Sebi mulls 'preventive' action to curb frauds

The Securities and Exchange Board of India (Sebi) has proposed a ‘preventive framework’ to curb market manipulation and has sought inputs from stock exchanges and depositories.
 
According to sources, the markets regulator is considering forming a mechanism to identify the end-beneficiary who could be using the stock market platform to launder black money. The proposed framework will involve a shift from gathering database to advance data analytics.
 
“The regulator is undertaking a comprehensive review of its surveillance systems. It is working on several measures that would fill the gaps in existing regulations and would be preventive rather than reactionary,” a regulatory official said. Sebi wants exchanges and depositories to consolidate details about the beneficiaries and facilitators of fraudulent trades.
 
“The exchanges and depositories require the adoption of an advance technology that would support scrutiny of promoters and stakeholders of such companies. This could be done with the help of an advance database, which could be created in coordination with brokerages,” the official added.
 
Further, the verification of client/investors need more checks and balances. The exchanges should pay heed to the weekly reports submitted by brokers about their clients. Besides, there should be automatic feeding of data about former and existing clients of those stocks which are showing unusual price movements, more than the defined parameters.
 
As directed by Sebi, the exchanges have formed a sub-committee to mull options. “The exchanges are analysing the past instances and the modus operandi adopted by the manipulators to plug the loopholes,” said an exchange official. Imposing a stringent penal action against the culprits is also under consideration, he added. It was observed that promoters own a large chunk of stake in these companies. Typically, the connivance between operators and promoters of the listed firms raise the stock price in an artificial manner, which leads to a multifold spike in valuation, the official explained.
 
Sebi has asked market intermediaries to identify the root cause of price rigging and the factors involved and then suggest riders to curb it.
 
Also, to curb the misuse of long-term capital gains (LTCG) benefits is on the agenda. However, the regulator is not only looking at penny stocks, which are among the most preferred ways to launder black money, but similar techniques used for trading in large-cap stocks are also on the radar, said the person cited above.
 
There have been some recommendations regarding doing away with LTCG exemptions, which could be also reviewed during discussion with the regulator, said the exchange official.
 
In the recent past, Sebi, along with the income-tax department, has detected thousands of cases where LTCG benefits have been misused to hide unaccounted income. Last year, Sebi had identified close to 32,000 entities for further examination on suspicion of violating securities law to evade taxes. Besides, the regulator may increase its coordination with other enforcement agencies to find out illicit fund flows in the market.
 
Sebi’s existing surveillance systems are generating over 100-plus alerts a day to facilitate detection of market manipulation. However, there is still a constant need to enhance capabilities of surveillance, both in terms of systems and strategies, to address the challenges.