4 Scams That Rocked Indian Politics This Year

This article is written by Michael Shriney from the Sathyabama Institute of Science and Technology. This article describes the history and background of Harshad Mehta, India’s greatest share market and money market scammer, the person who gave an overview of the share market and how brokers trade.

This article has been published by Sneha Mahawar.

Introduction 

Harshad Mehta is India’s biggest financial and share market scammer. Many wealthy individuals have been harmed by this man’s fraud, and some have committed suicide as a result of his manipulation. Many banks suffered losses and bankruptcy as a result of his actions. He was a smart and knowledgeable man when it came to tricking people about the share and financial markets. In early 1991-1992, he became well-known in India for his expertise in share and financial markets. Nowadays, it is simple, and individuals are more diligent about checking their share markets and learning about them via the internet. That was not the case in 1991-1992 because the internet was not popular at the time.

During the 1991-1992 period, Harshad was the wealthiest man, competing with actors and other wealthy professionals. This person is well-known for his numerous scams. He has fooled many wealthy individuals and even had political support with him. He was arrested twice. He led a luxurious lifestyle in India by scamming banks and stealing money, as well as scamming share traders. He was well-versed in all aspects of share marketing and financial marketing. He was a financial broker who connected banks with other banks.

The article goes into detail on what Harshad did from the time he was born till the time he died. The fraudulent actions he has engaged in, what motivated him to begin this type of conduct, his sanctions, and so on are discussed in this article.

The story of Harshad Mehta

About Harshad Mehta

  • Harshad Shantilal Mehta was born into a middle-class Gujarati Jain family. His father ran a small textile company. He was born on July 29, 1954. 
  • His parents moved to Bombay in order to ensure his future well-being. He completed his B.Com degree from Lala Lajpatrai College in Bombay in 1976 and worked in a variety of odd jobs for nearly 8 years. He didn’t have any money during 1982. 
  • He once had an opportunity to work at an insurance company. He had an ambition of getting involved in the share market. He quit all of his jobs and got a job under a broker to study the share market. 
  • Harshad Mehta died while on trial at Thane jail on December 31, 2002, of a heart attack. 
  • He was recognised to be a risk-taker who never allowed any danger to stand in his way of becoming wealthy and building his business. 
  • He had between 15 to 20 cars, some of which were imported from other countries, such as the Lexus LS 400. He was also the only man who had that style of the car back then. He had a net worth of almost ₹ 3542 crores and a luxurious house.

Why is Harshad Mehta famous

1st scam by Harshad Mehta

  • Harshad Mehta learned about the share market and techniques through his employment. He learned them through his own experience, not from books or the internet. He was a brilliant man who learned about the stock market in a short time. He was well-versed in how the stock market rises and falls. 
  • In 1986, he established his own brokerage firm, ‘Grow More Research and Asset Management,’ to sell and buy shares from the public in a certain company’s market in order to broaden his company. His customers began to approach him for advice on where to invest in or purchase shares in the stock market. He selected some filthy firm that is of no use, where those companies do not even have an address or a company that does not exist.
  • He was nicknamed the “Red Bull of Dalal street”, as well as the “Amitabh Bachchan of the Indian stock market”. The shareholders made a mistake by refusing to double-check the information given by him. They acquired those shares because they fully trusted him. 
  • The strategy employed to enhance these share market values was to portray such companies as profitable companies that generate benefits for those shareholders. 
  • There was no internet in the 1990s to check, thus this was his first scam. He made a lot of money from the stock market. 
  • Later, he needed more money to invest in the stock market, but he hadn’t earned enough money from the stock market to do so. Because investing in the stock market required so much money, it was usually done by wealthy people.

