Stock Market Manipulation Offences
🔍 What is Stock Market Manipulation?
Stock Market Manipulation refers to deliberate attempts to interfere with the free and fair operation of the market. It is the act of artificially inflating or deflating the price of a security or influencing the behavior of the market participants to gain undue advantage.
Such manipulation undermines investor confidence, distorts price discovery mechanisms, and violates the principles of market integrity.
🔒 Legal Provisions in India
In India, stock market manipulation is primarily governed under:
SEBI Act, 1992 – Especially Sections 11, 11B, and 12A.
SEBI (Prohibition of Fraudulent and Unfair Trade Practices Relating to Securities Market) Regulations, 2003 (PFUTP Regulations).
Indian Penal Code, 1860 (Sections like 420 for cheating).
Companies Act, 2013 (Sections related to insider trading and fraud).
Securities Contracts (Regulation) Act, 1956.
📚 Case Law Analysis – Detailed Case Studies
Below are five major case laws that demonstrate different types of stock market manipulation offences, how they were perpetrated, and how the regulators and courts responded:
1. Harshad Mehta Scam (1992) – The “Big Bull” Case
➤ Nature of Manipulation:
Harshad Mehta used Ready Forward (RF) deals and manipulated the banking system to divert huge funds into the stock market. He artificially inflated stock prices of selected companies like ACC Ltd. and sold them after driving them to unreasonable heights.
➤ Mechanism:
Faked bank receipts (BRs) were used in RF transactions.
Funds from public sector banks were diverted to the stock market.
Created an illusion of high demand to push stock prices.
➤ Impact:
The Sensex crashed from 4,467 points to 2,529 points in months.
Investors lost crores.
Mehta was arrested and over 70 criminal cases were filed.
➤ Legal Outcome:
SEBI tightened regulations after the scam.
Mehta was banned for life from the stock market.
Led to creation of NSDL, dematerialization of shares, and reforms in money markets.
2. Ketan Parekh Scam (2001) – “The Pentafour Group Stocks Scam”
➤ Nature of Manipulation:
Parekh engaged in circular trading and pump-and-dump strategies to manipulate prices of low-cap stocks (often called "K-10 stocks").
➤ Mechanism:
Took massive loans from banks (e.g., Madhavpura Mercantile Bank).
Used those funds to create artificial demand in selected stocks.
Manipulated volumes and prices through circular trading.
Colluded with brokers and promoters of the companies.
➤ Impact:
Caused a market crash post-Union Budget 2001.
Huge losses to retail investors.
Exposed weaknesses in stock surveillance systems.
➤ Legal Outcome:
SEBI banned him from trading for 14 years.
FIRs were lodged; Parekh was found guilty under various SEBI and IPC provisions.
Led to stricter margining systems, risk management norms, and surveillance systems in stock exchanges.
3. Sahara India Real Estate Corporation Ltd. v. SEBI (2012)
➤ Nature of Manipulation:
Though not typical stock price manipulation, it involved raising capital from investors in violation of securities laws – misrepresentation and failure to comply with SEBI's disclosure norms.
➤ Mechanism:
Sahara raised over ₹24,000 crore from millions of investors through Optionally Fully Convertible Debentures (OFCDs) without SEBI approval.
Claimed it was a private placement, not a public issue.
➤ Impact:
Regulatory arbitrage between SEBI and ROC was exploited.
Risked investor protection and transparency.
➤ Legal Outcome:
Supreme Court ordered Sahara to refund the entire amount with interest.
₹15,000+ crore was deposited in SEBI's account.
Sahara chief Subrata Roy was arrested for non-compliance.
4. SEBI v. Rakhi Trading Pvt. Ltd. & Ors. (2018)
➤ Nature of Manipulation:
Artificial volume creation and price manipulation through non-genuine trades – also referred to as "reversal trades".
➤ Mechanism:
The accused entered into pre-arranged trades to create artificial volumes.
Trades had no real risk or transfer of beneficial ownership.
Aimed at misleading investors about the liquidity of certain scrips.
➤ Key Legal Principle:
Supreme Court held that intent to defraud is not necessary – even non-genuine trades without intent can be considered manipulation.
➤ Legal Outcome:
Upheld SEBI’s penalties and bans.
Set precedent that market fairness > trader’s intent.
Strengthened enforcement under PFUTP Regulations.
5. NSE Co-location Scam (2015–2019)
➤ Nature of Manipulation:
Preferred access to market data by certain brokers using co-location servers – enabling high-frequency trading advantages.
➤ Mechanism:
NSE allowed certain brokers early access to price feeds.
These brokers placed orders ahead of others, gaining unfair profits.
Violated the principle of fair and equitable access to trading systems.
➤ Impact:
Huge erosion of trust in exchange mechanisms.
Allegations against top NSE executives.
➤ Legal Outcome:
SEBI imposed fines on NSE, former CEO Chitra Ramakrishna, and others.
NSE was barred from launching any new products for six months.
The case highlighted governance lapses and insider misuse of technical infrastructure.
🎯 Common Manipulative Techniques in These Cases
| Technique | Description |
|---|---|
| Pump and Dump | Artificially inflating stock prices to sell at high profits. |
| Circular Trading | Trading among colluding parties to create fake volume. |
| Insider Trading | Using unpublished price-sensitive information. |
| Quote Stuffing/Latency Arbitrage | HFT techniques that exploit system lags. |
| Misrepresentation | Misleading investors through false disclosures or reporting. |
| Price Rigging | Coordinated effort to influence stock prices unfairly. |
🏛️ Conclusion
Stock market manipulation remains one of the most damaging practices in financial markets. The above cases have led to:
Tighter compliance frameworks.
Strengthened investor grievance redressal systems.
Use of technology (like AI/ML) for real-time surveillance by SEBI.
Increased penal powers of regulatory bodies.
Understanding these landmark cases is essential for compliance professionals, investors, and students of securities law.
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