MUMBAI: It was a normal day when Sushil Kumar, who works for a private firm in Noida, received an SMS about investing in shares of a company. The message was about a sharp rise in a company’s shares and the sender claimed the price would rise further. To support this claim, the sender cited some websites that assigned ‘buy recommendation’ on the shares of the company.
Lured by the claims, Sushil decided to invest in the stocks in the hope of making some easy money. Several other investors received similar messages and they too fell for the claims and decided to buy these shares. After rising further for some more days, the prices of these shares crashed and retail investors lost their hard-earned money. The investigation by the Securities and Exchange Board of India (Sebi) into this incident, which occurred in 2019 and 2020, revealed that it was a well-orchestrated plan in which promoters of the company colluded with some influencers and pocketed R147 crore by fooling retail investors.
How was the trap set for investors?
A recent investigation conducted by Sebi has revealed promoters of five companies colluded with price influencers to manipulate share prices and fool investors. The market regulator has barred 135 entities from the securities market over the stock manipulation of five companies. These small-cap companies are Mauria Udyog Ltd, 7NR Retail Ltd, Darjeeling Ropeway Company Ltd, GBL Industries Ltd, and Vishal Fabrics Ltd.
The plan to trap investors was well-planned by promoters and influencers. Before approaching investors, the perpetrator artificially jacked up the prices of companies. After shares had risen, a person would send bulk messages to hundreds of investors. The messages contained ‘buy recommendations’ in these scrips through SMS and websites to artificially cause rapid price and volume increases in these scrips.
As a result of these messages, several investors bought these shares leading to a further rise in the shares. Once these shares had risen significantly, promoters and directors of the companies sold their shares pocketing substantial profit. There were three main players in this unholy nexus. The first category was price and volume influencers, who were instrumental in artificially influencing price and volume in the scrips before the SMSes were sent. The second category was offloaders, who had made substantial profits by dumping the shares by taking advantage of abnormal rises in the prices of shares. There was a mastermind who hatched this plan and sent bulk messages to investors. Promoters, influencers and the mastermind were all connected to each other and worked in sync to dupe investors.
How to spot price manipulation
There are several ways through which retail investors detect share price manipulation. The first thing which lures investors is rise in the prices of the company’s shares. Investors should look if the rise in share prices is backed by any major announcement by the company or a consistent increase in revenue or profit.
“Investors can detect signs of stock manipulation by watching for unusual trading patterns, such as abnormal volumes or sudden price spikes. If you notice a significant upward or downward movement in a stock without an underlying reason for the spike or fall, there is a chance that the stock has been manipulated through illegal means,” Shruti Jain, Chief Strategic Officer, Arihant Capital Markets told TNIE. “It’s important to pay close attention to stocks whose prices witnessed an increase or decrease more than they usually do in the context of 50-day moving averages. Lack of transparency in disclosures and irregular financial reporting are also warning signs. Monitor regulatory actions for investigations, penalties, or bans related to stock manipulation,” she added.
As there is no shortcut to success, similarly there is no shortcut to making quick money from the stock market. Instead of looking for tips, investors should do some research about the company. “Retail investors should focus on investing in fundamentally strong companies with solid financials and sustainable growth prospects. Relying on thorough research and analysis rather than market tips or hearsay is essential,” said Shruti Jain. “Additionally, assessing the quality of management becomes crucial. Investors should evaluate the track record, strategic vision, and integrity of the company’s management team, ensuring that they make decisions based on long-term value creation rather than short-term stock price fluctuations,” she added.
Delivery volumes of the shares are also an important metric to watch out for while making investments.
“Investors should also look at the delivery volume as a percentage of total volumes. A lower delivery volume against high trading volumes could mean that there are a smaller number of serious investors trading in that stock and most trades are square up intraday. This is another red alert which investors should keep in mind,” Narendra Solanki, Head Fundamental Research - Investment Services, Anand Rathi Shares and Stock Brokers said. “Inclusion of stocks in any index is also one of the criteria which can be used to filter bad stocks because exchanges already implement some shortlisting measures which weed out dubious scrips,” he added.
How to detect stock price manipulation
Keep this in mind for safe investing