2nd scam by Harshad Mehta

  • Then, taking the next step, Harshad Mehta opted to work as a broker for banks in the financial market. He tricked the banks by presenting as a broker to some of them. 
  • Bank brokers connect two banks for the purpose of lending money and receiving money when the bank requires it using the bank’s securities. 
  • Harshad Mehta directed the lending bank to deposit the funds into his personal account, from which he transferred money to the receiving bank. 
  • Similarly, he triggered and received unlawful funds from various well-known banks, including National Housing Bank, State Bank of India, and UCO Bank, by utilising forged bank receipts. 
  • He began by crediting such funds to the banks appropriately, and then he gradually began to scam those banks by crediting funds to his accounts without any bank security. He got additional money in crores as a result of this fraudulent plan and invested it in his small business. 
  • The bank’s money is the people’s money that was handed to the bank for safety or security. Those funds were not managed effectively and were delivered to him, where he spent it. He offered money and forced all wealthy people not to open his scams, but when he began to expand in wealth. 
  • Everyone began to take note of his behaviour, especially Sucheta Dalal, a Times of India journalist. When she learned about all of Harshad’s frauds, she began to take note of his activities. 
  • Then she posted the news in an article about the Harshad scam, and all shareholders became aware of the fraud, and each shareholder began selling all their shares at a low price. 
  • The shareholders’ firm began to lose money, and the RBI began to investigate and found Harshad’s fraudulent scam. 
  • He had committed a $1 billion scam to purchase stocks from the Bombay Stock Exchange, resulting in a significant loss of Rs.3500-4000 crores to the financial system and a severe collapse of the Indian stock market which is known as the scam 1992. 
  • He was arrested and then later released on bail. Harshad Mehta was accused of 74 criminal cases. He was later charged with another financial crime and imprisoned.

Facts abouts the infamous Harshad Mehta Scam of 1992

Banks were eligible to trade in the share market until the early 1990s. Harshad, who had links with bank executives, offered the banks a greater rate of interest in exchange for transferring the funds straight into his personal bank account. Fake financial receipts were also produced in his name by the banks. After fraudulently obtaining cash from banks, he utilised the vast sum of money to purchase a few selected shares, causing the price of those shares to rise. This would encourage other investors to buy those specific shares, causing the price of those shares to rise rapidly. He would then sell his shares secretly to pocket the big profit.

For example, in 1991, Harshad started investing in the shares in Associated Cement Company and increased their value from Rs. 200 to Rs. 9,000 in less than three months. Many people were suspicious of Harshad’s luxurious lifestyle, but it was journalist Sucheta Dalal who decided to take a step further and looked into the ways through which Harshad acquired such wealth in such a short period of time. The Harshad Mehta scam finally came to an end on April 23, 1992, when Sucheta published an article in the Times of India detailing Mehta’s fraudulent strategies for controlling stock prices. Harshad Mehta scammed the State Bank of India for Rs. 5 billion by creating an SGL receipt that disappeared, according to her. 

People had started to look for Harshad after that. On February 28, 1992, the tax institution conducted searches. The RBI set up the Janakiraman Committee, and he was found guilty and charged with 74 criminal offences. In November 1992, he and his brothers, who planned and executed the operation together, were imprisoned by the Central Bureau of Investigation. The financial regulatory system in India has undergone several adjustments as a result of the scam. The Securities Laws Amendments Act of 1995 was enacted. After three months in prison, Harshad and his brothers were released on bail, and weeks later, he and his lawyer, Ram Jethmalani, openly announced that he had given Rs 1 crore to Prime Minister PV Narasimha Rao as involvement to the Congress to just get him ‘off the hook.’

After Mehta’s release, some stock market investors welcomed him with enthusiasm. He came back as a ‘new age’ stock market expert numerous times after that, and by 1997, even had his own site and newspaper column where he advised readers on which stocks to purchase and sell. Another bit of criminal evidence was presented against Mehta. The Special Court established to examine matters linked to the securities fraud only approved 34 of the 72 charges brought forth by the CBI against Mehta in October 1997. In September 1999, the Bombay High Court sentenced him and three others to five years in prison for their scam in the Rs. 380.97 million Maruti Udyog Ltd fraud cases, which were part of a bigger securities fraud.

He was granted bail in all cases again, but in 2001 he was found guilty of misusing Rs. 2.5 billion from 2.7 million ‘missing shares’ of 90 blue-chip companies. He was not granted bail this time, and he died of a heart attack at Tihar prison on December 31, 2001, at the age of 47. After his death in 2003, his appeal was denied. Due to his death, the rest of his criminal prosecutions were terminated, but his civil lawsuits for money recovery continued.

The crimes that Harshad Mehta committed

Fraud is a capital market scam in which the facts are tricked in order to increase profits. This scam has four major features.

Diversion of funds

Funds are misdirected from the banking system to brokers in order to support their stock market operations. 

Intra-day trading

The basic strategy involved significantly investing in select stocks at the start of the day, which resulted in a sudden increase in the stock price, and then selling out at the end of the day to earn big profits. 

