3 Past Biggest Scams That Shook Indian Stock Market cover-min

3 Past Biggest Scams That Shook Indian Stock Market

A Study of biggest scams that shook Indian Stock Market: Do you know that if you had invested Rs 100 in the Sensex in 1979, your corpus would have become over Rs 30,000 by the end of 2017? There is no doubt in saying that the Indian stock market has yielded enormous returns to investors in the last few decades.

However, there were also times, when the market witnessed extreme malpractices carried out by a few wicked minds. Many people with foul intentions applied brainstorming techniques to manipulate the Indian stock market prices. You can have a look at this blog to understand a few common types of scams in the Indian stock market.

In simple words, a scam is referred to as the process of obtaining money from someone by deceiving him/her. The majority of the securities market scams that took place in India eventually led to a lot of financial distress to the retail investors. They adversely affected the normal functioning of the markets and degraded the trusts of lakhs of investors on the Indian share market.

3 Past Biggest Scams That Shook Indian Stock Market

Although there are hundreds of scams reported by the equity investors every year, let us have a brief study of three of the past biggest scams that shook the Indian share market.

1) Harshad Mehta Scam

During the early 1990s, Harshad Mehta, a stockbroker, started facilitating transactions of ready forward deals among the Indian banks, acting as an intermediary. In this process, he used to raise funds from the banks and subsequently illegally invest the same in the stocks listed in the Bombay Stock Exchange to inflate the stock prices artificially.

harshad mehta scamBecause of this malpractice, the Sensex moved upwards at a fast pace and reached 4,500 points in no time. The retail investors started feeling tempted seeing the sudden rise of the market. A huge number of investors started investing their money in the stock market to make quick money.

During the period from April 1991 to May 1992, it is estimated that around five thousand crore rupees were diverted by Harshad Mehta from the Indian banking sector to the Bombay stock exchange. After the fraud was revealed, the Indian stock market crashed consequently. And as guessed, Harshad was not in a position to repay crores of money to the Indian banks.

Conclusively, Harshad Mehta was sentenced to jail for 9 years by the honorable court and was also banned to carry out any share trading activity in his lifetime.

(Credits: Finnovationz)

2) Ketan Parekh Scam

ketan parekh

After the Harshad Mehta scam, a Chartered Accountant named “Ketan Parekh” had similar plans of arranging comparable securities scam. Coincidently, Ketan used to work as a trainee under Harshad Mehta earlier and hence also known as the heir of Harshad Mehta’s scam technique.

However, Ketan Parekh not only used to procure funds from the banks but also other financial institutions. Like Harshad Mehta, he also used to inflate the stock prices artificially. Apart from the Bombay Stock Exchange, the other stock markets where Ketan Parekh actively operated were the Calcutta Stock Exchange and the Allahabad Stock Exchange.

Nonetheless, Parekh used to deal mostly in ten specific stocks, also known as the K-10 stocks. He applied the concept of circular trading for inflating their stock prices. You might be surprised to know that even the promoters of some companies paid him to boost their stock prices in the market. Anyways, after the Union budget in 2001 was announced, the Sensex crashed by 176 points. The Government of India carried out an intensive investigation into this matter.

At last, it was the Central Bank who determined Ketan Parekh to be the mastermind behind this scam and he was barred from trading in the Indian stock exchanges till 2017.

3) Satyam Scam

satyam ramalinga rajuThe Chairman of  Satyam Computer Services Limited (SCSL), Mr. Ramalinga Raju confessed to SEBI of the manipulation done by him in the accounts of the Company. This corporate scandal was carried on from 2003 till 2008. It is estimated that the fraud took place for around Rs five thousand crores of cash balances as the company by falsifying revenues, margins.

The stock price of Satyam fell drastically after this incident. Eventually, CBI took charge of conducting the investigation into the matter. They filed three partial charge sheets against Satyam. Subsequently, these three partial charges were merged into one charge sheet.

In April 2009, Raju and nine others involved in the fraud were sentenced to jail by the honorable court. Consequently, Mahindra Group acquired SCSL and it was renamed as Mahindra Satyam. It subsequently merged within Tech Mahindra in 2013.

