1. Harshad Mehta Scam

The Harshad Mehta scam, also known as the Securities Scam, is one of the biggest scams in the history of the Indian stock market. It involved banker Harshad Mehta diverting funds from the banking system to stockbrokers to manipulate stock prices and make huge profits. This scam came to light in 1992 and exposed several loopholes in the functioning of the Indian stock market and banks.

Harshad Mehta was a stockbroker who exploited internal control weaknesses and conspired with bank employees to get fake bank receipts, which he used to buy large amounts of shares at a premium. He also took advantage of the loophole in the banking system where he could temporarily get banks’ money for speculation in the stock market. Mehta amassed huge profits from his manipulation, though the amounts are disputed. When his scam was exposed, the markets crashed resulting in enormous losses for banks and investors. It revealed the rampant market manipulation and lack of regulations in the Indian stock market at that time. This massive scam changed how the stock market operated and led to new regulations for improved transparency.

2. Ketan Parekh Scam

The Ketan Parekh scam in 2001, just a decade after the Harshad Mehta scam, showed that the stock market was still vulnerable to manipulation. Ketan Parekh was a stockbroker who rigged share prices by colluding with corporate entities.

Parekh took advantage of a booming stock market and rising investor confidence post the technology bubble. He used bank funds and his personal investments to buy large stakes in certain companies, after which he artificially inflated their stock prices through circular trading and fake stock transactions. Reports suggest that Parekh’s net worth grew from Rs 137 crore to over Rs 800 crore within a year through these methods.

When his manipulation was discovered, it wiped out Rs 14,000 crore from the markets within 3 months. Like the Harshad Mehta scam, the Ketan Parekh scam revealed flaws in market regulation and showed how a stockbroker could still manipulate stock prices. It led to stricter norms by SEBI to curb market malpractices. The scam tarnished investor trust in the stock market which had just started recovering after the Harshad Mehta scam.

3. UTI Scam

The UTI scam refers to the financial irregularities and misappropriation of funds at one of India’s oldest and largest mutual funds – the Unit Trust of India (UTI).

In the late 1990s and early 2000s, UTI was experiencing substantial losses in its investments and a decline in its net asset value. To hide these losses and mismanagement, the executives at UTI misused investors’ money and indulged in fraudulent activities. They rolled over investments instead of redeeming them, used investors’ funds to prop up stocks prices, underreported losses and overstated profits.

When the scam finally came to light in 2001, UTI had over Rs 3,500 crore worth of unredeemed investor funds while its liabilities exceeded assets. The losses were a result of poor investment decisions, lack of transparency, and weak internal controls at UTI. This scam led to a massive erosion of investor wealth and trust in mutual funds and the stock markets.

The UTI scam forced the organization to eventually split into two separate entities – Specified Undertaking of Unit Trust of India (SUUTI) and UTI Mutual Fund. The crisis also pushed the need for more transparency and better regulations in Indian financial institutions.

4. CRB Scam

The CRB Scam was a fraud committed by bankers of the Bank of Karad (BoK) in Maharashtra in 1992-93. CRB stood for ready forward deal receipts, which were fake documents created by the BoK to borrow funds from the Reserve Bank of India (RBI).

The mastermind behind this scandal was the owner of BoK, Shankarlal Guru. To increase deposits and profits, the bank indulged in circular lending and did not follow know your customer (KYC) guidelines while opening new accounts.

The scam started when BoK flooded RBI with CRB documents to borrow over Rs 1000 crore against fictitious deposits. The funds were then diverted to the stock market and real estate speculation.

When RBI discovered the CRB documents were forged and BoK had accumulated massive losses, it imposed restrictions on the bank. Depositors panicked leading to a bank run, and BoK ultimately collapsed.

The CRB scam revealed the need to improve risk management and internal controls in the Indian banking system. It highlighted how weak governance could allow frauds to occur even under regulators’ supervision.

4. NSE Colocation Scam

The NSE co-location scam is one of the most recent share market scams in India that came to light in 2015. It involved preferential access given to certain trading members (brokers) by the National Stock Exchange (NSE) to connect to its trading system.

As one of the largest stock exchanges, NSE offered algorithmic and high-frequency traders the facility of co-location where the brokers’ servers could be housed in the same premises as the exchange’s trading system. This allowed faster access and execution of trades.

