Harshad Mehta and the 1992 Securities Scam

How stockbroker Harshad Mehta diverted bank funds through the government securities market to fuel a stock market boom in 1991-92, and how the scam led to SEBI's powers and NSE's creation.

In April 1992, journalist Sucheta Dalal exposed a massive scam.

How it worked

Banks traded government securities through brokers.
Using bank receipts and loopholes in the settlement system, broker Harshad Mehta diverted bank funds into the stock market.
He drove up share prices, like ACC, which rose many times over.

The boom

The Sensex rose sharply from around 1,000 to over 4,000 in about a year.

The crash

After the exposure, the market crashed, and banks found huge holes in their books.

Scale

The scam was estimated at around 4,000 to 5,000 crore rupees, huge for 1992.

Reforms

SEBI got statutory powers under the SEBI Act, 1992.
The National Stock Exchange (1994) introduced electronic trading.
Dematerialisation of shares and the NSDL depository (1996).

Legacy

The story was retold in the web series Scam 1992 (2020).

The bank receipt

A bank handed money to a broker against a receipt for securities that didn't exist, and the broker used it to buy shares.

Thinking the 1992 boom was driven by fundamentals

Diverted bank funds fuelled it.

Key takeaways

Harshad Mehta diverted bank funds into shares in 1991-92.
The Sensex rose from about 1,000 to over 4,000.
The scam was estimated at 4,000 to 5,000 crore rupees.
It led to SEBI's powers, NSE and dematerialisation.