Biggest Stock Market Scams In India

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List Of The Biggest Scams In The Indian Stock Market

The Indian stock market is one of the 5 biggest stock market markets by market capitalisation. The total market cap of the Indian stock market stands at close to $3.21 trillion. In a place where so much money changes hands, greed is bound to tempt misdoers to perpetrate scams and frauds. This blog is a list of the biggest scams in the Indian stock market.

1. Harshad Mehta Scam

Year it came to light: 1992

Key Perpetrator(s): Harshad Mehta and some bank employees

Amount: ₹4,000 cr

Other names: Securities Scam, 1992’s Scam of Indian Stock Markets

In the history of the Indian stock market, the Harshad Mehta Scam is probably the biggest Indian scam perpetrated. Harshad Mehta, a well-known broker, colluded with bank employees to manipulate the Bombay Stock Exchange (BSE).

Allegedly, Harshad Mehta and some bank employees got fake bank receipts (BRs) issued which were then used to get other banks to lend him money under the impression that they were lending against securities (g-secs). Government securities are considered to be credit risk-free debt instruments, but fake bank receipts hold practically no value.

The total amount Harshad Mehta scammed the banks amounted to ₹4,000 cr, which was used to manipulate stock prices.

2. Ketan Parekh Scam

Year it came to light: 2001

Key Perpetrator(s): Ketan Parekh 

Amount: ₹40,000 cr

Other names: N.A.

The only scam that can hope to contest Harshad Mehta Scam’s position as the biggest stock market fraud in India would be the scam perpetrated by Harshad Mehta’s mentee, Ketan Parekh.

Ketan Parekh, a stockbroker, engaged in circular trading using funds he had acquired from banks and other financial institutions. Circular trading occurs when a group of people join hands and trade a scrip among themselves to create a false notion of high trading volumes to increase stock prices.

Alleged, Ketan Parekh manipulated the stock prices of 10 stocks from 1998 to 2001. These stocks, collectively known as K-10 or KP pack, were:

  1. Amitabh Bachchan Corp
  2. Himachal Futuristic Communication
  3. Mukta Arts
  4. Tips
  5. Pratish Nandy Communications
  6. GTL
  7. Zee Telefilms
  8. PentaMedia Graphics
  9. Crest Communications
  10. Aftek Infosys

Most notably, when the scam came to light in 2001 after the Indian Union Budget had been presented, SENSEX crashed by 4.13% causing the NDA government to set up an inquiry into the reaction of the market.

3. NSE Colocation Scam

Year it came to light: 2015

Key Perpetrator(s): Some executives at NSE including Chitra Ramakrishna

Amount: ₹50,000 cr to ₹75,000 cr (estimated)

Other names: Himalayan Yogi Scam

One of the most bizarre stock market scams in India involved a top executive at the country’s leading stock exchange claiming a Himalayan yogi instructed her to perpetrate a scam.

The scam revolves around colocation facilities which allow brokers to place their servers in the data centre of NSE which allowed them faster access to price feed distributed by NSE. Such facilities can be beneficial for high-frequency traders.

There is nothing illegal about colocation facilities. But, allegedly, Chitra Ramakrishna, the former CEO of NSE, and some of her few employees colluded with OPG Securities in such a way that OPG Securities knew which server was the least stressed at NSE’s colocation facility and thus the fastest.

This would allow them to have an advantage over other brokers who also availed of the same colocation services.

If someone knows a stock’s price faster than others, they may be able to make unfair gains at the expense of others. For example, if broker A knows that the stock price of a company will rise in the next 2 minutes, they may buy that stock from unknowing investors and make unfair gains.

4. Karvy Scam

Year it came to light: 2019

Key Perpetrator(s): Karvy Stock Broking Ltd

Amount: ₹2,300 cr

Other names: N.A.

One of the biggest financial scams in India involved Karvy Stock Broking Ltd (KSBL), a former leading stock broker in India with over 10 lakh retail broking customers. KSBL took loans against securities lying in the Demat accounts of its customers and diverted these funds into other Karvy Group companies like Karvy Realty.

According to initial estimates, KSBL has raised over ₹2,300 cr via loans against shares from banks like HDFC Bank, ICICI Bank, IndusInd Bank, Axis Bank, Bajaj Finance and Aditya Birla Finance using the shares owned by its clients.

KSBL executed this scam by transferring shares from Demat accounts of inactive clients to its Demat account named Karvy Stock Broking and presented these stocks as its own to lenders as collateral for taking loans.

5. UTI Scam

Year it came to light: 2001

Key Perpetrator(s): Unit Trust of India

Amount: At least ₹1,800 cr

Other names: N.A.

The Unit Trust of India (UTI) was established through a government act in 1963 and it enjoyed roughly 24 years of monopoly as a mutual fund. UTI had effectively used the 24 years of monopoly to build a vast customer base with its assets under management standing at ₹6,700 cr in 1988.

At the heart of this scam were assured return schemes (ARS) launched by UTI, for which an adequate guarantee was not set up. If a mutual fund promises a certain level of returns but does not have the capital to provide guaranteed returns, its guarantee is worthless.

In 2001, due to the Ketan Parekh scam and other factors, stock prices were plummeting. This triggered investors to redeem their UTI units. Since, the UTI unit price was set arbitrarily and was above the actual value of assets, the increasing flock of investors wanting to redeem their units put an enormous strain on UTI.

To add insult to injury for the retail investors, the largest investors such as SBI and ICICI had people on UTI’s board. This allowed large investors to pull out before others knew of the crisis at UTI.

In July, the UTI board decided to refuse unitholders for one of its schemes for the next 6 months and suspended redemption.

SEBI has since tightened rules for mutual funds to assure returns and currently if a mutual fund promises a certain level of returns it has to actually set up a guarantee.

Final Thoughts

Scams in the Indian stock markets have ranged from price manipulation using social media groups to much more complex ones involving colocation facilities. However, every time scams have been unearthed, SEBI, has taken steps to protect investor interests.

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What are the biggest financial scams in India?

Two of the biggest scams in India were the Harshad Mehta Scam of 1992 and the Ketan Parekh Scam of 2001.

Can Indian stock market be manipulated?

Indian stock markets have been manipulated in the past through pump-and-dump schemes operated over social media groups and by brokers frauding markets.

Who protects the Indian markets from scams and frauds?

Several bodies including the Securities and Exchange Board of India (SEBI) are responsible for ensuring that fair practices are followed by investors and traders in the Indian stock market.

Which is the biggest corporate scam in India?

The biggest corporate scam in India could be the Satyam Scam. This case involved Ramalinga Raju, founder and CEO of Satyam Computer Services, embezzling ₹7,136 cr from his own company.

Biggest Stock Market Scams In India

Biggest Stock Market Scams In India

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