Bonus: A few other popular corporate scams

Apart from the above-mentioned scams, here are a few other famous corporate scandals which also deserve to be mentioned in this post.

1) Saradha Scam

Sudipta Sen, the Chairman of the Chit-fund company called Saradha Group, operated a plethora of investment schemes. The schemes were called the Ponzi schemes and did not use any proper investment model. This scheme is alleged to have cheated over a million investors.

The Saradha Group collected huge funds from the innocent investors in West Bengal, Assam, Jharkhand, and Odisha. The money collected was used to be invested in real estates, media industry, Bengali film production houses and many more. The Saradha scam came to the fore in April 2013 when Sudipta Sen fled leaving behind an 18-page letter.

Although the Saradha scam didn’t have any direct impact on the Indian stock market, it had an indirect impact on the stock exchange. The Foreign Institutional Investors (FII) took a step back seeing such unregulated Ponzi schemes being floated in the market.

2) NSEL Scam

National Spot Exchange Ltd (NSEL) is a company that was promoted by Financial Technologies Indian Ltd and the NAFE. Two individuals named Jignesh Shah and Shreekant Javalgekar were held guilty for this scam. The Funds that were procured from the ignorant investors were siphoned off. This is because most of the underlying commodities did not have any existence at all. The transactions of commodities were being carried out only on the paper.

NSEL attracted the attention of the retail investors by offering them fixed returns on paired contracts in commodities. Around 300 brokers have been alleged roles in the ₹5,500-crore NSEL scam in 2013.

Also read: NSEL scam: 300 brokers face criminal action

Closing Thoughts

Securities and Exchange Board of India (SEBI) was established in India in the early 1990s to administer and regulate the functioning of the Indian securities markets. It is the apex authority which regulates the affairs of Indian securities market participants. If you are a follower of the financial market, you would know the frequent amendments that come every year in the SEBI Act and Regulations.

Although the occurrence of stock market scams and corporate scandals has reduced subsequent to the establishment of SEBI, but hasn’t completely stopped.

Additional resources to read

most common scams in indian stock market

3 Most Common Scams in Indian Stock Market That You Should be Aware of.

3 Most Common Scams in Indian Stock Market That You Should be Aware of. There are a number of common scams in Indian stock market which has resulted in many investors/traders to lose their hard earned money. These financial scams, although not known to many, still so common that thousands of people become victims of these swindles.

So, today I am presenting you with three most common scams in Indian stock market so that you can stay away from these rackets and protect yourself from the financial fraud and stress.

3 Most Common Scams in Indian Stock Market

1. Tips and Recommendation Fraud

This is one of the widely used and most common scams in Indian stock market. Here, the fraudsters try to attract the traders/investors by convincing them that they can provide a profit as much as 3-10% per day and 30-40% per month. Please note that Warren Buffet, the legendary investor, has got a yearly return of around 22% to become one of the richest people in the world. And these people are promising such high returns monthly. They further assure the people to give over 90% accuracy on their tips and recommendations.

These fraudsters argue that they have given minimum 40% return to their old clients. When people ask for trial tips before subscribing to their tips and recommendation program, they easily agree. {Although, most of the good companies clearly deny recommendations without complete registration}.

Many people who try these trials become victims of these fraudsters. All the tips provided by them during the trial period are 100% accurate. Seeing the results of the trial period, the traders/investors subscribe to the monthly/yearly recommendation plan of these fraudsters. They pay a high fee to subscribe to these tips. However, after the registration, none of their tips works well.

Now, let us see how these fraudsters are able to provide 100% accurate recommendations during the trial period.

Suppose, these fraudsters agree to give a trial period for 3 trading day. That is, they agree to give 1 recommendation to buy or sell a stock for three trading day. But there is a hidden side to this scheme that the investors do not know. During these three days, they don’t send the tips to just 1 person. They generally send the tips to thousands of people.

Let us say, they started with 1000 people initially to send the tips.

Day1: On day 1, these fraudsters send messages to sell a stock to 500 people and to buy to other 500 people for the same stock. Obviously, either the stock will go up or go down (they generally choose a volatile stock so that the probability of stock not changing price is zero). Therefore, on day 1, they have send a successful tip to 500 people. They, discard the other 500 people for whom the tip didn’t worked.