Use of Ready Forward (RF) to maintain Statutory Liquidity Ratio (SLR)

A ready forward loan is a short-term loan from one bank to another, usually for 15 days or shorter. It’s the same as one bank selling its securities to another with the guarantee of repurchasing them at a certain price. In the early 1990s, banks in India were required to keep a certain percentage of their deposits in the form of government securities, as prescribed by the Statutory Liquidity Ratio (SLR). The brokers handled the entire process of purchasing and selling bonds, and the brokers were aware of the two parties involved. Throughout the transaction, individual banks had no idea who the other party was. There are three stages to this process:

Settlement process

In the usual settlement process for government securities, the transacting banks make payments and transfer the securities to each other directly. Securities are delivered and payments are made through the broker in this settlement process. The seller then sends over the securities to the broker, who then sends them on to the buyer, and when it comes to payment, the broker, as the intermediary, pays the money to the seller. Both the buyer and the seller may have no idea who they’ve dealt with, only with the broker being the only one who knows.

Payment cheques

Brokered settlement permitted the broker to maintain the cheque while it passed from one bank to the next through him. The issue now was crediting the cheque to the broker’s account, despite the fact that it was written in favour of the bank and had a crossed account payee. Brokers requested that banks issue cheques in their own names, stating that they would pay the other party directly. As a result, the broker must get a cheque drawn from the RBI in favour of his bank, which will receive the funds and send them to the broker’s account the same day. This allowed the brokers to get money as soon as the deal was completed, which they could then invest in the stock market.

Dispensing of securities 

The brokers utilised their reputation to convince banks to write cheques without obtaining the securities in exchange for the promise of receiving the securities the next day with a 15% interest rate for one day. Bank staff was bribed to do this work because it was prohibited for banks to release their funds without a guarantee. 

Fake bank receipts (BR)

Another device utilised in this fraud was Bank Receipts (BR). Instead of sending the real securities to the lender, the borrowing bank typically issues a bank receipt. Bank receipts serve three purposes:

  • It is a confirmation of a security sale.
  • Guarantees that the securities will be delivered to the customer. It specifies that the seller holds the securities in trust for the buyer.
  • Functions as a receipt for the selling bank’s money

During the forgery, brokers were so skilled at forging BRs that they were able to get unsecured loans from several banks in order to issue BRs, which were then used to conduct RF trades with other banks. As a result, numerous banks extended large unsecured loans to these banks and granted credit to brokers.

These above-mentioned financial crimes are punished under forgery, Sections 465 and 467 of the Indian Penal Code, 1860.

How did Harshad Mehta commit these crimes

The following are the crimes committed by Mehta that is mentioned below:

Diversion of funds

Harshad Mehta took large amounts of cash from government securities over a short period of time and put it in his stock market. He then put the money into a few carefully chosen assets, increasing their values to insanely high rates. This is how he defrauded banks by instructing them to pay straight to his personal account while appearing as a broker.

Intra-day trading

Harshad and his investors used banking system weaknesses to launch a securities scheme that diverted Rs. 4000 crores from banks to stock traders between April 1991 and May 1992. He was responsible for the high increase in the stock market price in 1992 by investing at a premium for a large number of shares. ACC, Apollo Tyres, Reliance, Tata Iron & Steel Co, BPL, Sterlite, and Videocon were among the stocks heavily invested in by Mehta.

Use of Ready Forward (RF) to maintain SLR

Harshad Mehta used to handle the RF transactions. He was able to convince the banks to write cheques in his name. He’d then be able to invest the money that had been deposited in his account in the stock markets. He immediately took advantage of the hole in the system and rapidly expanded the swindle. Only two banks can be involved in a normal RF transaction. Securities would be taken from a bank in exchange for cash.  However, when a bank requested security or payback, Harshad Mehta would take the assistance of a third bank. Eventually, there will be the fourth bank, and so on. Instead of just two banks, there were suddenly plenty of them, all linked by a network of RF transactions.

Settlement process

Before in hand, Harshad Mehta had a good understanding of these processes: the transactional banks make payments and transfer securities directly to each other. Following that, he works as a bank broker, delivering securities and making payments to the relevant banks. The seller (bank) sends their securities to Harshad, a broker, who then transfers them to the buyer (bank). When the buyer pays the bank, Harshad returns the money to the seller. This is the settlement procedure. However, after building his trust with both banks, he began to trick them by depositing funds into his account without securities, which he slowly used to invest in the stock market. The involved banks were not aware of this trick. These were funds from the middle class. He took advantage of it for his personal gain.

