(Part -1)
India’s Stock Market Rollercoaster:
From Mundhra to Mehta and the Birth of SEBI.
India’s stock market has always been a place where dreams meet drama. From shady deals to market crashes, it’s been shaped by massive scams that forced the country to rethink how it polices its markets. Two scandals, both tied to names starting with “HM”, Haridas Mundhra in the 1950s and Harshad Mehta in the 1990s, stand out as turning points. Between these, the Securities and Exchange Board of India (SEBI) was born. It had the hopes of a nation fed up with fraud and desperate for a fairer market. This is how SEBI evolved.
The Early Days: A Market Without a Referee
Back in the early 20th century, India’s stock markets, like the Bombay Stock Exchange (BSE, founded in 1875), were like the Wild West. Brokers shouted trades on chaotic floors, and there were barely any rules to keep them in check. Investors were at the mercy of speculators who could rig prices or delay trades to pocket profits. Oversight was minimal, handled loosely by stock exchanges run by the same brokers they were supposed to regulate. Scams were common, and the average investor had no one to turn to.
The first big attempt to bring order came after a major scandal in the 1950s, sparked by a slick operator named Haridas Mundhra. That was India’s First big financial bust.
The Haridas Mundhra Scam (1957–58):
In the 1950s, Haridas Mundhra, a Calcutta-based stock speculator, built a ₹40 million empire by juggling shares and spreading rumors to inflate prices. But by 1956, his shady tricks like selling forged shares, got him in trouble with the BSE. Undeterred, he pulled off a bigger stunt in 1957. He convinced the government-owned Life Insurance Corporation (LIC) to sink ₹1.24 crore (about ₹900 crore today) into shares of six failing companies he controlled, including British India Corporation (BIC). The catch? The deal was pushed through under pressure from the Finance Ministry, bypassing LIC’s investment committee, and the shares were bought at inflated prices. LIC lost most of the money, and the scam might’ve stayed quiet if not for Feroze Gandhi, a Congress MP and Jawaharlal Nehru’s son-in-law, who blew the whistle in Parliament.
Feroze’s fiery 1957 speech called LIC a “child of Parliament” and demanded answers on why policyholders’ money was used to bail out Mundhra’s sinking firms. The scandal led to a public inquiry by Justice M.C. Chagla, who wrapped it up in just 24 days. It was a record for transparency. The probe exposed a cozy nexus between Mundhra, bureaucrats, and politicians, forcing Finance Minister T.T. Krishnamachari to resign and landing Mundhra in jail for 22 years. The Mundhra scam showed how easily insiders could manipulate the system and sparked calls for stronger regulation.
As documented by Durga Das in his book from “Curzon to Nehru”, the astrological prediction of fall of TTK came through.
The Pre-SEBI Era: Weak Rules, Big Loopholes
The Mundhra scandal led to the Securities Contracts (Regulation) Act, 1956 (SCRA), which was meant to regulate stock exchanges and license brokers. But the SCRA was like a flimsy lock on a treasure chest. It set basic rules but had no real enforcement power. Oversight was left to the Ministry of Finance and stock exchanges, which were often run by brokers with their own agendas. The 1960s to 1980s saw markets grow, especially as India’s economy opened up post-1980s, but scams kept happening. Brokers could still cheat clients by delaying trades or fudging prices in the manual, paper-based system.
By the late 1980s, India needed a proper regulator. Foreign investors were circling, but the lack of oversight scared them off. The government set up SEBI in 1988 as an advisory body, but it was more of a paper tiger. It offered suggestions but lacked the power to act. It would take another “HM” scandal to change that. India was waiting for “The Big Bull’s Big Bust.”
The Harshad Mehta Scam (1992):
Enter Harshad Mehta, the “Big Bull” of the BSE. In 1992, Mehta pulled off a scam that made Mundhra’s look small. He siphoned off billions from banks using fake bank receipts (BRs) to pump money into select stocks, inflating their prices and creating a market frenzy. When his scheme collapsed, the BSE crashed, banks lost billions, and investors were wiped out. The scam exposed gaping holes in banking and market oversight. Banks were lax, brokers were unchecked, and the SCRA was useless against such large-scale fraud.
