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BUSINESS LAWS
Harshad S Mehta vs. Union of India
and Another, 1992 94 BOMLR 789

SUBMITTED BY: SUBMITTED TO:

Simar Ms. Atambir

CLASS: B.COM. LL.B.(H.)

SECTION: E

ROLL NO: 291/20

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INDEX
CONTENTS PAGE NO.

1. FROM RAGS TO RICHES TO THE DOCKS 3

i. ABOUT 3

ii. THE 1992 SCAM 3

iii. HOW DOES, ALL THIS OPERATES? 5

iv. THE DOWNFALL THAT NOBODY EXPECTED 6

2. THE PRESENT JUDGMENT: HARSHAD MEHTA 8

V.UNION OF INDIA AND OTHERS (1992 34 BOMLR 789)

i. FACTS 8

ii. ISSUE 9

iii. ARGUMENTS 9

iv. HELD 10

3. THE SECURITIES AND EXCHANGE BOARD OF 12

INDIAACT, 1992- THE AFTERMATH
4. PROVISIONS RELATED TO SEBI,1992 14

5. CONCLUSION 16

6. REFERENCES 17
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FROM RAGS TO RICHES TO THE DOCKS!

Harshad Mehta aka Big Bull of Dalal Street or The Amitabh Bachchan of the
share market, a name that always comes up whenever we talk about scams. He is
the India’s biggest financial and share market scammer and many individuals’
wealth was harmed by this individual. Nowadays everyone checks their shares
investment related information themselves via internet but that was not the case
in 1990-1992 internet was not so popularly used at that time.

ABOUT -

Harshad Mehta was born in July 1954 into a middle-class Gujrati family. His
father ran a small textile shop. They used to live a life of poverty. He did various
odd jobs for many years. He once worked for an insurance company and
developed the passion to go into the share market. He first worked as a jobber to
learn how the share market functions then he started working as a broker. He
started a consultancy company soon along with his brother Ashwin Mehta named
as ‘Growmore’. In this way he stepped as an institutional broker in the game of
share market for which he soon became The Big Bull. Soon he became so wealthy
and led a celebrity life. He had a net worth of around Rs. 3542 crores. He had
various imported cars including a Lexus and he was only one to have this car in
India. he was considered a risk taker and at a time it seemed like nothing can led
to his downfall. He died due to heart attack in Thane jail on 31st December 2002.

THE 1992 SCAM -

He first established his company ‘Growmore Research and Asset Management’

as a consultancy company soon he started to sell and buy shares from public in a
certain company’s market to broaden his company. He had lot of customers who
approached him for advice on where to invest and where not invest. He selected
some filthy firms that is of no use and where those companies do not even have a
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address or a company that does not even existed. He built such a reputation and
trust that his clients refused to double check the information given by him and
due to lack of internet facilities this was much easier for him. He earned a lot from
the share market but soon he needed more money to invest so he now took the
turn to financial market.

Then he started working as a broker for banks in financial market. What bank
brokers do is they connect two banks for the purpose of lending or receiving
money with the use of bank securities. The usual practice was to transfer the funds
into brokers account and the broker when finds a favourable deal transfer that to
other bank in exchange of securities or bank receipts. He started receiving
unlawful funds from various well-known banks including National Housing bank
State Bank of India and UCO bank by using fake or forged bank receipt.

He soon begins crediting such funds to the banks appropriately and then he
gradually began to scam those banks by crediting those funds to his accounts
without any bank security. He got additional money in crores because of this
fraudulent plan and invested it in his business.

Harshad used to offer the banks a great rate of interest in exchange for transferring
the funds straight into his personal bank account. Fake financial receipts were a
common practice used by Harshad Mehta. After receiving the funds fraudulently,
he utilised that money to purchase shares of few selected companies, which lead
to increase in the price of those shares and eventually encourage other investors
to buy those specific shares causing the price of those shares to rise rapidly. Then
he used to sell his shares secretly to pocket the big profit.

Examples of such practice by Harshad are in 1991 he invested in the shares of

ACC Company and increased their value from ₹200 to ₹9000 in less than 3
months. Another example of such fraud by Harshad was taking ₹5 billion from
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State Bank of India without any bank receipt or SGL or any security. Many people
became suspicious of the luxurious lifestyle he was living add the huge profits he
was making in such a short span of time.

