India's stock market watchdog has found evidence that national stock brokers, banks and foreign companies investing in the country have been manipulating share prices.

Some brokers and investors have repeatedly forced India's stock market lower by short selling so-called "scrips", or certificates that demonstrate ownership of shares, according to a regulator's report on the scam.

Short selling is a financial technique where brokers or investors sell shares they do not own, with the intention of effectively "buying" them back after the selling has forced the price down.

"Falls in the prices of leading scrips affected market sentiment and caused market wide falls," the Securities and Exchange Board of India (SEBI) said in an interim report.

Cash injection

As part of the scam, investors and companies made large amounts of money available for Indian brokers, who then used the cash to build up large market positions which moved the market, the board said.

"Brokers received large finance from banks and corporates and used it for stock market operations," the watchdog said.

The shady cash injections were disguised in a variety of ways as share application money, loan advances and deposit bills.

A complex web of transactions was used to hide the identity both of those handling the money and of the ultimate financiers, the regulator said.

"Such unregulated flows of liquidity into the securities market distort the market equilibrium, leading to inefficient price discovery," the regulator said.

"Under the present dispensation, there is no regulation or monitoring of flows of funds in and out of the securities market," the regulator added.