The Pump and Dump Scheme in the Indian Stock Market
Name – Ananya P Rau
University – University Law College, Bangalore University
The Indian Stock Market is one the most important sectors of the Indian economy. It determines the health of the economy of India. Although the stock market is not an exclusive indicator, it is a mirror of how the economic health of the nation stands. Stock ownership facilitates investors to benefit from capital appreciation and dividends. Over time, investing in stocks has the potential to create wealth, providing individuals with a means to achieve financial goals such as retirement planning and education funding. The stock market provides a platform for companies to raise capital by issuing shares to the public. This capital is crucial for businesses to fund expansion, research and development, and other growth initiatives. Some of the biggest platforms such as National Stock exchange and Bombay Stock Exchange pave way for stock market participation in India. In the US, Regulatory bodies, such as the Securities and Exchange Commission (SEC) in the United States, actively monitor markets to detect and prevent manipulation. Investors should be cautious and conduct thorough research before making investment decisions to avoid falling victim to manipulative schemes.
Stocks are the entirety of shares issued by the company to investors. When someone buys a share, they gain a fractional ownership in the company and receive profits in dividends in the event the value of a share rises. The value of the share increases as the issuing company grows. Despite its many advantages in terms of profitability of individuals and economic health, the stock market has also been marred by stock market volatility, crashes and most vulnerable to, manipulation and fraud. This article will discuss the “Pump and Dump Scheme”, more commonly known as Stock Market Manipulation, the laws and liabilities attached to it. This scheme often targets low-priced or “penny” stocks, which are shares of small companies with low market capitalization and limited liquidity.
In India, securities markets are regulated by the Securities and Exchange Board of India (SEBI), and the legal framework for preventing fraudulent activities, including pump and dump schemes, is outlined in various SEBI regulations and the Securities and Exchange Board of India Act, 1992.
What is the pump and dump scheme?
When persons disseminate falsified information pertaining to a particular stock to increase its purchase by buyers, and subsequently sell their shares when the price decreases, is termed as a pump and dump scheme. This culminates to fraud as persons who invest in these hyped-up shares are unaware of the impending losses they would incur. The Pump and Dump scheme may be perpetrated in many ways. In the age of technology, social media remains the biggest influencer. The Securities and Exchange Board of India recently banned Bollywood Actor Arshad Warsi and his wife in the infamous Sadhna Broadcast. The regulatory board, after investigation held that the actor and his wife were using YouTube Platforms to pump the stocks, and would subsequently dump these shares which would cause losses to those who invested in these shares. By doing so actor, Arshad Warsi, gained a whopping 29 Lakh Rupees. And in consequence to this, the SEBI restrained the buying and selling of shares of people in connection to this. The Pump and Dump and Scheme facilitates fraud, misrepresentation and allows investors undergo loss. It creates unhealthy competition in the financial markets and also misrepresents the health of the issuing company.
Governing guidelines
The relevant section under the SEBI, Act is Section 12A under Chapter VA. The SEBI is also empowered with the primary function to investigate and impose penalties on such companies and individuals. The SEBI has also released many rules and guidelines, most importantly after the infamous Harshad Mehta Scam. SEBI’s role is crucial in maintaining the integrity and stability of India’s securities market. Through its regulatory framework and enforcement techniques, SEBI aims to create an equal for all market participants and instil investor confidence in the Indian financial markets. Investors and market participants are advised to stay informed and appraised about SEBI regulations and report any suspicious activities to contribute to the overall health of the market. The most relevant guidelines pertaining to the pump and dump scheme, is the Prohibition of fraudulent and unfair trade practices, (PFUTP) Act, 2003.
In conclusion, stock market manipulation is a serious threat to the integrity of financial markets. Regulatory efforts, technological advancements, and investor education are all critical components in combating manipulation and maintaining a fair and efficient market environment. Continued vigilance and collaboration between market participants and regulatory authorities are essential to address evolving challenges in this space.
