• by Stocktry Expert
• 10th Oct 2020

The Top 5 Indian Stock Market Scams

Every coin has two sides. While we praise the Indian Stock Market for giving good returns to many, the other side of it is plagued by scams. The Securities and Exchange Board of India (SEBI) regulates the markets. But sometimes, scammers find ways to work around the regulations. Here’s a list of five of the most remembered scams of the market:

• The Harshad Mehta Scam: Estimated around Rs 3500 crores, it is also known as the ‘Security Scam’. What actually happened:
• A stockbroker Harshad Mehta raised funds from banks between April 1991 and May 1992. He then illegally invested it in stocks listed on the BSE.
• This led to rising of BSE Sensex to 4,500 points from 1,194 points.
• Many people began worshipping him as the ‘Big Bull’ and started following his footsteps by investing in the same stocks as him.
• SBI reported a shortfall in government securities in August 1992. An investigation soon exposed the scam.
• The markets crashed by approximately 72% and became the harbinger of a two-year bear phase.
• Harshad Mehta was imprisoned in 1992 where he died in 2001 out of a cardiac arrest.

It was later found that many shares held by him were sold in the market by transferring them to benami names.

This raised concerns regarding genuine investors. After this Sebi began identifying the investors through valid documents.

• Ketan Parekh Scam: Ketan Parekh was a Chartered Accountant who worked with Harshad Mehta in his firm Growmore Investments in the 90s. What actually happened:
• After taking money from banks and other financial institutions, Ketan Parekh illegally invested them in stocks.
• The Allahabad Stock Exchange and the Calcutta Stock Exchange were taken back by surprise.
• He invested in Amitabh Bacchan Corporation Limited, Himachal Futuristic Communication, Mukta Arts, Tips, Pritish Nandy Communications, GTL, Zee Telefilms, PentaMedia Graphics, Crest Communications and Aftek Infosys. These set of ten stocks called the K-10 stocks.
• Circular Trading was used to inflate stock prices.
• Ketan was paid by many companies as well to inflate their prices.
• Eventually, bears hit these K-10 stocks and they crashed. Retail investors incurred huge losses.

With the Sensex losing 176 points in 2001, the fraud came out in front of the world. He, later on, sold off all the stocks and led to a market crash.

• Satyam Scam: This was the biggest corporate scam of India. Satyam Computer Services Limited accounts were manipulated to project an increase in sales and profits. The Chairman and other senior members confessed to doing so in front of the Sebi. It was found that these manipulations were made for 2003 to 2008 and led to a fraud of almost Rs 7000 crores.

When the CBI froze the company’s accounts and filed charge sheets, the stocks hit bottom immediately as investors panicked.

The Chairman and other guilty were sent to prison later. Mahindra Group eventually took over it and renamed it to Mahindra Satyam.

• National Spot Exchange Limited Scam: The NSEL was a commodity exchange that allowed agricultural and industrial commodities trade. The promoter of the exchange was Jignesh Shah.

In this exchange also, the buyer and the seller are unknown to each other. The commodity is delivered to the buyer once the trade is executed.

Commodities are normally kept in warehouses to avoid any discrepancies. The exchange also ensures that the seller is paid to avoid any default by the buyer. What actually happened:

• Several retail investors were attracted by twisting the rules that made the investments look attractive with fixed returns.
• These contracts were not backed by any commodities.
• This scam was carried out by the money that came via paired contracts.
• Money was also paid to some traders to make them feel comfortable

The discrepancy was realized by the FMC or the Forward Markets Commission and they ordered NSEL to stop all new orders. Once NSEL began paying to its investors, it soon ran out of funds and began defaulting. The estimations claim a fraud of approximately Rs 5600 crores.

• Nirav Modi Scam: This is another large scam in which Nirav Modi, a billionaire jeweler, defrauded India’s second-largest public sector bank of more than Rs 11300 crores. What actually happened:
• Nirav Modi acquired fraudulent Letters of Undertaking (LOUs) from a Mumbai branch of PNB.
• These LOUs helped him to get overseas credit from Indian lenders.
• PNB’s banking system was bypassed by raising the payment notes to overseas branches of other Indian Banks by using the international financial communication system, SWIFT.
• SEBI and CBI were informed by PNB in 2018 about fraudulent transactions in one of its branches.

The market turned bearish once this scam to light as the shares of PNB took a hit. But before the culprits could be arrested, both of them, Nirav Modi and his uncle Mehul Choksi, fled the country.

The bottom line is that the Indian stock markets have been threatened by many scams. However, SEBI, as the regulatory body, tries its best to protect the interests of the investors by keeping the scammers away.