Centre may get a windfall from SEBI penalties on sham F&O transactions

PALAK SHAH Mumbai | Updated on March 05, 2018

Regulator could net at least ₹750 crore from offenders

It is not only the Reserve Bank of India that shares hefty dividends with the Centre. Even stock market regulator SEBI could end up contributing handsomely to the government’s coffers.

The Centre could net hundreds of crores after the Supreme Court recently ordered the Securities and Exchange Board of India (SEBI) to act against sham transactions in the equity derivative segment.

In upholding SEBI’s penalty of ₹1.08 crore against one Rakhi Trading for creating artificial futures and options (F&O) volumes through the ‘reversal of trade’ route, the apex court paved the way for SEBI to crack down on other entities. The regulator has identified around 15,100 persons who indulged in similar transactions over the past few years, and the top court’s ruling opens the door to impose a penalty on all of them.

Fine gain

“The actual amount SEBI could collect in fines from all these people could be anywhere between ₹20,000 and ₹40,000 crore,” said a source aware of the regulator’s ways of functioning.

Even if SEBI were to ignore the gains from artificial trade volumes, the offence would entail a minimum penalty of ₹5 lakh per entity, under Section 15 of the SEBI Act. This means the regulator could realise a minimum of ₹750 crorein fines. Of the 15,100 instances identified by SEBI, it had passed interim orders against around 59 people.

“Just after the Supreme Court order in February, SEBI held a high-level meeting and discussed ways to bring all those identified by it to task. All the fines collected by SEBI would go to the Consolidated Fund of India. Senior Finance Ministry officials and those from the public works committee, who have been appraised about the developments, are keeping a close eye,” the source said.

Most of those identified by SEBI for ‘synchronised trading’ in illiquid F&O contracts argue that “they did not disrupt the wider market prices and hence their trades could not be called fraudulent”.

These manipulators hid behind a Securities and Appellate Tribunal (SAT) order that said: “Only if there is a market impact on account of sham transactions could there be a violation of SEBI’s fair trade rules.”

P Chidambaram, counsel for two traders, argued that a security like ‘Nifty’ is a vast pool and a dynamic index which makes it difficult for the manipulator to affect prices. But these arguments were disallowed by the apex court and SEBI was asked to bring to book those it had identified for the fraudulent practice.

SEBI did not reply to an email seeking its response on the issue.

Published on March 05, 2018

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