PUMP AND DUMP SCHEME (Syllabus: GS Paper 3 – Economy)

News-CRUX-10     10th June 2024        

Context: The Securities Exchange Board of India’s (Sebi) slapped a fine of Rs 7.75 crore on 11 individuals for allegedly operating a ‘pump and dump’ scheme in the scrip of Svarnim Trade Udyog.

Pump and Dump Scheme

  • About: It is a type of manipulation activity that involves artificially inflating the price of a stock through false and misleading information, only to sell the stock at the inflated price and leave investors with significant losses.
  • Mechanics of Pump and Dump

oAcquisition of a significant amount of stock in a thinly traded company, often penny stocks.

oAggressive promotion through various channels to create buzz and attract investors.

oIncreased demand drives up the stock price rapidly, creating the illusion of a valuable investment.

oSell-off at inflated prices, causing the stock price to plummet and resulting in losses for investors.

  • Regulations around pump and dump

oSebi's Ban: Pump and dump schemes are completely banned under the Securities and Exchange Board of India's (Sebi) guidelines.

oCrackdown on YouTube Operation: Sebi's crackdown on a YouTube-run share pump-and-dump operation indicates impending regulations on financial influencers (finfluencers) who disseminate investment advice without qualifications.

oAction Against Influencers: Recent actions by Sebi against influencers like Bollywood actor Arshad Warsi and his wife highlight regulatory efforts to curb pump and dump activities facilitated by influential figures.

Impact on investors and the market

  • Investor Losses: Those who bought at inflated prices face substantial losses when the stock price crashes.
  • Market Confidence: Pump and dump schemes undermine confidence in financial markets, making legitimate investors wary of potential fraud.
  • Legal Penalties: Participants in such schemes can face severe legal penalties, including fines, disgorgement of profits, and imprisonment.