From Hype To Crash: The Legal Anatomy Of Pump And Dump Schemes In SME IPOs
- IJLLR Journal
- 2 days ago
- 2 min read
Ria Garg & Ananya Garg, B.A. LL.B. (Hons.), WBNUJS, Kolkata)
ABSTRACT
The convergence of Small and Medium Enterprise (SME) Initial Public Offerings (IPOs) and the various prevalent market manipulations schemes, one of them being pump-and-dump, creates a big impediment in the efficient working of financial markets. With the rise in the abuse of pump-and-dump mechanics through which stock prices are artificially inflated to portray hyped up demand by insider information tactics, only to then ultimately plummet, leaving the participants to suffer tremendous losses. Despite the intention behind SME IPOs being to promote development of small businesses, presently they have become a dominant area of stock price manipulation schemes. Considering the nature of SME IPOs operating in comparatively less regulated markets and high price volatility, they become easily vulnerable to price rigging techniques. Implementing the pump-and- dump playbook, scammers spread fraudulent financial data to generate a fake hype within the market. Various elements are employed to facilitate the entire process including but not limited to using social media influencers to attract investors and creation of pressure to inflate prices, only to then finally enable the insiders to sell their shares on an early basis thereby triggering a crash in the market. Owing to the loopholes riddled in the regulatory framework, it becomes difficult to prevent such misrepresentations in reality. The lack of pre-IPO screening methodologies provides room for manipulation of financial disclosures. Moreover, social media remains largely unregulated, providing more people with unidentified backgrounds to influence the people, thereby further driving up the hype. The Security Exchange Board of India (SEBI) also fails to maintain a check of ongoing digital frauds and as a result greatly suffers in providing evidence of it in the court of law. The main aim remains to ensure a fairer market which can be achieved by enhancing the levels of transparency and accountability, addressing regulatory lacunae and utilizing advanced enforcement mechanisms according to the needs of the market.
