A scam in generic terms is known as fraudulent action, illegal activity or one that is a dishonest scheme. In legal terms scam is defined more elaborately. It essentially means the intentional use of deceit or dishonestly depriving a person of their legal right. Scams are also known as white-collar crimes, which means that these are crimes that have characteristics of deceit, concealment and violation of trust and are usually committed by business professionals for financial gains. A scam has both civil and criminal factors, each of which has a different set of penalties. For example, a scam that would harm a person economically would invoke civil liability as opposed to one which results in breaking or violation of the law.
Fraud: Frauds too are a common kind of scam that the financial sector faces, it comes in various forms. Essentially these are actions of scammers who deprive you of your financial health through any illegal, deceptive or misleading activity. Examples of these frauds are identity theft, investment, mortgage credit card and lending frauds.
The 1992 Indian stock market scam was a market manipulation carried out by Harshad Shantilal Mehta with other bankers and politicians on the Bombay Stock Exchange. The scam caused significant disruption to the stock market of India, defrauding investors of over ten million USD.
Techniques used by Mehta involved having corrupt officials signing fake cheques, misusing market loopholes, and fabrication to drive the prices of stocks up to 40 times their original price. Stock traders making good returns as a result of the scam were able to fraudulently obtain unsecured loans from banks. When the scam was discovered in April 1992, the Indian stock market collapsed, and the same banks suddenly found themselves holding millions of INR in now useless debt.
The irregularities in securities transactions of the banks and financial companies known as securities scam, which came to light in the second quarter of 1992 is unprecedented in many respects. Both the volume and the involvement of individuals and the institutions were various and stupendous. It embraces among others foreign banks, financial and other public/private sector corporations, the principal stock exchanges, select brokers, and persons occupying high offices.
Even though it wiped out over a third of the market valuation, the securities scam of 1992, popularly known as the Harshad Mehta scam, introduced a bouquet of historic changes.
At a time when banks were not allowed to invest in the market, Mehta convinced complicit banks to send money to his personal account. He used it to buy up large quantities of stocks, drive up the price, and cash out. It created a huge but false stock market boom.
The most important impact of the $1.3-billion market manipulation was that it paved the way for stronger, stricter, and smarter market regulation. The ease with which Mehta sold fake debt securities hand in glove with Bank of Karad and Metropolitan Bank exposed the chinks in the regulatory framework.
Also read: 1991: Economic reforms
SEBI or the Securities and Exchange Board of India, the country’s market watchdog, witnessed a massive overhaul. SEBI had come into being in 1988 but had lacked teeth. Now, it was given statutory powers. The SEBI Act was passed, giving it powers over all securities markets, thus ending the fiefdoms of independent stock exchanges owned and operated by brokers.
The second change was collateral. The scam indirectly led to the emergence of electronic trading. The scam was made possible because of the information asymmetry of the old ‘ring trade’ or physical trade, where brokers held immense clout. Trade orders went out to investors unevenly, and brokers could manipulate the process. For instance, reconciliation of trades took time and prices could change by then. The system was so slow the brokers could actually trade without stocks. The Mehta scam ended such malpractices.
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