REVISITING HARSHAD MEHTA SCANDAL: A CASE STUDY IN

CORPORATE GOVERNANCE & INVESTOR PROTECTION

AUTHOR :MADHUR GANDHI

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“Revisiting the Harshad Mehta Scandal: A critical study on corporate governance and investor protection
failures leading to regulatory reforms in India.”

In the early 1990s, Harshad Mehta, a stockbroker in Mumbai, orchestrated one of the biggest stock market scams
in India’s history. His modus operandi was to use fake bank receipts to manipulate the stock prices of certain
companies, leading to a surge in their share prices. He then sold those shares at inflated prices, reaping massive
profits in the process. Mehta’s fraudulent activities resulted in a significant loss of investor confidence in the
Indian securities market and underscored the need for stronger regulatory measures to protect investors.

The Harshad Mehta scam was a wake-up call for Indian regulators, who realized that the country’s securities
market was in dire need of a regulatory overhaul. The Securities and Exchange Board of India (SEBI), the
country’s securities regulator, took a number of steps to improve corporate governance and investor protection in
the wake of the scandal. These measures included increasing the transparency of stock trading, strengthening
insider trading regulations, and improving the disclosure requirements for listed companies.

This article revisits the Harshad Mehta scam as a case study in corporate governance and investor protection. It
examines the events leading up to the scam and the regulatory and legal framework that was in place at the time.
It highlights the shortcomings in corporate governance and investor protection that allowed the scam to occur
and the impact of Mehta’s actions on investors and the Indian financial system.

The scam came to light when Mehta’s fraudulent activities were exposed, causing a sharp decline in the stock
market, and leading to widespread panic among investors. The Indian government and regulatory authorities
took various measures to investigate and punish those involved in the scam, and to prevent such incidents from
happening in the future.

Now, let’s see how the Companies Act 2013 and the SEBI Act 1992 relate to this scam:

1. Companies Act 2013: This act provides the legal framework for the incorporation, operation, and
management of companies in India. The Act sets out various provisions to protect the interests of shareholders
and other stakeholders, and to ensure that companies are run in a transparent and accountable manner.

In the case of the Harshad Mehta scam, the Companies Act 2013 was relevant in two ways:

1. Section 195: Prohibition on insider trading: This section prohibits any person who is in possession of
any unpublished price-sensitive information from communicating, providing or using such information to
trade in securities. Insider trading is a criminal offense under the Companies Act 2013, and any person
found guilty of insider trading can be punished with imprisonment and a fine.
 2. Section 447: Punishment for fraud: This section provides for punishment for fraud, which includes any
act of deception or misrepresentation, with the intention to gain undue advantage or cause loss to another
person. A person found guilty of fraud can be punished with imprisonment and a fine.

3. SEBI Act 1992: The Securities and Exchange Board of India (SEBI) is the regulatory authority for the
securities market in India. The SEBI Act 1992 provides the legal framework for the regulation and
supervision of the securities market, to protect the interests of investors and to promote the development of
the securities market.

In the case of the Harshad Mehta scam, the SEBI Act 1992 was relevant in several ways:

1. Section 12A: Power to investigate and impose penalties for market manipulation: This section
empowers SEBI to investigate and impose penalties for market manipulation, including the use of
fraudulent and unfair trade practices. Harshad Mehta used various illegal and unethical methods to
manipulate the stock market, such as circular trading, which artificially inflated stock prices. This was a
violation of the SEBI Act 1992, and SEBI could investigate and penalize those involved in such practices.

2. Section 15G: Prohibition on insider trading: This section prohibits insider trading, which is the buying
or selling of securities by an insider who has access to unpublished price-sensitive information. Harshad
Mehta used his position as a stockbroker to manipulate the stock prices of various companies by using
insider information. This was a violation of the SEBI Act 1992, and SEBI could investigate and penalize
those involved in insider trading.

3. Section 24: Prohibition on fraudulent and unfair trade practices: This section prohibits any person from
engaging in fraudulent or unfair trade practices in securities markets. Harshad Mehta used fake bank
receipts to show that he had more funds than he actually had, which he then used to buy more stocks and
manipulate the market further. This was a violation of the SEBI Act 1992, and SEBI could investigate and
penalize those involved in such fraudulent practices.

In conclusion, the SEBI Act 1992 provided the legal framework for the regulation and supervision of the
securities market, and empowered SEBI to investigate and penalize those who engaged in market manipulation,
insider trading, and fraudulent and unfair trade practices. The Harshad Mehta scam highlighted the need for a
strong regulatory framework to protect the interests of investors and maintain the integrity of the securities
market, and led to several reforms in the Indian securities market. Harshad Mehta scam was a significant
financial fraud that exposed the loopholes in the Indian securities market. The Companies Act 2013 and the
SEBI Act 1992 provide the legal framework to regulate and supervise the securities market and to protect the
interests of investors. The regulators have taken various measures to strengthen the regulatory framework and
prevent such incidents from happening in the future.