Stock Market Scams in India : An Overview
The stock market is an attractive and dynamic market place. It attracts investors who want to grow their wealth by investing in stocks. It gives investors opportunities to invest their money and earn returns. Majority of the investors invest in the stock market with a long term perspective and with an informed investment strategy. There are many who want to manipulate the market and stock prices to make quick profits. India is not immune to Stock Market Scams.
In the last several years the stock market has been troubled by various scams. These scams have left investors suffering and the economy struggling. Over the years several high profile cases have rocked the Indian investment landscape. These scams have been committed by fraudulent individuals and companies who exploit the trust of investors and use illegal means to make a quick profit.
The consequences of these scams are far reaching. Furthermore they have caused significant financial losses to investors. they have negatively impacted the Indian economy. Despite the efforts of regulatory bodies to prevent such scams they continue to occur. This highlights the need for stricter supervision, regulation and accountability in the financial system.
In this Blog article let us look at some of the most notorious stock market scams in India and examine their impact on investors and the Indian economy.
Stock Market Scams in India
Harshad Mehta Scam
The Harshad Mehta scam also known as the Securities Scam of 1992. The scam is one of the most notorious stock market and financial fraud in the history of India. Harshad Mehta a stockbroker and financial trader took advantage of the loopholes in the Indian banking system to manipulate the stock market. Mehta exploited the lack of transparency and lapses in the banking system. He borrowed money from banks using fraudulent securities as collateral. Further he used this money to buy large number of shares in the stock market. He artificially inflated the prices of shares and created a speculative bubble. He further sold the shares at inflated prices to make massive profits.
Mehta had access to insider information of companies. He used this non public information to buy stocks of those companies and make huge profit from them. Furthermore Mehta used a technique called ‘pump and dump’ to manipulate stock prices. He would buy shares in a company and spread false rumours about its financial performance to attract more investors. Once the stock prices rose he would sell his shares causing the prices to crash.
The scam finally came to light when Mehta’s scheme was discovered. This resulted in a massive sell off in the stock market and loss of investor confidence in the Indian financial system. The Harshad Mehta Scam was one of the biggest stock market scam in Indian history. It is estimated to be around Rs 4000 crores.
Ketan Parekh Scam
The Ketan Parekh scam was another high profile case of stock market manipulation in India. Ketan Parekh was a former stockbroker and investor, He used a complex web of shell companies and financial instruments to manipulate the prices of several stocks. Parekh’s scheme involved buying large quantities of shares in certain companies. He then inflated their prices and further sold them for a profit. He also used his connections in the banking and financial sectors to manipulate the market further.
Parekh’s modus operandi was similar to that of Harshad Mehta. He used the banking system to borrow money. He then invested this money in the stock market driving up prices of certain stocks. Parekh focused on investing in the technology sector which was booming at that time. He used his influence to drive up the prices of certain stocks. Parekh also used his influence to manipulate the prices of certain stocks often through insider trading and in collusion with company officials.
The scam was detected after Securities and Exchange Board of India (SEBI) launched an investigation into Parekh’s activities. The impact of the Ketan Parekh scam was felt across the Indian stock market. It lead to Indian stock market and stock prices crashing. This lead to a decline in investor confidence and a loss of faith in the Indian regulatory system. It was estimated that Parekh had manipulated the stock market to the tune of over Rs. 1,000 crore.
Stock Market Scams in India : An Overview
Satyam Scam
The Satyam scam is also known as India’s Enron. The scam involved manipulation of financial statements by Satyam Computer Services one of India’s largest IT companies. The then founder and CEO of Satyam Ramalinga Raju, inflated the company’s profits and assets and created an illusion of financial stability and growth of the company.
The scam was discovered when one day Ramalinga Raju confessed to the fraud in a letter to the board of directors of the company. In his confession letter Raju admitted to falsifying Satyam’s accounts. He admitted that he had been inflating the company’s revenues and profits for years. He admitted to inflating revenues by over Rs. 7,000 crores and manipulating the company’s profits to the tune of over Rs. 2,000 crore.
The discovery of the fraud in 2009 led to a sharp decline in the share price of Satyam. It wiped out billions of rupees of investors wealth. Satyam Computers was eventually taken over by Tech Mahindra in 2012. The Satyam scandal had a severe impact on the Indian IT sector. the fraud lead to loss of investor confidence and a decline in the reputation of Indian companies on the global stage.
UTI Scam
The UTI scam took place in 2001. It involved the mismanagement of funds by the Unit Trust of India (UTI). There was violation of Investment guidelines by UTI. The then chairman was accused of mismanagement of funds. He was accused of allowing Harshad Mehta to manipulate the share prices. UTI invested in risky stocks and was engaged in insider trading and circular trading.
