Chapter 14A: the principle beneficiary and key propagant of the Harshad Mehta scam was Citibank. HDFC creation was catalysed by the regulatory threats emerging from the scam.
Harshad Mehta’s family finally broke their silence after 30 years. And Citi was centre stage. Like all other subsequent Citiscams, they were not just the beneficiary but the root cause of the scam – and in each one, competitors like Indian banks lost money.
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Let’s circle back to the scam:
The 1992 Harshad Mehta scam, exploited bank loopholes to pump money into the stock market. Citibank was the main player in creating the fraudulent Bank Receipts (BRs) and facilitating the flow of funds to Mehta.
Citibank, along with two other foreign bank – ANZ Grindlays & Standard Chartered – was heavily involved in the fraudulent transactions, with reports stating it handled a large portion of the broker-based deals. Citibank and other banks misreported transactions to make huge amounts of money available to brokers, including Harshad Mehta.
Following the exposure of the scam, Standard Chartered filed a $40 million lawsuit against Citibank in New York, alleging it was a victim of fraud in dealings with them. Harshad Mehta himself accused Citibank of masterminding the operation.
The legal battle between Standard Chartered Bank (SCB) and Citibank N.A. was a complex, multi-year litigation that concluded with the Supreme Court of India completely siding with Citibank, reversing earlier decisions.
The Special Court (appointed to handle scam cases) initially decreed that Citibank was liable to refund roughly ₹50 crore (plus high interest) to Standard Chartered for bonds that were never delivered. However, the Supreme Court reversed this in 2003.
The Court ruled that SCB voluntarily and unconditionally accepted “worthless” or dishonoured Securities General Ledger (SGL) forms from Canbank Mutual Fund (CMF) in exchange for Bank Receipts (BRs) issued by Citibank.
The Supreme Court ruled that Section 63 of the Indian Contract Act applied, allowing a promisee (SCB) to accept any satisfaction they deem fit, thereby ending the promisor’s (Citibank) liability. Because SCB had received payments from Citibank under the initial Special Court decree. SCB was required to refund Citibank the principal and interest it had previously received.
The Supreme Court rejected the contention that SCB was acting as Citibank’s agent to collect bonds from Canfina, setting aside the Special Court’s finding of an agency relationship.
Adverse Inference Against SCB: The Court noted that SCB suppressed facts about the interest it received from the bonds, drawing an adverse inference against SCB for withholding evidence.
SCB Lost: Standard Chartered had to repay the money it collected from Citibank, plus interest.
Citibank Won: Citibank was acquitted of liability regarding the disputed Bonds because SCB was found to have acted voluntarily in accepting faulty substitutes.