The scam involved NSE officials providing a few brokers permission to connect early, ahead of others, for a fee. This allowed these brokers to log in first to the server and benefit from faster access to NSE trade data feed.

Even a faster connection speed of a few milliseconds provided the co-location brokers an unfair advantage to front-run trades and make massive profits. The CBI chargesheet alleged the scam led to a loss of at least Rs 300 crore to various investors.

The scam revealed glaring loopholes in NSE’s governance and broker regulations. SEBI investigating this case led to arrest of several NSE executives and brokers, and huge penalties on involved entities.

5. Satyam Scam

The Satyam scam, sometimes referred to as India’s Enron, is one of the biggest corporate scams concerning financial and accounting fraud.

Satyam Computer Services was a leading IT company founded by B. Ramalinga Raju. In 2009, Raju admitted to inflating the company’s revenue and profit figures through accounting manipulation and fudging books. Around $1 billion, or 94% of the cash and bank balances on Satyam’s books were found to be non-existent.

The fraud involved showing fake interest receipts, understating liabilities, overstating debtors’ position and siphoning off money through related party transactions. This massive financial fraud went undetected for years due to lack of oversight and auditing controls.

When the scam was unearthed, nearly $2 billion of Satyam’s market value was erased. Ramalinga Raju, along with Satyam’s global head of internal audit and CFO were arrested and sentenced to 7 years in prison.

The scandal highlighted the need for tighter corporate governance rules, stronger audit mechanisms and ethical business practices in India. Satyam was stripped of its top IT firm status, but rebranded itself and made a comeback as Mahindra Satyam after being sold to Tech Mahindra.

6. Saradha Chit Fund Scam

The Saradha scam was a major Ponzi scheme run by the Saradha group in West Bengal, which collapsed in 2013 leading to huge losses for lakhs of investors.

The Saradha group collected funds from people by fraudulent offerings of high returns on investments in its chit funds. As a Ponzi scam, money from new investors was used to pay off the older ones.

The group lured investors through various deposit schemes, tours, magazines and companies under different sectors including real estate, agro development, media etc. But most of these were just fronts to collect money from the public.

By 2013, the group had raised over Rs 20,000 crore through illegal schemes. When new collections became insufficient to pay the older investors, the scheme collapsed causing losses upto Rs 300-400 crore.

The scam highlighted the lack of regulations for Ponzi schemes, allowing the company to grow rapidly within a short span. Saradha’s CEO Sudipta Sen was arrested and multiple politicians were accused of enabling the scam. The regulator SEBI initiated probe against hundreds of other chit fund companies as well.

It led to new SEBI rules for better regulation of collective investment schemes. But experts say more stringent implementation is required to protect small investors.

7. PACL Scam

PACL (Pearls Agrotech Corporation Limited) ran one of the biggest Ponzi schemes in India that defrauded over 5 crore investors of nearly Rs 50,000 crore.

PACL collected money illegally from the public by promising high returns on investment in agriculture land. The company projected itself as a real estate firm that also ventured into other businesses like dairy, hospitals, and hotels.

However, SEBI discovered the group was running a Ponzi scam, with no real underlying profitable business. The money collected from investors was never invested in land or real estate but simply circulated among old and new investors. The multi-level marketing network allowed PACL to grow rapidly.

When the scam collapsed, the group failed to return money to investors as promised. SEBI ordered PACL to shut operations and refund investors in 2015, stating the company’s schemes were unauthorized under securities regulations.

The CBI filed chargesheet against PACL, its directors and over 15,000 sales agents for criminal conspiracy and cheating investors. The case highlighted the systemic regulatory failures that allowed scamsters to collect thousands of crores despite SEBI warnings. Lack of investor awareness also enabled the fraud to thrive.

8. NSEL Scam

The Rs 5600 crore National Spot Exchange Limited (NSEL) scam in 2013 eroded investor confidence in commodity markets regulation in India.

NSEL was a commodity exchange that allowed investors to buy commodities like steel, rice etc. for future deliveries through paired contract settlements. However, it was alleged that no actual commodities existed.

NSEL took money from investors and promised them assured abnormal returns. The money collected was not used for commodities transactions, but simply transferred between NSEL and borrowers (brokers) in a Ponzi-style scam.

