Many Ways of Being Fooled in a Bull Market
India’s investor population has nearly doubled since the lock-down forced by the COVID pandemic in March 2020. This means that over half the investors today—almost 20 million of them—are first-time investors in the stock market. They are attracted by a ferocious bull run that has allowed many first-timers to make a lot of money, as the popular BSE Sensex, which hit a low at 25,638 on 24 March 2020 (a day after the first hard lock-down), has soared an extraordinary 234% in 22 months to close at 60,109 on 19 January 2022. 
 
Tipsters Galore
Although the new influx includes some serious, tech-savvy traders who study investment literature and try to grasp the risks associated with the capital market, a vast number is lured by the ease of online trading and the illusion of high returns, broadcast in social media. The situation is perfect for the proliferation of stock market scams and a big business opportunity for fraudsters and confidence tricksters. This is a global trend and regulators usually cannot keep up with the pace and innovative strategies employed to fool people. 
 
The Securities and Exchange Board of India (SEBI), like other regulators, has issued warnings periodically asking investors to be cautious; it has also threatened to crack down on illegal investment advice and tipsters using social media to entrap investors. Unfortunately, these warnings are largely ignored, until people suffer losses.
 
On 13th January, SEBI completed a relatively quick investigation to crack down and bar six people behind a Telegram channel called “Bullrun2017” for making false and baseless recommendations for trading in the cash and derivatives segments over an 11-month period. The channel had made a false claim of having four research analysts who were in the process of obtaining SEBI registration. This Telegram channel had 49,000 subscribers! 
 
SEBI, in its order, says “social media channels are being exploited for such fraudulent, deceitful, and unfair trade practices. Common investors should be cautious of being enticed by such schemes and it may be prudent to independently research investment opportunities.” Is anybody in the mood to listen? 
 
On the contrary, hundreds of fraudulent tip-sheets and investment groups/channels are continuing to offer ‘hot tips’ and ‘jackpot earnings’ based on stories cooked up by self-styled experts and market operators. Each of them has thousands of subscribers. What makes them doubly dangerous is the use of paid influencers to give credibility to their false narratives and to aggressively discredit those who question or point to flaws in their theory. 
 
Subscriptions to algo trading strategies promising high and guaranteed returns have attracted enormous interest. These are seen as a money machine on auto-pilot and people who have no time to understand equity investment spend hours every day on ‘stock-market trading’. 
 
A top Exchange official tells me that over 95% of trading volumes are now in options. These go up “hundreds of percentage points every few days in different series and different underlying stocks and index options” without attracting any major investigation. Many of them are powered by automated trading strategies since this is, as yet, an unregulated space.
 
The third set of investors simply hands over their savings along with control over their demat accounts to unregistered portfolio managers or brokers, based on word-of-mouth recommendations. This has happened in most of the 28 broker defaults on the National Stock Exchange (NSE) over the past 22 months. Many of the failed brokers were running illegal portfolio management or investment advisory services or simply funding their own trading operations with clients’ money and shares. The collective losses are well over Rs1,000 crore with little chance of recovery.
 
On 18th January, we reported how hundreds of people around Solapur have lost over Rs20 crore entrusted to one Vishal Fate who promised high returns through the stock market (Vishal Fate, Main Accused in the Rs20 Crore Barshi Stock Market Scam, Sent to 10 Days Police Custody) but went bust. The investors included prominent citizens, doctors and even journalists. Those who have filed complaints seem clueless about what he was to do with their money or whether he was even registered with SEBI as an investment adviser or portfolio manager. 
 
Bankruptcy Play
The level of ignorance among investors about the basic character of equity investment and inherent risks associated with it is such that bankrupt companies facing insolvency proceedings have become a hotbed for fraud and manipulation.
 
There are over 5,000 companies listed on the Bombay Stock Exchange (BSE) and about 1,600 on the NSE. Of these, about 3,000 are traded regularly and, at any point of time, a few thousand of them are nearly defunct companies, ready for resolution, are under the radar of fraudsters for price manipulation.
 
Since the price is usually a few paise, it is easy to lure the gullible with the promise of a massive percentage return (a 1,000% return is fairly routine in such manipulation) on very small investments. It is also easy to manipulate prices in the early stages to attract naïve newbie investors.
 
A classic example is that of Sintex Industries Ltd whose share hit a lower circuit after 11 January 2022 (Sintex Industries Shareholders Demand Fresh Bids since Media Leak Violated Principle of Confidentiality) when a newspaper reported that both the top contenders for the company, under the bankruptcy resolution process, wanted the existing equity written off. 
 
In a clearly orchestrated move, hundreds of investors have been bombarding the media with identical letters alleging a breach of confidentiality in the leak of information. Although Moneylife reported the charges made by angry investors, it is clear that most of them are clueless that the insolvency resolution process allows a successful bidder to decide the fate of existing equity. Most investors have also been lured to invest only recently, on the basis of two well-known examples of Ruchi Soya and Alok Industries where existing shares were not extinguished, giving shareholders a big bonanza. 
 
Those who take blind bets based on social-media wisdom rarely bother with even the cursory research that would have informed them of dozens of examples where existing shareholders lost out when equity was extinguished. So compelling is the fake narrative that millions of investors are buying shares of bankrupt companies as evident from the trading volumes of stocks that are being actively manipulated.
 
