Sebi cracks down on 'pump and dump': How it works, what you should do

From shady stock tips to sudden crashes, understand how 'pump and dump' scams unfold and what you can do if you've already fallen into the trap

India’s market regulator Sebi is cracking down on “pump and dump” scams, a type of securities fraud that’s been gaining ground on social media and messaging apps for a while now. Sebi has conducted multiple search and seizure operations in June 2025 and uncovered “incriminating evidence” related to such schemes. Investigations are ongoing.

 

But what exactly are these scams? How do they work, and what can retail investors do to avoid falling into the trap?

What is a pump and dump scam?

In a pump and dump operation, fraudsters artificially inflate the price of a stock by spreading misleading or false information, creating a frenzy among unsuspecting retail investors. Once prices rise, the scammers offload their own holdings at a profit, causing prices to crash and leaving other investors with heavy losses.

 

“These scams often target low-liquidity, penny stocks,” said Tomu Francis, partner at Khaitan & Co. “The tell-tale signs are sudden price spikes and trading volumes with no corresponding change in fundamentals.” 

 

How social media fuels the scam

 

Social media has become the modern-day playground for market manipulators.

 

“Platforms like Telegram, WhatsApp, and even Instagram are misused to spread fake testimonials, insider tips, and coordinated hype,” said Diviay Chadha, partner at Singhania & Co. He noted that many of these schemes masquerade as legitimate advice, often luring investors with promises of “guaranteed returns.”

 

“The speed and reach of these platforms enable manipulators to trigger FOMO (Fear of Missing Out), which leads to impulsive buying by retail investors,” added Kunal Sharma, founder & managing partner of Taraksh Lawyers & Consultants, as that viral content lacks any regulatory screening.

 

Red flags to watch out for

 

According to Amar Ranu, head of Investment Products at Anand Rathi, pump and dump scams tend to follow a pattern:

 

-Unrealistic “get-rich-quick” claims

 

-Heavy focus on obscure or penny stocks

 

-Vague business models with little public info

 

-Insider selling or sudden share issuance

 

-Aggressive marketing on unknown forums

 

“High growth rates without fundamental backing should be your first red flag,” Ranu cautioned.

 

Sharma stressed the importance of sticking to Sebi-registered advisers and verifying all stock tips with official disclosures.

 

What if you’re already caught in one?

 

If you’ve already invested, experts suggest halting further transactions immediately.

 

“Preserve all messages, screenshots, emails, and transaction data,” advised Ranu. “File a complaint through Sebi’s SCORES portal and alert your broker.”

 

Sharma added that consulting a legal expert and registered investment adviser is wise, especially if large sums are involved. 

 

Sebi’s role and recourse for investors

 

Sebi uses advanced AI and surveillance systems to track abnormal trading patterns. “They can impose penalties, freeze assets, and suspend trading of the stock under question,” said Francis.

 

While full recovery of funds isn’t guaranteed, Sebi does facilitate redressal through SCORES and can order disgorgement of profits made through manipulation.

 

“In grave cases, Sebi can even refer matters to agencies like the CBI or Economic Offences Wing for prosecution,” Sharma noted.

 

Bottom line

Pump and dump scams aren’t new, but they’re evolving. The best defence is a well-informed investor. Do your own research, stay away from unverified stock tips, and always check if your adviser is Sebi-registered.

   

Remember, if it sounds too good to be true, it probably is.