Analysis of Securities Scams in India Based on Criminal Procedure

Brief essence of the case (500 words)

India over the period of years have been a witness to many scams. The securities scam 1992 of Harshad Mehta has been of the biggest scams of stock market. Harshad Mehta from being an ordinary man with its ambitions to became rich very quickly used various strategies, and unfair practices to get rich. He was aware with the loopholes in the banking system and he had relations with various powerful personalities to facilitate him in various ways, he became to be known as the “big bull”.He also had somewhat succeeded in his practices and became one of the most powerful brokers in very short time. He had a luxurious lifestyle and was known as Big Bull of the stock Market. He was successful in manipulating the stocks of ACC from Rs.200 to Rs.9000.also, the sensex increased from 1194 points to 4467 points almost to 274%. But his strategies failed when there came a decline in the stock market due to nuclear changes in India. He then was not able to repay the money he had got from banks. Sucheta Dalal exposed his scams and than 72 cases were filed against him and more than 600 civil law-suits filed against him, many others were also accused of being involved in the scam. He used methods like READY-FORWARD deal and Diversion of Funds, Fake Bank Receipts technique to roleplay the scam, he used to aggregate the amount over 1 week to invest in share markets and then sell them off. The scam almost amounted to Rs.4000 crore, he had misproportioned the shares of about 90 companies. Also, the stock markets crashed by 72% leading to one of the biggest scams and lasted for a period of two years. He was convicted by the Bombay High court to upto 5 years in jail and a fine of 25000 rupees. He died while he was in Jail only. Also till he was dead only 4 of his cases were solved. At the outbreak of scam the Indian Economy got shaken and the stock Markets crashed. It remained a regret for SEBI that Harshad Mehta’s intelligence was not able to channelize in good ways but used his intelligence to result in such dreadful ways, Also the name of then prime minister PV Narsimha Rao was suspected in the corruption.it was also suspected that top bank officials were also involved in facilitating the scam for personal benefits SEBI since than has stricken it rules, also RBI removed the concept of Bank Receipts from than. Also after this incidence, various institutions have taken steps to improve transparency in the system. although several scams have taken place after this scam such as nirav Modi scam, Ketan Parekh scam, etc which shows that adequate steps aren’t taken yet to prevent the scams. Their family was acquitted of the taxes after 27 years of arduous battles.

Facts and issues

• Parties Involved:

Harshad S. Mehta(Petitioner)

Crime Branch of Investigation(Respondent)

• Judge:

Usha Mehra, J.

• Advocates:

Mr.D.C. Mathur, Sr. Adv. with Ms.Rebecca John, Advocate for Petitioner

Mr. S.K. Saxena with Mr. S. Lal Advocate for respondents.

Acts Involved:

Sub-Section (1) of Section 93 corresponds to Section 96(1) of the Old Code. Sub-Section 2 of Section 93 corresponds to Section 97 and Section 3 to Section 96(2) of the Old Code. Section 93 Bengal State Prisoners Regulation 1818 Madras Regulation Il of 1819, or Bombay Regulation XXV of 1827, or the State Prisoners Act, 1850, or the State Prisoners Act, 1858.18

Sections 11,12,13(2) and 13(1)(d) of Prevention of Corruption Act, 1988 (hereinafter called as PC Act) read with Section 120-B.I.P.C2.

Sections 167 Cr. P.C and Section 344 of the Old Code,(corresponding to Section 309)

Section 167 Cr. P.C Drawing attention to the provision of Section 167 (2) Cr.P.C.

Section 4(1) of the Old Code (which corresponds to Section 21h) of the new Code provisions of Section 155(2) of the Code of Criminal Procedure Provisions of Sections 94 to 96 of the Old Code. Section 91(3) of Sub Section 96 of the Code of Criminal Procedure, police.21. Provision (a) to Sub Section (2) of Section 167

Section 153 penal code provisions of Section 94 and 96 of the Old Code provision of Section 91, 92, and 93 of the Code Section 267 in the Cr.P.C8. Section 267 Cr.P.C. Section 167 Cr.P.C25.

That Section 167 Cr.P.C. sub-clause of Section 167 Cr. P.C of the Code provision of Section 94(1) of the Old Code Criminal Procedure Code under Section 267(a) of sub Section 2 of Section 167 Cr.P.C.

