How a Stockbroker Inflated ACC Cement Valuations by 4,500%: Inside the 1992 Market Manipulation That Shook India

The Rise of a Market Operator

Before the financial catastrophe, Harshad Mehta emerged as one of India’s most aggressive market participants. Known for his audacious trading strategies and rapid wealth accumulation, Mehta demonstrated an ability to move stock prices that attracted both investors and regulators. His trading methods exploited structural gaps in India’s banking and securities framework, creating artificial demand and valuations that seemed detached from fundamental business value.

The case of ACC (Associated Cement Company) became the defining example of this era’s market dysfunction. The stock’s valuation surged from INR 200 to INR 9,000—nearly a 45-fold increase—within a compressed timeframe. This unprecedented surge in ACC’s market value attracted widespread attention, though few understood the mechanics driving such extreme valuations.

The Operational Framework Behind Market Inflation

Mehta’s scheme operated through a systematic exploitation of India’s Ready Forward (RF) banking mechanism. Under this system, banks engaged in short-term lending arrangements backed by government securities. The vulnerability lay in inadequate documentation and oversight.

The Security Receipt Strategy

The central instrument was the Bank Receipt (BR)—essentially a promissory note representing funds received against government securities. Through coordination with banking officials, Mehta produced fraudulent BRs. These forged instruments gave him access to massive capital flows that he redirected toward equity purchases.

By accumulating large stock positions in targeted companies, Mehta created artificial scarcity and upward price momentum. Retail investors, sensing strong buying pressure, added their own capital, further amplifying valuations. The initial INR 200 entry point for ACC shares eventually climbed to INR 9,000—a valuation structure that bore no relationship to the company’s earnings or asset base.

The Liquidation Phase

Once valuations reached inflated levels, Mehta systematically sold accumulated shares at peak prices. The transaction volumes were substantial enough to generate enormous profits. Remarkably, this liquidation process supposedly eliminated short-selling positions held by other prominent market participants, including traders with significant net worth portfolios.

How the Manipulation Came to Light

In April 1992, investigative journalist Sucheta Dalal published revelations in The Times of India that documented the systematic market distortions. Her reporting detailed how forged bank receipts had been used to channel funds into equity markets artificially. The scam’s valuation component—billions in rupees—suddenly became public knowledge.

Dalal’s investigations triggered panic across financial markets. Investors liquidated Mehta-linked positions en masse. The Bombay Stock Exchange Sensex, which had peaked near 4,500 points, collapsed dramatically toward the 2,000-point level. The rapid devaluation of inflated securities created cascading losses throughout the financial system.

The Financial Devastation

The scam’s aggregate impact reached approximately INR 5,000 crores (roughly USD 1 billion at 1992 valuations). Multiple banking institutions suffered direct losses:

• National Housing Bank incurred substantial exposure to fraudulent BRs
• State Bank of Saurashtra faced significant write-downs
• Standard Chartered and other international institutions held impaired securities

The valuation collapse extended beyond direct fraud losses—investor confidence evaporated, triggering a prolonged bearish period in Indian equities and reducing foreign institutional participation in the market.

Regulatory and Judicial Consequences

The discovery necessitated comprehensive legal action. Mehta faced arrest alongside multiple associates, with over 600 civil suits and 72 criminal cases initiated. The judicial process extended for years, eventually resulting in conviction in 1999 with a five-year rigorous imprisonment sentence. Mehta’s death in 2001 prevented completion of his sentence.

Systemic Reforms

The scam catalyzed major regulatory evolution:

The Securities and Exchange Board of India (SEBI) received expanded powers to oversee market operations and prevent future manipulation. Banking regulations were strengthened to eliminate Ready Forward vulnerabilities. Documentation requirements became more stringent. Transparency protocols were established across government securities trading.

Broader Market Pattern Recognition

The Harshad Mehta scam value extended beyond the immediate fraud—it demonstrated systemic vulnerabilities that attracted subsequent exploiters:

Ketan Parekh’s Activities: In the late 1990s and early 2000s, another stockbroker employed comparable manipulation tactics on different stock panels, creating artificial valuations before collapse.

Satyam Computer Services Fraud: The 2009 corporate accounting scandal revealed that large-cap companies could misstate financial positions with inadequate detection mechanisms.

These subsequent frauds indicated that the 1992 scam’s core lesson—the ease of valuation distortion—remained incompletely addressed.

Preventative Framework Analysis

Had Mehta adopted alternative strategies, his outcome would have differed substantially:

Regulatory Compliance would have required full adherence to SEBI guidelines and RBI oversight protocols. Every transaction would need documented legitimacy.

Transparent Documentation would create traceable records impossible to forge or manipulate. Strong governance structures would implement operational checks and balance systems.

Ethical Standards would prioritize long-term strategic positioning over short-term manipulation gains. Whistleblower protections would encourage internal reporting of irregularities.

Reputation Building through consistent market behavior would establish credibility with regulators and counterparties, reducing future vulnerability to investigation.

Continuous Market Learning would help traders adapt to evolving regulatory environments rather than assume indefinite vulnerability to exploitation.

The primary catalyst for Mehta’s downfall was arguably his decision to pursue ostentatious displays of wealth and market dominance, attracting regulatory scrutiny and journalistic investigation that ultimately exposed his methods.

Legacy and Contemporary Relevance

The 1992 financial episode established lasting precedents for Indian regulatory practice. The scam’s valuation mechanics—how quickly securities could inflate divorced from fundamental value—shaped subsequent market structure reforms.

Contemporary financial markets benefit from the regulatory frameworks established post-1992. The SEBI’s expanded authority, improved banking documentation, and transparency requirements reflect direct responses to identified vulnerabilities.

For investors and market participants, the scam demonstrates the persistent risks associated with valuation bubbles, inadequate due diligence, and regulatory arbitrage. Understanding how the Harshad Mehta scam value system functioned provides insight into persistent market dynamics and the ongoing necessity for institutional oversight.

The transition from an inadequately regulated market environment to one with stronger fundamentals took decades and required substantial losses. Contemporary market participants continue to benefit from the hard-won regulatory lessons of 1992.