MUMBAI: How effective are SEBI orders banning individuals and entities from trading in the stock markets as a penalty for manipulative practices?
If Dalal Street veterans are to be believed, such curbs matter little as the debarred players can easily work their way around.
As surveillance officials in regulatory bodies (including stock exchanges) admit, enforcing the ban is far more difficult than handing out the punishment. "Float a private limited company, appoint some relative or close acquaintance as a director, and invest through this firm without drawing attention to yourself," said a market old-timer while talking on the modus operandi of players who have fallen foul of the regulator.
The more sophisticated players transfer their money out of the country, through hawala or some other convenient route, and deposit it with a friendly foreign bank. The bank then routes this money to a tax haven-registered sub-account of a foreign institutional investor (FII), with instructions to invest that money in specific stocks in India.
Back home, there are any number of brokers willing to execute trades on behalf of debarred players, as long as the margin commitments are met and brokerage commissions paid. In June this year, SEBI stumbled upon evidence showing that scam-tainted broker Ketan Parekh — banned by the regulator from the stock market for 14 years in 2003 — has been trading in shares using certain entities as fronts.
Another such market player, banned from trading in shares of Atlanta in 2007, is said to have established himself as a specialist in rigging mid-cap stocks, often in collusion with the management. Brokers say he was the kingpin of the bull cartel that ramped up the stock price
of realty firm Akruti from Rs 800 to Rs 2,200 during February-March this year.
Over the years, technological advancements have made it possible for regulators to quickly zero in on suspicious transactions/movements in stocks. At the same time, market operators too have been honing their skills to keep the regulator at bay. This includes using a chain of obscure investment firms, and retail investors who are willing to "lend" their accounts for transactions on behalf of the operators.
The toughest part for the regulator is to prove that the transactions have been done on behalf of the debarred individuals. The brokers can always claim that they had done their due-diligence as far as the Know-Your-Client (KYC) requirements are concerned.
It is rare that the broker may be unaware of who the end-client is, but the onus is on SEBI to prove that. Operators who trade on a big scale have tie-ups with a dozen odd brokerages. At each of these brokerages, there is a set of clients, which act as fronts for this operator. This way, there is little concentration of volumes at any single brokerage house, or in the account of any one client.
If Dalal Street veterans are to be believed, such curbs matter little as the debarred players can easily work their way around.
As surveillance officials in regulatory bodies (including stock exchanges) admit, enforcing the ban is far more difficult than handing out the punishment. "Float a private limited company, appoint some relative or close acquaintance as a director, and invest through this firm without drawing attention to yourself," said a market old-timer while talking on the modus operandi of players who have fallen foul of the regulator.
The more sophisticated players transfer their money out of the country, through hawala or some other convenient route, and deposit it with a friendly foreign bank. The bank then routes this money to a tax haven-registered sub-account of a foreign institutional investor (FII), with instructions to invest that money in specific stocks in India.
Back home, there are any number of brokers willing to execute trades on behalf of debarred players, as long as the margin commitments are met and brokerage commissions paid. In June this year, SEBI stumbled upon evidence showing that scam-tainted broker Ketan Parekh — banned by the regulator from the stock market for 14 years in 2003 — has been trading in shares using certain entities as fronts.
Another such market player, banned from trading in shares of Atlanta in 2007, is said to have established himself as a specialist in rigging mid-cap stocks, often in collusion with the management. Brokers say he was the kingpin of the bull cartel that ramped up the stock price
of realty firm Akruti from Rs 800 to Rs 2,200 during February-March this year.
Over the years, technological advancements have made it possible for regulators to quickly zero in on suspicious transactions/movements in stocks. At the same time, market operators too have been honing their skills to keep the regulator at bay. This includes using a chain of obscure investment firms, and retail investors who are willing to "lend" their accounts for transactions on behalf of the operators.
The toughest part for the regulator is to prove that the transactions have been done on behalf of the debarred individuals. The brokers can always claim that they had done their due-diligence as far as the Know-Your-Client (KYC) requirements are concerned.
It is rare that the broker may be unaware of who the end-client is, but the onus is on SEBI to prove that. Operators who trade on a big scale have tie-ups with a dozen odd brokerages. At each of these brokerages, there is a set of clients, which act as fronts for this operator. This way, there is little concentration of volumes at any single brokerage house, or in the account of any one client.
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