Issues:

he used the funds obtained by the bank receipts and forged them to manipulate the prices of the stocks, he used the concept of ready forward deal to obtain funds from the banks. The issues that were raised by this scam caused a domino effect in the entire Indian economy and fluctuated the economy between 4467 to 1194 points and Sensex was put into abysmal frenzy and markets crashed with 72 % which amounted to the biggest downfall that lasted for two years ranging from April 1991 to April 1992.

Harshad Mehta(petitioner) was lodged in the Byculla jail of Bombay previous to this case he was conducting a scam which was evidently illegal and therefore CBI moved an application before the special judge of delhi under section 267 under the code of criminal procedure, once he was formally arrested on 17th August 1992, he was put in police remand till 22nd August and in judicial custody till 25th August 1992, thereafter remand wasn’t sought nor granted. Due to this DC Mathur raised two important questions :

1. should the invocation of provisions of section 267 criminal procedure code be invoked for the purpose of interrogation in connection to the investigation
2. should the remand as defined by the section 167(2) of criminal procedure code has to be re-taken after span of 15 days and whether thereon after taking the initial remand the subject can be held in perpetuity with regard to the maximum limit of 60 to 190 days

The first point was smartly raised by DC Mathur as he targeted the loopholes in the legal system as the word “investigation” wasn’t used In the section 267 Instead the word of the proceedings was used which generally meant other things and not similar to investigation type cases so under ejusdem generis Which stands for a Canon of statutory construction The general words The enumeration of particular classes of things the general as word will be constructed as Applying only to the things of the same general class as those enumerated. And secondly he was kept in custody for more than 15 days without justification

Judgment and analysis

The judgment House this case between Harshad Mehta versus CBI resulted in Harshad Mehta not gaining bail as it was considered that he was never put into custody and only the people under custody can be granted bail,Mr. Saxena also agreed that Since the person was not in custody cannot be granted bail under this consideration bail became unnecessary and petition was closed. The judge also denied the claim made by Mr Saxena that Harshad Mehta was ordered to put in remand for perpetuity as there is no provision for this under section 167 stating that remand has to be specific period and that too to the satisfaction of the magistrate and granting this would deprive him the right to court, also the detention was illegal as the permission for the remand was not taken from the magistrate and nor the reason and neither the diary was produced for the same by the magistrate

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Place Order

An important feature of the legal system was brought into question from this that if a detention becomes illegal is the person automatically granted bail should he be entitled to bail? Now, laws have been established that if detention is illegal than the solution is not bail but rather the person can petition for habeas corpus which is writ by which the person under arrest can be brought in front of the judge to be released if the arrest was unlawful. Also in this case valid arguments were made targeting the loopholes in the sections and this may be a call to the lawmakers to make better descriptive documents that don’t exhibit vague behavior and hence can expedite the jurisdiction.

Social impact:-

This case shows prime importance of the technology in the field of banking, if there had been existing technology then there would have been a layer of transparency to the entire process of banking and this scam would’ve been avoided or caught early on. Due to lack of such technology harshad mehta was easily able to duplicate the bank receipts or forge them and no one suspected anything also smart machine learning algorithms can catch such frauds easily by detecting too many frequent purchases and sales of stocks that value too much. The public also suffered in this process as they too had their money invested in such banks, therefore introducing such technologies can prevent

Harshad Mehta from son of a peon, he became one of the most prominent broker of India.

He started his career by joining NIACL than by this time he got interested in the stocks and commodities Market. He so joined a brokerage firm in Mumbai as a Jobber. He served in positions of increasing responsibility at various brokerage firms. Harshad Mehta recognised as the big bull of the stock market industry the media houses replicated as Amitabh Bachchan of the securities market his articles also came in magazines such as Business Today, and Forbes. His power and prominence in the industry increased with time. He had great connections with various CEOs and Chairmans of major companies in the Banking and Financial Sector.

Ready Forward Deal:

In the 1990’s it was compulsory for Banks to invest, certain proportion of their capital in government bonds and securities. Also, The RF deal were used by banks for getting short-term loans approximately for period of 15 days. In it the seller bank(Sell Securities) sells the securities to the buyer bank and repurchasing them on a forward basis. Thus by selling the securities the seller bank creates temporary liquidity for itself.

