Pump and Dump Scheme

• Context (BS): The Securities Exchange Board of India (SEBI) slapped a fine of Rs 7.75 crore on 11 individuals for allegedly operating a ‘pump and dump’ scheme.
• Under SEBI guidelines, pump and dump schemes are completely banned.
• Pump and Dump scheme 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.
• It is prevalent, particularly in the micro-cap and small-cap sectors, where companies often have limited public information and trading volumes are lower.

Working mechanism

• First, a significant amount of stock in a relatively small or thinly traded company is acquired. These stocks are often referred to as ‘penny stocks’ because they trade at low prices and are more susceptible to price manipulation due to low trading volumes.
• Then the stock is aggressively promoted to create a buzz and attract investors. Once the stock price has been pumped up, a sell-off begins, causing it to plummet, often leaving unsuspecting investors with significant losses as the stock returns to its actual value or even lower.

Credit: LFT

Impact

• Causes significant losses to unsuspecting investors due to stock price crash.
• Undermines confidence in the financial markets, making legitimate investors wary of potential fraud.