Stock Market Manipulations
What is Stock Market Manipulation?
Stock market manipulation refers to deliberate actions taken by individuals or groups to interfere with the free and fair operation of the stock market to create artificial prices or volumes. These manipulations mislead investors and create false market sentiments, violating principles of transparency and fairness.
Common Forms of Stock Market Manipulation:
Pump and Dump: Artificially inflating the price of a stock through false or misleading statements to sell it at a higher price.
Circular Trading: Creating fake trades among a group to give an illusion of high demand.
Insider Trading: Trading based on non-public, material information.
Wash Sale: Selling and repurchasing the same security to create misleading activity.
Rigging the Market: Coordinated actions to set prices or volumes.
Price Rigging: Collusion among traders or brokers to keep prices at a certain level.
Spoofing: Placing large orders with no intention to execute, to manipulate prices.
Legal Framework in India:
SEBI Act, 1992: Securities and Exchange Board of India (SEBI) regulates market operations.
SEBI (Prohibition of Fraudulent and Unfair Trade Practices) Regulations, 2003: Specifically prohibits manipulative, fraudulent trading.
Indian Penal Code (IPC), 1860: Sections related to cheating, criminal conspiracy may apply.
Securities Contracts (Regulation) Act, 1956
Burden of Proof:
To prove manipulation, the regulator or prosecution must establish:
Manipulative intent
Artificial transactions or misleading statements
Impact on the market or investors
Landmark Case Laws on Stock Market Manipulation
1. SEBI v. Rajesh Jhaveri Stock Brokers Pvt. Ltd. (2003) — Supreme Court of India
Facts:
Rajesh Jhaveri Stock Brokers was accused of manipulating stock prices by creating artificial volumes.
Judgment:
The Supreme Court upheld SEBI’s powers to investigate and punish market manipulation under its regulatory framework. It confirmed that SEBI can pass binding orders and impose penalties.
Key Takeaway:
SEBI’s authority to regulate and punish manipulative practices in the stock market is upheld as necessary for investor protection.
2. Ramesh Babu v. SEBI (2010) — Securities Appellate Tribunal (SAT)
Facts:
The accused was alleged to have indulged in circular trading and price rigging to manipulate shares of a company.
Judgment:
SAT observed that circular trading creates artificial volumes, which mislead investors. It upheld the penalty imposed by SEBI, reinforcing zero tolerance for such acts.
Key Takeaway:
Circular trading is a punishable offence under SEBI regulations, damaging market integrity.
3. Ketan Parekh Scam Case (2001) — SEBI Proceedings
Facts:
Ketan Parekh was accused of large-scale stock manipulation involving pump-and-dump schemes in certain stocks (“K-10 stocks”).
Judgment:
SEBI barred Parekh from trading and imposed heavy penalties. The case became a benchmark for regulatory action against market manipulation.
Key Takeaway:
The case demonstrated the severity of consequences for large-scale manipulation and the importance of vigilant regulatory oversight.
4. SEBI v. Sahara India Real Estate Corporation Ltd. (2012) — Supreme Court
Facts:
Sahara raised huge sums through optionally fully convertible debentures (OFCDs) without SEBI approval, misleading investors.
Judgment:
The Court ruled that Sahara violated securities laws by manipulating investment schemes and ordered refund to investors with interest.
Key Takeaway:
Issuing securities without regulatory approval constitutes manipulation and cheating.
5. SEBI v. Harshad Mehta (1992) — Bombay High Court
Facts:
Harshad Mehta manipulated the stock market using fake bank receipts to artificially inflate stock prices.
Judgment:
The court held Mehta guilty of fraudulent trading and manipulation, leading to major reforms in market regulation.
Key Takeaway:
Fraudulent financial instruments and manipulation are criminal offences with severe consequences.
6. SEBI v. Satyam Computer Services Ltd. (2009) — SEBI Order
Facts:
The Satyam scandal involved falsification of company accounts leading to stock price manipulation.
Judgment:
SEBI ordered disgorgement of illegal gains and banned the directors from the securities market.
Key Takeaway:
Corporate governance failures linked to market manipulation attract strict regulatory action.
7. SEBI v. Zandu Pharmaceutical Works Ltd. (2002) — SAT
Facts:
Alleged manipulation through insider trading and misrepresentation in shareholding disclosures.
Judgment:
SAT upheld SEBI’s penalties emphasizing transparency and fair disclosure as critical to prevent manipulation.
Key Takeaway:
Non-disclosure or misrepresentation by insiders is a form of market manipulation.
Summary
Stock market manipulation undermines investor confidence and distorts markets.
The SEBI Act and regulations provide a robust framework for detecting and punishing manipulative acts.
Courts have consistently upheld SEBI’s regulatory powers.
Penalties include fines, bans from trading, disgorgement of illegal gains, and criminal prosecution.
Manipulation types include pump and dump, circular trading, price rigging, insider trading, spoofing.
Procedural fairness and evidence of intent and effect on market are crucial for conviction.
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