Mehta became notorious for manipulating the market due to his involvement in the 1992 Indian securities fraud, which involved ₹30,000 crore (about ₹2.3 trillion or US$27 billion in 2023). Banks in India were prohibited from making equity market investments till the early 1990s. Nonetheless, they were supposed to report earnings and hold onto a specific proportion (threshold) of their government fixed-interest bond holdings. To meet these banks' needs, Mehta deftly extracted funds from the banking system and invested them in the stock market. Under the pretense of purchasing securities for the banks from other banks, he also asked them to move the funds into his account and promised them higher interest rates.
Back then, a bank could not purchase securities or forward bonds from other banks without going via a broker. Mehta temporarily utilized this money in his account to purchase shares, which significantly increased demand for some shares (of well-known, well-established companies like ACC, Sterlite Industries, and Videocon). He then sold the shares, giving the bank a portion of the earnings while keeping the remainder for himself. As a result, in just three months, equities like ACC, which was trading for ₹200 per share in 1991, soared to around ₹9,000.
The bank receipt was another tool that was heavily utilized. Securities were not really exchanged back and forth in a straightforward transaction. Rather, the borrower—that is, the securities seller—provided a BR to the securities buyer. The BR guarantees that the buyer will receive the securities they have paid for after the terms and acts as a receipt from the selling bank. After determining this, Mehta required banks that could issue BRs that were either fraudulent or unbacked by government securities.
Following the issuance of these phony BRs, they were transferred to other banks, who then provided funds to Mehta, ostentatiously believing that they were lending against government securities when in fact they were not. He increased the price of ACC by 4,400%, from ₹200 to ₹9,000. The day he sold coincided with the market drop since he ultimately had to book profits. In a piece published in The Times of India on April 23, 1992, journalist Sucheta Dalal revealed unethical practices. Mehta was financing his purchases by unlawfully accessing the banking system.
In a standard ready-forward transaction, a broker brought together two banks in exchange for a commission. Although this was not the case before the fraud, the broker does not handle the cash or the securities. Payments and securities delivery were handled through the broker in this settlement procedure. In other words, the buyer provided the broker with the check, and the broker paid the seller after receiving the securities from the seller through the broker.
The buyer and seller may not even be aware of their trading partner during this settlement procedure; the broker may be the only one who knows. Since they were now market makers and had begun trading on their accounts, the brokers were mainly able to handle this. They acted as though they were carrying out the transactions on behalf of a bank in order to maintain the appearance of legality.
Mehta issued BRs on demand through several local banks and used faked BRs to obtain unsecured loans. Following the issuance of these phony BRs, they were transferred to other banks, who then provided Mehta with money under the pretense that they were lending against government securities. The stock market's stock values increased as a result of this funding. The shares were sold for a profit, and the BR was retired when it came time to return the funds. The bank received their money back.
As long as stock prices were rising and nobody was aware of Mehta's activities, this continued. However, several banks were left holding worthless BRs after the crime was made public; the banking sector had been defrauded by an astounding ₹40 billion, which is equivalent to ₹310 billion or US$3.6 billion in 2023. They were aware that if anyone found out he was involved in giving Mehta checks, they would be held accountable. It later came to light that Mehta's market manipulation had been permitted or made easier by Citibank, brokers Pallav Sheth and Ajay Kayan, businessmen Aditya Birla and Hemendra Kothari, several politicians, and RBI Governor S. Venkitaramanan.
Mehta and his accomplices took advantage of a number of banking system flaws to siphon off money from interbank transactions and purchase shares at a premium across numerous segments, which caused the BSE SENSEX to soar. The downfall was brought on by banks demanding their money back after the plan was revealed. Over 600 civil action lawsuits were brought against him after he was charged with 72 felony offenses.
Investors accused him of causing losses to a number of organizations, which led to his detention and exile from the stock market. On November 9, 1992, Mehta and his brothers were taken into custody by the CBI on suspicion of using fake share transfer documents to steal about 2.8 million shares of roughly 90 companies. The entire amount of the stolen shares was valued at ₹250 crore, which is equal to ₹19 billion or US$220 million in 2023. In each case, he was found not guilty.