Scam 1992: Valuation Models Behind Harshad Mehta’s Manipulations
When Scam 1992 launched on SonyLIV, it did not only create a runaway hit in the form of a web series, but it reintroduced to the world one of the largest financial scams in Indian history. The series showcases the excess, excitement, and havoc surrounding Harshad Mehta’s meteoric rise in the stock market. However, within that excitement and chaos lies an even greater lesson on how markets break down when the valuation model, liquidity and regulation fail simultaneously.
Image source: Sony LIV
Over 30 years later, Harshad Mehta’s story is still a relevant lesson on how to prevent him from being propelled into a financial legend. In addition, it exposed the systemic weaknesses of India’s financial sector and highlighted how critical disciplined modelling, risk management/control and ethical decision-making are for all those wishing to enter the finance sector today.
The 1992 Scam – What Actually Happened
This article will examine what transpired with the 1992 Scam, which has been widely misunderstood due to some of the methods utilized during this time.
It would be unreasonable to expect readers to understand the exact process behind the distorted values when they do not have an in-depth knowledge of this area.
Early in the 1990s (specifically 1992), Indian Banks were restricted as to how they could invest in various securities, such as purchasing Government Securities through brokers and utilizing Ready Forward and Bank Receipts for all transactions regarding these investments. While these transactions were part of normal daily money market activities, the opportunity for Mehta to take advantage of the regulatory gap existed and resulted in a significant portion of the funds he acquired for investing into equities being acquired through means other than legitimate methods.
Mehta, through collusion with specific individuals at banks and taking advantage of the set-up of the transactions (such as RF and BRs), was able to acquire significant amounts of capital through fraudulent RFs. By using these funds, Mehta was able to purchase quantities of shares of various public companies and induce large amounts of buy orders into the stock market, causing prices to rise significantly (and quickly). After several months, when the market began to collapse, the gap between the legitimate quantity of Government Securities (which were actually going out on the market) and the amount of Government Securities into which he had purchased on behalf of banks would become public knowledge. This discrepancy led to the resulting financial crisis in India.
How the Money Actually Flowed
Most people know the “stock market manipulation” aspect, but the real story is about funding.
Here’s the simplified chain:
- Banks issued BRs (many of them fake or without supporting securities).
- The funds from these RF deals flowed to Mehta, giving him access to huge leverage.
- Mehta deployed this capital to buy stocks, aggressively and consistently.
- This created artificial demand, pushing certain stocks into a steep upward spiral.
- Mehta sold at these inflated levels, used the profits to plug temporary gaps, then repeated the cycle.
- When banks eventually demanded real securities behind the BRs, the entire system collapsed.
The operation looked legitimate because RF deals were standard. What broke the system was the gap between appearance and substance, exactly the kind of thing modern analysts are trained to scrutinize.
Where Valuation Models Broke Down
Mehta wasn’t using sophisticated valuation models; he was using something far more powerful in the short term: liquidity.
In traditional finance, there are two primary ways to value a stock:
Fundamental Valuation
Methods like:
- Discounted Cash Flow (DCF)
- Dividend Discount Model (DDM)
- Relative Valuation (P/E, P/B, EV/EBITDA)
These depend on a company’s future cash flows, earnings quality, and economic fundamentals.
Flow-Driven or Momentum Valuation
Here, price is driven not by fundamentals but by:
- Buying pressure
- Availability of credit
- Short-term liquidity flows
- Market sentiment
Mehta operated in the second universe. His strategy exploited the fact that in an under-regulated market, short-term liquidity shocks can overpower fundamental models.
In valuation model terms:
- If cash flows stay constant
- But buying pressure increases 10x
- Prices can detach entirely from intrinsic value
This is exactly what happened in stocks like ACC, which Mehta famously pushed from ₹200 to nearly ₹9,000 in a matter of months.
A core assumption in DCF models, that market prices reflect rational expectations of future cash flows, was simply not valid in Mehta’s artificially heated environment.
In other words, the valuation models didn’t fail.
They were never used by the players driving the prices.Red Flags an Analyst Could Have Spotted
Image source: India Today
If you were an equity analyst back then (or studying to become one today), certain red flags would have stood out clearly:
1. Extreme Price – Fundamentals Divergence
When a stock price skyrockets without any improvement in:
- EPS
- ROE
- Cash flows
- Capacity utilization
- Profit margins
…you have a problem.
2. Abnormal Volume Spikes
Huge buying activity concentrated in a handful of brokers, disproportionately led by one, is an obvious signal of manipulation.
3. Funding Mismatch
Companies whose stocks were soaring were not actually generating corresponding operational cash flow. The liquidity was coming from the banking system, not business performance.
4. Concentrated Ownership
A small number of operators building large positions, especially without disclosures, distorts price discovery.
5. Excessive Leverage in Market Positions
Funding equity positions using short-term bank borrowings (directly or indirectly) is a structural risk.
These aren’t just theoretical red flags. They are the exact kind of forensic checks analysts learn to build into dashboards and models in a modern financial modeling course, especially under scenario analysis, liquidity stress testing, and forensic accounting modules.
What Modern Finance Students Learn That Could Have Prevented This
The aftermath of the 1992 scam led to sweeping changes in India’s financial markets:
- Creation of SEBI’s stronger powers
- Introduction of screen-based trading
- Tighter settlement processes
- Mandatory dematerialization
- Better audit trails
- Reformed money markets
For finance students today, the scam is more than history, it’s a template for what not to do and what to watch out for.
Modern finance and modeling training focuses on skills that would have flagged Mehta’s trades instantly, such as:
1. Scenario-Based DCF Modeling
DCF models today include sensitivity analyses, showing how valuation changes under different liquidity or risk conditions.
2. Forensic Accounting Techniques
Matching cash flows with bank statements, checking funding sources, and identifying anomalies.
3. Risk-Based Position Monitoring
Tracking concentration risk, market depth, and flow-based distortions.
4. Understanding Money Market Instruments
Knowing how BRs, repos, and RF deals work reduces the chance of being fooled by complex-looking transactions.
5. Governance & Ethics Training
Ethical reasoning is now a core part of any investment banking course, precisely because the Harshad Mehta episode showed what happens when incentives overpower integrity.
These techniques help analysts avoid being swept up in artificially inflated narratives, the same kind the webseries dramatizes so well.
The Webseries vs. Reality, Lessons Students Should Absorb
Scam 1992 isn’t just entertaining; it’s educational, if watched with the right lens.
The show brilliantly captures human psychology:
- Greed
- FOMO
- Herd behaviour
- Overconfidence
- Moral compromise
But what gets much less screen time is the quieter, boring-but-critical part: valuation discipline.
A modern finance student should walk away from the show not inspired by the “Big Bull,” but curious about:
- How liquidity distorts valuations
- How systemic loopholes create artificial bubbles
- How leverage amplifies small risks into catastrophic failures
It’s a reminder that financial markets reward intelligence only when paired with skepticism and structure.
Conclusion
Harshad Mehta’s story is a fascinating blend of ambition, opportunity, and systemic failure. But beyond the spectacle, it highlights a timeless truth:
Markets break not because models fail, but because people ignore them.
Strong valuation principles, sound modeling practices, and ethical decision-making are what protect investors from hype-driven bubbles, whether in 1992 or in today’s algorithm-driven markets.
For students entering finance, diving deep into valuation, DCF modeling, money markets, and risk analysis, the backbone of any investment banking course, is how you build the skillset to spot such distortions long before they become headlines.
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