What was the fallout of the Harshad Mehta-headlined Securities scam? Revisit the episode that rocked Indian financial markets

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The year 1992 in history is often remembered as the year of the stock market scam. On April 28, 1992, the Sensex registered a fall of 570 points (12.77%) to close at 3,870, following the revelations related to the securities scam headlined by Harshad Mehta.

Before the scam, in the period between April 1991 and April 1992, Sensex went into a frenzy and logged in returns of 274%, moving from 1,194 points to 4,467 — the highest annual return for the index.

Mehta, a broker by profession and a poster boy of stock markets back then, became famous for his rags-to riches story. Having earned the moniker of ‘Big Bull’, Mehta had allegedly used bank receipts of public sector banks and stamp papers to rig prices of dubious companies. He used to then sell these shares at a significant profits. Later, when his modus operandi in stock markets was discovered and exposed, banks realised that they were in possession of fake Bank Receipts holding no value. This eventually led the stock market to crash.

This even jolted the capital market participants, the financial industry and the nation as a whole. The scam triggered many changes in India’s financial regulatory system and the Indian stock market has come a long way since then.

Here’s how the investment ecosystem has changed:

Formation of SEBI

The government set up a regulatory body – Securities Exchange Board of India (SEBI) in 1992, to regulate the capital markets, oversee any irregularities and to protect the retail investors.

Enter the FIIs

Foreign institutional investors (FIIs) entered the Indian stock market in September 1992. The opening up of stock markets gave confidence to institutional investors on the India growth story which gradually saw the return of retail investors which has lost confidence due to previous malpractices.

Setting up of NSE

National Stock exchange was set up in 1992, but it commenced operations in 1994. this was a modern platform which provided fully automated screen-based electronic trading system to investors. This electronic trading helped reduce middlemen and delays in delivery of shares.

Depositories Act

Depositories Act was introduced in 1996 which ushered in dematerialised holding of shares, doing away with physical certificates that were prone to postal delays, theft, and forgery. This also prevented the issue of fake share certificates and ensured transparency.

Mutual Fund Regulations

Mutual Fund regulations have seen many changes in the last decade to reduce the costs and to protect the rights of investors. In 1993, the private sector was allowed to set up mutual funds. SBI removed the entry load fee in 2009 and improved upon the risk-o-meter tool and introduced a new category of “very high” risk and several such steps were taken.