Stock Market Scams

STOCK MARKET SCAMS

RAJIB RANJAN SAMAL (036) , SABYASACHI TARAI (039) , SAILAZA PRAHARAJ (040) , SANDEEP KUMAR BEHERA (041) , SANGRAM KESARI JENA(042) , SANTWANA SAHU (043)

Evolution of Stock Exchanges in India: Stock exchange

Year of incorporation

Bombay stock exchange

1894

Calcutta stock exchange

1908

Madras stock exchange

1920

Bengal share and stock exchange Ltd.

1937

Indian stock exchange Ltd.

1938

Uttar Pradesh stock exchange

1940

Nagpur stock exchange

1940

Hyderabad stock exchange Ltd.

1944

Bangalore stock exchange

1963

National stock exchange

1992

STOCK MARKET SCAMS: • Scams have been occurring in stock markets across the world at regular intervals and these have resulted in people loosing their huge capitals invested in various types of securities. 

• stock market scams are also called as securities scams as different types of securities are traded in the stock market. 

• stock market scams are result of various types of manipulations and other processes carried out by investors and traders at various levels. •

STOCK MARKET SCAMS in india: 

Indian Stock Market Scam of year 1992 is popular across the globe. 

ü Harshad Mehta was an Indian stock broker and is alleged to have engineered the rise in the BSE stock exchange. ü He was exploiting several loopholes in the banking system ü Harshad Mehta was borrowing huge amounts of money from banks, pumping it in to stock market and made the stock prices go up artificially. ü Mehta and his associates siphoned off funds from inter-bank transactions and bought shares heavily at a premium across many segments, triggering a rise in the sensex. ü When the scheme was exposed, the banks started demanding the money back, causing the collapse.

ü •

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Contd… ü It started in the month of April when press reports indicated a shortfall in the government securities held by various types of financial institutions. 

ü According to the investigations, in this stock market scam misappropriation of funds had been done to huge levels of more than 350 million rupees. 

ü This scam raised questions on integrity of top executives of financial institutions like nationalized and foreign banks and on various politicians, bureaucrats and stock market brokers. SABYSACHI TARAI -039

Cont… • Whole stock market was shocked and tainted shares became worthless all of a sudden. There was a huge panic among investors. 

• As a result, the stock prices dropped by more than 40% in less than 2 months. • In this scam, funds were diverted from banking system in the nation ; especially from inter bank market dealing in various types of government securities, to brokers financing fraudulent stock deals in the market. 

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SUMMARY OF SOME SCAMS IN INDIA: 1991-92 • Harshad Mehta and Hiten Dalal • Ready Forward Deals • Banking Receipts • Manipulation • SEBI Act on April 4th 1992 • NSE Established in November 1992 • Badla discontinued in 1993 

SECURITIES

1994-95 • Collusion of brokers and top-management for the purpose of price rigging 

– M. S. Shoes Ltd. – Rupangi Impex Ltd. – Magan Industries Ltd.

• Fraudulent Shares – Sesa Goa Ltd.

Cont: 1997 • C. R. Bhansali Group – Fraudulent Accounting Practices – NBFC 

1994-95 • Harshad Mehta – Collusion with topmanagement for the purpose of price rigging – BPL, Videocon, Sterlite – Involvement of BSE Officials – Lifetime Ban • T + 5 System, Rolling Settlement System 

STOCK MARKET SCAMS and banks: •

Most of banks involved in this stock market scam were carrying investments at cost of acquisition in their books

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This meant that financial institutions were not ready to sell securities held by them as losses are organized in such accounts only when securities are sold off.

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However, brokers and banks created an innovative way of accommodating such investment. Securities were sold by the banks at a discount to participating brokers either at the face value or at the price that has quite higher than the market price at that time.

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Banks also bought other securities from same participating broker at price that was higher than the market price. This settled transactions between them. However, whole scam was eventually unearthed.

Steps to prevent STOCK MARKET SCAMS •

Since stock market scams are becoming quite common in present times, it is really very essential that a person avoid being a part of these scams or being affected by such scams.

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There are certain guidelines following which above purpose can be solved.

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People with fraudulent behavior are quite aware of the fact that investor like to subscribe to such stocks that have higher yield. For example, all investors wish to have stocks of software companies in their portfolio as these stocks are able to provide high returns. Investment in such companies, thus, should not be made.

TYPES OF STOCK MARKET SCAMS: • Let us try to understand one type of stock market scam that is generally noticed. 

• This type of scam occurs by making investing in those companies that have higher market capitalization and offer higher liquidity too but stocks of which are hardly traded. 

• In each stock market, there are different categories of stocks and one particular category comprises above types of stocks. For example, in Bombay Stock Exchange, principal stock exchange of stock market of India, B2 is the category that comprises stocks having higher capitalization and liquidity but low trading volume. 

• Most of these stocks pertain to those companies that are no longer in operation. People and companies with fraudulent behavior take over these companies and entity of company is also changed. 

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New entity pertains to that sector which attracts more investment, for example, software industry. People are then hired, required equipment installed and even export orders are also processed. But in realty, there is no requisite infrastructure or professionals to carry out such orders.

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In some cases, a subsidiary is set up on foreign markets by hiring representatives for running operations. Even a small place is taken on rent. Export transactions are carried out through free ports like Dubai, Hong Kong, Singapore etc. Promoters of such companies also hire market operators at later stage who publish long success stories regarding huge orders, excellent profits, collaborations etc. Net profit figure in the balance sheet is boosted due to forged export income. This makes EPS or Earning Per Share quite healthy for that company.

CONT: • In such cases, it is deemed that stock is trading at very low levels and as a result, people consider it as excellent buy. Liquidity in that stock is also increased by some market operators, which may be a part of scam. • • It has been generally seen that price of stock rises 3-5 times in a very short period of time. This condition is then taken advantage of by the promoters and they sell stocks owned by them. This results in price of share going down suddenly. General public that had made investment in such stock suffers while promoters make a huge cash profit. This is how a stock market scam generally occurs. • • It is always advised that before investing into any type of company, a person should check the background of company very carefully. Similarly, performance of stock should be searched for at least last 2 quarters. It is in the interest of a person if he does not make investment in stocks that show high price fluctuations. •