HOW DOES, ALL THIS OPERATES? -

i. BY DIVERTING FUNDS -

He took large amount of cash from government securities in a short period of time
and invested all that in his stock market. Then he put the money carefully in few
chosen assets increasing their value to insanely high rates. And that's how
appearing as a broker defrauded the banks by instructing them to pay money
directly to his personal account.

ii. READY FORWARD DEALS -

Harshad Mehta used to handle ready forward deals. He was good at convincing
the banks to write cheques in his own name. Due to which he was able to invest
the money that had been deposited in his accounts in the stock market. He took
huge advantage of the loopholes in the system. In a normal ready forward deal
only two banks can be involved. Securities would be taken from one bank in
exchange of cash from another bank. However, Harshad saw the loophole here
and when a bank requested to give the security or bank receipt, or payback
Harshad would take the assistance of a third bank and when another bank
requested for the same, he eventually relied on some other fourth bank and this
chain went on and on. So according to what Harshad was doing in a ready forward
deal plenty of banks were linked in a web of ready forward transactions.

iii. FAKE BANK RECIEPTS -

Due to the huge reputation which Harshad carried during that time nobody used
to crosscheck him. He was given fake bank receipts by two well-known banks
which were Bank of karad and the Metropolitan co-operative bank limited. The
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fake bank receipts provided by them were handed over to the banks who in turn
provided Harshad with money. He utilised all those funds to invest in the stock
market.

THE DOWNFALL THAT NOBODY EXPECTED -

This was the public money which was being misused by Harshad Mehta. He gave
money and forced all the wealthy people not to open about his scams but when
he began to expand his wealth everyone started noticing his growth. Sucheta Dalal
A Times of India journalist started noticing his behaviour and activities very
closely she soon learnt about all of Harshad’s fraud. She posted the news in an
article about Harshad scams and all the shareholders became aware of the fraud
and each shareholder began selling all their shares at a very low price which led
the firm to lose money and the RBI began to investigate and found Harshad
fraudulent scam.

On February 28, 1992, the income tax department conducted searches in his
premises and offices. The RBI set up the Janaki Raman committee and found that
he was guilty and was charged with 74 criminal offences. In November 1992
Harshad Mehta along with his brothers were imprisoned by the CBI. The financial
system in India has changed a lot after that scam After 3 months they were
released on bail. Then he along with his lawyer Ram Jethmalani at that time
openly announced that he had given ₹1,00,00,000 to Prime Minister PV
Narasimha Rao and said that he can prove the same but soon he was seen stepping
back from this statement as result of some deal or what nobody knows.

After his release several investors welcome with enthusiasm he has now become
a new expert in the field of stock market by 1997 he had his own website a
newspaper column on which he advised readers which stocks to purchase and
what to sell. The special court only approved of 34 cases out of 74 brought by the
CBI against Mehta. In 1999 the Bombay High Court sentenced him and 3 others
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to 5-year imprisonment in the scam of Maruti Udyog limited which was a part of
bigger securities fraud. He was granted bail this time also but in 2001 he was
found guilty of misusing around ₹2.5 billion of missing shares he was not granted
bail this time and soon died due to heart attack in Tihar jail on December 31,
2002. Criminal cases against him abated on his death but the civil suits for money
recovery continued. He had committed a $1 billion scam to purchase stocks from
the Bombay Stock Exchange resulting in significant loss of about 4000 Crores to
the financial system and a severe collapse of the Indian stock market which is
known as the scam of 1992.

THE PRESENT JUDGMENT: HARSHAD MEHTA v.

UNION OF INDIA AND OTHERS (1992 94 BOMLR 789)
FACTS -

On 31st May 1992, the residence of a person named Niranjan Shah was searched
by the officers of income tax department. Niranjan Shah is a close associate of
Harshad Mehta. During the search the officers found large number of documents
showing questionable deals by various persons Niranjan Shah eloped from there.
Some of the documents also showed violations under the Foreign Exchange
Regulation Act 1973. The petitioner Harshad Mehta was arrested on 4 June 1992
by the CBI in the commonly known as the scam of the century. Since that time,
he is in custody. The search carried out by income tax department at the residence
of Niranjan Shah led to discovery of various documents including computer
floppy discs and computer printouts. On the scrutiny of these documents one of
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the names mentioned in the printouts was ‘Mehta. H’ which stood for the
petitioner Harshad Mehta.
Niranjan Shah is said to have had arranged funds abroad for several persons
including Ashwin, Hitesh, and Sudhir. Niranjan Shah was a close associate of the
petitioner and other members of his family. Petitioner's brothers had acquired
foreign exchange from time to time under arrangements made through Niranjan
Shah. Statements of these brothers were recorded under S. 40 of FERA on 2-
71992. In these statements, the persons interrogated had chosen to come out with
denials. Niranjan Shah could not be interrogated as he had decamped. The
accounts discovered were in codes and could not be ascertained. The brothers of
the petitioner were produced before the Magistrate with a request that they be
dealt with in accordance with law. This is an application for anticipatory bail
under S. 438 of the Code of Criminal Procedure, 1973.

