In 1992, the Indian securities market was shaken by the Harshad Mehta scam. Mehta, a stockbroker, had obtained fake bank receipts (debt securities) that he used to dupe other banks into funding his stock market trades, creating a false boom. When the scam was revealed, the market severely crashed and investors lost almost INR 4,000 crore. Cases such as this elicited heavy media coverage and prompted a debate on the need for a better-regulated financial system. C. Rangarajan, Governor of the Reserve Bank of India established the Janakiraman Committee to report on the securities transactions of banks, particularly repos, a rapidly growing market. Repos are repurchase agreements where one party sells securities and agrees to buy them back later. The committee was chaired by R. Janakiraman, Deputy Governor of the RBI, with committee members Y. H. Malegam (CA); V. G. Hegde (Principal Legal Adviser, RBI), and V. Visvanathan (Executive Director, RBI and Member-Secretary).

The committee observed that repos were being used by virtually all wholesale money market participants despite being prohibited. Where such prohibitions were reversed, it found, banks used repos to understate their liabilities. Additionally, regarding the delivery and payment mechanisms for government securities, the committee uncovered weaknesses that had given rise to undocumented transactions. It produced six detailed reports on irregularities in the stock market that involved banks, brokers, other financial institutions, and public sector undertakings (PSUs).

The reports found that the majority of unethical transactions were related to PSU bonds: in 1992, the banks’ total acquisition cost of PSU bonds (for their portfolios and schemes such as the portfolio-management scheme) came to INR 10,681 crore, or 56.4 percent of a total outstanding amount of INR 20,550 crore. Of a total (face) value of transactions of INR 1,285,549 crore (which was then twice India’s GDP), merely INR 69,192 crore represented direct sales or purchases. The remainder represented ready-forward, double ready-forward, or similar transactions. Government securities amounted to INR 607,627 crore, and PSU bonds INR 494,415 crore.

In its final report, the committee recommended the following steps, among others: all ready-forward transactions should be barred until safeguards are decided; the issuance of bank receipts must be restricted and recorded; brokers must be registered and approved per criteria set by independent authorities; portfolio management and similar schemes should be limited; the adequacy of banks’ internal-control systems for securities must be assessed; and all Reserve Bank of India directives should be published and indexed. The Reserve Bank of India, on June 10, 1992, issued instructions prohibiting banks from entering into ready-forward transactions until further notice and requiring them to clearly separate the functions of (i) trading, (ii) settlement, monitoring, and control, and (iii) accounting, among others.

The Janakiraman Committee highlighted systemic weaknesses in the regulation of securities transactions by banks, including misuse of repos and inadequate internal controls. Its recommendations aimed to prevent unethical practices through stricter oversight, improved transparency, and better institutional safeguards.