Stock Exchange Scams (Harshad Mehta Case)
1. Overview: What Are Stock Exchange Scams?
Stock exchange scams involve fraudulent manipulation of securities, stock prices, or insider trading to gain unfair profit.
These scams undermine market integrity, cause huge investor losses, and shake public confidence.
Common scams: price rigging, circular trading, insider trading, fake receipts, and manipulation of banking transactions linked with stock market.
2. The Harshad Mehta Scam – The Mother of Indian Stock Market Frauds
🔹 Harshad Mehta Scam (1992)
Background:
Harshad Mehta, a stockbroker, manipulated the Bombay Stock Exchange (BSE) by exploiting the loopholes in the bank receipts (BRs) and ready forward (RF) transactions.
He used fake bank receipts to obtain large sums from banks and pumped these funds into shares, artificially inflating prices.
Harshad Mehta made a fortune by driving up stock prices of select companies, earning massive commissions.
The scam involved ₹5,000 crores (approximate estimate at the time) siphoned using bank securities.
Legal Issues:
Fraud, cheating, criminal breach of trust (IPC Sections 420, 406).
Violations of SEBI regulations.
Forgery and falsification of documents.
Outcome:
The scam was exposed in 1992 by journalist Sucheta Dalal.
The SEBI tightened regulations; the scam led to reforms in banking and stock exchange operations.
Harshad Mehta was arrested, tried in multiple courts, and convicted in several cases.
He died in 2001 while still embroiled in legal battles.
Significance:
Led to the establishment of SEBI as a strong regulator.
Introduced real-time surveillance and stricter audit of banks and brokers.
The scam highlighted the critical need for transparent banking and stock market processes.
3. Other Notable Stock Exchange Scam Cases in India
🔹 Case 1: Ketan Parekh Scam (2001)
Facts:
Ketan Parekh, a stockbroker, manipulated prices of select stocks known as “K-10 stocks” using circular trading and preferential access to funds.
Used funds from companies like Citi Bank and Madhu Kapur.
Manipulated market for years; when the bubble burst, many investors suffered heavy losses.
Legal Issues:
Stock manipulation, fraud, insider trading.
Violations under SEBI Act, 1992, and IPC.
Outcome:
SEBI banned Parekh from trading for several years.
Courts and SEBI ordered investigations and actions against accomplices.
Led to reforms in margin rules and trading practices.
🔹 Case 2: Sahara India Pariwar Case
Facts:
Sahara raised billions via Optionally Fully Convertible Debentures (OFCDs) without SEBI approval.
Failed to disclose accurate information; alleged to have defrauded investors.
Sahara was ordered by the Supreme Court to refund the money.
Legal Issues:
Securities fraud, violation of SEBI regulations.
Criminal contempt proceedings in Supreme Court.
Outcome:
Sahara faced massive penalties and Supreme Court contempt notices.
Funds refunded after several years.
Highlighted regulatory gaps in investment products.
🔹 Case 3: National Spot Exchange Limited (NSEL) Scam (2013)
Facts:
NSEL defaulted on payments to investors due to illegal trading practices and non-payment by trading members.
Losses exceeded ₹5,600 crores.
Legal Issues:
Breach of trust, cheating, and failure of regulatory oversight.
Enforcement Directorate involved for money laundering.
Outcome:
CBI and ED investigations ongoing.
Triggered debate on regulation of spot exchanges and commodity futures.
🔹 Case 4: Satyam Computer Services Scam (2009)
Facts:
Chairman Ramalinga Raju confessed to inflating company profits by over ₹7,000 crores.
Stock prices were manipulated using falsified accounts.
Legal Issues:
Corporate fraud, securities fraud, violation of SEBI Act.
Cheating and criminal breach of trust.
Outcome:
Raju and associates convicted.
SEBI enhanced corporate governance norms.
Significant impact on investor confidence.
🔹 Case 5: Reliance Industries Insider Trading Case (2007)
Facts:
Allegations against Reliance officials for insider trading related to strategic acquisitions.
SEBI investigated unauthorized leak and misuse of unpublished price-sensitive information.
Legal Issues:
Insider trading violations under SEBI (Prohibition of Insider Trading) Regulations.
Outcome:
SEBI imposed fines and bans on key personnel.
Reinforced insider trading norms.
🔹 Case 6: Jet Airways Share Manipulation (2020)
Facts:
Allegations surfaced that promoters manipulated Jet Airways share prices before insolvency proceedings.
SEBI ordered investigation.
Legal Issues:
Stock price manipulation.
Violation of SEBI regulations on fair trading.
Outcome:
SEBI imposed penalties and restrictions.
Emphasized the need for vigilant market surveillance.
4. Legal and Regulatory Framework
Securities and Exchange Board of India Act, 1992 (SEBI Act) is the primary legislation.
SEBI is the regulatory authority responsible for regulating stock exchanges and protecting investors.
IPC sections like 420 (Cheating), 406 (Criminal Breach of Trust), 120B (Criminal Conspiracy) apply in criminal prosecutions.
Companies Act provisions on corporate governance also play a role.
Other laws like Prevention of Money Laundering Act (PMLA) also apply where money laundering is involved.
5. Key Judicial Observations
Courts have consistently held that stock market manipulation affects the economy and public confidence.
Harshad Mehta Case laid down that financial frauds involving the stock market must be dealt with severely.
SEBI’s powers to investigate, impose penalties, and order disgorgement are supported by judicial precedents.
Insider trading and price rigging are serious offenses punishable with fines and imprisonment.
6. Summary Table of Cases
| Case | Year | Nature of Scam | Outcome/Significance |
|---|---|---|---|
| Harshad Mehta Scam | 1992 | Bank Receipt Fraud | Led to reforms; Mehta convicted |
| Ketan Parekh Scam | 2001 | Price Rigging, Circular Trading | SEBI ban and tightened regulations |
| Sahara India Pariwar | 2012–ongoing | Unregulated Fundraising | Supreme Court refund order and penalties |
| NSEL Scam | 2013 | Commodity Futures Default | Ongoing CBI/ED probe; raised spot market regulation |
| Satyam Scam | 2009 | Corporate Fraud | Convictions; enhanced corporate governance |
| Reliance Insider Trading | 2007 | Insider Trading | SEBI fines and regulatory action |
| Jet Airways Price Manipulation | 2020 | Share Price Manipulation | SEBI investigation and penalties |
7. Conclusion
The Harshad Mehta Scam was a watershed moment in Indian stock market history, exposing the vulnerabilities of the system and the need for rigorous regulation and surveillance. Since then, several high-profile scams have highlighted the importance of strong regulatory frameworks, effective policing, and stringent judicial actions to maintain market integrity.
With rapid modernization and technology adoption in stock exchanges, the risk of sophisticated scams continues, requiring constant vigilance from regulators, market participants, and courts.
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