ISSUE -

i. The petitioner is alleged to have committed offences punishable under

Section 8, 9 and 14 read with section 56 of the foreign exchange regulation
act 1973. Should anticipatory bail be granted to the petitioner or not?
ii. Whether justice is to be denied to his client because the print-media has
already convicted him?

ARGUMENTS -

BY PLAINTIFF’S COUNSEL -
The application under scrutiny is dealing with anticipatory bail petition the family
of the petitioner is under great scrutiny of the investigate agencies. The family is
in great trouble due to all of this.
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From 4 June the petitioner is in custody and has been questioned only once by
the investigating agencies, this is clear that they cannot prove the allegations
against the plaintiff and know that the plaintiff is innocent.
Thus, the petitioner should be given anticipatory bail as he is also willing to assist
the investigating agencies in all kinds of proceedings and interrogations.

BY STATE COUNSEL -
The CBI and the ED cannot question the accused because in case they would have
done so it would have been hit by section 25 and section 26 of Indian Evidence
Act.
It is necessary that the petitioner should remain in custody so that necessary
evidence and materials can be unearthed.
Since the plaintiff is in custody the investigation has progressed and has led to
discovery of foreign accounts in relation to the case.

Also, documents containing name of Harshad Mehta was found at the residence of
Niranjan Shah.
So, the petitioner should remain in custody which will help in smooth investigation of the
case.
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HELD -
First issue -
The petitioner is supposed to have committed offences punishable under Section
8, 9 and 14 read with 56 of the FERA. These offences are non-cognizable as per
Section 61(2)(ii) disables a Court from taking cognizance of an offence
punishable under S. 56 except upon a complaint in writing made by authorities.
That the FERA requires offences punishable under the enactment to be
investigated and prosecuted by its own set of officers or personnel is evident from
many other sections of the enactment.
Section 35 empowers an Officer of the Enforcement Directorate to arrest a
person where he has reason to believe that any person in India or within the Indian
customs waters has been guilty of an offence punishable under the Act.
Section 36 empowers an Officer of the Enforcement to stop and search any
aircraft or vehicle or any animal or vessel for the purposes of locating documents
which will be useful or relevant to any investigation or proceeding under the Act.
Section 37 empowers an Officer of the Enforcement not below a certain rank to
search any place if he has reason to believe that any documents useful for and
relevant to any investigation or proceeding under the Act are secreted in it and
seize such documents.
Section 38 confers the power of seizure.
Section 39 the power to examine persons and
Section 40 to summon and record the evidence of persons and production of
documents. The power under S. 40 of the Act is conferred upon a Gazetted
Officer of the Enforcement Directorate. Sub-section (4) of this section provides
that an investigation or proceeding referred to in the preceding three sub-sections
shall be deemed to be a judicial proceeding within the meaning of Sections 193
and 228 of the Indian Penal Code.
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Section 45 does empower a Police Officer not below the rank of a P.S.I. to enter
any place and search and arrest without warrant any person therein who is
reasonable suspected of having committed an offence punishable under Section
8 of the Act. But the power of the Police Officer is short-lived, for the next
Section 46 indicates that where any foreign exchange or any other goods are
seized and suspected to have been stolen etc. Such foreign exchange or goods
have to be sent to the nearest Officer of Enforcement or the nearest Officer of the
Customs. This analysis is sufficient to indicate the primacy of the Enforcement
Directorate in the matter of detection, investigation and prosecution of offences
and offenders suspected to have violated the law in relation to foreign exchange.
Petitioner while in custody at the instance of the CBI has been questioned and in
this questioning some traces of offences punishable under the FERA have become
evident. But as of now the leads which have been noticed have not been fully
explored. Consequently, it is not as if the full magnitude of the affair has come to
light. As always, it is the public interest which shall prevail and the request for
anticipatory bail by the petitioner has to be turned down. The application for
anticipatory bail fails and is hereby rejected.

