After the failure of its first amnesty scheme, which found very few takers, to settle 14,720 cases of manipulative trading in illiquid scrips, SEBI has initiated scheme - 02. SEBI intends to collect approximately over ₹700 crore via the new settlement scheme. Only 1,018 entities had availed the earlier scheme.

“The period of SEBI settlement scheme 2022 will commence in August and close on November 21. It will provide an opportunity for settlement to the entities who have executed reversal trades in the stock option segment of the BSE during April 2014 to September 2015, against whom enforcement proceedings are pending,” SEBI said in a notice to those involved in the matter.

In the scheme-02, SEBI has said that a flat penalty of ₹1 lakh will be imposed on 1-5 alleged manipulative trades, ₹2 lakh for 6-50 trades and ₹5 lakh penalty for 51 or more such trades. The settlement terms of scheme-02 are simpler than the earlier version, experts say.

Penalising non-genuine trades

In 2018, Madhabi Puri Buch, the then whole-time member (WTM) - SEBI, had promised action against entities for sham transactions in stock derivatives between 2014 and 2015. In August 2015, former SEBI WTM Rajeev Kumar Agarwal passed an order against 59 entities for trading in illiquid options of stocks on the BSE. Then, certain entities consistently made losses in trading, executed among themselves.

Analysis showed the entities generated over 70 per cent of their volumes in illiquid options in a year. Agarwal held entities with over ₹5 crore in loss or profit, responsible for the non-genuine trades. In the same matter, in 2018, Buch further identified 14,720 entities. As many as 81.41 per cent of the trades executed in the segment were constituted to fall in the purview of unfair trades and the proceedings and entities were imposed with penalties under Section 15HA of SEBI Act, 1992.

‘Consider Lok Adalat’

The Securities and Appellate Tribunal (SAT) had asked SEBI to “consider a Lok Adalat or adopt any other alternative dispute resolution process for the cases”. The parties involved had argued that there were no specific rules for execution of trades with ‘self or related parties’ then and that ‘non-genuine trades’ were SEBI’s notion. Rules on executing trades with self were enacted much later.

“Settlement Scheme 1.0 was grossly underutilised leaving SEBI with two difficult choices — to amend the scheme and tacitly admit that it was uneconomical or not an optimal solution or to take it upon itself to appoint hundreds of adjudicating officers to issue notice, conduct hearings and pass penalty orders in thousands of cases, which could have clogged the system,” said Sumit Agrawal of Regstreet Law Advisors and a former SEBI Officer

According to Agrawal, the new scheme provides a simple calculation. “In Scheme 1.0, settlement factor of 0.55 along with artificial volume created, number of non-genuine trades and number of contracts entered by the entities were considered while arriving at the settlement amount. But it seemed onerous. SEBI has now tried to make it simpler. In the new scheme, the amount is based on number of contracts,” said Agrawal.

Tax implications

“SEBI’s mandate is protection of investors. Any violation which has not adversely affected any investor in any manner is necessarily just a technical and venial violation. SEBI had no business getting into these cases in the first place as these trades have not harmed any investors in any manner. Having said this, it is finally a step in the right direction. I’ve been asked this question many times whether opting for SEBI consent scheme has any bearing on income tax proceedings. The answer is a clear No. Both are independent and have no bearing on each other,” said Deepak Sanchety, ex Commissioner, Income Tax and former Chief of Surveillance at SEBI. 

SEBI’s amnesty terms can be accepted without acceptance or denial of guilt, while the tax matters will take its own course.

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