In 1992, the Bombay Stock Exchange (BSE),3 the leading stock exchange in India, witnessed the first major scam masterminded by Harshad Mehta (Mehta) Analysts unanimously felt that if more powers had been given to SEBI, the scam would not have happened. As a result, the Government of India (GoI) brought in a separate legislation by the name of 'SEBI Act 1992' and conferred statutory powers to it. Since then, SEBI had introduced several stock market reforms. These reforms significantly transformed the face of Indian stock markets.
SEBI introduced on-line trading and demat5 of shares which did away with the age-old paper-based trading, thus bringing more transparency into the trading system. Analysts and experts appreciated SEBI for these reforms. One stock market analyst said, "I'm sure that most of us would agree that SEBI has handled the challenges exceptionally well. "6 In spite of SEBI's capital market reforms and increasing regulatory powers over the years, analysts felt that it had failed miserably in stopping stock market scams.In the ten years after the Mehta scam, several scams came to light, casting doubt on the efficiency of SEBI as a regulatory body. However, a few analysts felt there was a need to confer more powers to SEBI to stop these scams.
One analyst commented, "It's rather daunting task of putting in place a regulatory framework for the market against all odds. The Genesis of SEBI In the 1980s, Indian capital markets witnessed significant changes. During the sixth Five-Year plan (1980-85), many major industrial policy changes were introducedThese included opening up the Indian economy to foreign corporations and emphasizing a greater role for the private sector. Many companies tapped the primary market to raise required funds from the public. The total capital raised from the primary market increased from Rs 1. 96 bn in the fiscal 1979-80 to Rs.
65 bn in 1989-90. With more companies raising money by issuing shares, retail investors got another investment avenue to park their surplus funds.Between 1987 and 1991, 12% of household savings were invested in equity and corporate debentures as compared to only 7% between 1982 aWith the increasing interest of retail investors, many dubious companies that did not have any real plans to do business raised money by issuing shares, only to vanish at a later date. These malpractices took on significant proportions and the grievances of retail investors increased alarmingly. The investors turned to GoI for redressal. However, GoI was rather helpless in solving the retail investors' grievances in such large volumes because of the lack of proper penal provisions.
The government, therefore, constituted SEBI as a supervisory body to regulate and promote security markets and 1985, signifying the increasing number of retail investors in the stock markExcerpts The Regulator The Indian economy was liberalized in 1991. In order to achieve the full potential of liberalization and enable the Indian stock market to attract huge investments from foreign institutional investors (FIIs), it was necessary to introduce a series of stock market reforms. SEBI's efforts to boost investments in the capital markets faced a severe setback in 1992 when Mehta's illegal activities led to a stock market scam.Mehta had managed to obtain huge funds from top banks and financial institutions in India, including State Bank of India, Stanchart, National Housing Bank, Citibank and ANZ Grindlays, to manipulate stock prices, which rose significantly.
Between September 1991 and April 1992, the BSE index went up by 143%. However, when the prices crashed, several small investors lost their hard-earned money. The amount involved in this crisis was approximately Rs. 54 bn. SEBI's inefficiency in regulating the markets was brought to light for the first time.
A journalist commented, "Harshad Mehta in 1992 had caught the SEBI napping".