Day2: On day two, they again send message to sell another stock to 250 people and buy the stock to other 250 people. Obviously, again one group will receive correct recommendation. They again discard the other group whom they sent wrong tip.

Day3: On last day of tip, they send buy suggestion to 125 people and sell suggestion to other group of 125 people. Hence, 125 people will receive a correct tip for three consecutive days.

Now, these 125 people will now think that all the recommendations provided by these fraudsters for three continuous days are correct. Therefore, many of the people from this group will subscribe to the tips and recommendation plan and become a victim of one of the most common scams in Indian stock market. Let us assume that the charge for sending tips is Rs 15,000 for a year. If even 100 people are trapped in this swindle, these fraudsters easily make around 15,000*100 = Rs 15 lakhs.

Soon after subscribing to the tips from these fraudsters, the investors/traders start losing money. The tips aren’t working anymore. Overall, these people lose they money apart from paying a heavy registration fee for taking tips and recommendations.

Also read: 6 Reasons Why Most People Lose Money in Stock Market

2. Pump and Dump:

Pump and Dump is a micro-cap stock (penny stocks) fraud, where the fraudsters try to inflate the price of these micro-cap stocks by providing misleading information to investors/traders. They try to increase the price of these penny stocks by giving the fake news.

For example, If the fraudsters want to increase the price of XYZ microcap stock, then they will send messages like a big company is taking over a that stock; or that micro-cap stock is giving a bonus of 1:1; or A large-cap is buying 50% stake of that micro-cap stock etc

The fraudsters want the retailers to buy the shares of these stocks as much as possible. Let us see what the main aim of these fraudsters is.

  • First, these fraudsters buy a cheap penny stock at a large volume.
  • Then they send fake messages or emails to millions of investors/traders recommending them to buy that stock.
  • Those who take this news as true, start buying stocks of these companies.
  • Because of this increased demand, the price of that stock starts increasing.
  • When the share price reaches a good price, then these fraudsters sell their stocks and get good returns.

After selling their stocks at high prices, these fraudsters then stop sending email/messages to the people. Moreover, the price of these stocks becomes very volatile, as they are not worth that high price. Hence, soon the price of these stocks falls heavily and the retail investors lose their money.

If you want to get in-depth knowledge about Indian Stock Market, I will highly recommend you to buy this book: How to avoid loss and earn consistently in the stock market by Prasenjit Paul

3. Fake messages in the name of brokers.

Many people invest in the stock market on the recommendation of their stockbrokers or advisers. As these people trust blindly on their brokers, they don’t research much about the stock after receiving the recommendation/tips. Instead, they just buy these stocks trusting their advisers.

In this scam, a lot of fraudsters, trap the retail investors/traders by using their trust in their brokerage firm. They send messages in the names of their brokers recommending them to buy certain stocks. As these people, misunderstood the message and think that it is sent by their brokers, they buy the recommended stocks.

However, as the recommendation did not truly send by their brokers. Hence, the stock prices fall soon and these investors/traders lose a huge amount of money.

Let’s see why these fraudsters send these messages to retail investors/traders.

Initially, these fraudsters send the recommendations to buy the same stock to their paid subscribers. Then, they try to inflate the price of these stocks by sending fake messages in the name of registered brokers to general people. When the stock price starts increasing, they suggest their paid subscribers sell the stock and get a good return. Therefore, their paid customers are satisfied with the recommendation and continue to their monthly/yearly paid recommendation plan.

In the end, it’s the retail investors only who end up losing their money by blindly following the fake recommendations. This is the third most common scams in Indian stock market that every investors/trader should be aware of if they want to safeguard their money.

Although, not all advisory company try to loot their customers and some give good guidance and recommendations. Still, it is advisable to stay away from free stocks tips and recommendations of any type. After all, no one cares about your money more than you.

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Tags: Most Common Scams in Indian Stock Market, Stock market scams in India, 3 most common scams in Indian stock market, pump and dump scam in stocks, scams in stock market India, stock market scams India, common scams in stock market
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