The public was furious, and the Mehta scandal became a wake-up call. It showed that the old system of manual trading, weak rules, and no real regulator, was a recipe for disaster. SEBI, still a powerless advisory body, couldn’t do much, but the scandal lit a fire under the government to give it real authority. India still hoped for a Regulator to clean the system.
The Birth of SEBI:
The Harshad Mehta scam was the final straw. In 1992, the SEBI Act transformed SEBI from a toothless advisor into a full-fledged regulator with sweeping powers to:
Oversee stock exchanges, brokers, and mutual funds.
Investigate and punish fraud, from fines to market bans.
Protect investors and bring transparency to the market.
SEBI was given near-absolute authority, acting as judge, jury, and executioner, with only limited appeal options through the Securities Appellate Tribunal (SAT) or the Supreme Court. No other Indian institution had such concentrated power over an entire sector, and with it came massive expectations:
End Scams: Investors wanted a market free of Mundhra- and Mehta-style fraud, where insiders couldn’t rig prices or cheat the public.
Build Trust: A fair market was key to drawing in retail and foreign investors, especially as India’s economy liberalized in 1991.
Modernize Trading: SEBI was tasked with dragging India’s markets into the modern era, replacing shouting matches on trading floors with electronic systems. The NSE, launched in 1994, brought real-time trade tracking and transparency.
Tough Enforcement: With powers to slap hefty fines (up to ₹25 crore) or ban violators, SEBI was expected to be a no-nonsense cop, rooting out fraudsters.
The Prohibition of Fraudulent and Unfair Trade Practices (PFUTP) Regulations, introduced later in 2003, gave SEBI a legal weapon to tackle scams like front-running, insider trading, and pump-and-dump schemes. The nation hoped SEBI would make the market a safe place to invest, leaving the chaos of the Mundhra and Mehta eras behind.
Between the “HM” Scams: A Regulatory Leap
The Haridas Mundhra and Harshad Mehta scams, though 35 years apart, mark a turning point in India’s securities regulation:
Mundhra (1957–58): Exposed the lack of oversight, leading to the SCRA, but its weak enforcement couldn’t prevent future frauds.
Mehta (1992): Showed the system was still broken, forcing the creation of a powerful SEBI to replace patchwork rules.
SEBI’s creation was a direct response to the failures exposed by Mundhra and Mehta, carrying hopes of a scam-free, world-class market. Did SEBI Deliver?
The hopes for SEBI were sky-high, but the reality’s been a mixed bag. The Ketan Parekh scam in 2001, another case of front-running and price rigging, showed SEBI wasn’t an instant fix. Even today, scams like the Axis Mutual Fund front-running case (2021) or social media-driven pump-and-dump schemes (2024) keep happening. SEBI’s brought in game-changers like electronic trading, Unique Client Codes, and real-time surveillance, but it’s often stuck reacting to fraud rather than preventing it. Its reliance on data mining catches some crooks (like Jane Street in 2025). But limited resources and a cautious approach, mean it misses others. Despite its unmatched power, SEBI’s performance hasn’t fully lived up to the dreams of investors.
Conclusion
India’s securities regulation evolved from a free-for-all to a structured system, driven by two “HM” scams. Between these scandals, India learned hard lessons about the need for strong oversight. SEBI’s changed the game, but scams keep slipping through, showing that even a powerful watchdog can’t catch every crook.
The problem starts with SEBI’s fundamental operating philosophy. It functions like a police force perpetually chasing thieves, writing new rules after each robbery based on how that particular crime was committed. This reactive approach means regulation is always one scam behind innovation in fraud. Instead of designing market structures that inherently discourage manipulation, SEBI patches holes after fraudsters exploit them. It’s regulatory whack-a-mole, and the moles keep winning.
The dream of a scam-free market lives on, but it’s still a work in progress. The specific issues in the policy of SEBI shall be discussed in Part – 2 of this article tomorrow.