The Securities and Exchange Board of India (SEBI) has clamped down on one of the nation’s most elaborate pump and dump operations. This has resulted in the regulator barring more than 220 entities and ordering the recovery of unlawful gains.
The issue came to light in a 394-page final issued by the market regulator on 30 June, which detailed how a coordinated network allegedly manipulated stock prices, misled retail investors through fake investment messages and exited with hefty profits, leaving unsuspecting investors holding overpriced shares.
How did the scam take place?
The scam is part of an elaborate scheme in which strategic steps were taken to cheat unsuspecting retail investors. These steps are discussed below in detail:
- The alleged the stocks of Mauria Udyog, 7NR Retail, Darjeeling Ropeway Company, GBL Industries and Vishal Fabrics for about three years, between 2017 and 2020.
- They first deliberately utilised coordinated trades to stock prices and trading volumes, creating the illusion of strong investor interest.
- Once the stocks jumped in prices, thousands of SMSs, text messages that were designed to resemble recommendations from reputed brokerages, were sent to retail investors, urging them to take immediate action and buy.
- On this news, as fresh buying pushed prices even higher, the operators allegedly offloaded their shares at inflated prices, leaving exposed to serious losses when the prices eventually corrected.
Why are retail investors targets of such scams?
Retail investors are generally targeted because they may easily fall for stock tips circulating freely through SMS, WhatsApp, Telegram or other prominent social media platforms.
Due to a lack of fundamental understanding, retail investors often fail to conduct proper data verification and analysis. Fraudsters exploit this mistake, create the Fear of Missing Out (FOMO), and later utilise it to cheat unsuspecting retail investors.
This is particularly true of lesser-known stocks, where market prices can be easily manipulated. Also, any misleading recommendations on such stocks are harder to counter-check and properly verify.
5 ways how investors can stay safe from such scams
1. Ignore unsolicited stock tips: As a matter of rule, make sure that you treat recommendations received through text messages, SMS, , Telegram or social media with extreme caution, even more so if they promise quick or guaranteed returns within a short period of time.
2. Verify before investing: Investing requires knowledge building, reading good books on investing, consulting certified financial advisors and patience. It takes time to build wealth. That is why you should check the financials, stock exchange filings and official announcements before investing. Make sure you avoid making investing decisions based solely on viral tips or messages.
3. Watch for unusual price and volume movements: Sharp price rallies in a particular stock, accompanied by a sudden jump in trading volume, particularly in small-cap or lesser-known stocks with no major business developments, could be a warning sign and a clear red flag. Avoid participating in such stocks.
4. Don’t rush because of urgency: Scammers often create a sense of urgency, i.e., the Fear of Missing Out (FOMO), by claiming a stock is about to surge. Do not fall for such tricks of the scammers. Taking time to research before investing, questioning the investment idea and practising sensible decision-making. These simple steps can help avoid costly mistakes.
5. Build a diversified, long-term portfolio: A diversified portfolio in which an individual invests in various asset classes, such as stocks, bonds, gold, fixed deposits, etc., backed by research and long-term investment goals, is generally less vulnerable to the impact of price manipulation in individual stocks.
While SEBI’s latest crackdown highlights the regulator’s efforts to curb market manipulation, investors also have an important role to play in protecting themselves.
To ensure adequate protection from such scams, you should verify information and facts properly, avoid making irrational decisions based on stock tips, read good books on investing and and focus on disciplined, research-driven investment methods after guidance from a certified financial advisor. These methods can significantly reduce the risk of falling victim to pump-and-dump schemes.