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Photo: Abhijit Bhatlekar/Mint
Photo: Abhijit Bhatlekar/Mint

Sebi bars 22 entities from dealing in securities

The Securities and Exchange Board of India says 22 entities allegedly manipulated trades in equity derivatives of thinly traded and illiquid stocks

Mumbai: The Securities and Exchange Board of India (Sebi) on Wednesday barred 22 entities from dealing in the securities markets for allegedly manipulating trades in equity derivatives of thinly traded and illiquid stocks on stock exchanges.

Following a probe, Sebi found that these entities, through reversal trades for their clients, have generated a total loss to the tune of 1,272.8 crore and a total profit to the tune of 1303.1 crore for the period between 1 April, 2014 and 31 March, 2015.

The 22 entities, however, will be allowed to act as stock brokers for their existing clients in the cash segment, but they cannot accept registration of any new client, an order by Sebi whole time member Rajeev Kumar Agrawal said.

The market regulator also directed stock exchanges to conduct a focussed inspection of these trading members, take corrective action, if any, and submit a report on the same to Sebi within six months.

A preliminary probe by Sebi found that in a majority of instances, the client and the counterparty orders forming part of reversal trades were entered within few seconds of each other.

“….Sebi came across several instances/internal alerts 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 Sebi order said.The latest order follows an ex-parte ad interim order by Sebi in the matter of illiquid stock options on 20 August, 2015.

The regulator found that the loss-making entities were trading mainly in options on individual stocks which were thinly traded and the trades by these loss-making entities, in many cases, contributed 70% to 100% of total traded volume for the contracts on those days.

“From the preliminary examination of the trades entered by these trading members on behalf of their clients on BSE Stock options segment, it prima-facie appeared that majority of the trading members executed reversal trades for majority of clients who traded through them and the reversal trades accounted for significant proportion of the total turnover done by these trading members on stock options segment on BSE," the order read.

According to Sebi, such misuse of stock options not only displays an unreal picture of market activity to other investors but also defeats the basic premise of screen-based electronic trading system and price discovery mechanism by repeated execution of pre-decided reversal trades.

“These 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," Agarwal said in the order.

Sebi, however, said it will conduct a detailed investigation in the matter to ascertain the exact reasons for such abnormal behaviour of the trading members.

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