Stock Market Manipulation
Stock Market Manipulation refers to deliberate actions by individuals or entities to interfere with the free and fair operation of the stock market, often to create artificial prices, deceive investors, and gain unfair profits.
Common forms of stock market manipulation include:
Pump and Dump: Artificially inflating a stock’s price through false or misleading statements, then selling at the high price.
Wash Trading: Buying and selling the same security to create misleading volume and price movement.
Churning: Excessive buying and selling by brokers to generate commissions.
Cornering the Market: Acquiring enough shares of a stock to control its price.
Rigging Quotes or Prices: Manipulating bids or offers to distort the price.
Stock market manipulation undermines investor confidence, distorts price discovery, and harms market integrity. Regulatory bodies like SEBI (in India), the SEC (in the US), and others have stringent laws to prevent and punish such acts.
Case Laws Related to Stock Market Manipulation
1. SEBI vs. Sahara India Real Estate Corporation Ltd. & Ors. (2012)
Facts:
Sahara raised funds through optionally fully convertible debentures (OFCDs) from millions of investors without SEBI’s approval.
SEBI alleged Sahara violated securities laws by not complying with public issue norms, leading to misleading investors and market manipulation.
Judgment:
The Supreme Court held that Sahara's activities violated the SEBI Act and securities laws.
Sahara was ordered to refund money to investors with interest.
The Court emphasized the need for transparency and investor protection to prevent manipulation.
Significance:
The case highlighted how raising unregulated funds could manipulate investor perception and market stability.
Reinforced SEBI’s authority in regulating market practices and protecting investors.
2. Ramesh Agarwal vs. SEBI (2007)
Facts:
Ramesh Agarwal was accused of price manipulation and creating artificial volume in shares of certain companies to inflate prices.
Judgment:
The Securities Appellate Tribunal (SAT) upheld SEBI’s order restraining Agarwal from the securities market.
It was found that Agarwal engaged in synchronized trading and artificial transactions to manipulate stock prices.
Significance:
This case clarified the evidentiary requirements for proving manipulation.
Affirmed regulatory powers to act against individuals using artificial trading techniques to manipulate the market.
3. Nikhil Mehta vs. SEBI (2003)
Facts:
Nikhil Mehta was involved in circular trading and price rigging in the shares of certain companies.
SEBI initiated proceedings for stock manipulation.
Judgment:
The Securities Appellate Tribunal confirmed SEBI’s findings and imposed penalties.
It underscored that artificial transactions to create misleading appearances of trading volumes or prices are violations of securities laws.
Significance:
The judgment reinforced that manipulative acts distort market prices and harm genuine investors.
It emphasized that intention and effect of manipulation are key factors in adjudication.
4. SEBI vs. Ketan Parekh (2001)
Facts:
Ketan Parekh, a famous stockbroker, was found guilty of manipulating stock prices through circular trading, pump and dump schemes.
He used funds from banks and created artificial demand to inflate stock prices.
Judgment:
SEBI barred Ketan Parekh from the securities market and imposed heavy penalties.
The case led to stricter regulations and controls on brokers’ trading activities.
Significance:
This high-profile case exposed major manipulation schemes.
Led to reforms in market surveillance and tightened regulatory frameworks.
5. SEBI vs. Rajat Sharma (2016)
Facts:
Rajat Sharma was accused of insider trading and manipulating prices by using non-public information and synchronized trading.
Judgment:
SEBI barred Sharma from trading and imposed penalties after investigation.
The Securities Appellate Tribunal upheld SEBI’s decision, affirming the role of regulators in preventing manipulation.
Significance:
Highlighted the link between insider trading and market manipulation.
Showed regulatory vigilance against misuse of information and coordinated trades.
Summary:
Stock market manipulation distorts prices and harms investor confidence.
Regulatory bodies take a firm stand against manipulative practices using market surveillance and legal provisions.
Case laws demonstrate the types of manipulation: artificial volume, price rigging, insider trading, and unauthorized fundraising.
Courts and tribunals emphasize the importance of transparency, fairness, and investor protection.
Penalties and bans serve as deterrents for market manipulators.
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