Sebi bars 59 entities for manipulating markets, evading taxes

Bars the entities for alleged manipulation of the stock exchange route to evade taxes

The Securities and Exchange Board of India (Sebi) on Thursday passed an interim order against several wealthy investors, for alleged manipulation of the stock exchange route for evading taxes.

In a 37-page order, Sebi wholetime member Rajeev Kumar Agarwal has barred 59 entities from trading, buying, selling or dealing in the securities markets, either directly or indirectly. This is the third such crackdown against alleged market manipulators looking to evade taxes or convert black money into ‘white’. The latest was in the stock options segment of the BSE exchange in the country's nearly Rs 2-lakh crore derivatives market.

The regulator's surveillance system detected a systemic tax evasion scheme. Low-value illiquid stocks in the options segment saw huge volumes, unsubstantiated by adequate open interest (unsquared positions). The focus period of the said surveillance is a year, starting 2014.

A reference is also being made to the enforcement directorate, income tax department and financial intelligence unit, for investigating a probable money laundering scheme.

"In my view, the misuse of stock options as shown above not only displays an unreal picture of market activity to other investors but also defeats the basic premise of a screen-based electronic trading system and price discovery mechanism, by repeated execution of pre-decided reversal trades at irrational/arbitrary prices. Moreover, the impact of such trading on the traded volume and the price of stock options contracts is huge," went Agarwal's order.



Through the use of the provision on long-term capital gains, certain operators have been actively helping small value companies and their promoters to evade tax and manipulate the markets. So far, the regulator has cracked down on two schemes. One was the use of equity trading in penny stocks and the other was the use of the small and medium enterprises platform.

Agarwal has so far issued around 10 orders, with 36 companies involved in allegedly irregular trades being suspended and 900 entities barred.

The investigation into market manipulation showed companies with poor financial fundamentals raising huge capital by allotment of preferential shares to various entities. This was followed by a sharp rise in share prices, once preferential allotment is done, through circular trading. The artificially inflated stocks are then offloaded through companies funded by those seeking to convert unaccounted money into 'white' money.

BSE has stopped trading deep out of money options from July and now provides trading in only three options series, compared to the seven allowed by the regulator, the exchange spokesperson said.

“The Sebi interim order talks about trading in illiquid stock options contracts, leading to non-genuine and non-legitimate transactions. In Indian markets, close to 90 per cent of equity derivatives contracts available are not traded every day and are, therefore, illiquid”.

“By stopping the trading in deep out of the money contracts, BSE took a precautionary step in this regard in July. BSE is looking into the issue relating to price bands for stock options, on the lines of equity markets,” the spokesperson added.