Harshad Mehta scam in 1992 ushered regulatory regime in Indian capital market

India’s liberalisation era initiated in 1991 faced an immediate backlash in 1992 with a stock market scam that rocked the capital market of the then-emerging economy, which was reforming itself from the license raj. Though termed as a stock market scam, this estimated Rs 5,0000000000 scam involved bogus debt securities issued by Bank of Karad and Metropolitan Bank in connivance with the poster boy of the scam – Harshad Mehta. Mobilising a huge sum by dealing in government securities issued by the above-mentioned banks, Mehta popularly called big-bull then pumped that amount in select large-company stocks and some initial public offers in the stock market. In the process, he fraudulently manipulated the market by creating fictitious demand and disturbed the market equilibrium with an unprecedented rally. Related stories Makarand Joshi Partner|MMJC and Associates The scam went unnoticed for a period of four long years from 1988 to 1992 primarily because the Indian capital market was trading in physical shares and not in an electronic or Demat mode and there was no active regulator for the securities market. The rip-off effects of the scam led to the emergence of a strong regulator, Securities, and Exchange Board of India (SEBI) (which was established in I988) being empowered by the government, according to statutory powers with the passing of SEBI Act 1992. SEBI undertook a series of initiative to regulate listed and unlisted companies, initial public offerings, fraudulent trading activities, collective investment schemes followed by establishment of financial institutions promoted National Stock Exchange in I993 that commenced screen-based trading for equity and debt market segment followed by the Depositories Act 1996. All these initiatives were good but not good enough to deter fraudulent motives of the white-collar scammers. Unfortunately, scams continue to galore. In 1998, the market saw the Ketan Parekh scam of circular trading of securities and controlling prices followed by the Satyam scam of 2009 involving falsification of books of accounts and further to GDR/IPO related scam in 2010-11 of bogus investors and kick-backs to operators and so on. In 2012, Sahara scam of manipulative investment scheme followed by Sharepro in 2016 which was a registrar and transfer agent that manipulated the physical holding of inactive folios. All the lacuna that led to these scams has been addressed via various policy and regulatory interventions including KYC of investors, mandatory push for demat trading, monitoring hot and bad money in the market, suspending in-active companies, strict action on falsification of books of accounts, and closing down manipulative investment schemes.