Harshad Mehta Scam & Market Manipulation Techniques

Harshad Mehta Scam & Market Manipulation Techniques

Harshad Mehta was responsible for one of India’s largest stock market scams and the new web series based on it ‘Scam 1992’ is gaining a lot of attention and popularity. Let’s understand how it was carried out and understand different techniques of market manipulation.

Crux of the Matter

What Was The Scam And How It Was Carried Out?
Harshad Mehta, in the 1990s, rattled India’s stock market, the banking system, and the stockholders by using the loopholes in the banking system. In one of the cases, he caused the stock of ACC to artificially rise by 45 times. The markets crashed the day he sold.

He fraudulently laundered over ₹24,000 crores within three years. He utilized the technique of Pump and Dump which surged the Sensex to rise from 1,000 to 4,500 points within a year. It caused the great bull run, which earned him the nickname the ‘Big Bull’.

What Is Market Manipulation?
Market manipulation refers to artificially inflating or deflating the price of a financial instrument or otherwise influencing the behavior of the market participant for personal gain and it is highly illegal.

What Is ‘Pump And Dump’?
Pump and Dump is a market manipulation technique in which the perpetrator attempts to boost the price of stock through false and exaggerated recommendation statements. The perpetrator already has with him significant amount of that company’s stock and later sells them after price increases due to his own artificially created hype.

Other Market Manipulation Techniques
Churning
When a trader places both buy and sell orders at the same price. The intent is to churn up the trade volume, making the stock look more interesting to other investors, and thereby increase the price.

Wash Trading
This is where large traders buy and sell securities back and forth either to each other or to themselves to increase the volume in a certain market. It often entails the same party selling shares through one broker and buying them through another.

This is an illegal practice as it is done to give a deceptive picture of volumes and inflate prices.

Bear Raiding
When a group of multiple investors conspires to push down the price of a stock through concerted short-selling and spreading of false rumors about the target company. It is an illegal practice but it is common with traders who have opened large short-positions in a bullish stock.

Market Cornering
It involves purchasing enough stock (stake) in a company in order to be able to manipulate and control prices. However, most attempts at cornering are unsuccessful because oppositional forces rise up against the perpetrator, weakening its position.

It is highly illegal as it provides an unfair advantage to the perpetrator, allowing them to manipulate prices in order to make a profit.

Change In Rules And Regulations
After the ‘Securities scam’ of 1992, The Securities Amendments Act was passed in 1995, which widened the jurisdiction of the Securities and Exchange Board of India (SEBI), and allowed it to regulate depositories, FIIs, venture capital funds, and credit rating agencies.

Curiopedia
  • Bad Boy Billionaires is a 2020 Indian Netflix documentary which focuses on four prominent business magnates of India. The documentary chronicles major financial scams by Vijay Mallya, Nirav Modi, Subrata Roy and Ramalinga Raju. 
  • In finance, a dead cat bounce is a small, brief recovery in the price of a declining stock. Derived from the idea that “even a dead cat will bounce if it falls from a great height”, the phrase originated on Wall Street.
  • Jordan Ross Belfort is an American author, motivational speaker, former stockbroker, and convicted felon. In 1999, he pled guilty to fraud and related crimes in connection with stock-market manipulation and running a boiler room as part of a penny-stock scam. He published the memoir The Wolf of Wall Street in 2007, which was adapted into a film in 2013.

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