Harshad Mehta V. Central Bureau of Investigation

Author: Amanpreet Kaur

College: 2nd year Student of Department of Laws, Panjab University, Chandigarh.

Introduction: Corporate frauds are not new in India. From Sahara estate scam to Satyam scam, Sharda chit fund scam, the list is never ending. Despite the number of legislations, such corporate frauds did not pause. This raised a number of questions on the regulatory authorities and the grey areas of legislations. Herein I shall provide a deep insight to one of the scams which shook the entire stock market i.e. Harshad Mehta scam.

Background of the case

During 1990s the scenario was such that the banks were required to maintain a particular amount of their deposits in government bonds which is known as SLR(Statutory Liquidity Ratio). On the closing of everyday basis, the banks were required to submit their balance sheet reflecting the sufficient sum of money invested in government bonds. Later on this rule was changed and as per the government notification the banks would be submitting such record only on Fridays rather than on daily basis and that the average bonds(in %age) held by the banks per week will have to be more than the SLR.

This provided an opportunity to the banks whereby they could sell their bonds and buy back the same at the end of the week when the records were about to be submitted. Now the capital freed would be utilized by the banks for investing purposes and when the time to buy back the bonds approached nearer, this is where the role of the brokers came into picture. The brokers now had the knowledge of the banking sector as to which the amount invested by different banks in the bonds.

Harshad Mehta was also a broker who facilitated the banks by working as an intermediary. Gradually he was able to gain the trust of the top management of the banks. As he was involved in dealing with a number of banks a the same time, this is where he came up with the idea of a blunder.

He kept some of the capital of the banks with him at times and used to invest them in the stock market. During that time it was against the banking norms to invest their funds in the stock market. He continued this for a long time and was thus able to squeeze the funds of the banking sector, which he utilized to shoot up the value of the stock market securities. He did this through a ready forward (RF) deal method whereby he used to take short term (15days)loans from one bank to another against the government securities. Now this lending of loan from one bank to another and delivering of securities involved dealings through brokers. The banks at times did not even know which bank they have been dealing with, as they only dealt through the brokers. Later on, such brokers represented themselves to be dealing on behalf of the banks. In this entire picture the borrowing banks used to issue bank receipts as an acknowledgement of the debt by the other bank. In order to divert the funds of the banking sector, Harshad Mehta ended up coming together with two banks – Bank of Karad and the Metropolitan Cooperative Bank who issued fake Bills Of Exchange in return of some fee, in furtherance of Mehta’s blunder. Against these fake bills, the banks started giving money to Harshad Mehta assuming that they were granting loans against government securities but it was nothing like that. He then invested this money in the stock market to bring a boom in the market. When the due date of return of the debt came, he used to sell the securities and return back the money to the banks. However when Harshad Mehta and his filthy intentions were exposed by a journalist Sucheta Dalal in April 1992, many banks were left with those fake bills of exchange which were of no value. By the time this came into light, he was able to divert approximately ₹40 billion of the entire banking sector by making misuse of the existing loopholes. From embezzlement of fund of Maruti Udyog Ltd. (MUL), to SBI and many other scams with prominent banks, he kept coming into light.

Charges framed

It was in November 1992 that Mehta was arrested by CBI including his brothers (Ashwin and Sudhir) who conspired with him in executing his mastermind plan of banking fraud. He was charged with 72 criminal cases including that of bribery, criminal conspiracy(U.S 120A of IPC), cheating, forgery, and falsification of books of accounts. He was also charged with around 600 civil suits with respect to the money of the banks misappropriated by him. His confederates – his brothers, with Bhupen Dalal, Hiten Dalal were also charged for being a part of the scandal.

Investigation and trial

For detailed investigation of the scam, Reserve Bank of India(RBI) constituted a Joint Parliamentary Committee(JPC). The committee was also known as Janakiraman Committee which was entrusted with the power to examine the nature and extend of the fraud and its implications. The government by an ordinance also created a special court to conduct the trial of the offence in the case. An office of custodian was also appointed by the court to manage the assets of the accused during the trial period.

Harshad Mehta and his brothers hired one of the most prominent lawyers i.e. Ram Jethmalani in his defense. After getting the bail after three months, he alleged that he gave ₹1 crore to the then Prime Minister- Narsimha Rao as a donation to help him get him freed of the same. He also made the suitcase public which carried the amount as per the allegation. However, even after a long series of investigation, the CBI could not find any evidence of the same.

He made a comeback in the stock market again but was again found indulging in price rigging in the market.

Inspite of the active investigation and quick action of CBI and Joint Parliamentary Committee, it took a lot of time to gather strong evidence against Harshad Mehta and the alleged scam.

The Bombay High Court awarded 5 years rigorous imprisonment to Harshad Mehta and his confederates in 1999 with respect to MUL blunder involding embezzlement of almost ₹380 million. He succeeded getting bail in almost all cases however in the year 2001, he got arrested again for misappropriation of ₹2.5 billion of 90 blue chip companies. He could not get bail in the same. After that he passed away due to a heart attack while serving imprisonment in Tihar jail on December 31, 2001.

Status of the cases

All the criminal cases against Harshad Mehta got disposed off however the civil cases are pending. The money is also not completely recovered. Till now, we have come a long way but still such scams continue to come into light.

Impact of the scam on present law

The liberalization policies of the government came started to face criticisms after the scam, with Harshad Mehta and others being called as the products of these policies. Due to the bad press it received during the scam, the liberalization policies were put on hold for a while by the government. The Securities Exchange Board Of India (SEBI) postponed sanctioning of private sector mutual funds. Implementation of certain aspects of the Narasimham Committee recommendations on the banking system were also delayed. Some question marks arose regarding privatization as the chairman of the committee looking into this ended up in jail on charges of involvement in the scam. The much talked about entry of foreign pension funds and mutual funds became more remote than ever. The Euro-issues planned by several Indian companies were delayed since the ability of Indian companies to raise equity capital in world markets was severely compromised.

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