KAAND: The Retail Investor Kaand TACTIC: Every kaand in this series ends with the same victim — the person who trusted the system and was the last to know
THE TACTIC IN ONE PARAGRAPH The tactic is a simple transfer of risk: insiders and connected players extract value from a company or financial instrument while shifting the downside to retail investors, depositors, or small shareholders. The mechanism works in stages. First, the entity raises capital from the public through equity, debt, or deposits, often with the implicit or explicit backing of regulators, ratings, or brand reputation. Second, the funds are diverted—through related-party transactions, overvalued assets, circular lending, or outright fraud—into entities controlled by the same insiders. Third, when the scheme collapses, the insiders have already exited with their gains, while the retail participants are left holding illiquid, worthless, or legally contested assets. The key to the tactic is timing: the extraction happens before the collapse, and the collapse happens after the insiders have cashed out. The system is designed to ensure that the last to know are the first to lose.
HOW IT WORKS IN INDIA SPECIFICALLY This tactic thrives in India due to a combination of regulatory fragmentation, judicial delays, and cultural trust in institutions. The Reserve Bank of India (RBI), Securities and Exchange Board of India (SEBI), and Ministry of Corporate Affairs (MCA) operate in silos, creating gaps where oversight fails. For example, NBFCs regulated by the RBI can lend to shell companies that then invest in listed entities overseen by SEBI, with no single regulator tracking the full chain of transactions. The Companies Act, 2013, mandates independent directors, but these positions are often filled by retired bureaucrats or industry insiders who rubber-stamp decisions. The Insolvency and Bankruptcy Code (IBC) was meant to speed up recoveries, but delays in the National Company Law Tribunal (NCLT) mean that by the time a resolution is reached, the assets have often been stripped. Banking secrecy laws and the slow pace of forensic audits further shield insiders. The political economy of India—where large conglomerates enjoy implicit state backing—means that even when fraud is exposed, the cost of failure is socialized, while the gains remain privatized.
The most critical enabler is the lack of real-time transparency. SEBI’s disclosure norms require listed companies to report related-party transactions, but these filings are often buried in dense quarterly reports, and retail investors lack the tools to parse them. The Depositories Act, 1996, allows for dematerialized shares, but it also enables "penny stock" manipulation, where insiders inflate share prices through circular trading before dumping them on unsuspecting retail buyers. The gap between the RBI’s oversight of banks and SEBI’s oversight of capital markets means that when a bank collapses (like Yes Bank or PMC Bank), depositors are bailed out, but when a listed company collapses (like DHFL or IL&FS), shareholders are wiped out. The system is designed to protect the institution, not the individual.
THE HISTORICAL RECORD The tactic has been deployed repeatedly in India, with retail investors bearing the brunt. In the Satyam scandal (2009), the company’s founder inflated revenues and profits for years, raising capital from retail and institutional investors. The fraud was uncovered only when the founder confessed to falsifying accounts to the tune of ₹7,000 crore. By then, the stock had already been pumped up through circular trading, and insiders had sold their holdings. Retail investors, who had bought into the "India’s Enron" story, saw the stock collapse from ₹200 to ₹10 in weeks. The perpetrators were convicted, but the recovery for shareholders was minimal.
In the Sahara case (2012), the Sahara Group raised ₹24,000 crore from 30 million retail investors through optionally fully convertible debentures (OFCDs), marketed as "safe" investments. SEBI ruled that the issuances were illegal, but by then, the funds had been diverted into real estate and other ventures. The Supreme Court ordered Sahara to refund investors, but the process was mired in delays. A decade later, only a fraction of the money had been returned, with the rest tied up in legal battles. The insiders, meanwhile, continued to operate other businesses.
The IL&FS collapse (2018) was a masterclass in the tactic. The infrastructure conglomerate, rated AAA by credit agencies, borrowed heavily from banks and mutual funds, then lent to its own subsidiaries at inflated valuations. When the group defaulted on ₹91,000 crore of debt, retail investors in debt mutual funds—who had been sold these instruments as "safe"—were left with worthless paper. The RBI and government stepped in to prevent a systemic crisis, but the recovery for retail investors was negligible. The forensic audit revealed that funds had been diverted through a web of shell companies, but the legal process to claw back the money remains ongoing.
THE INSTITUTIONS THAT ENABLED IT No tactic works in isolation. In each of these cases, multiple institutions failed in their roles. Auditors—PwC in Satyam, Deloitte in IL&FS—signed off on financial statements that later proved fraudulent. Credit rating agencies—CRISIL, ICRA, CARE—gave AAA ratings to IL&FS and DHFL even as their debt levels ballooned. Banks—Yes Bank, ICICI Bank, Axis Bank—lent to these entities without adequate collateral, often based on personal relationships rather than creditworthiness. Mutual funds—Franklin Templeton, HDFC Mutual Fund—packaged these risky instruments into "safe" debt funds and sold them to retail investors. Regulators—SEBI, RBI, MCA—either missed the red flags or acted too late. The judiciary—NCLT, Supreme Court—took years to resolve cases, by which time the assets had been stripped.
The most consistent enabler is the board of directors. In Satyam, IL&FS, and DHFL, the boards were packed with retired bureaucrats, industry veterans, and "independent" directors who either lacked the expertise to question management or were complicit. The Companies Act mandates that at least one-third of directors be independent, but in practice, these directors are often nominated by the promoters themselves. The media also plays a role—business channels and newspapers often amplify the hype around "growth stories" without questioning the underlying numbers. When the fraud is exposed, the same media shifts to sensationalism, but by then, the damage is done.
THE CURRENT STATE The tactic is still in use today, though the instruments have evolved. The IBC has made it harder to delay insolvency, but the process remains slow, and recoveries are low. SEBI has tightened disclosure norms for related-party transactions, but enforcement is weak. The RBI’s new framework for NBFCs has reduced some risks, but the sector remains vulnerable to asset-liability mismatches. The mutual fund industry has seen a shift toward passive investing, which reduces some risks but also means that retail investors are now more exposed to index-level frauds.
The biggest change is the rise of digital platforms, which have democratized access to capital markets but also made it easier to manipulate retail investors. Pump-and-dump schemes, coordinated through Telegram groups and WhatsApp, have become common. The SEBI has cracked down on some of these, but the sheer volume of retail participation—over 100 million demat accounts as of 2024—means that the tactic remains viable. The government’s push for financial inclusion has also created new vulnerabilities, as first-time investors are often the most trusting and the least informed.
Nothing has fundamentally changed. The incentives remain the same: insiders extract value, regulators react slowly, and retail investors bear the cost. The only difference is that the scale is now larger, and the tools are more sophisticated.
WHAT TO WATCH FOR 1. Sudden spikes in promoter pledging: If a company’s promoters are pledging a large portion of their shares—especially if the pledging increases rapidly—it’s a sign that they are raising cash, often to fund other ventures or exit quietly. Check the shareholding pattern filings on the stock exchange website.
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Related-party transactions with unlisted entities: If a listed company is buying or selling assets to an unlisted entity at valuations that seem too good to be true, dig deeper. Look for transactions where the counterparty is a shell company or has the same address as the promoter’s other businesses.
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Debt mutual funds holding illiquid paper: If a debt fund is holding a large portion of its assets in bonds or commercial paper issued by a single group, especially if the group is in a cyclical industry (real estate, infrastructure), it’s a red flag. Check the fund’s portfolio disclosures for concentration risk.
This newsletter describes documented business tactics and systemic patterns based on public records, regulatory orders, and published financial journalism. It does not make allegations against any individual or entity. Readers are encouraged to consult primary sources and form their own conclusions.