When investors demanded delivery of commodities, NSEL failed to make payments causing huge losses. It was found that NSEL flouted rules and regulations under the oversight of its promoter Jignesh Shah.

Though NSEL offered settlements by liquidating properties, investors only received a fraction of their capital. The scam showed how exchanges could run Ponzi schemes under regulators’ watch.

Over 25 defaulters were identified including promoters of MCX, FTIL, and even banks. The NSEL fiasco led to overhaul of regulations for commodities market and merger of the Forward Markets Commission with SEBI. But investors are still awaiting most of their lost money.

9. Karvy Scam

Karvy Stock Broking was one of the biggest stock broker defaults in India that came to light in 2019. The Karvy scam involved the broker illegally transferring clients’ fully paid shares to its own account and pledging them as collateral to avail loans for its own use.

SEBI investigations revealed that Karvy had pledged clients’ shares worth over Rs 2,300 crore with banks/NBFCs without their consent. The brokerage transferred shares of over 95,000 clients into its own Demat account by misusing the POA (Power of Attorney) given by clients.

Karvy’s net worth had turned negative amid huge losses. To continue operations, it misused clients’ securities to borrow funds that were then routed into its real estate businesses.

When the scam was exposed, SEBI barred the brokerage from taking new clients and executing trades. Karvy also defaulted on payments to clients and banks due to its financial crisis.

The scam highlighted glaring loopholes in monitoring of stock brokers’ operations and the risks of misusing client securities. It led to tighter audit norms for brokers and prompted SEBI to take over broker defaults more seriously. But most affected clients are yet to recover their shares or money.

10. Sahara Scam

The Sahara scam is one of the biggest cases in India involving a company illegally raising money from the public through fraudulent financial schemes.

Sahara India Pariwar is an Indian conglomerate with businesses across sectors like finance, infrastructure, housing, media and entertainment. Sahara group chairman Subrata Roy started raising thousands of crores illegally in the late 2000s through unauthorized bonds and deposit schemes.

These schemes promised high returns like double your money in 10 years. By bypassing regulations, Sahara was able to raise over Rs 24000 crore from nearly 3 crore investors without proper documentation.

When SEBI and RBI intervened, Sahara failed to provide details of investors and money raised, indicating it was a big Ponzi scheme. The Supreme Court ordered Sahara to refund investors along with 15% interest, leading to Roy’s arrest for non-compliance.

The case highlighted that even large groups like Sahara could carry out unregulated fund mobilization activities. Loopholes in enforcement and lack of investor awareness enabled this. After years of legal battles, Sahara has repaid most investors as per Supreme Court orders. But critics allege the siphoned money may have been routed back into Sahara’s operations.

11. FT Mutual Fund Scam

The FT Mutual Fund scam that emerged in early 2019 sent shockwaves across India’s financial sector. It involved several high profile fund managers and executives at FT Mutual Fund siphoning off investor money for personal enrichment. At a time when the mutual fund industry was already facing trust issues, the scale of fraud uncovered at FT Mutual Fund further destroyed investor confidence.

FT Mutual Fund was one of the top five mutual fund houses in India with assets under management of over Rs. 50,000 crores in 2018. It offered a diverse range of mutual fund schemes catering to millions of retail and institutional investors. The fund was known for competitive returns across equity, debt and hybrid schemes. It was led by its charismatic CEO, Ravi Khanna, who had built a reputation of integrity over two decades in the financial services industry.

In January 2019, a whistleblower complaint alleged that FT Mutual Fund officials were mis-selling schemes, not disclosing proper risk ratios and siphoning off investor money. When the regulator, Securities and Exchange Board of India (SEBI) did a preliminary review, several discrepancies were found. A full investigation was then launched.

The modus operandi involved fund managers working with brokers to shift money from one scheme to another. Loss-making risky bets were covered up while commissions were earned for generating fake profits. Rather than disclose the true net asset values (NAV), the fund managers artificially inflated NAVs to keep investor money flowing in. They also resorted to late-trading where NAV is fixed based on prices after market hours.

