Introduction:
The Harshad Mehta scam of 1992 remains one of the most shocking and defining financial frauds in Indian history. This case not only shook the foundations of the stock market but also exposed deep-rooted loopholes in the Indian banking and financial systems. Often referred to as the most notorious financial deception the country has ever seen, the scam led to investor losses worth thousands of crores and caused widespread panic in the capital markets.
Harshad Mehta, a flamboyant stockbroker once hailed as the ‘Big Bull’ of Dalal Street, masterminded a securities fraud worth over ₹4,000 crore by manipulating stock prices through fraudulent banking instruments. His actions, though illegal, exposed the fragility of India’s financial infrastructure at the time.
Even decades later, Mehta’s name sparks intense debate—was he a financial genius who exposed the system’s flaws, or simply a conman who brought it to its knees? Regardless of which side you’re on, there’s no denying the impact this scam had on the Indian economy.
The 1992 scam acted as a catalyst for major reforms—leading to stronger financial regulations, greater capital market transparency, and a tighter legal framework governing securities trading in India.
Background of Harshad Mehta
Harshad Mehta was a stockbroker who became one of the most well-known and controversial figures in India’s financial history. Born into a lower-middle-class Gujarati family, he moved to Mumbai in the 1970s with big ambitions. After doing a few odd jobs, he found his way into the world of finance and began working as a jobber at the Bombay Stock Exchange. It was here that he observed how the market truly worked how large trades were executed, how brokers operated, and most importantly how loosely regulated the system was at the time. Mehta was quick to understand the cracks in the system. He realised that not only could stock prices be influenced with enough capital, but that banks and brokers operated in silos with very little oversight.
By the 1980s, he had launched his own firm, GrowMore Research and Asset Management, and quickly rose to fame with his aggressive trading style. Mehta gained the nickname “Big Bull” of Dalal Street, known for inflating stock prices and attracting huge investor attention. But behind this success was a much darker play he was using fraudulent bank receipts and exploiting gaps between the banking and stock market systems. His understanding of market manipulation and access to banking systems became the foundation of the ₹4,000 crore scam that would later shock the entire nation.
Scam 1992 Exaplained
The Harshad Mehta scam was a sophisticated operation that took advantage of the weak coordination between banks and the stock market.
1. Exploiting the Ready Forward Deal Loophole
At the heart of the scam was the Ready Forward (RF) deal, a short-term loan arrangement where one bank sells government securities to another with an agreement to repurchase them at a later date. These transactions were common in the interbank money market, and brokers like Mehta often acted as intermediaries.
Mehta exploited this system by posing as a broker between banks, but instead of just facilitating deals, he started manipulating them by inserting fake instruments into the system.
2. Issuing Fake Bank Receipts (BRs)
In RF deals, Bank Receipts were issued as proof that securities had been sold. However, in many cases, the actual securities were never transferred. Mehta convinced smaller banks to issue fake or unbacked BRs — documents that claimed securities existed when they didn’t.
These BRs were then passed on to larger banks like SBI as legitimate proof of transactions. The banks, trusting the system, released huge sums of money to Mehta — believing they were secured by real government bonds.
3. Diverting Bank Funds to Manipulate Stock Prices
The money that Mehta obtained from the banks — often hundreds of crores — was not used for any real RF deals. Instead, he diverted these funds to buy stocks in the stock market, focusing on a handful of low-liquidity but high-potential stocks. By purchasing these shares in large volumes, he was able to artificially inflate their prices at an unprecedented scale. Mainly focusing on a few select companies like ACC (Associated Cement Company), Sterlite, and Videocon.
For instance, shares of ACC surged from ₹200 to nearly ₹9,000, while Sterlite and Videocon also witnessed sharp, unjustified price rallies — all driven by Mehta’s market manipulation, not real business growth.
Sterlite Industries was another stock targeted by Mehta. Though it was a mid-sized industrial firm, its share price saw an unnatural surge due to bulk buying using funds siphoned from banks. Just like ACC, Sterlite’s stock rose sharply without any real improvement in the company’s fundamentals, and once the scam was exposed, its price plunged, causing massive losses for late investors.
4. Creating a Bull Run and Squeezing the Bear Cartel
By injecting massive funds into the market, Mehta artificially inflated stock prices. This led to a bull run, where prices kept rising and investors — especially retail ones — rushed to buy in fear of missing out.
