Frauds in Equity Markets due to Lure of Returns
In the alluring realm of financial markets, where fortunes are made and lost in the blink of an eye, the lure of high returns has repeatedly led to frauds. From ingenious deceptions exploiting systemic loopholes to outright scams that manipulate the trust of millions, history is replete with lessons about the cost of greed. Cyber frauds are becoming increasingly common and in 2024, Indians have reportedly lost around Rs. 11,000 cr. What's more worrisome is that AI's digital footprint is making it harder to distinguish between fake and genuine.
As these illicit actions unfold, they not only disrupt the market but also leave investors vulnerable, undermining trust in the financial system.
So, what exactly are these frauds, and how have they impacted the stock market?
Juzer Gabajiwala, Director, Ventura Securities, sheds lights on some significant "frauds" in the equity market over the years that caused widespread disruption to the Indian financial ecosystem:
- 1992: In the Harshad Mehta Scam of 1992, Mehta staged a massive fraud of about Rs. 30,000 crores by exploiting the lack of regulatory oversight in the banking sector. By engaging in "Ready Forward" (RF) deals, essentially using fake bank receipts (BRs) as collateral to siphon funds from the banking sector, which were then diverted into the stock market, inflating share prices. For instance, stocks like ACC, Reliance Industries, and Tata Steel saw significant spikes during this period with ACC's price surging 4,400% from ₹200 to nearly ₹9,000 due to manipulative tactics. The Sensex hit a record ~4,467 in April 1992, nosedived to ~2,529 by August 1992—a staggering 43% fall in 4 months.
- 2001: The Ketan Parekh Scam of 2001 valued at around ₹4,000 crores, involved inflating the prices of small-cap stocks by circular trading, collusion with company promoters, and funds from institutional investors. The focus was on a group of lesser-known stocks, referred to as "K-10" stocks, like Zee Telefilms, Visualsoft, and Sonata Software, which saw a massive surge. For example, Zee Telefilms rose from ₹127 to ₹10,000 and Visualsoft jumped from ₹625 to ₹8,448. In February 2001, the bear cartel on the BSE began shorting the K-10 stocks, causing their prices to plummet, triggering a payment crisis in Calcutta.
- 2015: The NSE Co-location Scam involved market manipulation of Rs. 500 billion at the National Stock Exchange (NSE) through rigged algorithmic trading and the use of co-located servers, giving certain brokers an unfair advantage. The scam was exposed in January 2015, following an anonymous whistleblower complaint to SEBI, alleging collusion between traders and exchange officials.
- 2019: The Karvy Stock Broking Scam, valued at over ₹2,000 crores, involved the unauthorized misuse of client securities. Karvy pledged client holdings to secure loans and diverted ₹1,096 crore to its real estate arm, Karvy Realty Private Limited, between April 2016 and October 2019. Investigations revealed that by May 2019, the company sold excess securities—those not available in their DP account—worth ₹485 crore through nine related clients. Additionally, it transferred securities worth ₹162 crore to six of these nine related clients by the same date.
While traditional scams relied on exploiting systemic loopholes, modern frauds are more sophisticated, leveraging digital platforms.
Let's explore some of the recent "new age scams" that have disrupted the Indian equity markets and shaken investor confidence:
- Pump & Dump Scheme: A fraudulent practice where perpetrators artificially inflate a stock's price by sharing misleading recommendations, often through platforms and channels like Telegram. This tactic prompts public shareholders to buy the stock at inflated prices, resulting in losses when the scamsters dump the stock and its price crashes. For instance, in June 2024, SEBI imposed a ₹7.75 crore fine on 11 individuals for allegedly executing a 'pump and dump' scheme in the shares of Svarnim Trade Udyog.
- Fake Investment Apps: A major scam involving fake investment apps where investors are lured into downloading fraudulent apps through deceptive social media ads promising unrealistically high stock returns. In 2024, fraudsters posted fake advertisements on social media platforms, like Facebook, and X, promising high returns on stock market investments. Victims were directed to download fraudulent apps like IC ORGAN MAX, where fictitious profits encouraged more investment. The stolen money was funneled abroad and converted into cryptocurrency. In Sep 2024, five arrests were made by the ED, and ₹25 crore was recovered.
