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India@75

1992: The Harshad Mehta scam

Print edition : Aug 25, 2022 T+T-

1992: The Harshad Mehta scam

Harshad Mehta.

Harshad Mehta. | Photo Credit: The Hindu Archives

The securities scam introduced a bouquet of historic changes.

Even though it wiped out over a third of the market valuation, the securities scam of 1992, popularly known as the Harshad Mehta scam, introduced a bouquet of historic changes.

At a time when banks were not allowed to invest in the market, Mehta convinced complicit banks to send money to his personal account. He used it to buy up large quantities of stocks, drive up the price, and cash out. It created a huge but false stock market boom.

The most important impact of the $1.3-billion market manipulation was that it paved the way for stronger, stricter, and smarter market regulation. The ease with which Mehta sold fake debt securities hand in glove with Bank of Karad and Metropolitan Bank exposed the chinks in the regulatory framework.

Also read: 1991: Economic reforms

SEBI or the Securities and Exchange Board of India, the country’s market watchdog, witnessed a massive overhaul. SEBI had come into being in 1988 but had lacked teeth. Now, it was given statutory powers. The SEBI Act was passed, giving it powers over all securities markets, thus ending the fiefdoms of independent stock exchanges owned and operated by brokers.

The second change was collateral. The scam indirectly led to the emergence of electronic trading. The scam was made possible because of the information asymmetry of the old ‘ring trade’ or physical trade, where brokers held immense clout. Trade orders went out to investors unevenly, and brokers could manipulate the process. For instance, reconciliation of trades took time and prices could change by then. The system was so slow the brokers could actually trade without stocks. The Mehta scam ended such malpractices.

Coincidentally, the formation of NSE and the advent of e-trading took the sheen out of Bombay’s stock market. Now anyone could trade from anywhere.

Ironically, the scam also fuelled retail investor interest in the stock market. The media coverage of Mehta made him a star of sorts. And the Big Bull, as many called him, changed the middle-class attitude towards stock trading. Mehta, the son of a small-scale textile businessman, had powered up the BSE’s marquee Sensex index to 10,000 points from around 1,000 points in a year and a half. Many saw this as a great feat. This rekindled interest eventually triggered more scams—from Ketan Parekh to Satyam. The swarm of new investors also led to the now-infamous IPO boom of the mid-90s.

Also read: India at 75: Epochal moments from the 1990s

There was one other fallout: The Harshad Mehta scam was among the best researched and most data-heavy investigative reports run by Indian media, and ignited interest in what is today called data journalism.

Mehta was arrested in November 1992 and sentenced to five years rigorous imprisonment. He appealed but died in jail in 2001 of cardiac arrest.