Harshad Mehta Scam 1992
The Harshad Mehta scam of 1992 was a coordinated securities fraud involving the diversion of interbank funds through forged bank receipts to inflate stock prices, resulting in the Sensex tripling in eighteen months before a sudden collapse that wiped out billions in investor wealth.
Harshad Mehta, a stockbroker who came to be called the Big Bull, orchestrated one of the largest financial frauds in India's history by exploiting gaps in the interbank settlement system. Banks at the time frequently needed short-term funds and settled transactions through instruments called bank receipts, or BRs. A BR was essentially a commitment by a bank to deliver government securities at a later date in exchange for funds received today. Mehta conspired with bankers at several institutions to issue fake bank receipts not backed by actual securities. The funds raised through these fraudulent BRs were channelled into the stock market.
Between April 1991 and March 1992, the BSE Sensex rose from roughly 1,200 points to over 4,500 — an astounding tripling in less than two years. Mehta concentrated buying in select stocks including ACC, Apollo Tyres, and Sterlite, driving them to stratospheric valuations. Retail investors, seeing these spectacular gains, rushed in near the peak.
In April 1992, journalist Sucheta Dalal published an exposé in The Times of India revealing the bank receipt fraud. The Reserve Bank of India launched investigations, and SEBI initiated its own probe. As the scam unravelled, banks scrambled to recover funds, causing a massive sell-off. The Sensex fell from its peak by over 40 percent within weeks, devastating retail participants who had entered at elevated prices.
The scam exposed critical weaknesses: absence of a delivery-versus-payment settlement system, lack of statutory powers for SEBI, and inadequate oversight of interbank transactions. In direct response, Parliament passed the SEBI Act 1992 granting the regulator statutory authority to investigate and penalise market misconduct. The scam also accelerated the move towards dematerialisation of securities and electronic settlement, which eventually led to the formation of NSDL in 1996.
Harshad Mehta faced over 600 criminal and civil charges. He died in judicial custody in December 2001 with cases still pending. The episode left a deep imprint on Indian financial regulation, transforming SEBI from a toothless advisory body into a genuinely empowered securities regulator and catalysing systemic reforms that underpinned the later growth of Indian capital markets.