 "SEBI")
Markets regulator Securities and Exchange Board of India (Sebi) has issued show cause notice to over 500 investors, seeking explanation over alleged illicit gains made through trading in illiquid stock options. According to people in the know, several of these are high net worth individuals (HNIs) allegedly manipulated the stock exchange route for evading tax, and also violated Sebi’s regulations on unfair trade practices.
Typically, any stock with an average daily turnover of less than Rs 0.2 million for two previous quarters is termed as illiquid (thinly-traded), as defined by the stock exchanges.
The move followed an order that the regulator had passed in April, in which it had decided to take action against 14,720 entities that had indulged in non-genuine trades in the equity derivatives (options and futures) segment. The action was part of Sebi’s crackdown on market manipulators looking to evade taxes or convert black (unaccounted) money into legitimate funds.
“Adjudication proceedings have been initiated in phases and notices are being issued accordingly. In the first phase, we have identified investors who have made significant profits. Further, the investors were asked to explain the reason behind repeatedly incurring profit/loss, and to file a reply within 15 days," said a person in the know.
The total estimation of gains from this artificial (non-genuine) trade volumes could be anywhere between Rs 50 billion and Rs 100 billion, the person added.
Sebi has found that illiquidity has driven promoters to join hands with stock market operators for creating an artificial market. Such misuse of stock options displays an unreal picture of market activity. The orders for such stock options, which involved buying and selling of the same security, were executed at pre-decided irrational/arbitrary prices (reversal trade).
Sources say the regulator has shared the findings with the income tax department and financial intelligence unit, for investigation of probable money laundering.
In 2014, the regulator’s surveillance system detected systemic tax evasion by entities. Low-value illiquid stocks in the options segment suddenly saw huge volumes, without an adequate change in open interest (unsquared positions).
Accordingly, Sebi initiated a preliminary examination into the matter for April 2014 to March 2015 period. Sebi observed that a set of entities were repeatedly incurring significant losses by executing reversal trades in the stock options segment of BSE. Another set of entities were repeatedly making significant profits by becoming their counter parties in orchestrated trades, with the intended execution of the non-genuine trades.
The regulator has come across close to 15,000 entities, while it was probing 59 entities in this case, to check whether they violated norms pertaining to fraudulent trade activities.
Later, the scope of investigation was expanded to cover all the entities that had indulged in executing reversal trades and the time period was also extended to September, 2015.
Meanwhile, the BSE undertook a series of corrective measures to prevent occurrence of such non-genuine trades in its stock options segment. “The turnover in BSE’s stock options segment saw a marked decline, with the average daily turnover decreasing from a high of Rs 7.2 billion (approximately) during 2014-15 to Rs 3 billion (approximately) during 2015-2016, and thereafter reducing to almost nil during 2016-2017,” Sebi noted.
Earlier this year, BSE and NSE advised their members to take extra caution while trading in as many as 194 illiquid stocks. BSE and NSE have listed out 186 and 8 illiquid stocks, respectively, where additional due diligence is required.
A certain section of the industry, however, feels that the trades executed were merely an adjustment and hence no illegitimate gains were made. “The entities who have traded in illiquid stock options merely for possible profit and loss accommodations had no illegitimate gain. Further, no loss has been caused to any investor," said Deepak Sanchety, an independent lawyer.
According to him, if trades during the investigation period are held to be in violation of Sebi’s Prohibition of Unfair Trade Practices (PFUTP) rules, then it would necessarily mean all similar trades in illiquid stocks, since the inception of the options trading. are in violation.
CRACKING THE WHIP
- Hundreds of HNIs on radar for market manipulation, tax evasion
- Sebi issued notices to over 500 investors, estimated loss worth Rs 50-100 billion
- Investors under the options segment caught trading in illiquid stocks
- In April, adjudication initiated against 14,720 entities indulging in
- non-genuine transactions
- Sebi has shared probe findings with financial intelligence unit and
- income tax department
