Walking A Tightrope

Cybercriminals are taking over vast parts of India’s increasingly digitalised financial markets. The SEBI wants to act, but it cannot afford to spook rookie retail investors 

Madhukant Patel, a retired chartered accountant based out of Ahmedabad, has spent his life studying and analysing company finances. Yet, he fell victim to a stock trading scam. It all started after he was added to a WhatsApp group called ‘Stock Vanguard 150’. Two people whom Patel identified as Sunil Singhania and Karanveer Dhillon shared investment advice on the group.

Patel invested according to their advice. They then pointed him to a website app[dot]alicexa[dot]com. Patel traded around Rs 2 crore on it and saw massive profits. His portfolio value went up to Rs 5 crore in two months. And then, something very suspicious happened.

Singhania, one of the advisers, said he could help Patel obtain shares of a company after its initial public offer (IPO) had closed. A little wary, Patel was still hopped up on the happiness of how his money had grown. The charade ended when Patel told Singhania he wanted to withdraw Rs 1.5 crore. Singhania allegedly demanded a 15% tax on payment and 1% of portfolio value. That is when Patel realised that he had been conned.

Patel’s story is not unique. The Indian markets have seen an avalanche of retail investors scurrying to score profits in an economic environment that is not as rosy as it seems.

These rookie investors have downloaded apps on their phones on which they trade. Some go to shady websites seduced by claims of their money doubling or tripling in days. And they are getting conned by the thousands. Between January and April this year, more than 20,000 trading scams have been reported in which victims have lost Rs 14,204 crore, according to the Indian Cybercrime Coordination Centre (I4C).

As conmen take retail investors for a ride, the Securities and Exchange Board of India (SEBI), the country’s markets regulator, seems to be walking a tightrope. On one hand, SEBI is cautious—it does not want to spook retail investors into exiting the markets. On the other hand, it cannot put retail investors at risk.

The finance ministry too does not seem keen on regulatory overreach.

Caught between a rock and a hard place, SEBI has released guidelines and circulars warning investors about fraud, manipulations in the small- and medium-enterprises (SME) segment, online investment apps, speculative trading and impersonation by financial advisers.

Scammers Everywhere

The rise of digital investment platforms has democratised access to the stock market. Demat accounts in India have grown from 4.1 crore at the end of the 2020 fiscal to 11.4 crore at the end of the 2023 fiscal. But democratised access without necessary awareness creates predators. More than 7,000 cybercrime complaints are registered on average every day in India. From January to May 27, 7,40,957 complaints were lodged. Digital fraud complaints went up 113.7% from 2021 to 2022 and have gone up 60.9% more from 2022 to 2023.

In May, a video circulated on WhatsApp showing BSE chief executive Sundaram Ramamurthy telling people to join specific investment communities. The exchange had to issue a clarification stating that the video was forged. Last December, Ratan Tata put up a post on Instagram labelling a video that showed his image supposedly asking investors to make ‘risk-free’ investments ‘fake’.

More recently, on June 24, former Reserve Bank of India (RBI) governor Raghuram Rajan wrote in a post on LinkedIn: “I understand there are videos of me on various social media purporting to give advice on investing, especially in individual stocks. These are fake and the perpetrators should be reported to relevant authorities.”

Shriram Subramanian, founder and managing director (MD) of InGovern Research Services, a corporate governance research and advisory firm, says investors need to be aware and educate themselves as scammers are getting sophisticated by the day. “They are spoofing wealth managers and investment advisors and using global names like BlackRock,” he says.

Guardians At Odds?

In a strange turn for the Indian stock markets, mid- and small- cap indices have consistently outperformed benchmark Sensex over the past few months. This happened despite global fluctuations and SEBI’s alerts over froth. By June 10, 2024, the BSE Sensex had surged nearly 6% in calendar year 2024.  In the same period, the BSE Midcap index surged over 20%, the small-cap index went up 15%. Last year, 182 companies were listed on SME exchanges through IPOs. This year, 87 SME IPOs have been listed so far. Several of these IPOs have been oversubscribed 500–1,000 times their issue size.

