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 SABYSACHI TARAI -039
•
 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.


SABYSACHI TARAI -039

SUMMARY OF SOME
SCAMS IN INDIA:
1991-92
 1994-95
• 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

• 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
 1994-95


• C. R. Bhansali Group • Harshad Mehta

– Fraudulent – Collusion with top-
Accounting management for
Practices the purpose of
– NBFC 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


• 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.


• 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.


•
CONT…
• 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.


• There are certain guidelines following which above purpose can be

solved.


• 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.

CONT:
• 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.


• 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.
•