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SEBI acts on illiquid options trade manipulators

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Regulator levies minimum fines on those alleged to have violated laws five years ago

The Securities and Exchange Board of India (SEBI) has started acting against entities that are alleged to have executed manipulative and orchestrated non-genuine trades in the illiquid stock option segment of BSE almost five years ago.

The penalty, however, imposed in most cases has been the minimum stipulated ₹5 lakh, though the markets regulator and the Supreme Court have earlier stated that these are serious offences affecting the integrity and safety of the markets.

In the recent past, there have been at least five such orders where the regulator has imposed a penalty of ₹5 lakh each on the alleged offenders. In one other matter, however, a penalty of ₹20 lakh has been imposed on Pepson Steels Pvt. Ltd.

An order passed by whole-time member Madhabi Puri Buch in April had said investigations showed that a total of 14,720 entities indulged in executing non-genuine transactions in BSE’s stock options contracts between April 2014 and March 2015 and appropriate action would be taken against them all. Section 15HA of the SEBI Act, under which recent orders have been passed, allows the regulator to impose a penalty of up to ₹25 crore on entities indulging in fraudulent trade practices.

‘Reversal trades’

“If any person indulges in fraudulent and unfair trade practices relating to securities, he shall be liable to a penalty which shall not be less than five lakh rupees but which may extend to twenty-five crore rupees or three times the amount of profits made out of such practices, whichever is higher,” states Section 15HA.

The order by Ms Buch had further said the investigation “found that the entities have indulged in fraudulent and unfair trade practice by virtue of reversal trades” which is a “serious violation affecting the integrity of securities market and investor confidence.”

“SEBI’s enforcement in illiquid stock options cases has been topsy turvy,” said Sumit Agrawal, Founder RegStreet Law Advisors. “A policy measure to address this issue is a better approach than issuing notices to every such trader and taking a different stand in the Securities Appellate Tribunal for not exonerating these entities.”

The investigation found that a set of entities were repeatedly incurring huge losses by executing reversal trades in the illiquid stock options contracts while another set was repeatedly making huge profits by becoming the counter party in orchestrated trades.

“The case of illiquid stock options is for penalising entities for creating artificial volume in various contracts and not solely for making profit/loss and accordingly, the penalty depends on the artificial volume generated,” said Tejesh Chitlangi, senior partner, IC Universal Legal.

“Since more than 80% of the people who had traded in illiquid options on BSE are being charged by SEBI, an amnesty scheme similar to the one brought in self trade cases should be considered by SEBI,” added Mr. Chitlangi.