Explainer: What is YouTube pump-and-dump scheme that turned Sebi red-faced

Markets regulator Sebi has recently barred noted bollywood actor Arshad Warsi, wife Maria Goretti, and a few others from the securities market for alleged involvement in the pump-and-dump scheme through Youtube channels.

While market participants hailed the regulator for enforcing tough penalties, the actor on his part has denied any wrongdoing.

In this article, we will try and explain what a pump-and-dump scheme is, its impact on share prices, what Arshad Warsi case is about and why retail investors should be cautious while taking unauthorised tips.


Pump-and-dump scheme
As the name suggests, the pump-and-dump scheme involves "pumping up" the share price, that is driving it higher by spreading misleading information through social media channels or various other media.

Once the elevated share-price levels are reached, vested interests "dump" the shares by booking profits, making retail investors gullible and vulnerable to lose invested money. Sebi terms such schemes as fraudulent and unfair trade practices, which can hamper the sanctity of Indian capital markets.


What is the Arshad Warsi case?
According to Sebi, Arshad Warsi and a few others have "pumped up" the share prices of Sadhna Broadcast and Sharpline Broadcast through uploading misleading videos on YouTube channels.

These YouTube videos had circulated false and misleading news to recommend that investors should buy shares of Sadhna and Sharpline for big profits.

After the release of videos, Sebi found that there was an increase in the price and trading volume of the shares of two firms during April-July last year.

Large volumes indicated that a large number of retail investors were likely influenced by the videos and bought the shares. During the same time, Arshad Warsi, promoter shareholders and others have sold their holdings at inflated prices and booked profits.

According to the regulator, Arshad Warsi has made a profit of Rs 29.43 lakh and his wife has earned a profit of Rs 37.56 lakh.

Word of caution for retail investors
With the rise and rise of financial influencers and the massive reach of social media, there is no dearth of personal finance advice. However, experts say some influencers, with no skin in the game, pose risks to an individual's financial stability. They advise retail investors to be cautious before taking unauthorised recommendations from various media, particularly, social media.