It revolved around renowned stockbroker Harshad Mehta, who used “circular trading” to influence the stock market and took advantage of weaknesses in the banking system.
Background & Context:
India was undergoing major economic changes in the late 1980s and early 1990s, opening up to foreign capital and liberalizing its economy. The stock market saw a spike in activity at this time, as a large number of new investors entered the market.
Rise of Harshad Mehta:
Harshad Mehta, a stockbroker and former insurance agent, became well-known very fast thanks to his audacious investing methods and charm. Because of his aggressive trading strategies and capacity to affect stock prices, he earned the moniker “Big Bull”.
Modus Operandi:
Mehta took advantage of the Ready Forward (RF) arrangement, a financial loophole. Through these transactions, he was able to divert bank cash into the stock market, artificially driving up the value of some firms’ stocks. As a result, the stock market had a tremendous bull run and values surge to previously unheard-of heights.
Effect on the Market:
The fraud caused the Bombay Stock Exchange (BSE) index to soar to absurd heights, giving the market a false impression of prosperity and wealth. The inflated pricing provided a short-term boost to many enterprises, while naïve investors poured in their cash.
Dissecting the Scam:
In 1992, journalist Sucheta Dalal revealed anomalies in Mehta’s transactions, which led to the discovery of the scam. This discovery set off a series of events that revealed the fundamental flaws in India’s financial regulatory system and precipitated a catastrophic stock market crash.
Legal and Regulatory Repercussions:
Following the incident, a number of investigations were started, which resulted in Mehta’s detention and the ensuing court cases. To strengthen rules and stop scams in the future, the Securities and Exchange Board of India (SEBI) undertook major revisions.
Lessons learned and legacy:
The Harshad Mehta scandal had a long-lasting effect on the financial markets in India. It emphasized the necessity of strong regulatory frameworks, openness in trading procedures, and investor education. The experience also emphasized the significance of moral behavior in the financial markets and the dangers of speculative trading.
In conclusion
the Harshad Mehta-led Indian stock market scam of 1992 is still remembered as a lesson in the country’s financial past. It is a sobering reminder of the fallout from unbridled greed and the necessity of upholding responsibility and ethics in the financial industry.
