How can stocks be manipulated and how is that a fraud ?

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I was reading about the whole affair of the billionaire Adani – he has allegedly engaged in fraud by ‘stock price manipulation’ through offshore ‘shell companies’. I don’t get any of it.

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Anonymous 0 Comments

In very basic terms, fraud is the crime of tricking someone into giving you money.

Securities fraud is a particular type of fraud, where you convince people to buy things for more than they are worth. One of the most common kinds of securities fraud is called a “pump and dump” – you generate interest in a stock by getting your buddies to buy shares, which makes the price go up because there’s high demand, and then other investors want to invest in the stock because the price is going up. The price rises higher and higher, and suddenly your buddies stop buying the stock, and now these investors are stuck with stocks that are actually worthless because no one wants to buy them.

Anonymous 0 Comments

The allegations are that the Adani group is in violation of Indian securities regulations and is using that to bump up their own shareprices and value.

The Indian securities bureau (SEBI) mandates that any publicly traded company must have at least 25% of its shares held by funds/investors who are not “insiders” or linked to the company management. This is meant to provide a measure of public confidence in the company’s stocks; basically, since 25% of the stocks are independently held, they can be sold at whatever is the desired rate no matter what the leadership of the company wants, allowing the stock price to accurately reflect public sentiment. If the public isn’t confident in the company, those 25% can start selling at lower prices.

The allegation is that the Adani group is actually holding most of it’s own stocks through offshore funds and shell companies. A shell company is a company that exists only on paper as a way to mask something else: a shell over another company. If the legally-required “independent” stock holders are actually just the Adani group executives holding those stocks under another name/company, that means that they can excessively inflate their own stock prices by putting out flattering public statements/profit reports, confident that no shareholder is going to look into them and try to jump ship.

Why go through the bother? Because the Adani group can then turn around to other firms and borrow against their own value; they can claim that they are a multi-billion dollar company based on the stock valuation. Other firms will charge interest on the loan, but they would feel safe to lend to such a well-established and valuable company. Meanwhile, the loan can be spent on whatever the executives want; their own salaries, business trips to various locations, or simply embezzles. There’s no independent stockholder to protest or call for an investigation into the group’s finances, so they can do whatever they want.

The end result is that a number of investment firms or banks are willing to lend money to a group of people who may not actually have any significant assets or holdings to their name (at least, not significant relative to the market valuation). They are defrauding those firms and banks by lying to them about how safe their loans/investments to the group are. It would be the same as if you went to the bank and convinced them that you were worth as much as Jeff Bezos.