FraudTech, the new game in town

AARATI KRISHNAN | Updated on January 16, 2018 Published on October 13, 2016


Shady market players are leveraging technology to bait unwary investors and taming them is a tall order

Of late, the Securities and Exchange Board of India’s attempts to crack down on financial scamsters has begun to resemble the game of whack-a-mole. As soon as SEBI wraps up investigations and brings the hammer down on one set of fraudsters, a brand new set pops up from the ground.

If the lacklustre stock market of 2009 to 2013 spawned dozens of Ponzi schemes, the recent bull market has given birth to an army of self-anointed investment advisors.

And unlike tipsters of the past, who had to rely on telephone calls or word-of-mouth to drum up a following, new-age ones can leverage on bulk SMS, WhatsApp, promoted Tweets and Facebook groups, to reach out to thousands of unwary folk at the flick of a finger.

Wealth through SMS

Sending out a bulk SMS offering hot BTST (Buy Today Sell Tomorrow) tips seems to be one popular form of new-age ‘investment advice’.

In the last couple of months, my phone inbox has been flooded with many generous, unsolicited tips to buy penny stocks that will double or treble my money within a week. In early September, one SMS informed me that Raymond has taken over Supreme Tex Mart, trading at ₹10.95 and urged me to buy over 20,000 shares for a ‘Big Blast’. Since then, I have been deluged by buys on the same stock at varying prices from ₹6 to ₹8, with targets pegged at ₹12 to ₹22. Clearly, the Big Blast promised in the September SMS is yet to materialise. After topping out at over ₹11 in September, the stock fell off a cliff to ₹5.5 and hasn’t managed to claw back yet.

A quick check on the company’s website reveals very little except that it is an exporter of yarn and knitted fabric. Its last annual report (FY15) shows a ₹208 crore loss, a mountain of debt and negative net worth of ₹7.7 crore; it reported losses for the past five quarters. The company’s stock exchange announcements show that it flirted with a stake sale to one ‘KTE Exports’ (no relation to Raymond) in September, only to defer it later.

So, given the firm’s transparently poor fundamentals, did many investors fall for this tip? Well, the Moneycontrol message-board for Supreme Tex Mart shows over 9,000 followers, with many anguished messages about being unable to sell the stock.

A more recent SMS asks me to buy the obscure Shivansh Finserv, citing ‘confirmed news’ of IDFC MF buying a 49 per cent stake. IDFC MF has promptly issued a public denial. Shivansh’s latest quarterly results show barely-there operations, with its promoters owning less than a 2 per cent stake in the firm!

In short, the SMS tipping industry seems to use a well-worn modus operandi to snare unwary investors. The tip is sent from an ID that is suggestive of a big-name brokerage or mutual fund (KOTKMF, SHKHAN, MOSWAL, etc). ‘Inside’ news of an imminent takeover or merger is dangled as bait to mask dodgy fundamentals. All this suggests a classic pump-and-dump operation at work (pump up volumes so that operators/promoters can sell the stock).

Subscribe to jackpots

If there’s something inherently fishy about free advice, it’s harder to sift good advice from bad when you’re subscribing to a paid service. Today, a simple Google search for ‘stock tips’ throws up scores of freelance advisory firms offering to churn out multi-bagger stock, commodity and forex calls to make you instantly rich.

So, one ‘SEBI-approved commodity tips provider’ promises to turn ₹50,000 into ₹50 lakh in one month, with a 99.9 per cent accuracy level. The website reveals a neat rate card for interested investors. A basic package of Cash Calls can be bought for ₹5,000 a month. But if you would like the Bumper Jackpot Options package or News-based Sureshot Tips, you will have to shell out ₹15,000 or ₹20,000 a month.

The site has ‘data’ showing 100 to 300 per cent returns on its past recommendations. Pop-up testimonials by twenty-somethings who made money by the bagfuls, invite you to follow their example. For good measure, the site also flaunts an ‘ISO 9001’ certificate, the SEBI logo and membership with the EPF (Fine print: European Press Federation).

Now, while there’s nothing wrong with seasoned portfolio managers or research analysts offering recommendations on a subscription basis (indeed, there are reputed services like Equitymaster in this space too), problems arise when swarms of fly-by-night operators threaten to crowd out genuine firms.

First, it is doubtful if all these firms meet the registration and qualification criteria laid down in SEBI’s Research Analysts or Investment Adviser regulations. Then, there’s the matter of tall claims (even successful day traders seldom claim more than a 70 per cent hit rate).

The fixes

Assuming that there are a good number of rotten apples in this basket, what’s the solution? For starters, SEBI is aware of the unregulated advice menace and is taking steps to curb it. In recent months, acting on specific complaints from investors, it has issued quite a few cease and desist orders against unregistered investment advisers.

It has also put out a very recent discussion paper that suggests a blanket ban on all tips, calls or recommendations through electronic or social media, unless they are from a registered Investment Adviser.

But there are problems with this blanket ban approach. For one, it may end up throwing the baby out with the bathwater. Today Facebook posts, Twitter feeds and Google groups serve as extremely useful forums for genuine long-term investors to exchange notes on companies and markets too. To enforce a blanket ban on this practise will hurt such informed decision making. Two, enforcing the ban will entail policing all forms of social media, which will surely prove a Herculean task for SEBI.

Therefore, it may be best for the market regulator to tackle this menace on a case-to-case basis, based on specific complaints. The regulator could consider setting up a specialized cyber cell that uses the power of technology to nail these tech-enabled tipsters.

Targeted investor awareness programmes that acquaint newbie investors with the basics of fundamental analysis, quarterly results, SEBI’s takeover code and material disclosure norms may equip them to avoid the more rudimentary scams, on their own.

Given the sizeable coffers of the investor protection/awareness/education funds that are today at the disposal of MFs, Finance Ministry, the stock exchanges as well as SEBI, there’s certainly no dearth of money to take on these scamsters at their own game.

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Published on October 13, 2016
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