SEBI extends deadline for 14,720 entities to settle unfair trading case

With few takers for SEBI’s settlement scheme on unfair trading in illiquid derivative options, the regulator has extended its deadline for the same till December 2021. SEBI has accused 14,720 entities of making unfair gains by trading in illiquid options in BSE’s derivatives. But the regulator found it tedious to adjudicate all the entities and hence offered a one-time settlement scheme. There are not many takers for it as they fear huge income tax liabilities as an outcome of settlement with SEBI, sources said. Many entities have challenged SEBI’s case.

In August 2015, the former SEBI WTM Rajeev Kumar Agarwal had passed an order against 59 entities for trading illiquid options of stocks on the BSE. Then, certain entities consistently made a loss in trading executed trade among themselves. The analysis showed such entities generated over 70 per cent volumes in illiquid options in a year. Based on their modus operandi, Agarwal held entities with over Rs 5 crore loss or profit, responsible for non-genuine trades. In 2018, Madhabi Puri Buch, WTM, SEBI, promised action against entities for sham transactions in stock derivatives between 2014 and 2015. She further identified 14,720 entities.

All the cases fall under SEBI’s Prevention of Fraudulent Unfair Trade Practices (PFUTP), attracting a minimum penalty of Rs 5 lakh and a maximum of Rs 25 crore. SEBI had announced a settlement scheme wherein the regulator asked entities to pay a one time fine. In each of the above cases, the settlement sum depended on the amount and number of non-genuine trades. Initially, the scheme was up to October.

Deepak Sancheti, Ex-Head of Surveillance, SEBI, “Regulator is finding it extremely difficult to handle these tens of thousands of possible adjudication proceedings. It's for this reason that SEBI somehow wants to close as many cases in consent as possible. On the other hand, the IT department is enlarging the scope of the probe and is getting into currency derivatives and also beyond the limited period examined by SEBI

How will SEBI handle those additional tens of thousands of "cases" will be interesting to watch.”

Securities and Appellate Tribunal (SAT) had asked SEBI to “consider a Lok Adalat or adopt any other alternative dispute resolution process for the cases.”

Parties involved had argued that there were no specific rules for execution of traders with ‘self or related parties’ then and that non-genuine trades was SEBI’s notion. Rules on executing trades with self were enacted much later. Experts say, the entire case was a systemic issue and hence difficult to pursue strictly as per the law. Hence, on the directions of SAT, Sebi has now offered a ‘settlement.’

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