What is the Bulk SMS Scam?

What’s in today’s article?

• Why in News?
• Background (Context)
• How Did the Scam Take Place?
• Action Taken by SEBI
• SEBI’s Advice to Investors
• About Securities and Exchange Board of India (SEBI)
• Why was SEBI Formed?
• Powers of SEBI

 

Why in News?

• The SEBI has restrained 135 entities from accessing the securities market as they were found indulging in circulating ‘buy recommendations’ in the scrips of certain companies through bulk text messages, SMSs, and websites to investors.

 

Background (Context)

• The Securities and Exchange Board of India (SEBI) had initiated an investigation into the trading of scrips of five small-cap companies.
  • This was done after it witnessed an abnormally sharp rise in their share prices and trading volume.
• In the investigation, SEBI observed certain strong commonalities in the trading pattern followed by various entities in these five scrips.
• One common feature was that ‘buy recommendations’ for all five scrips were widely circulated through bulk SMSs.
• Certain websites were also used for recommending buying in all five scrips, the regulator noticed.
• The period of SMS circulation coincided with an exponential rise in the prices and volumes of the shares of these companies.
• SEBI, in its investigation, found that certain identified suspected entities were allegedly involved in fraudulent acts that led to the abnormal rise in the volumes and prices of the shares of the five companies.

 

How Did the Scam Take Place?

• SEBI said the entire stock manipulation happened in a pre-planned scheme by these entities, which was mainly centered around the circulation of bulk SMSs.
• SEBI said the scheme involved three major sets of entities – PV (Price Volume) Influencers, SMS Sender and Off Loaders.
• PV Influencers were found to have increased the price and volume of the five scrips through manipulative trades.
• This was followed by the circulation of buy recommendations via bulk SMSs in the five scrips by the SMS Sender- Hanif Shekh, the kingpin who was the mastermind behind the implementation of the entire fraudulent operation.
• In the last leg of the scheme, the Off Loaders sold the shares of these five scrips (previously acquired by them) at elevated prices thereby making substantial profits.
• These profits were transferred through multiple layers and conduits to the ultimate beneficiaries of the scheme who were identified as promoters of some of the companies and Shekh.

 

Action Taken by SEBI

• The SEBI has identified a total of 135 entities who were involved in circulating ‘by recommendations’ through bulk text messages, SMSs, and websites to investors.
• The SEBI has restrained these entities from accessing the securities market and barred them from buying, selling or dealing in securities.
• The SEBI has also imposed a fine of Rs 126 crore on these entities.
• SEBI has been cracking down on entities and financial influencers who are involved in manipulating the share prices of companies by providing recommendations on various social media channels to investors.

 

SEBI’s Advice to Investors

• There have been many instances wherein investors are being misled by influencers or certain entities for buying or selling specific shares.
• These entities use social media channels like Telegram, Instagram and YouTube to provide wrong investment tips.
• SEBI has time and again cautioned investors to be aware of fraudulent activities which are being carried out through SMSs, various websites and social media.
• It has also advised investors to deal only with registered intermediaries.

 

About Securities and Exchange Board of India (SEBI)

• The SEBI is a statutory regulatory body established by the Government of India in 1992. It was given statutory powers through the SEBI Act, 1992.
• Objective: To regulate the securities market in India and protect the interests of investors in securities.

 

Why was SEBI Formed?

• SEBI was established to keep a check on unfair and malpractices and protect the investors from such malpractices.
• The organization was created to meet the requirements of the following three groups:
  • Issuers: SEBI works toward providing a marketplace to the investors where they can efficiently and fairly raise their funds.
  • Intermediaries: SEBI works towards providing a professional and competitive market to the intermediaries
  • Investors: SEBI protects and supplies accurate information to investors.

 

Powers of SEBI

• Quasi-judicial powers – 
  • In case of frauds and unethical practices pertaining to the securities market, SEBI has the power to pass judgments.
  • The said power facilitates to maintain transparency, accountability and fairness in the securities market.
• Quasi-executive powers –
  • SEBI has the power to examine the Book of Accounts and other vital documents to identify or gather evidence against violations.
  • If it finds one violating the regulations, the regulatory body has the power to impose rules, pass judgements and take legal actions against violators.
• Quasi-legislative powers –
  • To protect the interest of investors, the authoritative body has been entrusted with the power to formulate suitable rules and regulations.
  • Such rules tend to encompass the listing obligations, insider trading regulations and essential disclosure requirements.
  • The body formulates such rules and regulation to get rid of malpractices that are prevalent in the securities market.

 

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Q1) What is Insider Trading in simple terms?

Illegal insider trading refers generally to buying or selling a security, in breach of a fiduciary duty or other relationship of trust and confidence, on the basis of material, non-public information about the security.

 

Q2) What is capital market in economics?

Capital markets are financial markets that bring buyers and sellers together to trade stocks, bonds, currencies, and other financial assets.

 

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Source: What is the bulk SMSs scam and why did SEBI bar 135 entities from markets?