Continuing its crackdown on misuse of stock exchange system for tax
evasion, the Securities and Exchange Board of India (Sebi) on Wednesday
barred 22 brokers from the securities market for executing 'reversal
trades' worth over Rs 8,100 crore to generate fictional profits or
losses.
However, these trading members would be allowed to function as stock
brokers on behalf of their
existing clients in the cash segment. But,
they cannot sign any new client.
The latest directive follows an interim order passed in August 2015,
wherein Sebi had barred 59 entities from markets for their suspicious
trades in stock options segment.
In the instant matter, Sebi probed the trading members through whom
these debarred entities were trading. A major portion of their turnover
was found to be reversal trades in stock options to create fictional
profit or losses.
According to Sebi, these trading members reversed significant proportion
of the trades within minutes of entering the original trade. These
trades resulted into significant profit for one set of entities and
significant loss to another.
Trading members, through reversal trades for their clients, generated a
total loss to the tune of Rs 1,273 crore and total profit of Rs 1,303
crore, Sebi said.
Prima facie examination revealed that exchange platform was abused to
generate such artificial profit or loss by executing reversal trades to
the tune of Rs 8,100 crore.
As part of ongoing surveillance, Sebi came across several instances,
wherein a set of entities were consistently seen incurring trading loss
by executing reversal trades in options on individual stocks in equity
derivative segment.
Market regulator Sebi found that these 22 brokers have "prima-facie,
facilitated their clients to use and employ a pre-meditated manipulative
device or contrivance while dealing in securities market and indulged
in non-genuine and deceptive transactions".
Such activity by trading members deliberately or otherwise damages
market integrity apart from presenting wrong picture of liquidity to
gullible investors which could affect their investment decisions, Sebi
said.
Accordingly, Sebi has restrained 22 entities "from buying, selling or
dealing in the securities markets, either directly or indirectly, in any
manner, except as a stock broker for their existing clients in the cash
segment".
The debarred entities included Sunstar Securities, Subh Stock Broking,
Mauzampuria Securities Broking, Guiness Securities, Abans Securities,
Kayan Securities, Odyssey Securities, Giriraj Stock Broking, Best Bull
Stock Trading, Lalit Kumar Tulshyan and Mousumi Deb Roy.
Besides, Sebi has directed the concerned stock exchanges
to conduct a focussed inspection of these trading members, take
corrective, if any, action and submit a report to the regulator within
six months.
Outside of such trades, there was not much activity by these trading
members in the stock options segment, implying that they prima-facie
carried out business of registered stock broker in this segment mainly
to facilitate such trades - that is dummy book entries/artificial
profit-loss generation.
The order examined the activity of stock brokers spanning from April 2014 to September 2015.
In another order later in the evening, Sebi confirmed its earlier
interim order barring 104 entities from the markets for misuse of the
stock exchange mechanism to exit at a high price in order to book
illegitimate gains with no payment of taxes as long term capital gain is
tax exempt.
The interim order was passed in June 2015 and related to Sebi's probe
into a huge rise in the traded volumes and prices of the shares of Eco
Friendly Food Processing Park, Esteem Bio Organic Food Processing,
Channel Nine Entertainment and HPC Biosciences on the SME platform of
BSE.
In the matter, all the preferential allottees and pre-IPO transferees had collectively made a profit of Rs 614 crore.
In the interim order, Sebi had barred a total of 238 entities, including
the aforementioned 104 entities that were also asked to file their
objections, if any, within 21 days.
However, none of the noticees have approached Sebi in these seven months
since the order was passed, Sebi said, adding that detailed
investigation in the matter was still in progress and there was no need
to modify or vacate the earlier directions.
Explaining the modus operandi, Sebi said there was a nexus between the
companies, their directors and promoters, preferential allottees,
pre-IPO transferees, funding group entities and trading group entities.
The companies in nexus with preferential allottees made a facade of
preferential allotment and some of the preferential allottees
transferred their holding to the entities belonging to pre-IPO
transferees.
"Thereafter, the entities of Funding Group aided the companies to list
their shares on SME segment of BSE by funding the IPOs of these
companies."
"Once the shares of the companies were listed, the entities belonging to
Trading Group increased the price of the scrips astronomically through
manipulative trading," Sebi said.
"After the expiry of the lock-in period, Trading Group entities
purchased shares from preferential allottees and pre IPO transferees at
artificially increased prices."
"In the whole process, entities of Trading Group provided a hugely
profitable exit to the preferential allottees and pre IPO transferees,"
it added.
"Hence, preferential allottees and pre-IPO transferees with the aid of
the entities of Trading Group misused the stock exchange mechanism to
exit at a high price in order to book illegitimate gains with no payment
of taxes as long term capital gain is tax exempt.