Sunday Stock Market Flashback: The night of the 1992 scam is unforgettable for Indian investors and market enthusiasts. Harshad Mehta, along with influential figures in banking and politics, orchestrated a massive manipulation of the Bombay Stock Exchange (BSE). With an estimated value of 10 million USD, the scam shocked the public, authorities, politicians, and big brokers. It shook the very roots of the stock market in India, breaking the spine of the big brokers who were sitting at the top of the game.

Harshad Mehta: The Big Bull-

Harshad Shantilal Mehta, famously known as ‘The Big Bull’ of the market, was a renowned Indian stockbroker who later became a businessman. He started small and gradually cracked the code of the stock market, eventually becoming the king of the market in his time. However, this privilege eventually led him to rags. His life story is also famous for being a classic example of the journey from riches to rags.

Mehta cleverly exploited the loopholes he discovered in the Indian stock market system, becoming involved in creating havoc that led to the collapse of the market—known as the 1992 scam.

The scam, valued at Rs 30,000 crore, is considered one of the biggest financial frauds in Indian history. By exploiting the system’s weaknesses, Mehta became a manipulator, a game-changer in the stock market. His every move shifted the market in his favor. His actions shook the foundation of India’s financial system, and he was eventually crowned not as ‘The Big Bull’ but as the convicted fraudster of the decade.

What Did Harshad Mehta Technically Do?

The Big Bull used the loopholes that could have been exploited by anyone who discovered them, but Mehta took a chance and leaped forward, taking action on them. He used techniques like forging fake cheques, exploiting market loopholes, and manipulating market sentiments by driving stock prices up to 40% of their original value.

He also gained the trust of traders gradually. The traders took advantage of inflated stock prices and fraudulently secured unsecured loans from banks.

According to Wikipedia, Mehta issued fake BRs, which he passed on to other banks. The banks, in turn, gave him money, assuming they were lending against government securities, when in reality, they were not. He took the price of ACC from ₹200 to ₹9,000 (an increase of 4,400%). Since he had to book profits in the end, the day he sold was the day when the markets crashed.

The Dusk Of Harshad Mehta And The Indian Stock Market, 1992-

The Indian stock market saw its worst dip when the scam unfolded in 1991 and 1992. At the same time, the Indian economy went through a major reform. As Mehta rose to power and became able to play a monopoly in the broker market, other big brokers became worried.

On 23 April 1992, journalist Sucheta Dalal exposed illegal methods in a column in The Times of India. Mehta was dipping illegally into the banking system to finance his buying.

The government had opened the economy, and there was a lot of optimism in the air. The stock market was skyrocketing, with major figures on the Sensex rising from 1,000 points to 4,500 points in just a year.

How Harshad Took Advantage of This Situation-

The 1992 stock market scam was a massive manipulation of India’s financial system, and it had a significant long-term impact. Here’s how:

• Exploiting Loopholes – Mehta took advantage of the tax regulations in the new economy and enjoyed the overexcited market to manipulate stock prices. He used complex financial techniques such as bank receipts, ready-forward deals (a type of short-term loan agreement), and fake securities to secure large sums of money from banks.
• Manipulating Stock Prices – Mehta used his funds to pump up specific stocks. This artificially inflated the prices to unrealistic levels. This helped Mehta create an illusion of growth in the market, gradually leading investors to buy inflated stocks.
• Massive Scale of the Scam – The total value of the scam was estimated at around ₹4,000 crore (roughly ₹24,000 crore in today’s money), which was siphoned off from the banking system. When the scam was exposed, the stock market crashed, wiping out wealth to the tune of ₹1 lakh crore.
• Impact on the Financial System – While the financial losses were enormous, the real damage came from the exposure of deep flaws in India’s financial system. Mehta’s actions highlighted the lack of regulation and oversight in the stock market and banking system, leading to a loss of public trust.
• Reforms Post-Scam – As a result of the scam, the Indian government introduced several reforms to strengthen the banking and stock market systems. These included measures to improve transparency, better regulation of financial markets, and tighter controls on banking practices. The aftermath of the scam also led to the establishment of the Securities and Exchange Board of India (SEBI) as a stronger regulatory body to prevent such manipulation in the future.

Mehta’s manipulation exposed the vulnerabilities in India’s financial system, but it also prompted reforms that continue to influence and shape the markets today. The scandal led to a loss of confidence in India’s financial system, prompting significant regulatory reforms to prevent future manipulation.

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