5 Biggest Stock Market Scams in India

Stock scams in India have shaken the financial world, leaving investors stunned and regulators scrambling for control. But what makes these scams so shocking? The masterminds behind them were once celebrated as financial geniuses, hailed for their sharp wit and strategic moves. However, their brilliance soon turned into deception, exploiting loopholes and outsmarting the system.

What drove them to take this path? How did they go from being heroes of the stock market to villains in the eyes of investors?

In this blog, we’ll uncover five of the biggest stock scams in India, exploring the shocking tactics used, their impact on the market, and the lessons investors can learn from these infamous frauds.

Here’s a list of the biggest stock market scams in India: 

1. Harshad Mehta Scam 1992 

Harshad Mehta was an ambitious, daring, and sharp stockbroker. He was one of the first brokers to become a megastar in the Indian Capital Market. His rags-to-riches story fascinated many, and his knack for predicting market trends earned him the title Big Bull. 

In just a few years, Harshad went from being an immigrant to a well-known stockbroker at BSE. Had it not been for his greed and constant desire for more, he could have been the king of the Indian stock market. 

To do something so big, you need a sharp mind, good analytical skills, and most importantly, a bag full of courage. 

In just a few years, Harshad transformed from a small-time jobber at the Bombay Stock Exchange (BSE) to the man everyone wanted to imitate. Later, he founded GrowMore Research & Asset Mangement, a stock broking firm in 1986.  

Now that we know who Harshad Mehta was, we can dive deep into the details of this mind-blowing scam.

During the economic reforms of 1990, India was opening its doors to foreign funds and boosting the economy through LPG (Liberalization, Privatization, and Globalization). During this time, Harshad Mehta was thriving. 

The scam involved the misappropriation of ₹1,439 crores, leading to a total loss of ₹3,542 crores for investors.

He, in his scam, used instruments like stamp paper, bank receipts, higher interest rates and Ready Forward (RF) deals. A Ready Forward deal is a short-term loan transaction between banks.

Harshad Mehta colluded with Bank of Karad and Metropolitan Co-operative Bank for issuing fake bank receipts. These bank receipts were not backed up by any government bonds, so they were basically just pieces of paper.  

He used those fictitious bank receipts to obtain large sums from banks, which were then passed on to other banks. Other banks assumed they were lending money against government securities. 

This was all done to drive up the prices of stocks in the market, which it did. He owned shares of ACC, the price of this share surged from Rs. 200 to Rs. 9000.  

No one suspected a thing until Sucheta Dalal, an investigative journalist, exposed him in her article. From here onwards, Harshad Mehta’s empire crumbled to dust. 

Reforms

1. Strengthening SEBI's Powers: SEBI was given statutory powers through the SEBI Act, 1992, enabling it to regulate the securities market more effectively.
2. Dematerialization of Shares: To prevent fraudulent practices involving physical share certificates, shares were dematerialized and introduced in electronic form. 
3. Creation of National Stock Exchange (NSE): Established as a technology-driven exchange to bring transparency and efficiency. 
4. Introduction of Rolling Settlement: The T+2 settlement system replaced the account period settlement to reduce risks of market manipulation. 
5. Strict Bank-Market Linkages: Banks were prohibited from directly participating in the stock market, and their involvement was strictly regulated. 
6. Auditing and Monitoring Systems: Improved surveillance of brokers and other intermediaries.

2. Ketan Parekh Scam 2002

Ketan Parekh was another pied piper of Indian Capital Market. Walking in the footsteps of his mentor Harshad Mehta, He was responsible for the artificial inflation of selected stock prices. These selected stocks were known as K-10. Below is a list of these companies:  

• Amitabh Bachchan Corp 
• Himachal Futuristic Communication 
• Mukta Arts 
• Tips 
• Pratish Nandy Communications 
• GTL 
• Zee Telefilms 
• PentaMedia Graphics 
• Crest Communications 
• Aftek Infosys 

The stock prices of PentaMedia Graphics surged from Rs. 175 to Rs. 2700 and Global Telesystems from Rs. 185 to Rs. 3100. Ketan raised funds from the promoters of the company he was manipulating the stocks of.

This was done by buying and selling stocks between two or more parties to create an illusion of activity. However, in reality, there was no actual change in ownership—the same securities were bought and sold repeatedly among the involved parties. This is known as Insider Trading.

