New Delhi, Feb. 11 -- For months, shares of LS Industries, a little-known textile firm with no revenue, soared inexplicably, transforming it-on paper-into one of India's most valuable companies. Investors who ignored financial fundamentals saw their portfolios balloon. A similar pattern played out in Pacheli Industrial Finance, a consultancy firm with negligible earnings but an outsized market valuation.

Then, India's stock market watchdog stepped in.

Read this | Astronomical gains in penny stocks under Sebi lens

On Tuesday, the Securities and Exchange Board of India (Sebi) halted trading in LS Industries Ltd (LSIL) after uncovering glaring discrepancies between its financial health and its skyrocketing stock price. The move followed a...