At the same time, Mehta clashed with a bear cartel — a group of traders who had short positions and were betting on the market to fall. As stock prices rose, these traders were forced to cover their losses by buying at higher prices, pushing prices even further up. This short squeeze worked in Mehta’s favor and strengthened his control over select stocks.
The Scam Unravels
The carefully built house of cards began to collapse in mid-1992, and the first major crack appeared when the State Bank of India (SBI) reported a shortfall in its government securities. On investigation, it was found that the bank had issued large sums to Harshad Mehta based on Bank Receipts (BRs) — but no actual securities had ever changed hands.
The turning point came when journalist Sucheta Dalal, then working with The Times of India, started digging deeper into Mehta’s unusually lavish lifestyle — including his luxury cars, expensive suits, and sudden rise to financial fame. In April 1992, she published a front-page article revealing how Mehta had illegally used banking loopholes and fake BRs to manipulate the stock market.
Her report blew the lid off the scam, triggering a series of investigations by the RBI, SEBI, CBI, and parliamentary committees. As the truth spread, investor confidence evaporated almost overnight. The BSE Sensex crashed from 4,500 to 2,500 points, wiping out billions in investor wealth. Panic gripped the market, and Harshad Mehta’s financial empire crumbled in full public view.
Impact and Consequences On the Indian Stock Market:
The Harshad Mehta scam had a devastating impact on the Indian stock market, triggering one of the worst crashes in its history:
1. Massive Market Crash:
Once the scam was exposed, the stock market went into free fall. The BSE Sensex plummeted from around 4,500 to 2,500 points in a matter of weeks. Investors panicked, and billions of rupees in market value were wiped out.
2. Retail Investors Crushed and Confidence Shattered
The biggest victims of the Harshad Mehta scam were retail investors ordinary people who had poured their savings into the stock market, inspired by the bull run that Mehta helped create. Thousands of individuals followed his stock picks blindly, believing in his financial genius and the seemingly unstoppable rise of the market. But when the scam unraveled and stock prices crashed, many were left holding worthless shares.
This widespread loss led to a complete erosion of trust in the financial system. Shocked and betrayed, countless investors withdrew from the markets entirely, and retail participation remained weak for years. The idea that the market could be rigged by powerful insiders left a deep psychological scar on Indian investors — one that took a long time to heal.
3. End of the Unregulated Era:
The scam marked the end of a relatively unregulated stock market environment. It became clear that the lack of proper checks and balances had enabled manipulation on a massive scale.
4. Push for Market Modernization:
One positive outcome of the scam was that it accelerated much-needed reforms in the Indian stock market. The exposure of loopholes and manual processes led to a nationwide push for modernization. This included the introduction of electronic trading platforms, eliminating the need for physical share certificates, and eventually leading to the rise of dematerialization (Demat accounts). These changes made trading faster, more transparent, and less prone to forgery or manipulation, laying the foundation for a more efficient market structure.
5. Banking Sector Reforms:
The scam also highlighted serious flaws in the Indian banking system, particularly in how banks managed government securities and interbank transactions. In response, the Reserve Bank of India (RBI) tightened its norms by:
- Introducing stricter guidelines for banks’ investment in government securities.
- Placing tighter controls and audit mechanisms on interbank transactions.
- Enhancing regulatory oversight to ensure that banks no longer issue instruments like Bank Receipts (BRs) without backing them with actual securities.
These reforms were crucial in restoring credibility and improving the financialdiscipline of Indian banks.
Conclusion
The Harshad Mehta scam of 1992 was more than just a financial fraud — it was a wake-up call for the entire Indian financial ecosystem. It exposed critical flaws in the way banks operated, how stock markets were regulated, and how easily systemic loopholes could be exploited by a single powerful individual. The shockwaves from this scam were felt across the country, not only in economic terms but also in public trust and perception.
However, out of this crisis came an opportunity for transformation. The scam led to a wave of reforms that laid the groundwork for a more transparent, technology-driven, and better-regulated financial system in India. From electronic trading platforms to Demat accounts and tighter banking regulations, the changes that followed helped safeguard the system against similar manipulations in the future.
Harshad Mehta may have brought the market to its knees, but his actions forced India to confront its regulatory weaknesses and modernize its financial architecture — a legacy that continues to shape the market even today.