Frauds in the Stock Market

Since its establishment in 1992 Indian stock market has witnessed many scams, taking the whole country by storm. The first and the biggest scam so far was the Rs 3500 crore #Harshad Mehta scam that still haunts the memory of investors. The scam caused thousands of investors to lose every single penny and the crash of the stock market.

Similarly, the Ketan Parekh scam, Rs 7000 crore #Satyam scam, and Rs 5600 crore National Spot Exchange Limited Scam, etc. The Harshad Mehta scam has led to many structural changes in the Indian financial system; the most important of them were the beginning of online trading by the #NSE in 1994 and the formation of #SEBI (Securities and Exchange Board of India) as a regulatory body.  

The scammers of the above scams have utilized the loopholes in the market and siphoned thousands of crores of the investors’ money, by forging documents, bank notes, stamps, etc.

#SEBI has been regularly issuing guidelines from time to time to keep a check on frauds and tricksters, but a few of them still manage to fool investors.

Below we will discuss about some of the most popular methods devised by the fraudsters and also what steps the #SEBI has taken to put a leash on them.

1) Shell Companies  

The companies that got themselves listed in the stock exchange, without due credibility are called shell companies. These companies manage to raise #IPO (Initial Public Offering), by investing their own money and then gradually raise the share prices by deploying several manipulation techniques. Once the common investors start investing it further soars the prices to a new high. But as the company is only functioning on paper, there is no actual growth and as the owners feel that they have got enough returns on their investment, they part away with the money leaving the common investors penniless. The Indian government has whipped heavily on these shell companies, deregistering around 1.75 lakh of them.

2) Boiler Rooms

In simple terms, the boiler room technique involves a high-pressure sales technique used to lure investors. The brokers usually call the person on phone or contact them through text messages. They often lure investors by guaranteeing high returns in a very less time period. It must be kept in mind that every investment in the market carries a certain amount of risk.

3) Insider Trading

Insider trading is an instance when an insider, supposedly an employee of the company trades in the company’s stocks. Such a person has vital information about the company’s stock which information is still not in the public domain. Insider trading could seriously influence investor’s decisions in buying or selling securities and is seriously guarded by the regulatory agency.

4) Pump and Dump

 This technique uses the spread of false information to inflate the price of penny stocks. Thereby, when the stock reaches the target price, the tricksters part away with profits, compelling others to sell the shares at loss.

5) Financial Statement Fraud

Financial statement frauds include a deliberate manipulation of financial statements by corporate. These manipulations are done to project a false image of the company completely different from the views of an analyst. A company may show its profitability high, and understate its expenses and liabilities.

6) Churning

‘Churning’ is a practice when brokers trade a customer’s account to generate a high commission but not in the interest of the customer. It is a kind of misconduct on the part of the broker or the brokerage firm that may result in serious losses to the client or investor.

How to Avoid Stock Market Frauds

As a beginner one should first do a self research of the market before making a serious investment. There is a thumb rule to identify financial frauds – “If the deal seems too good to believe then there is something fishy in it “.

Don’t fall into traps of #tricksters and bogus brokers trying you to lure on pretext of easy and early returns. The #SEBI also from time to time issues guidelines and supervise the functioning of the market so that no investors are fooled and their money looted.

With the technology evolving every day, new methods to fool the investors are invented by the fraudsters. In the end it all comes down to how much aware is one about the market.

Where to Complain?

If one has an issue with his/her broker and feels that some information is being concealed then he/she can file a written complaint with the #NSE (National Stock Exchange) or the #SEBI (Securities and Exchange Board of India). However, before doing so one is advised to first file a written complaint to the broker and the brokerage firm as proof of the complaint not being addressed.

The #National Stock Exchange has also come up with an e-complaint register called #NICE Plus, where you can file complaints about the broker or the brokerage firm. NICE stands for #NSE Investor Service Center. The website link is -

#SEBI has also launched toll-free helpline numbers for investors in the securities market. The numbers are – 1800 266 7575 and 1800 22 7575



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