Pump and dump is a form of securities fraud that attempts to inflate the price of a stock through false, misleading or greatly exaggerated statements in order to sell cheaply purchased stock at a higher price.
In recent time, the price of salt trading corporation is rising continuously. The stock price which was Rs 500 in the beginning of current FY soared to Rs 2,005 on Sunday, January 5. As the end of the second quarter is nearing, the stock price has jumped by Rs 1,500. The continuous rise of the stock price has made the investors suspicious of its transaction. The investors are suspecting ‘pump and dump’ practice in the stock. “The way the price of the stock being pumped, I see the possibility of a dump in the near future,” said an investor.
The perpetrators of ‘pump and dump’ usually already have bulk stocks purchased at low price. Once the price reaches the highest point, they sell their stock at a higher price and rake maximum profit.
Previously, pump and dump schemes were done through telephone and personal visits. But in today’s world with excessive use of the internet, this illegal practice has become even more prevalent. Fraudsters post messages online enticing investors to buy a stock quickly, with claims to have inside information that development will lead to an upswing in the share's price. Once buyers jump in, the perpetrators sell their shares, causing the price to drop dramatically. New investors then lose their money.
These schemes usually target stocks with low capital, as they are the easiest to manipulate. Due to the small float of these types of stocks, it does not take a lot of new buyers to push a stock higher.
As per Anjib Tuladhar, Treasurer of Nepal Investors Forum, although such practices are far from abnormal in the international stock market, Nepal has not witnessed such a scenario. He opined that such practice is difficult in Nepal due to the huge gap between the demand and supply of the stocks.
“In the past, there were few stocks and more investors. But the supply of shares has surged dramatically in recent days, thus, it is not easy to ‘pump and dump’ any stock. However, there have been attempts to carry out the practice,” he said. A similar trend was seen in the stock of Upper Tamakoshi and Everest Bank some time back.
“Although few have been punished for similar nature of the act, no one has been taken action for the specific cause of pump and dump,” said Rupesh KC, sub-spokesperson of Securities Board of Nepal (SEBON).
SEBON has set the following action in relation to such act.