The Harshad Mehta scam, 1992 — how the money got in, and what it changed
The answer
Between 1991 and April 1992 a Mumbai broker, Harshad Mehta, used gaps in the way Indian banks settled trades in government securities to move very large sums of bank money into a small number of shares. The Sensex rose sharply, then collapsed when the mechanism was exposed on 23 April 1992. Almost every protection an Indian investor has today exists because this happened.
Why this costs you money
This is the article in the cluster that asks you to check something about your own account rather than your own thinking.
The 1992 scam was not about stock picking. It was about who could move somebody else's assets, and whether anybody would notice. Bank securities moved on the strength of a receipt. Client shares sat in physical form with brokers. The gap between "you own it" and "somebody else controls it" was where the money went.
That gap has not disappeared. It has been narrowed by rules, and the narrowing works only if you use it. If a broker holds a broad authority over your demat account, your shares can be moved without a fresh instruction from you each time. In the great majority of cases nothing bad happens. In the cases where something does, the shares are gone before the statement arrives.
Indian regulators have acted on this repeatedly, including after broker failures in 2019 and 2020 where client securities were pledged for the broker's own borrowing. The protection now exists. Most account holders have never checked which version they signed.
How it works
To understand 1992 you need 1 idea: a ready forward deal, and what a bank receipt was doing inside it.
Banks in India were required to hold a proportion of their deposits in government securities, and they also lent to each other short term. The standard way to do both at once was a ready forward deal: Bank A sells securities to Bank B today and agrees to buy them back in 15 days at a slightly higher price. Economically it is a secured loan.
Now the settlement problem. Moving the actual securities was slow and paper-based. So instead of delivering securities, the selling bank issued a bank receipt: a document saying it held the securities on the buyer's behalf and would deliver them later.
Three things then follow, and they are the whole scam.
1. A broker sat in the middle. Banks did not deal directly. They dealt through brokers, and the broker often held the cheque and the receipt at the same time. Cheques were sometimes written in the broker's name rather than the counterparty bank's.
2. A receipt is only as good as the securities behind it. Some smaller banks issued receipts for securities they did not have. That turns a secured loan into an unsecured one, and nobody checked, because checking meant physically verifying paper.
3. Money in transit is money available. Funds passing through the broker between banks could be used in the days before settlement. Those days were the float, and the float was invested in shares.
So the flow was: bank money leaves for a securities transaction, spends time under the broker's control, and buys shares. Rising share prices produced profits and confidence, which allowed more transactions, which produced more float.
Two consequences are worth naming.
The shares chosen were concentrated. A small number of companies, including ACC, Sterlite and Videocon, rose enormously. ACC is the most quoted: its share price is commonly reported as rising from about ₹200 to nearly ₹9,000 in a matter of months. Concentration is what made the ramp possible and what made the collapse total.
There was a public justification. Mehta argued that the market had previously undervalued companies and was now valuing them at their replacement cost — what it would cost to build the same business from scratch. That argument is not nonsense. Replacement cost is a genuine valuation method. It was being used to explain a price that had a completely different cause, and it worked because it sounded like analysis.
On 23 April 1992, Sucheta Dalal published a column in The Times of India setting out how bank funds were reaching the stock market. The market fell heavily over the following months. A Joint Parliamentary Committee investigated and reported in 1993. Mehta faced dozens of criminal cases, was convicted in some, and died in custody on 31 December 2001 at the age of 47. Estimates of the size vary widely by definition and source, from roughly ₹4,000 crore for the direct banking losses to far larger figures for total funds involved.
What it tells you, and what it does not
What it tells you. Manipulation does not usually happen in the share market. It happens in the plumbing that connects the share market to money. If you want to know whether a market is safe, do not look at the price. Look at settlement: how does an asset actually move, who verifies it, and what happens between the instruction and the transfer.
It also tells you that the loudest justification arrives after the price. The replacement-cost argument became popular because the price had already moved. A story that appears to explain a rise, and that appears only after the rise, is evidence about the storyteller.
What it does not tell you. It does not tell you that everyone who bought in 1991 and 1992 was a fool. Indian markets were reacting to something real: the 1991 balance of payments crisis had forced a genuine liberalisation. An investor in 1991 who believed Indian companies were about to become far more valuable was correct, and remained correct for 30 years. The scam ran inside a real re-rating, which is the hardest kind of manipulation to see.
It also does not tell you that regulation solved it. Ketan Parekh did a version of the same thing 9 years later using cooperative bank funding. The specific loophole closes. The category does not.