They were not told that Bhushan Steel, Bhushan Power and Electrosteel Steel, Lakshmi Vilas Bank, Dewan Housing Finance Ltd (DHFL) and UVSL (Uttam Value Steel Ltd), among others, have been delisted after the equity was written off. Many investors were trapped in some of these companies.
 
A third development is investors turning into ‘whistle-blowers’ instead of voting with their feet when the management is dubious or the share is actively ramped up. While claiming to be good Samaritans working to expose market manipulation, they are often actively engaged in a dialogue with the promoter or the person running the pump-and-dump operation of companies whose stock is being manipulated. They aggressively badger journalists to report their finding and, often, have no compunction about name-dropping and making fake claims about impeding ‘exposés’ on the basis of calls and emails sent to us. This often makes their motives very suspect, but each of them also claims that attempts to alert SEBI have drawn a blank and their emails are not even acknowledged. 
 
SEBI alone has the power, the resources, the tools (including real-time tracking systems) and a statutory duty to investigate and act against price manipulation to protect investors. It also has the duty and obligation to, at least, acknowledge investor complaints, although, like the Securities and Exchange Commission (SEC) of the US, it is not obliged to keep them informed about the progress of the investigation. At the moment, there is neither public nor political pressure on the regulator to respond to investors.
 
 

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Comments
pikus1618
2 months ago
That equity value of Sintex would be zero is shocking. Poor investors total money got lost due to Asia's richest man wants equity to be zero

Thanks Mr. Mukesh Ambani. Many many thanks
AJ Singh
4 months ago
fantastic analysis
saharaaj
4 months ago
when ethics in public life is low legal punishment notional and sympathetic and that too after protracted proceeding , the condition fertile for fraudsters
shamsumadeena
4 months ago
there are many you tube channels spreading false info ...
prasanna
4 months ago
Regarding Companies whose shares are delisted or become zero after write off of equity against losses, the investors can claim capital loss on "extinguishment of rights" therein. This is defined as a transfer u/s 2(47). The date would be the date on which SEBI communicates the same which rarely reaches us.
yrd2k2
Replied to prasanna comment 4 months ago
Dear Prasanna,
Thanks. I will like to receive more detailed reply please. MY CA is stay put on his position that as there is no transfer of asset, the capital loss (in this case) can not be booked. Also, how to claim loss in ITR etc.
Thanks again in advance
Kamal Garg
Replied to prasanna comment 4 months ago
Dear Mr. Prasanna,
You are requested to kindly further elaborate on this matter.
On the one hand, we have lost money due to delisting/ market price crash, on the other hand, we are not able to claim this loss in ITR.
You are requested to elaborate on this point as to where and how to claim such losses.
Kamal Garg
4 months ago
I have failed to understand how a sealed confidential bid submitted to RP/CoC can be selectively (only to ET and not to any body else/ general press briefing) leaked creating a mockery of the IBC process and law.
It is earnestly requested to MoneyLife/Sucheta Dalal to take up this issue vociferously at various forums to create awareness and wrong committed by high and mighty against the hapless small investors.
yrd2k2
4 months ago
Madam, you write so well.
I have been (stupid) share holder of Laxmi Vilas Bank, for last several years. I had also subscribed to the last Rights issue.
Last FY RBI, reduced FV of the share to "0". This has resulted in significant losses to me. I wanted to book this as long term capital losses.
However, my CA refused stating the shares have not been sold on a stock exchange, so it is not loss.
Request your kind guidance & expert opinion. Thanks in advance and Regards
Kamal Garg
Replied to yrd2k2 comment 4 months ago
This is a serious tax anomaly. If I am able to sell a share on the stock exchange, then, I am able to book the losses (STCG/LTCG). Whereas if the same shares are delisted from the stock exchanges (with no involvement or fault of the retail investors), then, there is no provision of booking the loss.
It is bizarre, goes against the common principle of tax laws, equality and justice. And therefore, this anomaly should be rectified immediately, preferably with retrospective effect so that instead of rubbing salt on the wound of the investors, let a soothing and pain relieving ointment be rubbed on the wound of the investors.
sathya2011
4 months ago
The absence of control by regulating agency in a market which is evolving and not mature is a recipe for disaster and is happening.
Shivendra Gupta
4 months ago
Really a great information sharing tool is this totally unbiased bataoge.
ragup
4 months ago
Learning of the day for me that the insolvency resolution process allows a successful bidder to delist the equity shares. As usual, excellent write up madam.
alphastocks1953
4 months ago
You forgot Brightcom Group where all the Mega profits since reverse merger listing in 2012 are in Overseas Unaudited Subsidiaries and defaults galore in India .
arvindsimhan
4 months ago
This bull run sends such a rush to invest further so we don't miss out on a bonanza. On the other hand, being cautious means we hold on to cash waiting for a corrections which never seems to come. Very confusing times :)
Srinivas Icici
4 months ago
not able to share it through WhatsApp.
msg2gramesh
Replied to Srinivas Icici comment 4 months ago
All negatives are written. Can you write a note on some positive points for the investors. Or Investors have to only go through others ?? I am sure if you want you can write 100 Positive points
sanvidwans
Replied to msg2gramesh comment 4 months ago
Every "investor" must start with a mutual fund investment. Then study how they manage portfolios. Listen to lectures by CAs like Rachana Ranade, Debashish Basu. Then at least after 5 years of such observation, one may invest on it's own. Very significant wealth generation is being done by thousands of patient investors
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