Free Press Journal

Black Money: Sebi to upgrade surveillance systems

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Sebi

To further tighten its noose on manipulators and black moneylaunderers in the stock markets, regulator Security and Exchange Board of India​ (Sebi) will undertake a comprehensive review of its surveillance systems including with help from independent experts and also fast-track its enforcement actions.

Sebi has been asked by a Supreme Court appointed Special Investigation Team (SIT) on Black Money to take additional measures to catch those evading taxes and laundering black money through trading in illiquid stocks and P-Notes.

The regulator is also pitching for a greater coordination among various watchdogs and enforcement agencies to bring to book the rogue elements that misuse the stock market platform, a senior official said.


Sebi would soon discuss with the government the details regarding the existing safeguards against this menace, as also the proposed new measures, after which same would be communicated to the SIT, he added.

Amid a sharp surge in volatility in Indian stock markets, Sebi has stepped up its surveillance to ensure that no unscrupulous players take genuine investors for a ride.

The enhanced vigil has resulted into identification of broadly four distinct ways adopted by the manipulators.

In one typical modus operandi, certain entities seeking Long Term Capital Gain (LTCG) were misusing the stock exchange mechanism, while the second one involves Offshore Derivative Instrument (ODI) holders trading on the basis of Unpublished Price Sensitive Information.

Also, certain Indian and overseas entities were engaged in fraudulent activities of manipulating GDR route, while the fourth modus operandi involves unregistered entities being involved in fraudulent act of luring investors to securities market through false or unrealistic SMS claims.

While Sebi’s existing surveillance systems are already generating over 100 alerts a day to facilitate detection of market manipulation, it has been felt there is a constant need to enhance capabilities of surveillance both in terms of systems and skill sets so as to address challenges emerging out of extremely dynamic Indian securities market.

Towards this continuous endeavour, Sebi has decided to upgrade its existing surveillance infrastructure by enhancing the system capacity this year.

“Further, a comprehensive review of surveillance systems is also proposed by engaging outside experts. In addition, a world class data centre for hosting Sebi IT Infrastructure (specifically Data Warehouse set up of SEBI) is also proposed to be built during the year,” the official said.

Simultaneously, continuous skill enhancement program and training would also be undertaken during the year.

For faster action against the manipulators, Sebi is also adopting a time-bound approach to complete its probes as also other enforcement actions including prosecution proceedings.

Sebi expects the newly set-up special courts for securities markets to further speed up the prosecutions.

At a board meeting last week, the Securities and Exchange Board of India (Sebi) took stock of all the checks and balances it has put in place to check such manipulations.

The board members, which include nominees from the government and the RBI as also independent members, were apprised of the action initiated by Sebi against those suspected to be evading taxes and laundering black money through stock markets.

Sebi has barred over 1,000 entities so far in such cases through interim orders, while further proceedings are underway and all these matters have been referred to other agencies including Income Tax Department, Financial Intelligence Unit and the Enforcement Directorate.

While the government and Sebi are of the view that sufficient measures are in place to deal with such cases, further consultations would be held to ascertain whether additional safeguards are need to be put in place.

The SIT had suggested last month that further steps might be required to check misuse of P-Notes route to launder unaccounted money from abroad. It also suggested that Sebi needs to further strengthen its monitoring mechanism to detect instances of the stock market platform being misused for tax evasion.

Sebi is also of the view that it has put in place a robust system to check any misuse of the P-Note route.

P-Notes are issued by foreign portfolio investors registered with Sebi to other overseas investors who want to take a position in the Indian markets without any direct registration for trading in Indian markets.

These instruments are popular as they provide a low-cost and easier route for investing in the country’s markets.

Sebi says it has put in place strong checks and balances to avoid misuse of this route, and P-Notes can be issued only after strong KYC requirements are followed and they can not be issued to high-risk investors. The norms have been tightened considerably for P-Notes over the years.

In May, investments through P-Notes hit a seven-year high of Rs 2.85 lakh crore. It stood at Rs 2.75 lakh crore at the end of June. The offshore derivative instrument accounts for nearly 15-20 per cent of the total FII investment in India since 2009.

Its share has fallen over the years after Sebi tightened disclosure norms and other related regulations. It was as high as over 50 per cent at the peak of stock market bull run in 2007.

In the recent months, Sebi has also stepped up its crackdown on tax evasion and laundering of black money by HNIs and other domestic entities through the stock markets.

Suspecting tax evasion of over Rs 5,000-6,000 crore, Sebi has clamped down on a large number of organised syndicates who had set up ‘shops’ to convert black money into legitimate-looking funds through the stock market platform