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Frauds and Scams in the Indian Stock Market

frauds and scams in the Indian stock market

You have heard it multiple times in the NEWS that some kind of fraud or scam has been committed in the Stock Market. Individual or a group of them have scammed Investors or Traders. Sometimes these frauds and scams in the Indian Stock Market are so huge that they caused the whole stock market or a particular company to go down as Investors and Traders lost trust in the market. And Trust in the market is a very important factor to keep the economic wheel turning.

Some of these frauds and scams are so common nowadays that a slightly experienced Investor or Trader will not even bat an eye to those frauds and scams, but the fraudster’s aim is not locked on the experienced Investor but the newbie. So in this article, we are going to discuss some of the frauds and scams in the Indian stock market. What can we learn from each event and how to prevent those frauds and scams from happening with you!

Pump and Dump

frauds and scams in the Indian stock market

This one of the most famous and common way scammers and fraudulent people scam the Indian Stock Market Investors and Traders.

If you are somehow involved in the Indian Stock Market, at some point you must have received an email or text message saying to BUY a certain stock at a certain price.

You don’t even bat an eye at first. The next day you received another text saying that the particular stock had hit the Upper Circuit yesterday and today also it will hit the UC.

Now you are a bit curious to see what is this stock, so you log in to your broker trading platform to see the stock. And to your surprise, the stock has hit UC today, too. But you still don’t place a BUY order fearing this could be some kind of scam.

The next day, you receive another message saying this stock will again hit UC today. So now the FOMO slowly starts to set in. FOMO means Fear Of Missing Out.

You log in to your preferred trading platform and you see that the stock has not yet hit the Upper Circuit today, and there is a chance for you to participate in the upward tsunami wave. So just because of FOMO, you place a Buy Order.

Now the stock has risen near about 8 to 9 per cent from the day when you received those messages first. The stock has hit multiple UC and had made lifetime highs on each and every day since you started receiving those messages. And in most of the cases, these stocks are penny stocks, and a single stock is not worth more than 20 to 25 rupees.

Now you have jumped into the bandwagon and waiting for your Big Pay Day. What you see the next day is that the stock is hitting Circuit but not Upper Circuit, the stock is hitting Lower Circuit. You are now a bit worried. But you don’t sell thinking it will rise tomorrow.

The next day, the very same thing happens. From the very opening of the market, the stock is in Lower Circuit. Now you are very worried. You have lost almost 2 to 3 per cent of your capital and you want to book out. But you cannot. The stock is in LC and there is no one on the market to buy the stock.

When you get the chance to sell your stocks, that particular scrip has lost almost 10 to 15 percent from its life time highs and you are sitting on a huge loss.

Now you can either wait for eternity for the price to come back to your buying price so at least you don’t lose money or book the loss and move on.

Now you are a victim of the Pump and Dump scheme.

This kind of Frauds and Scams in the Indian Stock Market is very common. Now let us take peek at the “behind the scene” and try to understand what happened.

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How Pump and Dump Works?

At first, someone with malicious intent and huge capital at bay starts buying stocks of a company unknown to the common man. They do their research and pick the perfect penny stock which has a low market liquidity so buying stock worth a few crores will pump up the price of the stock immensely.

Then they spread the fake news of stock price rising and asking common retail investors to buy the stock through their fake news spreading channels.

When the gullible retail investor’s money comes pouring in, making the stock price hitting new highs. The scammers starts dumping their holding on to the market, making a huge profit at the expense of the common retail investors.

So it is always advised, never to invest or trade on market rumours and investors are requested to do their own research or take expert advice from their financial adviser.

Insider Trading

frauds and scams in the Indian stock market

By reading the name you might be able to guess what “Insider Trading” actually means.

Insider Trading is a kind of fraud, committed by scammers and fraudsters by using Information inaccessible to other Investors or Traders.

When a person or an organization or any entity take trading decision in the stock market using privileged, non-public information to gain an edge over the others, those are called Insider Trading.

For example, if you somehow knew that ABC company is getting out with its third-quarter result in the next week and they have performed very well compared to the public expectation.

Now with this privileged information which is not available to the general public, you place a buy order of X number of Shares of ABC company in order to make a profit when the news becomes public. This would be called Insider Trading.

SEBI (we had a detailed discussion of what SEBI is, in this article) has a very strict law against Insider Trading. And they are very vigilant against this type of frauds. SEBI imposes some serious punishment who are caught in committing this crime.