Second issue -

The answer to the second question in issue must be a resounding 'NO'. Court
dispenses justice and justice does not lie in giving diligence to a media-generated
sensation if not dis-information. Mr. Desai has referred to a caution addressed by
the apex Court to those manning judicial offices in Gurbaksh Singh v. State of
Punjab reported in (1980CriL J1125). The court said that:
"Judges have to decide cases as they come before them, mindful of the need to keep
passions and prejudices out of their decisions."
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THE SECURITIES AND EXCHANGE BOARD

OF INDIA ACT, 1992 – THE AFTERMATH.
The two legislations that governed the securities market till early 1992 before the
enactment of SEBI Act were the Capital Issues (Control) Act, 1947 (CICA) and
the Securities Contracts (Regulation) Act, 1956 (SCRA). The stock exchanges
operating lacked intact legislation for their regulation until the Bombay Securities
Contracts Control Act, 1925. This was, however, found to be deficient in many
aspects. After the Constitution coming into force on January 26, 1950, stock
exchanges and markets came under the exclusive authority of the Central
Government. A.D. Gorwala Committee was appointed in 1951 by the
Government to formulate legislation for regulating the stock exchanges and
contracts in securities. It gives Central Government regulatory jurisdiction over
stock exchanges through a process of recognition and continued supervision,
contracts in securities, and listing of securities on stock exchanges. This ensured
the stock exchanges complied with conditions prescribed by Central Government,
allowing organised trading activity in securities is permitted on recognised stock
exchanges.
SEBI Act, 1992 was enacted with the statutory responsibilities to safeguard the
interest of investors in securities, promote the development and growth of the
securities market, and regulate the exchange in securities market. This was
followed by the repeal of the Capital Issues (Control) Act, 1947 which paved the
way for market-determined allocation of resources. Later, the Securities Laws
(Amendment) Act in 1995 was enacted, which extended SEBI’s power over
corporate in the issuance of capital and transfer of securities, in addition to all
intermediaries and persons associated with securities market. It authorized SEBI
to appoint adjudicating officers to adjudicate a wide range of violations and
impose monetary penalties and provided for establishment of Securities
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Appellate Tribunals (SATs) to hear appeals against the orders of the adjudicating
officers. This was followed by the Depositories Act in 1996, to provide for the
establishment of depositories in securities with the objective of ensuring free
transferability of securities with speed, accuracy and security. It made securities
of public limited companies freely transferable subject to certain exceptions;
dematerialised the securities in the depository mode and provided for
maintenance of ownership records in a book-entry form.

However, the securities scam of 1992 and 2000-02 highlighted the ambiguities in
the legislation which had been exploited by manipulating brokers. With the
objective of improving the market many measures and reforms were undertaken.
The market today uses state-of-the-art information technology to provide efficient
and transparent trading, clearing and settlement mechanisms and has witnessed
several innovations in products and services via demutualization of stock exchange
governance, screen-based trading, compression of settlement cycles,
dematerialization and electronic transfer of securities, security lending and
borrowing, professionalization of trading members, fine-tuned risk management
systems, emergence of clearing corporations to assume counterparty risks, market
of debt and derivative instruments and intensive use of information technology.
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PROVISIONS RELATED TO
SEBI,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
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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.
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CONCLUSION
Harshad Mehta was an ingenious man with big ambitions, but he took the wrong
path. This path led to his downfall and, finally, his death. The biggest thing India
took away from this scam was several unmonitored areas and loopholes in the
Indian financial market system which needed urgent care. Irregularities of all
kinds were so widespread that even highly irregular transactions raised very little
inquiry. This is the ideal setting for a scam to take form and develop to dangerous
dimensions.

The Harshad Mehta scam was the most public and terrible financial scandal to
ever occur in India. Many individuals had died and some even committed suicide.
All the wealthy individuals were suffering from mental and physical exhaustion
because of the scam the stock market broke badly. Harshad was very aware of the
loopholes in the system and the techniques to misuse them to fill his pockets. The
Harshad Mehta story also forces a reasonable man to ponder upon this money and
politics nexus connection which was seen clearly here. How these privileged
criminals get off the hook so easily? How the people who have lost their lives and
life savings are just left seeking relief whole their life? Surely, there has been lot
of developments since 1992 but these questions remain the same and that too
unanswered.
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REFERENCES
• HARSHAD MEHTA V. UNION AND OTHERS (1992 94 BOMLR 789)
• https://blog.ipleaders.in/all-about-the-harshad-mehta.
(VLOG IPLEADERS)
• https://aishmghrana.me/2020/07/03/what-in-the-securities-marketchanged-
in-1992/
(BLOG AishMGhrana)