1992: The Harshad Mehta Scam

The securities scam introduced a bouquet of historic changes.

Although it wiped out more than a third of market valuation, the 1992 securities scam, 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 conniving banks to send money to his personal account. He used it to buy large amounts of stock, drive up the price, and cash out. This created a huge but fake stock market boom.

The most significant 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 hand with Bank of Karad and Metropolitan Bank exposed the flaws in the regulatory framework.

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

The second change was collateral. The scam has indirectly led to the emergence of e-commerce. The scam was made possible due to the information asymmetry of old “loop trading” or physical trading, where brokers held immense influence. Trade orders were sent to investors unevenly and brokers could manipulate the process. For example, matching transactions took time and prices could change by then. The system was so slow that brokers could actually trade without shares. The Mehta scam put an end to these wrongdoings.

Coincidentally, the formation of NSE and the advent of e-commerce have dulled the luster of the Bombay stock market. Now anyone could trade from anywhere.

Ironically, the scam also fueled retail investor interest in the stock market. Mehta’s media coverage has made him something of a star. And the Big Bull, as many called it, changed the attitude of the middle class towards stock trading. Mehta, the son of a small textile businessman, had boosted BSE’s Sensex index to 10,000 points from around 1,000 points in a year and a half. Many saw this as a great achievement. This renewed interest eventually sparked other scams, from Ketan Parekh to Satyam. The swarm of new investors also led to the now infamous IPO boom of the mid-1990s.

There was another fallout: the Harshad Mehta scam was among the best-researched and data-rich investigative reports published by Indian media, and sparked interest in what is now known as data journalism today.

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

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