Scams tend to emerge as a by-product wherever money involves. Stock markets are not an exception due to huge cash flow. There are always some people who try to take advantage of loopholes in the system to make money. Indian stock market has seen some very big scams since its inception. This article illustrates the biggest scams in Indian stock market.
India inherits the tag of one of the richest and advanced civilizations in the world’s history. Its ancient richness, although seen as mythological concepts in today’s world (by many) still delivers the smell of India’s golden historical era. It was invaded and looted by many outsiders taking advantage of regional insecurities.
Manuscripts on Indian stock market can be traced back when East Indian Company was ruling India. The first stock exchange was established within a decade of the first freedom fight erupted against the East India Company. This was Bombay Stock Exchange (Then named as The Native Share and Stock brokers Association). It was formed by a small group of brokers in Bombay (now Mumbai) and worked on the concept of floor trading.
After BSE, several stock exchanges were established at the regional level known as regional stock exchanges. All stock exchanges used to function on a black box mechanism and there was no authority to regulate them. Thus lots of malpractices and forgeries were done by the one’s who knew the loopholes. Unattended small forgeries encouraged the fraudsters to execute huge scams. In 1992, SEBI came to power as a statutory body and started regulating all the entities of Indian financial market including the financial intermediaries. After the regulation of SEBI, scams were minimized and investors can come upfront to register their grievances at a platform called SCORES.
Although SEBI with its 20 departments enforces its bye-laws and has taken serious efforts to create Indian financial eco-system very transparent, however, some fraudsters do manage to find loopholes in the system.
This article lists the biggest scams in the Indian stock market.
In this article name of scammers are intentionally not capitalized
- harshad mehta Scam
- crb Scam
- ketan parekh Scam
- Satyam Scam
- NSEL Scam
Estimated Size: Rs 3,500 crore
Central figure: harshad mehta
Modus Operandi: Used money from banks to make personal gains via investment in shares
harshad shantilal mehta, born on 29 July 1954 in Rajkot district of Gujarat is known for one of the first biggest scams in Indian stock market. He is seen as a broker who degraded and damaged the Indian stock market resulting huge losses for many investors. Some of the investors lost every penny they saved leading to committing suicide. This scam is estimated to be around 3500 crore and known as security scam. He was always a fraud who used to find the loopholes in the system to exploit for his sole benefits and tend to use everyone for the same.
Loosely explained, during 1991-92 he used banks to get funds then used that money to rise the SENSEX by 4500 points. This was a boom in the BSE index and everyone was investing money. He bought some stocks hugely e.g. ACC which was at the price of 200 reached to incredible price of 9000. His scam was revealed on 23 April 1992 by a journalist Sucheta Dalal. mehta was convicted by the Bombay High Court and Supreme Court. SEBI debarred mehta from security dealings. He was tried for 9 years and died in a civil hospital in Mumbai. He was in Thane central jail and had a chest pain when shifted to hospital. mehta breathed his last on 31 December 2001 at 12:40 am. He actually ruined lots of households just for his sole benefits and ambitions.
Estimated Size: Rs 1,200 crore
Central Figure: cr bhansali
Modus Operandi: Raised public money through FDs, MFs and debentures via nonexistent firms and invested them in stocks for personal gains.
chain roop bhansali, a scammer born in a jute trader’s family in Kolkata (then Calcutta). He was studious and financially very ambitious. He was willing to do anything to live a lavish life. He left for New Delhi after realizing that he can’t get what he wants in Kolkata. He worked at a leading registrar of companies over there but was involved in a small scam. He was forced to leave. Then he planned for a long-term scam and established “CRB consultant” in 1985. In 1992 the name was changed to “CRB Capital Markets” CRB Cap. This, with other financial firms like CRB Mutual Fund and CRB Custodial Services, attracted lots of investors promising attractive returns. Gradually he scored huge money, then transferred that money to more than 100 bogus companies. He was paying the interest to the investors thus no one doubted. Even his firms were given the A+ rating by the good credit rating agency like CARE. He got a hard beating in the stock market in 1995. To pay the interest he started borrowing. But the stock market beating continued. He borrowed more and more and more. Finally, he got caught when started defaulting. All was well until December 1996. Then the Reserve Bank of India (RBI) refused banking status to CRB and contemplated an action for various irregularities. bhansali spent three months in jail in 1997.