The decision rule
Before you evaluate any investment, know 2 things about your own account: who can move your assets, and how you would find out if they did.
If your broker can transfer securities out of your demat account under a broad authority you signed once, then your protection is the broker's integrity, not your own. That is fine most of the time and it is a choice you should make knowingly.
The conditional version: a broad authority is acceptable if you also read the monthly statement that comes directly from the depository, not from the broker. It is not acceptable if you have never opened that email, because then nothing in the system is checking on your behalf.
Try this now
Ten minutes. This is the most practical action in the cluster.
If you invest in India.
- Open your broker's website or app and find the section on authorisations, POA, or DDPI. Find out which of 3 situations applies to you: a power of attorney (POA) granted to the broker, a Demat Debit and Pledge Instruction (DDPI), or neither, in which case you authorise each sale using a TPIN and OTP from the depository.
- If it is a POA, read what it covers. A POA signed years ago may be wider than the DDPI that replaced it. SEBI introduced the DDPI in 2022 specifically to narrow the authority to 4 defined purposes. You can usually revoke a POA and switch to DDPI or to TPIN authorisation.
- Now find the CAS — the Consolidated Account Statement — emailed monthly by CDSL or NSDL. It goes to your registered email, not through your broker. If you have never seen it, your email or mobile number registered with the depository may be wrong, and that is worth fixing today.
- In the statement, check 2 things: the holdings match what your broker app shows, and there are no pledges you did not create.
- Register directly with CDSL (Easi) or NSDL (IDeAS) so you can see your holdings without going through your broker at all.
If you invest in the United States.
- Confirm your account type. A cash account does not permit your broker to lend your shares. A margin account usually does, under the margin agreement, even if you have never borrowed.
- Check whether you are enrolled in a fully paid securities lending program. These are optional and pay you a fee for lending your shares. Find out whether you opted in.
- Look up your broker on FINRA BrokerCheck and confirm SIPC membership and coverage limits.
What you should see. Most Indian readers will find they granted a POA or DDPI years ago and have no memory of it. Most will also find they have never opened a CAS. Neither of those means anything is wrong. It means the only person checking your account is your broker, and 1992 is the reason that is worth changing in 10 minutes.
Three real cases
1. Harshad Mehta and the bank receipt, 1991 to 1992 (India) — the plumbing, not the price Bank funds reached the equity market through the settlement gap in ready forward deals. What it turned out to be: the direct cause of the modern Indian market structure. The SEBI Act of 1992 gave the regulator statutory powers. The NSE began trading in 1994 with screen-based matching, replacing the open outcry floor. The Depositories Act of 1996 enabled dematerialisation. Rolling settlement, completed in 2002, ended the weekly cycle that made carry-forward possible.
2. Ketan Parekh, 1999 to 2001 (India) — the same category, a new loophole A group of around 10 stocks, funded partly by borrowing from a cooperative bank where the operator had influence, and by circular trading. When the market fell after the Union Budget of 28 February 2001, the funding failed and the stocks collapsed. Madhavpura Mercantile Cooperative Bank went under. SEBI barred Parekh for 14 years, and barred him again in January 2025 after a front-running investigation. What it turned out to be: proof that the pattern outlives the rule that closed it.
3. Broker misuse of client securities, India, 2019 to 2020 — why DDPI exists Several brokers were found to have pledged client securities for their own borrowing. SEBI responded with a margin pledge system in which pledged shares remain in the client's own demat account, and later with the DDPI replacing the broad POA. What it turned out to be: the reason the Try this now in this article exists. The rule protects you only if you use the narrower authority.
The question that resolves it
A novice asks: is this stock going up?
An expert asks: where is the money coming from?
Every large price move has a funding source. Sometimes it is savings. Sometimes it is foreign inflows. Sometimes it is borrowed money that has no business being there. The question is answerable more often than people think, because volume, delivery percentages, promoter pledges and bulk deal disclosures are all public.
What would make this wrong
The falsification condition. The claim is that manipulation concentrates in settlement and funding rather than in trading itself. If the major Indian and American market abuse cases turned out to be mostly about false information rather than control of assets and money flow, the claim would be weakened. Some cases are about information — false announcements, false accounts. But the largest Indian ones, 1992 and 2001, were both funding cases, and the regulatory response in both was to change settlement, not disclosure.
The honest limit. Checking your POA does not protect you from a broker's outright fraud, from a mis-sold product, or from your own bad decisions. It closes 1 specific door. It is worth doing because it takes 10 minutes, and because it is the door that was open in the cases that actually happened.
