When we talk about stock market scams, one of the most common ones is the Pump and Dump. Many people, even after knowing, become a part of the scheme, but the question here is: ‘Is Pump and Dump illegal in India?’
If you’ve ever wondered what it is, how it works, and what SEBI does about it, this blog is for you.
What is a Pump and Dump Scheme?
A Pump and Dump scheme involves artificially inflating the price of a stock (usually a penny stock or illiquid stock) by spreading false, misleading, or exaggerated information.
Once the price rises due to increased investor interest, the scammers “dump” their shares at the inflated price, leaving unsuspecting investors with huge losses when the price crashes.
How Does a Pump and Dump Scam Work?
Now, this scam is generally run by company promoters, who want to make money by inflating stock prices. Here is the complete detail of how this scam works:
- Stock Selection: Scammers generally company promoters choose a low-volume, low-priced stock.
- Hype Creation: They spread fake tips via WhatsApp groups, Telegram channels, social media, or spam calls.
- Price Surge: Retail investors buy the stock, pushing the price up.
- Exit Point: The scammer sells all their shares at the peak.
- Crash: The price collapses, and retail investors are left trapped.
Is Pump and Dump Legal in India?
Yes. Pump and Dump schemes are a violation of Indian securities laws.
SEBI considers this a form of market manipulation and fraud, which falls under:
- SEBI (Prohibition of Fraudulent and Unfair Trade Practices) Regulations, 2003
- Securities Contracts (Regulation) Act, 1956
- Indian Penal Code – under cheating and criminal conspiracy (Sections 415 & 420)
Here are a few cases where SEBI takes strict action against such fraud:
- 2021: SEBI barred multiple individuals and entities for artificially inflating the prices of penny stocks and promoting them through bulk SMS.
- 2022: SEBI froze bank accounts of influencers and Telegram channel admins involved in stock manipulation.
- 2023: Action against YouTubers promoting microcap stocks with misleading claims to benefit their holdings.
Scammers or companies involved in such fraud are:
- Ban from securities markets
- Seizure of profits and bank accounts
- Hefty monetary fines
- Criminal prosecution and imprisonment in extreme cases
How to Identify Pump and Dump Stocks?
There are more than 5000 stocks listed on the stock market, but it is still easier for one to identify this fraud.
Here are some of the signs you can check for:
- “Guaranteed return” claims
- Sudden sharp rise in unknown stocks
- Messages urging you to buy quickly before “news is out”
- No credible source or business news backs the rise
How to Report Pump and Dump Scam?
Now, to protect yourself from such schemes, you can:
- Avoid trading based on tips from unknown sources
- Check the stock fundamentals and volumes
- Verify news from official SEBI announcements or stock exchanges
However, if you have been unfortunate enough to identify the scheme, then you can take action by reporting the concern in SEBI.
How to Complaint in SEBI?
You can reach out to SEBI directly by sending an email.
Also, since the listed company is involved, you can file it in SCORES by following the steps below:
Register in the SCORES portal.
- Log in using the credentials.
- Choose the type of complaint
- Select the name of the listed company
- Draft your complaint
- Upload supporting documents
- Submit the complaint.
Need help in reporting the complaint? Register with us, and we will assist you with the process and guide you with the follow-ups.
Conclusion
So, if you are looking for the answerer of: Is pump and dump illegal in India, the answer is YES. SEBI is constantly tightening its grip on such activities. As an investor, your best defense is awareness and vigilance.
If you suspect you’ve been a victim or spot a scheme in progress, don’t hesitate to and reach out to us by filling in the details below.