Estimated Size: Rs 800 crore
Central Figure: ketan parekh
Modus Operandi: Circular trading in selected stocks via borrowed money from banks to manipulate share prices
ketan parekh is seen as an heir of harshad mehta’s scam mindset. He came in contact with mehta in 90’s and started working in his firm Growmore Investments. Just like mehta, parekh was also using the manipulative strategies to rig the stock prices. He used banks and institutions to get funds. Then started circular trading with other traders to increase the prices. His favourite stocks were called as k-10 stocks. Some companies even paid him to increase their stock prices and he did that by circular trading. Later his K-10 was hit by bears excessively. Groups started hitting his k-10 so hard that it started to fall leading to huge losses to investors.
On 01 March 2001 just after Indian Union Budget was presented BSE SENSEX crashed 176 points. This led the then NDA government to set enquiry for the market reaction. Later RBI found parekh suspicious and commenced an investigation against him. His k-10 was also getting hugely beaten by opposition groups. Finally, parekh sold off all his stock leading to the market crash.
Estimated Size: Rs 7000 crore
Central Figure: ramalinga raju
Modus Operandi: The top management of the software company manipulated accounts to show inflated sales, profits and margins from 2003 to 2008.
Satyam Computer Services (SCSL) scam surfaced in 2009 when its chairman ramalinga raju confessed that the company’s accounts were tampered with. He disclosed a Rs 7,000 crore accounting fraud in the balance sheets. As a consequence, CitiBank froze SCSL account. Due to the fraud news panic created in the market and Satyam’s price floored. Later Mahindra took-over Satyam and renamed as Mahindra Satyam.
Estimated Size: Rs 5,600 crore
Central Figure: jignesh shah
Modus Operandi: Investors were wooed by offering fixed returns on paired contracts with agri and industrial commodities as underlying. Stocks were missing and money was allegedly syphoned by so-called borrowers.
NSEL is the abbreviation of National Spot Exchange Limited. This scam was around 5,600 crore. It was one of a kind of scam on such a very big scale from an exchange itself in India. In 2001 Calcutta Stock Exchange has a 600 crore settlement problem. NSEL was a commodity exchange promoted by jignesh shah led financial technologies (fintech).
In a spot commodity exchange, a buyer and seller agree for a certain price and the commodity is delivered to the buyer. Both buyer and seller remain anonymous to each other. To avoid defaults from the seller, commodities are kept in a warehouse by the seller. In case the buyer defaults, exchange makes sure to replace it with another buyer.
NSCL twisted many rules to attract investors for commodity trading. In fact, there were no actual commodities ever available in any warehouse. It was also mandatory to use both buy-sell (pair) so that the capital remains within the exchange. But this capital was actually used by the scammers in the stock market and other sources to earn money and some money was returned to the traders making them believe as if they were having profits in the exchange.
At that time Foward Markets Commission (FMC) used to regulate commodity market in India (later merged into SEBI in September 2015). FMC smelled that something suspicious was going on and forced NSCL to stop making any fresh contract. As a consequence NSCL was out of money to pay the investors. This led to payments default and a scam of 5600 crore.
Indian stock market since its inception has improvized its system to fix the loopholes which gave birth to various scams. SEBI the regulator of Indian financial market is continuously deploying various bye-laws and security measures to ensure that same mistake is not repeated in the market. Still some scammers viz. mehta, bhansali, parekh, ramalinga and jignesh did find the loopholes and became the reason for market crash.