SEBI has placed the SME IPO segment under additional surveillance measures (ASMs) and trade-to-trade (T2T) settlement practices after the market watchdog observed signs of manipulation at both trading and issuance levels. The regulator’s move restricts the number of participants and trading volumes, making SME stocks better for high net worth individuals (HNIs) than retail investors.

The Union finance ministry, though, does not seem happy with the SEBI’s interventions. In March, after the SEBI chairperson alerted exchanges to the potential for froth, Union finance minister Nirmala Sitharaman said, “I will let the markets play on their own. As much as some people observe that our stocks are overvalued. We can see that despite global fluctuations, the Indian markets have maintained a level of sanity.”

Experts acknowledge that the situation is difficult.

“When [the] SEBI chief cautions stakeholders that certain segments of the equity market have gathered too much froth, she is protecting the interests of the retail investor, which is one of SEBI’s objectives,” says Anand Mishra, professor of finance at BITS Law School.

“However, vibrancy in the SME segment of the market has enthused various market participants, including entrepreneurs who have been able to raise funds through IPOs and FPOs [follow-on public offers]. The finance minister is referring to that fact,” Mishra adds.

“I believe what the finance minister has said is bang on,” says Thomas Matthew, former joint secretary at the Department of Economic Affairs.  “The markets should be left to their own wisdom, but that does not mean there should be mayhem,” he adds.

Matthew does not agree with what SEBI is doing. “In March, of this year, SEBI apparently asked MFs [mutual funds] to moderate inflows in small- and mid-cap schemes. I think that it was an irrational move as the regulator should concern itself with the integrity of the market and it does not behove it to interfere with the preference of investors for any segment,” he says.

Some experts believe SEBI needs to address the lack of awareness among investors. An Asian Development Bank (ADB) report says only 27% of Indian adults meet the criteria for the minimum level of financial literacy as defined by RBI. The regulator has been organising seminars and webinars in partnership with trading members.

Samir Shah, head of online business at Axis Securities, says SEBI uses advanced surveillance systems to identify and prevent market manipulation and insider trading. “Further, they have set up an investor education and protection fund to aid awareness efforts. SEBI is also developing measures to regulate content posted on social media to ensure investors receive reliable information.”

All SEBI Can Do

Even as SEBI tries to educate rookie retail investors, the number of bad actors is rising at an alarming pace. In just the past four months, people in Bengaluru lost Rs 197 crore to fraudulent investment schemes. A total of 735 cases have been registered with zero recovery and only 10% of bank accounts frozen. According to the Pune cybercrime police, cases of online scams went up from 43 in the whole of 2023 to 112 in just the first two months of 2024.

The criminals seem to be using a familiar cheat-sheet: A person is added to a WhatsApp group with fake accounts of renowned investors as members. Discussions begin on upcoming ‘opportunities’. The initial stock tips are free and often conflicting. As certain tips prove useful, members are encouraged to invest more, fostering a sense of urgency and exclusivity. Realisation dawns on the victims only when they attempt to book profits and withdraw from the markets.

Sandeep Agarwal, co-founder of Teamlease Regtech, a compliance management software company, says the pace of developments in the securities market makes it difficult to isolate fraudulent practices and mitigate the damage quickly.

“The government should give more power to the regulator to put a break on the increasing number of scams and trading frauds,” says Siddhartha Bhaiya, managing director and chief investment officer at Aequitas Investment Consultancy.

But former finance secretary Matthew sees the situation differently. “SEBI is an autonomous body. It has enough powers as of now until it discovers something that falls outside its purview,” he says.

He suggests that SEBI should not allow investment in futures and options unless a demat account is at least one year old. “Even if you want to make an exception there, they should not be allowed to play more than 25–30% of the value of your annual trading in cash. This way you may get scorched, but you will not burn and die,” he adds.

Awareness First

As a regulatory body, SEBI’s adjudication powers are limited to civil law. The body can, however, involve criminal investigation authorities in probes. “SEBI and brokers are making efforts to educate investors about risks, but it is also the responsibility of investors to be aware of their own actions,” says Subramanian.

While it is SEBI’s responsibility to put up guardrails to ensure long-term growth in the markets, investors need to stop seeing the markets as gambling dens or routes to make a quick buck.