Explained: What Is 'Pump-And-Dump' Scheme For Which Bollywood Actor Arshad Warsi Was Banned From Stock Market

The Securities and Exchange Board of India (SEBI), the country’s markets regulator, recently banned Bollywood actor Arshad Warsi and his wife Maria Goretti from participating in the securities market for one year.

This decision came after SEBI found them involved in a case linked to misleading promotional videos and manipulative trading around the shares of a company called Sadhna Broadcast Limited (now renamed Crystal Business System Ltd).

What Happened?

SEBI’s investigation revealed that Warsi, his wife, and 57 other individuals and entities took part in a “pump-and-dump” scheme involving Sadhna Broadcast shares.

What is Pump-and-Dump Scheme

Pump and dump is a type of stock market scam where a group of people artificially inflate the price of a low-value stock by spreading false or exaggerated positive information to attract buyers.

For example, if a stock is priced at Rs 10, these people secretly buy a lot of shares and then create hype through social media or videos, saying the company will do really well. This hype makes more investors buy the stock, pushing its price up to Rs 50. Once the price is high, the original group sells all their shares at the inflated price, making huge profits.

After they sell, the excitement fades, the stock price crashes back down, and the new investors who bought at the high price end up losing a lot of money. Here’s how the scheme worked:

Background of the Case

The issue came to light after complaints in mid-2022, alleging price manipulation and false promotions about Sadhna Broadcast shares. SEBI investigated trading patterns between March and November 2022 and found clear evidence of market manipulation.

Artificially Inflating the Share Price

Connected people, including promoters of Sadhna Broadcast and others, traded shares among themselves in a coordinated manner. Although the trades were often small in volume, they were enough to push the stock price up because the stock had low trading activity (liquidity).

Misleading Promotions

After the price was pushed higher, misleading videos promoting Sadhna Broadcast as a great investment opportunity were uploaded on YouTube channels like Moneywise, The Advisor, and Profit Yatra. These channels were controlled by one of the masterminds behind the scheme, Manish Mishra.

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Drawing in Retail Investors

The promotional videos, combined with rising share prices, attracted everyday investors to buy the stock, believing it was a promising opportunity.

Dumping Shares for Profit

Once the price was sufficiently inflated, the promoters and connected entities sold off their shares, making large profits. This caused the stock price to crash, leaving the new investors with losses.

Arshad Warsi’s Role and Penalty

SEBI’s probe showed that Arshad Warsi made a profit of Rs 41.70 lakh from the scheme, and his wife earned Rs 50.35 lakh. The regulator fined both of them Rs 5 lakh each and barred them from the securities market for one year.

Who Else Was Involved?

Apart from Warsi and his wife, SEBI fined 57 other entities, including promoters of the company, with penalties ranging from Rs 5 lakh to Rs 5 crore. SEBI also ordered these entities to return illegal profits worth Rs 58.01 crore along with interest.

The investigation identified key masterminds like Gaurav Gupta, Rakesh Kumar Gupta, and Manish Mishra, who planned and executed the scheme. Several brokers and middlemen were also involved in facilitating the manipulative trades.

SEBI’s Final Verdict

SEBI concluded that the entire operation was a classic case of “pump-and-dump”, where the share price is artificially inflated and then dumped to the detriment of innocent investors. This kind of fraudulent and unfair trading violates SEBI’s rules under the Prohibition of Fraudulent and Unfair Trade Practices (PFUTP).