Sebi bars 22 brokers for ‘tax evasion’ trades of Rs 8,100 crore

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What : Brokers for Tax evasion
Who : Sebi
When :  February 1,2016

Continuing its crackdown on misuse of stock exchange system for tax evasion, regulator Sebi on Wednesday barred 22 brokers from securities market for executing ‘reversal trades’ worth over Rs 8,100 crore to generate fictional profits or losses.

However, these trading members would be allowed to function as stock brokers on behalf of their existing clients in the cash segment. But, they cannot sign any new client.

The latest directive follows an interim order passed in August 2015, wherein Sebi had barred 59 entities from markets for their suspicious trades in stock options segment.

In the instant matter, Sebi probed the trading members through whom these debarred entities were trading. A major portion of their turnover was found to be reversal trades in stock options to create fictional profit or losses.

According to Sebi, these trading members reversed significant proportion of the trades within minutes of entering the original trade. These trades resulted into significant profit for one set of entities and significant loss to another.

Trading members, through reversal trades for their clients, generated a total loss to the tune of Rs 1,273 crore and total profit of Rs 1,303 crore, Sebi said.

Prima facie examination revealed that exchange platform was abused to generate such artificial profit or loss by executing reversal trades to the tune of Rs 8,100 crore.

As part of ongoing surveillance, Sebi came across several instances, wherein a set of entities were consistently seen incurring trading loss by executing reversal trades in options on individual stocks in equity derivative segment.

The Securities and Exchange Board of India (Sebi) found that these 22 brokers have, “prima-facie, facilitated their clients to use and employ a pre-meditated manipulative device or contrivance while dealing in securities market and indulged in non-genuine and deceptive transactions.”

Such activity by trading members deliberately or otherwise damages market integrity apart from presenting wrong picture of liquidity to gullible investors which could affect their investment decisions, Sebi said.

Accordingly, Sebi has restrained 22 entities “from buying, selling or dealing in the securities markets, either directly or indirectly, in any manner, except as a stock broker for their existing clients in the cash segment.”

The debarred entities included Sunstar Securities, Subh Stock Broking, Mauzampuria Securities Broking, Guiness Securities, Abans Securities, Kayan Securities, Odyssey Securities, Giriraj Stock Broking, Best Bull Stock Trading, Lalit Kumar Tulshyan and Mousumi Deb Roy.

Besides, Sebi has directed the concerned stock exchanges to conduct a focussed inspection of these trading members, take corrective, if any, action and submit a report to the regulator within six months.

Outside of such trades, there was not much activity by these trading members in the stock options segment, implying that they prima-facie carried out business of registered stock broker in this segment mainly to facilitate such trades – that is dummy book entries/artificial profit-loss generation.

The order examined the activity of stock brokers spanning from April 2014 to September 2015.