Sebi bars 59 cos from market over illegal trades

MUMBAI: Market regulator Sebi on Thursday banned 59 entities, including some high net worth individuals (HNIs) and RiddiSiddhi Bullions, one of the largest bullion trading companies, from the stock market for using the equity derivatives contracts on the exchanges for illegal trades to avoid taxes worth crores and also convert black money into white.
Sebi's investigations found that, through a series of synchronized trades, several related entities notched up trading losses and gains, most of which happened during the last quarter of the financial year.The suspicion is that these trades were done to avoid paying taxes on trading profits these entities had earned through the financial year that ended in March 2015.
This is how the trades were executed: In the first leg, through synchronized trades, an investor will sell some put options contracts to another at a price which is totally out of sync with the market. The buyer will buy the contracts at prices much lower than the value of the contracts. This then will be reversed between the same set of entities that will lead to loss for one and profit for the other, the loss being settled against trading profits made earlier to avoid paying taxes.
For example, according to Sebi investigations, an entity A sold about 6.2 lakh units of Axis Bank put option contracts to entity B for Rs 58 each while the value of those units were Rs 98 each. Subsequent to the sale, after about 10 minutes, again through synchronized trades, these same 6.2 lakh units of Axis Bank put options were back with A from B at a price of Rs 97.37 each.
Even though the same option contracts were bought at a price that was nearly Rs 40 more than the price at which it was sold 10 minutes ago, there was no significant change in the prices of these options or the underlying stocks during those 10 minutes. Sebi pointed out that within 10 minutes, B made a loss of about Rs 2.45 crore while A made a profit of an equivalent amount. Now it is alleged that entities A and B are conduits in the game.
B made the loss because he had made trading profits elsewhere and he set off this loss against that profit, thus avoiding paying any taxes on his profits. On the other hand, A had losses and set that off through this profit. Now the tax that the two entities together made were set off through the illegal channels where cash changed hands.
Sebi found that "the loss-making entities were deliberately making repeated loss through their reversal trades in stock options which do not make any economic sense, and the profit-making entities were facilitating them by becoming their counterparties and were acting in concert with a common object of intended execution of these suspicious and non-genuine trades". One of the reasons for such trades could be to show artificial volume and trading interest in these instruments, or tax evasion, or portraying artificial increase in net worth of a private company/individual.
"Be as it may, it is amply clear to me that the rationale for such transactions is not genuine and legitimate as the behaviour exhibited by these entities defies logic and basic economic sense. No reasonable and rational investor will keep making repeated loss and still continue its trading endeavors," Rajeev Kumar Agrawal, whole time member, Sebi, said in the report.
To protect the interest of investors, Sebi banned the 59 entities from the market till further order. It said that its investigation will continue and the entities named in the order could approach Sebi for personal hearing. Several of these entities are based in Kolkata.