This blog will tell you about the background of the scam of1992 and explains it’s effect on the market and the government regulatory and security system.
BACKGROUND
Harshad Mehta, in 1992 drew off about 1,000 crores through loopholes in the banking system to buy stocks in the Bombay stock exchange. As he was then considered the big bull, many retail investors tried copy his portfolio and the markets, because of his pattern started achieving new heights. But this came to an end after the SBI investigation due to short fall in government securities,which revealed the fact that he almost manipulated 3,500 crores. He was jailed in 1992, and died due to a cardiac arrest in December 2001, while being in the jail.
IMPACT ON THE STOCK MARKET
The immediate effect of the news was a dip in the overall market.The index which was usually around 4500, fell down to below 2500 with a loss of crores of market capitalisation. The estimated fall was about 72% just because of the news. Since many retail investors considered him to be the big bull and copied his portfolio while the market was growing, due to emotional quotient withdrew their market money because of lack of confidence.
SEBI ACT 1992
Though first formed in 1988, after the scam the SECURITIES EXCHANGE BOARD OF INDIA ACT was established in April 1992 to look over fraudulent trade and prohibit it, and also to promote the rights of investors and players of the stock market. A new committee was formed to look over SEBI which made major changes in banking sector and simultaneously the Reserve Bank of India was given more power.
TAINTED SHARES
Tainted stock refers to stock owned or transferred by a person disqualified from serving as a plaintiff in a derivative action. All the shares held throughout this fraud became tainted i.e. they were worthless peices of paper which also led to a controversy between the investors and the government because of the confusion that which shares were tainted and which weren’t.
FORMULATION OF NATIONAL STOCK EXCHANGE
After the scam, the national stock exchange was established to bring about the transparency in the share market of India through an appropriate communication network. It ensured that anyone who had the financial requirements and was qualified enough was allowed to trade.
CII CODE
A report made by a 12 member committee headed by Rahul Bajaj was one of the major steps taken after the scam. It called for establishment of audit committees, a minimum number of board members to be non executives and urged companies to disclose more about business management and their accounting issues.
Rashika namdev 