Mumbai, February 12, 2018

After its clampdown on shell companies, Sebi is turning its glare on 'benami trading'.

The market regulator is trying figure out ways to pull up perpetrators who indulge in insider trading and share price manipulation through 'layering' of fund flows. This is an age-old technique of moving money as loan from one company to the next — in a chain of nine to ten entities — before the last outfit receiving fund buys or sells shares.

These layers of companies — many of which are normal operating business entities and not shell firms — are used to mask the identities of men behind the trades and obfuscate the true nature of the transaction. The matter was raised last week by Sebi wholetime member Madhabi Puri Buch at a meeting that was attended by officials of stock exchanges, a few senior officials of Sebi and members of financial services industry.

"It is tougher and more complicated than cracking down on shell companies. Such transactions for insider trading have been going on for years. Sebi wants to find out how it can build a solid case against such offenders," a person aware of the discussions told ET.

In 'layering', most of the companies and individuals in the chain are money mules who lend their identities, bank account, and demat trading account.

The regulator is believed to have come across instances of suspicious fund movement of unsecured loans through multiple companies and individuals.

"Investigating these transactions is tedious, time consuming. In many cases, the money flow appears like part of normal business activity. But there would be regulatory suspicion if a person acting as a mule and having a salary of ?75,000 cuts deals worth crores from loans without collaterals..," said another person familiar with the subject. " "Besides acting on privileged information, a promoter or acquirer can use layered companies to push up price in order to make it unattractive for shareholders to tender stocks in an open offer; or, it can be done to rig up price before placing shares to investors at a high valuation," said the person. A Sebi committee is doing a comprehensive review of Fraudulent and Unfair Trade Practices (FUTP) regulations and is looking at all aspects of price manipulation.

"This has been a challenge... Typically, when trading happens Sebi goes after people who have done the trading. Price manipulation happens though benami trading. So, how do you get to the real person? There are no easy answers," said a source. ET's email to a Sebi spokesman went unanswered.

FUTP rules were among the first few regulations framed after Sebi was formed. It was last reviewed in 2003 and thereafter small amendments were carried out. The latest review on fair market conduct is being done by a Sebi panel under the chairmanship of former Union law secretary TK Viswanathan. At last week's meeting one of the committee members told Sebi officials about specialised software and algorithms which could make enforcement easier.

While Buch and senior officials of Sebi may strongly feel about such corrupt market practices and are keen to minimise them, the regulator is likely to take its time in formulating an action plan.

First, a sudden crackdown in a choppy market may not go down well with the government which has been repeatedly attributing the recent volatility in stock prices to global factors. Second, Sebi has to build cases that can stand legal scrutiny and make sure its actions don't appear ham-handed.

[The Economic Times]