The Securities and Exchange Board of India (SEBI), barred 31 entities, including actor Arshad Warsi, from the securities market for uploading misleading videos on YouTube recommending investors to buy a company’s shares. The entities are said to be involved in a ‘pump and dump’ scam. In this context, you need to understand the meaning of the ‘pump & dump’ scam and how they affect investors in the stock market. This topic is relevant for the IAS exam economy segment.
What is the ‘pump and dump’ scam?
It is an illegal act by an investor or group of investors wherein they promote their stocks and sell them once the stock price rises as a result of their endorsement.
- They use social media platforms or anonymized messaging apps like Telegram and Discord as favoured platforms.
- The promoters coordinate rumours, misinformation, or create hype in order to artificially increase interest in the security, leading to a surge in its price.
- With the advent of the internet, this illegal practice has become even more prevalent.
SEBI bars Arshad Warsi and others for stock manipulation
- They have been found to be involved in a “pump and dump” scam leading to unlawful gains.
- The violators have further been asked to open an escrow account to deposit the impounded amount within 15 days.
Broadcaster’s and Arshad Warsi’s roles in Pum & Dump Scam
- Arshad Warsi and his wife come in the category of volume creators, who both bought and sold shares contributing to a rise in trading volumes and interest in the scrip.
- The SEBI has uncovered a nexus between the broadcaster (Sadhna Channel) and the promoter which entailed manipulating naive retail investors into buying scrips by spreading fictitious data.
- Their modus operandi was buying the thinly-traded stocks before publishing videos on the platform disseminating false information.
Is pump and dump illegal in India?
Yes, the practice of pump and dump is illegal in India.
Why is it called pump and dump?
The illegal practice is so-called because fraudsters first spread false information and ‘pump’ up or hike the prices of stocks they would have already bought. Then, they ‘dump’ or sell them and win huge profits.
Conclusion: Investors need to be mindful of the market trends and do some level of research before delving into financial management by themselves. Blindly following celebrities and promoters can be detrimental to the economic prospects of gullible investors. The regulators need to be ahead of the scammers in this game by using social media surveillance mechanisms to secure people’s hard-earned money.
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