As a result, it appeared as though a high volume of stocks was being actively traded in the market. This made some institutional investors invest in these stocks which lead to an increase in demand and price of the stocks. Then the retail investors also started investing.  

Ketan Parekh manipulated the stock market through Foreign Institutional Investors (FII), Overseas Commercial Borrowings (OCB), Banks and Mutual Funds (Union Trust of India). 

However, his scheme was heavily dependent on constant cash flow. The dot-com bubble burst in early 2000, leading to a decline in technology stocks worldwide. This panic also affected India’s markets, causing the stocks Parekh had inflated to crash.

As stock prices crashed, institutional investors who had been lured into the bubble began selling their holdings, triggering a market collapse. Retail investors, who had blindly followed the trend, suffered massive losses.

The Reserve Bank of India (RBI) and the Securities and Exchange Board of India (SEBI) soon discovered discrepancies in banking transactions linked to Parekh. Investigations revealed that he had misused funds from MMCB, causing a liquidity crisis in the banking system. 

In 2001, Ketan Parekh was arrested and charged with stock manipulation, fraud, and insider trading. SEBI banned him from trading in the stock market for 15 years. The scam caused MMCB to collapse, leaving depositors and financial institutions in distress. The total estimated fraud exceeded ₹1,200 crores, causing a ripple effect on the stock market and mutual fund industry.

Despite the ban, reports suggested that Parekh continued trading through proxy accounts even after his conviction. His manipulation of the stock market remains a cautionary tale in Indian financial history, highlighting the dangers of unchecked greed and regulatory loopholes.

Reforms  

1. Risk Management in Stock Exchanges: 2Value-at-Risk (VaR) margining system was implemented to prevent price volatility from excessive speculation.
2. Ban on Insider Trading and Circular Trading: SEBI enforced stringent rules to curb insider trading and circular trading practices.
3. Strengthened Cooperative Bank Oversight: The Reserve Bank of India (RBI) introduced tighter controls over cooperative banks' lending practices.
4. Limit on Broker Exposure: Stock exchanges imposed limits on the exposure that brokers could take in any single stock or sector.
5. Stock Watch Mechanisms: Surveillance systems were improved to monitor unusual trading patterns in real-time.

3. UTI Scam 2002

The Unit Trust of India was one of India’s largest mutual fund organizations, established in 1964. It became popular due to various schemes offering attractive returns. 

However, in the early 2000s, several issues surfaced due to the performance of its US-64 scheme. This was just the beginning of the scam.  

It came into the picture because of the manipulation of the financial markets by UTI.   

UTI invested heavily in volatile equities without adequate risk assessment. Poor investment decisions and a lack of accountability led to significant financial losses. 

UTI continued offering attractive returns to investors, despite its declining financial health, to maintain public trust. By 2001, US-64's net asset value (NAV) fell drastically, and UTI suspended the sale and repurchase of units. 

This decision affected approximately 20 million investors, who were left uncertain about their investments. 

Allegations emerged of UTI making investments influenced by political and corporate lobbying, ignoring profitability and risk factors. The government had to step in with a ₹14,500 crore bailout to restore investor confidence and stabilize the financial markets. 

Reforms

1. Splitting UTI: UTI was restructured into two entities are UTI Mutual Fund (regulated by SEBI) and Specified Undertaking of UTI (SUUTI) for government-backed investments.
2. Introduction of NAV-Based Pricing: Net Asset Value (NAV)-based pricing replaced fixed-price schemes to ensure transparency.
3. Improved Mutual Fund Regulations: SEBI mandated better disclosures and transparency in fund investments and operations. 
4. Investment Caps: Mutual funds were prohibited from concentrating too much investment in specific sectors or companies.

4. The CRB Scam 1995-1996

The CRB scam was orchestrated by Chain Roop Bhansali. He was a Chartered Accountant and a middle-class broker. Bhansali started his own finance company named CRB Capital Markets. Since he had good connections, he had a lot of good clients.  

After CRB Capital Markets, CRB Mutual Funds and CRB Share Custodial Services came into existence. From 1992 till 1996, he collected money from investors through fixed deposits, debentures and bonds.  

He floated 133 companies to pull in funds. His fraud mechanism included pooling funds in these companies and siphoning off this money. Most of his money was transferred to these dummy accounts.  

His flagship companies went public, raising Rs. 176 crores within three years by issuing shares of CRB Capital Markets, from CRB Mutual Funds, through its Arihant Mangal Growth Scheme raised Rs. 230 crores.  