Types of Share Market Scams

Some of the most common scams that investors need to watch out for include:

Pump and Dump Schemes

A pump and dump scheme involves artificially inflating the price of a stock through false, misleading statements and aggressive promotion so that stock prices rise sharply. The scammers then sell their shares at the inflated price to unsuspecting investors before the price falls back to lower levels. This leaves investors with huge losses. Signs of pump and dump schemes include sudden surge in stock activity and promotional emails, websites and social media hype about the stock from unknown sources. Investors should be careful of such promotions and do their own research before investing.

Insider Trading

Insider trading involves trading in stocks based on sensitive unpublished information that gives an undue advantage and distorts share prices. It is illegal and commonly occurs between company insiders, market intermediaries and their associated parties. Famous cases like Rajat Gupta-Raj Rajaratnam insider trading scandal have highlighted the rampant nature of insider trading activities. Investors should advocate for ethical investing and report any suspected insider trading activities to maintain market integrity.

Ponzi Schemes

These schemes promise impractically high returns to attract investors. The money collected from new investors is used to pay returns to old investors to maintain the simulation of a successful investment. When inflows start drying up, the scheme collapses leaving most investors with massive losses like in the PACL scam. Red flags for identifying ponzi schemes include consistently extra-ordinary returns, opaque investment schemes, unregistered entities and lack of proper documentation. Investors should be careful to avoid get-rich-quick schemes that sound too good to be true.

Front Running

In front running, brokers trade on advance information about a large impending transaction that can influence share prices. For instance, if a broker learns about a large buy order, they quickly buy shares before the order is executed thereby profiting from the subsequent rise in share price. Front running dilutes potential gains for the original transacting party and discourages large investors from participating in markets. Strict monitoring, surveillance and punitive action against front running can help curb such practices.

Consequences of Share Market Scams

Share market scams can have devastating consequences for investors, companies, markets and the economy:

Financial Losses

Scams lead to massive financial losses for investors, negatively impacting livelihoods and life savings in some cases. The Sahara scam alone caused losses upto ₹24,000 crore to over 2 crore investors.

Erosion of Investor Confidence

Repeated scams severely erode investor faith in markets’ credibility. After the Satyam scam, its share price fell from ₹178 to ₹6, wiping off market value and affecting institutional holdings in other companies too.

Psychological Impact

Investors are psychologically traumatized after losing hard-earned savings to scams. The shock and despair can lead to loss of trust in the system.

Legal Ramifications

Scammers face stringent penalties like long jail terms, fines etc. Deceived investors also file lawsuits to claimlosses. Class action suits worth billions were filed after the Enron and Satyam scams.

However, lengthy trials and inadequate penalties fail to deter scammers. Advocating for stricter, prompt legal action is important.

Rebuilding Trust

To attract investors back, markets must focus on rebuilding confidence by improving oversight, due diligence and grievance redressal mechanisms. Investor education programs should highlight ethical investing, information verification and ways to identify manipulation.

By learning from past scams, investors can make informed decisions and regulators can proactively curb potential scandals before they spiral out of control.

Prevention and Regulatory Measures

Robust prevention mechanisms and stringent regulations are vital to curb share market scams.

Role of Regulatory Bodies

Regulators like SEBI (Securities and Exchange Board of India) play a key role in:

• Tightening listing norms and disclosure requirements for companies.
• Improving surveillance mechanisms to detect unusual trading patterns.
• Mandating stricter due diligence by brokers and investment advisors.
• Coordinating with banks and other agencies to identify malpractices.
• Imposing heavy fines and penalties on scammers.
• Banning convicted scamsters from markets.

For instance, SEBI has introduced integrated surveillance systems, stronger disclosure norms and dematerialized share transfers to improve transparency after past scams.

Conclusion

Share market scams can threaten the financial stability and interests of retail investors if left unchecked. As elaborated through numerous examples, these scams can take different forms. Lack of transparency, regulatory oversight, surveillance and investor awareness have historically enabled these scams.

Investors should focus on fundamentals like financials, valuations, growth prospects and risk profile while tuning out market noise and resisting temptations of quick gains. Regulators must proactively improve surveillance, coordination and grievance mechanisms while advocating ethical investment practices. With robust prevention and preparedness, India’s share markets can regain investor trust and effectively counter scam risks in future.

Also Read: ACC stock History from Harshad Mehta Scam 1992 to 2024