The UTI Scam involved the manipulation of UTI’s investments in the stock market primarily through the purchase and sale of shares . UTI officials colluded with brokers and traders to manipulate the share price of stocks. They artificially inflated the price of stocks to create the impression that the UTI’s investments were performing well. This manipulation continued for several years. It resulted in huge losses to the UTI and its investors. UTI scam was a scheme involving multiple players and fraudulent practices. The scam was estimated to be around Rs. 4,800 crore.
Stock Market Scams in India : An Overview
NSEL Scam
The NSEL (National Spot Exchange Limited) scam was a case of manipulation in the commodity market in India. The scam involved trading of commodity futures contracts on the NSEL platform. NSEL was owned and operated by Financial Technologies India Limited (FTIL). NSEL scam was involved in the trading of commodities such as sugar, gold and silver. The exchange allowed trading in commodities that did not exist.
FTIL under the leadership of Jignesh Shah illegally manipulated the trading volume and prices of commodities on the NSEL platform. This lead to massive losses for investors. The scam came to light when the exchange failed to deliver the promised commodities to investors which resulted in a payment crisis. The scam was estimated to be around Rs. 5,600 crore. The NSEL scam had a severe impact on the Indian commodity market. It lead to a loss of investor confidence and a decline in the reputation of FTIL.
IPO Scam of 2006
The IPO scam took place in 2006 and involved a nexus of brokers, investors and bankers. The scam involved manipulating the allocation of shares in initial public offerings (IPOs) to favour certain investors and brokers. The scam involved manipulation of the IPO process to artificially inflate share prices and make huge profits. This led to a surge in the prices of these shares. The prices eventually collapsed and caused significant losses to the investors.
The modus operandi of the scam involved the creation of fake demat accounts. These fake accounts were used to apply for shares in IPOs. These accounts were created using fake identities. Further the shares allocated to these accounts were later sold in the secondary market at inflated prices to make massive profits. The SEBI investigation revealed that several companies had colluded with stock market operators to manipulate the IPO process and manipulate share prices. The scam was estimated to be around Rs. 1,000 crore.
The NSE Co location Scam
In 2017 the National Stock Exchange of India (NSE) was accused of allowing some high frequency traders ( HFTs) to co locate their servers next to the exchanges servers. This gave the HFTs an unfair advantage over other market participants. Furthermore the HFTs were accused of front running by receiving market data a fraction of a second before other traders and using this information to execute trades ahead of them.
The NSE Co location scam was a case of unfair access to the exchange’s servers by select brokers. The brokers were able to get their servers placed in close proximity to the exchange’s servers. This allowed them to receive market data before other investors. This gave them an unfair advantage in trading and caused significant losses to other investors. The scam resulted in a penalty of Rs 1,000 crores being levied on NSE by the Securities and Exchange Board of India ( SEBI )
The impact of stock market scams on the Indian economy and investors
The impact of stock market scams in India has been severe. Many investors lost their money and trust in the Indian financial system. The scams have left a negative impact on the Indian economy. It has lead to a decline in foreign investments. further it has led to a loss of credibility for Indian companies.
Stock market scams also have had far reaching consequences. It not only affected the investors but also the overall economy. They have caused a decline in consumer confidence leading to lower spending and decreased economic growth. The scams have also lead to loss of jobs. furthermore it lead to decline in the reputation of the Indian financial system.
The way forward
To prevent such scams in future the Indian government and regulatory bodies need to take steps, they need to ensure greater transparency and accountability in the financial system. There is a need for stricter regulations, accountability and supervision. There is a need to empower investors. They need to provide investors with more information and resources to make informed investment decisions.
Investors need to be alert and cautious while investing in the stock market. They should conduct thorough research before investing. They should not fall prey to “get rich quick” schemes that promise unrealistic returns. It is important to take advice of financial experts and invest in companies with a proven track record.
To conclude Stock Market Scams in India have had a profound impact on the Indian economy and investors. There Scams have lead to a loss of investor confidence. It has further lead to loss of trust in the Indian financial system. To prevent such scams in future there is a need for greater transparency, accountability and stricter regulations. Investors need to be more cautious. They need to take informed decisions while investing in the stock market
FAQs – Frequently Asked Questions
The biggest stock market scam in India was the Harshad Mehta scam of 1992. It was estimated to be worth around Rs. 4,000 crore.
A scam is a fraudulent scheme or deception where in an individual or group of people aim to make quick and easy money by fooling others.
Insider trading is when someone who has access to non public information about a company uses that information to make a profit by trading in the company’s stock.
Investors can protect themselves from stock market scams by doing their research on the company and its promoters. Check for any regulatory violations. Avoid investments that promise very high returns in short time. They should also invest in companies with a proven track record. Should avoid investing large sums of money without due diligence.
Author: Dr Savita Satav
Read our Blog
Try our Financial Calculators