- AI-Driven Investment Scams: Fraudsters used AI-generated deepfakes, including videos and voice cloning, to impersonate financial experts and promote fake stock tips. For instance, in 2019, a British energy company employee was tricked into transferring $250,000 (Rs 20.6 crores) by a deepfake voice that impersonated the CEO of the parent organization. This incident showcases how AI-driven voice cloning and deepfake technology can be used to manipulate individuals into making fraudulent transactions, making it a clear case of AI-related scams.
- Social Media Scams: Unregistered financial influencers on platforms like YouTube, Instagram, and Telegram often share misleading stock tips with promises of high returns. In July 2024, SEBI flagged 8,890 instances of unlawful content and notified platforms such as Facebook, Instagram, Telegram, and YouTube, urging them to take strict legal action against those spreading false stock market claims. In Dec 2024, SEBI penalized several financial influencers, including Ravindra Balu Bharti and Nasiruddin Ansari, for misleading investors.
As frauds continue to create challenges, the question arises: how can investors protect themselves from being conned?
Important dos and don'ts to consider before making any investment:
- Beware of Unrealistic Promises: Be wary of offers that promise quick or unrealistically high returns, such as claims of returns higher than the typical 8-10% seen in debt funds, promises of doubling your investment within a month through equity markets, or guaranteed returns; these should raise red flags. Always analyse market returns before believing such claims. These are often deceptive schemes designed to exploit your trust. Remember, all genuine investments carry some degree of risk, so be cautious when faced with such promises. If making money were easy, everyone would do it. Remember, you earn your salary only after working hard for a full month.
For example, In January 2025, the Torres Jewellery scam was uncovered in Mumbai, revealing a Ponzi scheme that defrauded over 1.25 lakh investors of approximately ₹1,000 crore. The company lured individuals with promises of high weekly returns, ranging from 3% to 7%, primarily through investments in moissanite stones. After initial payouts, Torres abruptly ceased operations in late December 2024, leaving investors in distress.
- Rely on Verified Advisors: Always choose financial advisors or brokers who are officially registered with SEBI or AMFI. Their registration can be easily verified on the respective regulatory websites. Registered advisors adhere to ethical standards and ensure your investments are managed responsibly. In contrast, relying on social media influencers for financial advice can be risky. Their research may be inaccurate or based on limited knowledge, leading to misguided decisions. Influencers often promote content that garners high views, regardless of its relevance, which can result in poor investment choices.
- Use Secure Trading Platforms: Always trade through reliable and well-known stockbroking platforms or apps that prioritize security. Steer clear of lesser-known services to protect your money and personal information from potential fraud. Always meet or speak to the company representatives and validate their websites before committing resources.
- Be alert: Always be cautious when receiving unsolicited offers or following advice from financial influencers or social media platforms. Conduct thorough research before committing your funds and question anything that seems too good to be true.
Lastly, Greed and Fear are two emotions that drive equity markets and both are equally important. If you have only "Greed", you will be reckless and lose money. If you only have "Fear", you will not enter equity markets and would always be in low-risk assets, like bank deposits. Safeguarding your investments from frauds and scams also requires a clear understanding of risk, returns, and liquidity, especially amidst growing predatory financial practices in India.
Evaluating risk is crucial; schemes offering unrealistically high returns often carry high risks that could jeopardize your financial stability. Understanding relevant returns means setting realistic expectations aligned with market trends rather than succumbing to promises of "guaranteed" profits. Additionally, consider liquidity—ensuring you have access to your funds if needed, as locking in money in illiquid investments can lead to financial stress. As financial scams increasingly exploit technological advancements and social media, adopting a cautious, informed, and research-driven approach is essential for protecting your hard-earned money while fostering trust in India's evolving financial ecosystem.
Source: ACE MF, Media.