When the stock market was in Harshad Mehta bear phase, Bhansali managed to raise Rs. 900 crores.  

Despite raising massive funds, Chain Roop Bhansali's financial empire was built on deception. His strategy involved using money from new investors to repay old ones, similar to a Ponzi scheme.  

The apparent success of CRB Capital Markets and its subsidiaries attracted more investors, allowing Bhansali to expand his fraudulent operations. 

However, in 1996, cracks in his empire started to appear. The Reserve Bank of India (RBI) and the Securities and Exchange Board of India (SEBI) grew suspicious of his financial dealings. Investigations revealed that Bhansali had manipulated financial statements and diverted investor funds into shell companies and personal accounts. 

In 1997, the RBI revoked CRB Capital Markets' banking license, leading to a complete collapse of his business. With no new funds coming in and massive liabilities to settle, Bhansali's empire crumbled, leaving thousands of investors in financial ruin. 

The total scam was estimated at ₹1,000 crores. Following the exposure, Bhansali was arrested and faced legal action. However, much of the money he siphoned off was never recovered, leaving investors with heavy losses. 

The CRB scam served as a major wake-up call for regulatory authorities in India, leading to stricter oversight of financial institutions and investment firms.  

Despite his downfall, Bhansali’s scam remains one of India’s biggest financial frauds, highlighting the dangers of unchecked financial manipulation. 

Reforms

1. Tighter NBFC Regulations: RBI introduced stricter norms for the operation of non-banking financial companies (NBFCs), including minimum net worth and capital adequacy requirements.
2. Mandatory Credit Rating: NBFCs had to obtain a credit rating from an authorized agency before collecting deposits.
3. Deposit Insurance Scheme: To protect small depositors, measures were taken to introduce insurance for deposits in NBFCs. 
4. Enhanced Disclosure Norms: NBFCs were required to disclose financial details, deposit collection, and investments regularly.

5. Sahara Scam 2010

Sahara group is a conglomerate business which was owned by a flamboyant owner, Subrata Roy. Roy and Sahara created an environment of ‘Pariwar’ which included the group itself, the customers and the employees working for them.

Sahara was a big name which was present everywhere, from real estate, hospitality to sports and entertainment. Subrata Roy started this company from Rs. 2000. The Sahara Empire started as a small Sahara Chit Fund company, then later it became India’s largest conglomerate.

Now that you know who we are talking about, you’ll be able to understand the gravity of this scam much better. Let's get the story begun!

Back in mid 2000, Sahara was dealing with some financial trouble. Their market of middle-class and lower middle-class investors saturated after a certain point.

Earlier, Sahara used to urge the target audience to invest in their schemes, then they would get their money back in some time with extra interest. Since their market started to saturate, Saharashri a.k.a Subrata Roy decided to launch IPO for his business. 

At the time of launch, Sahara prepared a Draft Red Herring Prospectus. It is a list of all the financial, prospects, risks and industry details. Sahara India Real Estate Corporation Limited (SIRECL) and Sahara Housing Investment Corporation Limited (SHICL), the two Sahara company was found to have already raised funds previously Rs. 4000 and Rs. 32,300 respectively.

To raise funds in these two companies, Sahara group issued fund raising assets called Optionally Fully Convertible Debentures (OFCD). The company was using these instruments without getting necessary approval from the regulatory bodies.

Though this scam was not directly related to the stock market, the attempt was surely made to fool the SEBI.  

Reforms

1. Strict Regulations for Debentures: SEBI mandated that all companies raising money through debentures must register the issue and disclose the purpose, risks, and returns. 
2. KYC Norms: SEBI introduced stricter Know Your Customer (KYC) norms for investors to prevent misuse. 
3. Crackdown on Unregistered Schemes: SEBI and the Ministry of Corporate Affairs started targeting unauthorized collective investment schemes. 
4. Mandatory SEBI Approval: All investment products needed prior approval from SEBI to ensure compliance with regulatory norms. 

Conclusion

The history of stock market scams in India serves as a stark reminder of how greed, ambition, and unethical practices can disrupt financial markets and destroy investor trust. 

While these scams were masterminded by individuals with sharp intellect and strategic minds, their actions caused significant financial loss and shook public confidence. 

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However, every scam also paved the way for stronger reforms, tighter regulations, and improved transparency in the financial system.  

By learning from these dark chapters, investors can remain vigilant, and regulatory bodies can continue building a safer, more transparent market that fosters trust and growth for the future.