Anyone caught by SEBI on the charge of Insider Trading can get a prison time up to 10 Years. Criminal, Charged with Insider Trading can also be penalized, as high as Rs. 25 Crores or three times the amount of profit earned from Insider Trading, whichever is higher.

You can read more about Insider Trading here.

Insider Trading is one of the most common, among other frauds and scams in the Indian Stock Market.

Churning

Churning is an another type of scam, infamous among the other frauds and scams in the Indian stock market. This is scam mainly committed by security brokers to earn extra brokerage on the expense of the less-knowledgeable clients.

There are some disreputable security brokers who advise their client to Buy or Sell a position without a need of one in order to generate a brokerage-able transaction to earn commission. This falls under broker misconduct.

Most of the newcomers in the stock market fall prey to Churning, when they transact on the advice of their broker, most of the time.

Not all brokers are immoral and we reviewed India’s one of the biggest discount broker, who, in the first place doesn’t advise their clients. So you can be sure you won’t fall prey to Churning if you use Upstox. You can read our Upstox Review here.

Moneypremier.net always suggest their users to talk to their independent personal financial advisor before making any financial decision and save themselves from the frauds and scams in the Indian stock market.

If you want to read in more details, we would suggest go check out the book “THE SCAM” by Sucheta Dalal, who uncovered some of the biggest scam in India like the Harshad Mehta Scam and the Ketan Parekh Scam.

Financial Statement Fraud or False Reporting

A few years ago, if you have kept your eyes on the Indian NEWS media then you might have heard about the YES BANK scam. Where Rana Kapoor, CEO of YES BANK, scammed YES BANK shareholders by reporting fake numbers to RBI (Reserve Bank of India), thus inflating the earnings of the bank.

He did much more than just false reporting but here we are going to talk about the Financial Statement Fraud that Rana Kapoor did.

By going through the earning reports, and believing the false numbers present in the report, shareholders poured in more money and bought YES BANK shares at a highly inflated levels than it was worth at that time.

Once the whole scandal was made public, within 12 months, YES BANK shares came crashing down from the highs of Rs. 400 and became a 20 Rupees penny stock.

There have been multiple cases in the Indian stock market, where false reporting was discovered in the company’s financial statement. Some fabulous companies in India which died a painful death because of the greed of their management.

Now let’s talk about how to avoid such frauds and scams in the Indian stock market.

How to Detect a False Reporting or Financial Statement Fraud?

It is always advised that you do your own proper research before Investing, or talk with your SEBI registered financial advisor.

If you are doing your own research, always crosscheck each and every data point from multiple sources.

Check the authenticity of the source and how reliable the source is.

Never trust rumors or Invest based on one.

Always be thorough and careful while going through any financial report, so you can save yourself from becoming a victim of this kind of frauds and scams in the Indian stock market.

Boiler Rooms

The term “Boiler Rooms” is mainly used in the business world where questionable Investment are sold through the telephone.

But in the Indian stock market, “Boiler Rooms” is kind of fraud committed by the brokers, where they advise or pressurize their client to speculate on stocks which are well above the risk appetite.

The stocks that the brokers pushes are mostly penny stock. And without realising, Investors fall in to trap and pumps out a huge sum of capital, causing serious capital erosion. And at the end of the day they go out of the stock market with a bad taste in the mouth.

Again, not all brokers do this kind of frauds and scams. But Investors should be careful while choosing any broker so they don’t fall victim of this kind of frauds and scams in the Indian stock market.

Most of the PAN-INDIA stock brokers are very reliable.

We did a Upstox Review, do give a read, you may like it.

Conclusion

To conclude the whole article, frauds and scams were present in the stock market since it was established. But the people who are participating in the market should be careful and be diligent while researching and Investing in the stock market.

Always double check your data, and from multiple sources. Sometimes, going with tried and tested methods helps you from falling victims to these frauds.

So to finalise, be careful while investing in the stock market so you don’t fall victim to the above-mentioned frauds and scams in the Indian stock market.

Disclaimer: The views, investment tips, presumptions, and calculations expressed on Moneypremier.net are not of the website or its management. This article is for Educational Purpose only. Moneypremier.net advises users to check with certified experts before making any financial decisions.

What do you think?

Written by Sayantan Chakraborty

I have been investing in the Indian stock market for more than 8 years. I have invested in the Indian Stock Market via Mutual Funds, ETFs and Direct Stocks. I have seen multiple markets cycle, and from my experience, all I can say is persistence is the key to succeed in the Indian Stock Market, as an investor.
I also Love reading financial books and company results and reports.
You can ask me anything on Twitter by clicking on the button below.

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