Payment cheques

Harshad Mehta, who was the broker for several banks, slowly requested that cheques be issued in his name. He also stated that he would directly pay the other party (bank). Then he withdrew a cheque from the RBI in his bank’s favour, receives funds, and deposited them into his account the same day. This permitted him to get money as soon as the transaction is finished and deposit it in his stock market.

Dispensing of securities 

Harshad Mehta utilised his reputation to convince banks to issue cheques without collecting the securities in exchange for the promise of receiving them the next day. This was a bribe to banks that would release cash without collateral. Harshad Mehta and his companions were able to utilise the money of the banks to invest in the stock market as a result of this. 

Fake bank receipts (BR)

Harshad Mehta was offered fake bank receipts by two well-known banks, the Bank of Karad and the Metropolitan Co-operative Bank Limited. They were handed to banks, who in turn provided him money. He faked bank receipts by asking for the help of bank staff involved in the scam. He utilised them to withdraw funds from banks in order to invest in the stock market.

Legal statutes related to Harshad Mehta’s crimes

The criminal punishment was given to Harshad Mehta based on the provisions of the Indian Penal Code of 1860 legislation, which stated specific crimes and their accompanying punishments.

Punishments under the Indian Penal Code

Harshad Mehta’s criminal offences are included in Chapter 18 of the Indian Penal Code, 1860. The offence falls under Section 463, while the penalty falls under Sections 465 and 467, which deal with forgery offences and forgeries of important securities, wills, and other documents. This includes bribery, cheating, criminal conspiracy, and falsification of accounts, all of which are punishable under this statute for Harshad Mehta offences.

Forgery  

  • Section 465 deals with forgery. Anyone who creates a fake document or false electronic record with the intent to harm the public or any person, or to support any claim or title, or to enter into any express or implied contract, or with the intent to commit fraud or the potential to commit fraud, is considered a forgery.
  • Forgery is punishable by Section 465, which states that anybody who commits forgery will be imprisoned for a term of up to six months to four years and imposed fines of Rs.11.95 lakh on the accused. 
  • Forgery of important security, wills, and other documents is dealt with under Section 467. Anyone who forges a document that claims to be valuable security, will, or authority to adopt a son, or who claims to give authority to any person to make or transfer any valuable security, receive the principal, interest, or dividends, or to receive or deliver any money, movable property, will be sentenced to one year in prison, with a maximum sentence of ten years, as well as a fine.

Bribery

Section 171E deals with bribery punishment. Bribery is a criminal offence that is punished by imprisonment for a term that may extend to one year or with a fine, or both.

Cheating

Cheating and dishonestly inducing the transfer of property covered under Section 420.  Whoever cheats and dishonestly provokes the person tricked to transfer any property to any person or to make, alter, or destroy the whole or part of a valuable security or anything signed or sealed and capable of being transformed into valuable security is punishable by imprisonment for a term that may extend to seven years and a fine.

Criminal conspiracy

Section 120B deals with the criminal conspiracy penalty, which states that anybody who is a party to a criminal conspiracy to commit an offence is punished by death, life imprisonment, or severe imprisonment for a duration of two years.

Falsification of accounts

Falsification of accounts is dealt with under Section 477A. Whoever, while employed or acting in the capacity of a clerk, officer, or servant, wilfully and with intent to defraud, destroys, alters, mutilates, or falsifies any valuable security or account in his employer’s possession or received by him or on behalf of his employer, or willfully and with intent to defraud, aids or abets the making of any false entry or omits or alters in accounts book or electronic record shall be punished with imprisonment for a term which may extend to seven years or fine or both.

Conclusion 

Harshad Mehta was a clever man with big ambitions, but the path he took to get there was the wrong one. This path led to his downfall and, finally, his death. One of the loopholes that the scam brought into light was that there was a complete absence of clarity in the financial markets. 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 of the wealthy individuals were suffering from mental and physical exhaustion as a result of the scam. He was a brave stock broker as a natural outcome and was well-versed in both the banking system’s weaknesses and techniques of how to enjoy those benefits from them. 

References 


Students of Lawsikho courses regularly produce writing assignments and work on practical exercises as a part of their coursework and develop themselves in real-life practical skills.

LawSikho has created a telegram group for exchanging legal knowledge, referrals, and various opportunities. You can click on this link and join:

https://t.me/lawyerscommunity

Follow us on Instagram and subscribe to our YouTube channel for more amazing legal content.

LEAVE A REPLY

Please enter your comment!
Please enter your name here