How does Grey Market Frauds Work in Indian Stock Exchanges

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Indiaforensic Media
Indiaforensic Media
Forensic Accounting in India started with one word - Indiaforensic.

In the intricate world of the stock market, where fortunes are made and lost with the click of a button, the initial public offering (IPO) market is particularly susceptible to manipulation. Recent events in India, as exposed by the Securities and Exchange Board of India (SEBI), have once again raised concerns about the shadowy practices that surround IPO price manipulation. In this article, we delve into the mechanics of how the grey market is utilized to manipulate IPO stock markets, shedding light on the tactics employed by those involved.

The Murky World of IPO Price Manipulation

IPOs are a means for companies to raise capital by issuing shares to the public for the first time. However, the process can be hijacked by unscrupulous operators who aim to inflate stock prices artificially. Here’s how it unfolds:

  1. Targeting Mid and Small-Sized Public Issues: Manipulators often steer clear of high-profile IPOs and instead focus on mid and small-sized offerings, which are easier to manipulate due to their lower investor bases.
  2. Collaboration with Investment Banks: Promoters sometimes partner with investment banks that assure the success of the IPO, regardless of market conditions. These banks may even price the issue higher than its actual value.
  3. Cornering Shares Through Multiple Applications: Manipulators may submit multiple applications for shares, exploiting the lack of circuit filters on listing day to control prices.
  4. Utilizing the Grey Market: To further distort supply and demand dynamics, manipulators turn to the grey market. Here, high-net-worth individuals, market operators, brokers, and merchant bankers secretly corner shares through unofficial means.

The Role of Grey Market

Grey market can be used in three methods to manipulate the stock market prices viz. cornering shares, creating artificial demand, and in some instances to even shortsell.

Cornering shares

Operators can corner shares in the grey market by buying them in bulk from investors who are willing to sell their shares before the stock lists on the stock exchange. This can be done for a variety of reasons, such as if the investor wants to book profits early or if they are not confident about the long-term prospects of the company.

Once the operators have cornered a large number of shares, they can control the price of the stock once it lists on the stock exchange. They can do this by placing large buy orders, which will drive up the price, or by placing large sell orders, which will drive down the price.

This can be harmful to retail investors because it can make it difficult for them to get a fair price for their shares. It can also lead to artificial volatility in the stock price, which can make it difficult for investors to make informed investment decisions.

Creating artificial demand

Operators can create artificial demand for a stock in the grey market by placing fake buy orders. This can be done through a variety of methods, such as using multiple brokerage accounts or using fake identities.

When retail investors see that there is strong demand for a stock in the grey market, they may be more likely to subscribe to the IPO. This can further drive up the demand for the stock and lead to a higher listing price.

This can be harmful to retail investors. They may end up paying a higher price for the stock than it is actually worth. It can also lead to a bubble in the stock market, which can eventually burst. It causes significant losses for investors.

Short selling

Short selling is a practice where an investor sells shares that they do not own. To do this, the investor borrows shares from a broker and sells them on the open market. Moreover, the investor then agrees to buy back the shares at a later date and return them to the broker.

If the stock price falls after the investor has sold the shares, the investor can buy back the shares at a lower price and return them to the broker. This allows the investor to make a profit on the difference in price.

Operators can use short selling to manipulate the stock market by short-selling a stock in the grey market before it is listed on the stock exchange. Operators make a profit by buying back when the shares trade at a lower price.

This can be harmful to retail investors because it can drive down the stock price and make it difficult for them to sell their shares at a profit. It can also lead to a bear market in the stock market, which can cause significant losses for investors.

It is important to note that these schemes are illegal. Additionally, the operators who are caught engaging in these activities can face serious penalties, including imprisonment.

The Certified Stock Market Forensic Accountant course is one of the most advanced certification courses that deals with these type of scams and educate investors about the different methods.

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