It will be a Herculean task for SEBI to go after 14,720 entities

Before the gain, there could be some pain for SEBI as it has set out for what could be the largest penalty proceedings that any regulator in India has undertaken so far.

On Thursday, SEBI said it will initiate action and penalty proceedings against 14,720 entities that were found to be involved in ‘sham transactions’ in the equity derivative segment.

The mammoth task, which could result in windfall gains worth several thousands crores of rupees to the exchequer, is likely to keep SEBI highly occupied for years to come. Under the stipulated process, the regulator will have to issue show cause notices and give them hearing before imposing penalty. The nearly 15,000 new cases will be in addition to around 8,000 adjudication cases that the regulator is already handling at various stages. An order by Madhabi Puri Buch, whole-time member, SEBI, which promised action against 14,720 entities in a phased manner, has now become the talking point among current and ex-SEBI officials, sources told BusinessLine . Buch followed a recent Supreme Court diktat, which called for SEBI to act against sham transactions in the equity derivative segment.

“It could be a herculean task but not impossible,” said JN Gupta, former executive director of SEBI. “The entire proceedings could take time but would clean up the system.”

Gupta is of the view that since all the entities are being penalised for a similar kind of offence, show cause notices being issued to them would be standard and adjudication proceedings may be quick. Also, there may not be too many hearings for any of the parties involved as the Supreme Court verdict in a similar matter is clear. “Still, it cannot be ruled out that penalising all the entities could take around a couple of years,” said Gupta.

In any case, SEBI first issues show cause notice to entities involved in some wrong-doing, gives them a few weeks to reply to it, holds personal hearings and finally disposes of the cases with a final order. Such a procedure takes over a couple of months for each entity.

Have to focus on old cases too

These 14,720 cases of non-genuine trades that SEBI has unearthed pertains to just one financial year, 2014-15. According to experts, now that the regulator has decided to penalise even the smallest instances of non-genuine trades in the derivative segment, it will have to dig out cases prior to financial year 2014-15 where ‘synchronised trading has occurred.’

“If SEBI investigation for just one financial year has unearthed some 15,000 wrong doers, imagine how many more such instances could be dug out if the regulator decides to go further in its adventure,” said a legal expert on SEBI matters.

The Supreme Court in February said “even small schemes of fraud in the derivative segment could impact the integrity of the stock markets”. The apex court’s ruling with regard to one Rakhi Trading, which had indulged in ‘sham transactions’ in illiquid derivative scrips, opened the doors for SEBI to penalise nearly 15,000 entities it had identified for similar offences over the years.

COMMENT NOW