In RF deal the original documents were not exchanged between banks rather the seller bank gave the Buyer Bank, Bank Receipt(BR). Thus Harshad Mehta identified the loophole in the Banking System, he made fake Bank Receipts and issued fake BRs to various Banks. Thus he issued BRs which were actually void but the banks actually didn’t verify the BRs. Also, he used his relations with various people like chairman of Vijaya Bank to see to it that the BRs issued by him are not verified and the cheques issued were not in favour of the Bank but were issued in favour of Harshad Mehta.

He used 2 small banks the Bank of Karad (BOK) and the Metropolitan Co-operative Bank (MCB) to issue fake BRs and BRs, not backed by any government securities.

Diversion of Funds/Stamp Paper Scam:

In the 1990s the Banks were not allowed to invest in the shares and securities market. Mehta identified this need of the banks and thus extracted money from the banking system and invested in the stock market. Also, he promised the banks higher than usual interest on their capital and insisted them to pay the check-in favour of Harshad Mehta. So the Banks were also unaware that who they are transacting with and where their money is going.But using the Bank’s money he was able to inflate the price of various stocks. In his times the BSE index saw steep rise from Rs.1000 to Rs.4500.He used to trade in stocks like Associated Cement Companies, Sterlite Industries,Videocon. He was able to increase ACC share price from Rs 200/share to almost Rs.9000 which is almost 4400% increase. Also, when he required the money or he had to return money to the bank he would carefully sell out his stocks and liquidate them. He slowly came to known as Big Bull of the Indian stock market. Thus indirectly using the funds of Bank to manipulate the stock prices. The scam involved an amount of approximately Rs.4000 crores in present day’s money value it is said the amount can be considered equivalent to Rs.24000 crores.

Modus Operandi:

The Modus Operandi adopted by Harshad Mehta he used was that if Bank X needed money he used to take Bank Receipts of government Bonds from them and ask Bank X for some time to sell their securities. Meanwhile, he would find a Bank Y who is ready to buy the securities with a clause that Bank X will it buy it back after the prescribed time. But Mehta would insist to Bank Y to transfer the funds to his account. So the Bank Y does not actually know where there funds are actually going. Now He would use this money to invest in the stock market. Now when Bank A would ask for their money than he would find a Bank Z which also is interested in buying government securities and Bonds, He would take money from Bank Z and give it to Bank A. Thus he made a chain like this by which there was always some money left with him at all times. This worked as he was aware about the loopholes in our Banking System. Also when he had to return money and not able to continue the chain than he is used to sell the stocks and return the money. Also he than with the help of 2 small banks issued fake Bank Receipts to various Banks. Thus using the Ready Forward Deal, Fake Bank Receipts, allegedly using the funds to invest in the stock market are the key things in the scam.

Later, in the investigations, it was found that Mehta had established companies under the name of Damyanti group to undertake Market Operations.

Also, he had great relations with people at BSE, which helped him with carrying the transactions with ease. Also, he had became one.

Outbreak of the scam:

Their started bearish trends in the market, the stock prices started to fall, and thus he was unable to pay back the money to the Banks on time. Sucheta Dalal in her column exposed the Harshad Mehta Scam. As soon as scam came out than chairman of Vijaya Bank came to know that the Bank receipts he had were fake and were of no value, he committed sucide. Also, many famous personalities came into the picture for allegedly supporting Harshad Mehta to support him in various ways executing the scam. Also, Mehta publically gave a statement that he has given Rs. 1 crore of funds as bribe to than the Prime Minister of India Mr. P.V. Narsimha Rao, as donation to the party, for getting him off and saving him from the scandal case.

Below is the chart of Sensex after outbreak of the scam.

Bank system had to face losses amounting Rs.4000 crore due to this scam. The stock Markets crashed, people’s capital got vanished and the Indian Economy faced a great downfall.

Also, Harshad Mehta was banned for a lifetime from trading in markets, from BSE by SEBi.

He was later charged for 72 criminal offences and over 600 civil lawsuits.

Social impact:

SEBI tightened its rules for brokers and government increased the powers with SEBI. Also established various offices and departments for regulating various trader activities and to regularise the securities market.

The transparency also increased in market operations. Various types of rules were introduced to see to it that fair trading practice is undertaken by traders. Bank Receipts were banned by the RBI.