Harshad Mehta scam: When a financial scandal triggered reforms in India

If year 1991 heralded the reform of our economic systems, the following year saw the beginning of the cleansing of the financial markets.

But as always, we needed a crisis to trigger the reform process.

That trigger came from the heavy price that the government, the banking system and small investors paid after the scam orchestrated by Harshad Mehta and his ilk got exposed in April of 1992.

Mehta was an enigma, the first broker to appear on the cover of business magazines, which were just learning to celebrate money in liberal times.

With Reliance Industries going public in 1977, Dhirubhai Ambani democratised wealth creation in stock markets making risk-weary middle class people invest in shares, taste hot money and get a high.

The markets thus rapidly grew in size but policing and regulations didn't keep pace allowing players like Harshad to exploit the systems to their fullest.

As Debashish Basu and Sucheta Dalal puts in their book The Scam: "It took Dhirubhai Ambani decades to attain superstar status. Harshad managed it in just a few years without Ambani's hassles of setting up industries, battling the government and the press."

With the weakness of the whole of the financial systems and its constituents, from the Reserve Bank to State Bank of India and particularly the foreign owned banking entities stood exposed in the light of the revelation, the country's regulatory framework was strengthened, but in a slow pace.

Mehta, who was arrested in November of 1992 charged with 72 criminal offences and died a decade later, was lovingly called the Big Bull, a tag later become part of the lexicon.

But as subsequent scams showed us, banking and financial regulations need to evolve and get sophisticated as markets grew in size.

Fraudstar C R Bhansali of Kolkata could able to set up a mutual fund, raise money from gullible investors and even came close to setting up his own bank before his whole empire came crashing down in 1996 with his arrest.

People like Bhansali or Mehta could flourish with ease in a financial market that was primitive where stock exchanges existed in silos outside the realm of technological advances that had been radically altering the way communication, processes and supervisions took place across the world.

Computers were unknown to capital market.

Before the 1990s, securities trading happened in open outcry systems with scrips classified as specified (in which the infamous badla or the carry-forward system was allowed) and non-specified or cash scrips that were settled with delivery at the end of the settlement period.

But for the millenials, it's difficult to fathom the nature of the beast in today's era of information technology.

It was an environment where research was just another word for insider trading where the key knowledge was finding out which stock were going to be ramped upwards or driven down by cartels of moneybag brokers and operators.

The abysmal level of investors' service standards, disclosure and surveillance levels and rampant use of insider and circular trading forced the Department of Economic Affairs to sit up in 1991, review the current systems and implemented the recommendations of G S Patel Committee on stock exchange reform.

Next year, Securities and Exchange Board of India, which in 1988 was set up as an administrative body under the finance ministry, was given statutory status on January 30, 1992.

National Stock Exchange became operational in 1994, and with this screen-based trading took off in India.