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.
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.
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