The Harshad Mehta Scam: The Banks Involved and the Consequences
The Harshad Mehta scam, a significant financial scandal in India, which came to light in 1992, involved multiple banks and financial institutions aiding in the fraudulent activities. This article explores the banks involved directly in the scam, the impact of the scandal on the Indian financial sector, and the subsequent reforms brought about.
The Banks Involved Directly in the Scam
The Harshad Mehta scam, a masterful scheme orchestrated by the controversial stockbroker, saw multiple banks play a significant role. The largest bank in India, State Bank of India (SBI), was at the heart of the scam. Mehta used fake bank receipts to manipulate stock prices, leading to a substantial manipulation in the market.
Bank of India (BOI) was another major player involved in the issuance of fake bank receipts that facilitated Mehta's operations. PNB, the Punjab National Bank, was implicated for providing financial support to Mehta through manipulated transactions. Canara Bank and Indian Bank were also involved in the scam, issuing fraudulent bank receipts that Mehta exploited.
Several foreign banks like Standard Chartered were also implicated in the scam. Standard Chartered issued bank receipts to Mehta, while ANZ Grindlays was accused of pumping money into Mehta's personal account.
The Securities Scam and its Exposure
The securities scam of 1991-92 involved the diversion of bank funds worth Rs 3500 crore to a group of stockbrokers led by Harshad Mehta. These funds were then selectively pumped into the stock market, causing it to surge to over 4500 points. Mehta's scheme was first exposed by veteran journalist Sucheta Dalal in April 1992.
On 23 April 1992, Dalal wrote an article in The Times of India detailing the loopholes in the banking system that had been exploited by the stockbroker. She received the tip-off after seeing Mehta's brand new Toyota Lexus SUV at the State Bank of India offices.
By the end of April 1992, the State Bank of India realized it was holding worthless bank receipts and owed Rs 500 crore to Mehta. By June 1992, revelations of misappropriations from banks and public sector units by Mehta kept coming to light. The stock market crashed as quickly as it had risen, with banks demanding their money back.
The Impact and Reforms in the Banking Sector
The Harshad Mehta scandal had a significant impact on the Indian financial sector, leading to reforms in the banking and securities sectors. The lax regulatory practices of the banks and the failure to verify transactions properly allowed Mehta to orchestrate one of the largest financial scams in Indian history.
Several measures were implemented to strengthen the regulatory framework and prevent such activities in the future. The scandal highlighted the need for better internal controls and stricter supervision in the banking sector. The government also introduced stringent regulations to monitor financial transactions and prevent fraud.
Conclusion
The Harshad Mehta scam remains a testament to the potential for financial disasters when regulatory oversight is inadequate. The involvement of multiple banks and financial institutions in the scam underscores the importance of strict compliance with regulatory norms and the implementation of robust internal controls. The subsequent reforms in the banking and securities sectors reflect the lessons learned from this catastrophic event.