The hindsight trap, and it is severe here. It is very easy to say that anybody could see the 1991 to 1992 rise was artificial. Consider what a careful Indian investor genuinely saw at the time.
India had just been through a real crisis. In 1991 the country had weeks of import cover left and pledged gold to raise foreign exchange. The reforms that followed were genuine and large: industrial licensing was largely dismantled and the rupee was devalued. Company profits were expected to rise substantially, because companies could finally expand without permission. A large re-rating of Indian equities was justified.
The information environment was also completely different. There was no internet. Prices were quoted on the floor of the BSE. Results arrived by post and in newspapers. The volume and delivery data a modern investor pulls up in 5 seconds did not exist in accessible form. A retail investor in Nagpur in January 1992 had no practical way to see that a few stocks were being driven by 1 broker's funding.
So what could a careful person genuinely have seen?
Two things.
First, the concentration. It was visible on the floor and it was reported in the financial press that a handful of stocks were driving the index and that one broker was associated with them. A person who noticed that the rise was narrow had the beginning of a real warning.
Second, the incoherence of the justification. Replacement cost is a valuation method for asset-heavy businesses. It gives a value, and that value does not change by a factor of 40 in a few months. Anybody who took the argument seriously enough to apply it would have found that it did not support the price. The story defeated itself, for anybody who checked it rather than repeated it.
What a careful person could not have seen was the bank receipt mechanism. That was inside the banking system, invisible to the market, and it took an investigative journalist with banking sources to find it. Nobody should pretend they would have worked it out from the price chart.
In India
Everything in this list exists in its current form partly or wholly because of
- Read it as a list of what you now have.
- SEBI Act, 1992. Made SEBI a statutory regulator with powers to investigate and penalise.
- NSE, 1994. Screen-based, anonymous, nationwide order matching. Removed the floor broker's information advantage.
- Depositories Act, 1996, and dematerialisation. Shares became electronic entries at NSDL or CDSL, ending physical certificates and forged transfer deeds
.
- Rolling settlement, completed 2002. Every trade settles a fixed number of days after the trade, so positions cannot be carried forward indefinitely. India later moved to T+1, ahead of most world markets.
- Margin pledge, 2020. Pledged shares remain in the client's demat account
.
- DDPI, 2022. Replaced the broad power of attorney with an instruction limited to defined purposes.
- Investor Protection Fund at the exchanges, and the SEBI SCORES complaint system.
The pattern is consistent: India's investor protections are structural. They change how assets move rather than relying on the investor to be vigilant.
In the United States
The United States has its own 1992, in the same market: government securities.
Salomon Brothers, 1991. The firm submitted false bids in US Treasury auctions, including bids in customers' names without their knowledge, to acquire more than the permitted share of an issue. It paid a settlement of roughly $290 million and its chairman resigned; Warren Buffett stepped in as interim chairman. The result was reform of the Treasury auction system .
The structural protections a US retail investor relies on today:
- The Customer Protection Rule (Rule 15c3-3), requiring brokers to segregate customer securities and cash from their own.
- SIPC, which protects customer assets up to defined limits if a broker fails, currently $500,000 including a $250,000 limit for cash.
- DTCC, holding securities centrally.
- FINRA BrokerCheck, a free record of registration and disciplinary history.
The important structural difference: US retail shares are usually held in street name, meaning the broker is the registered holder and you are the beneficial owner on the broker's books. In India, your name is on the record at the depository.
Where they differ, and what that tells you
This is the sharpest India-United States difference in this cluster.
In India, the depository holds the record in your name. Your shares are identified as yours at CDSL or NSDL, not at the broker. If your broker fails tomorrow, your holdings still exist in your account at the depository, and the statement comes to you directly — a check the broker cannot alter.
In the United States, shares are usually held in street name. The broker is the holder of record and its books say what is yours. The protection is regulatory — segregation rules and SIPC insurance — rather than a registry.
So the correct verification habit is different in each country.
In India: read the CAS from the depository every month, and keep the authority you have granted as narrow as possible. Your independent record exists. Use it.
In the United States there is no equivalent independent registry for a street-name holder, so the habit is: keep the brokerage statement, check the account type, know whether your shares can be lent, and confirm SIPC coverage. Registry-level ownership through direct registration is available but rare.
Neither system is safer in general. Indian investors have a verification step Americans do not, and most Indian investors have never used it.
Carry this
- Manipulation lives in settlement and funding, not in the price chart.
- Know who can move your shares, and read the statement that does not come from your broker.
- A story that explains a rise, and appeared after the rise, is evidence about the storyteller.