.

SUGGESTION

a. Credit rating agencies must establish standards that concentrate on substance rather
than mode of governance, according to SEBI regulations.
b. Executive director compensation should be based on the board's objective
performance assessment process.
c. There must be credit rating agencies must establish standards that concentrate on
substance rather than mode of governance, according to SEBI regulations.
d. Regulators should strengthen penalties and clarify responsibility when applying
severe penalties for non-compliance.
e. Strict monitoring of the transactions is necessary so that in future there should not
happen any such scam which ruined the entire economy of the country and everyone
suffered such a huge loss.

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CONCLUSION

The iReserve iBank iof iIndia i(RBI) istarted iinspecting ibank ibooks ifor iirregularities iin isecurities
i transactions iin iJanuary i1992. iThe iRBI idiscovered ia iRs i649 icrore ideficit iin iSBI's iinvestment
i portfolio iin iApril. iThe ibank ilacked ithe isecurities ifor iwhich iit ihad ipaid iits ibroker iHarshad
i Mehta. iHarshad ipaid iup iabout iRs i620 icrore ibetween iApril i13 iand iApril i24 iunder ipressure
i from iSBI. iHowever, ithe iRBI iconducted ifurther iinvestigation iand idiscovered ithat iHarshad ihad
i paid iRs i574 icrore ifrom ihis iGrindlay's iBank iaccount. iNational iHousing iBank icheques idrawn
i in ifavour iof iGrindlays iBank iand iattributed ito iHarshad's iaccount iaccounted ifor iRs i489.75
i crores. iNHB iand iGrindlays iclaimed ito ihave iparticipated iin ia isecurities itrade, ibut iNHB ihad ino
i securities ito ishow ifor iit. iThe icat ihad igotten iout iof ithe ibag. iNational iHousing iBank, iState iBank
i of iSaurashtra, iSBI iCapital iMarkets, iStandard iChartered iBank, iCanbank iFinancial iServices,
i Canbank iMutual iFund, iand iAndhra iBank iFinancial iServices iwere iall iincluded iin ithis
i calculation. iFor igovernment isecurities iand iPSU ibonds, ithese iorganisations ipaid ia itotal iof iRs
i 4024 icrore ito iother iinstitutions. iHowever, ithey ilacked ithe irequired isecurities ito iback iup ithe
i money icharged, iand iin isome icases, ithey iwere iin ipossession iof iforged isecurities.7

BIBLIOGRAPHY
7
i Joint iparliamentary icommittee iReport(April i27, i1992)

Kirit P. Mehta School of Law Page | 18

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Kirit P. Mehta School of Law Page | 19