One month on, Sebi's one-time settlement scheme remains doubtful starter

High settlement amount and prosecution from other probe agencies draws little interest

The Securities and Exchange Board of India’s (Sebi’s) one-time settlement scheme for entities allegedly involved in illiquid stock options manipulation has garnered little interest, so far.

The one-time settlement period under the scheme remains open from August 1 to October 31. The regulator is expected to collect Rs 4,000 crore if a majority of the 14,000 alleged wrongdoers avail of this window.
 

Sources said most entities could give it a miss, given the high settlement cost and fears of prosecution from other enforcement agencies. Under Sebi’s normal legal proceedings, the penalty works out to Rs 5-10 lakh. Under this scheme, the settlement amount could be as high Rs 60 lakh.

Sebi on July 27 had proposed a one-time opportunity for settlement to the entities against whom proceedings have been initiated for executing bogus trades in the BSE’s stock options segment between April 1, 2014, and September 30, 2015. In a bid to evade taxes, they are accused of making losses in their trades, which were later reversed by the counterparties the same or next day. The scheme does not provide immunity from prosecution by other agencies, including the income-tax (I-T) department. Sources said Sebi has issued thousands of notices to errant brokers and individuals, including high networth investors, seeking to opt for the scheme. The regulator expects 60 per cent of the entities to avail of the scheme. 

Sebi said it had observed that of the 21,652 entities which executed such trades, 14,720 were involved in the generation of artificial volume by executing non-genuine and reversal trades on the same day. It had initiated legal action against 567 entities. In some cases, orders have been passed where it levied penalties below Rs 10 lakh. 

 

 

“The settlement amount is exorbitantly high. The quoted amount is three times the profit earned. Soon after the closure of the scheme, the I-T department is expected to take up the capital gains evasion matter and such entities may have to face scrutiny,” said a law firm representing one such entity.

Experts, too, believe only a few entities, which are concerned about their reputation, will avail of the scheme. This is because by opting for such a settlement, the entity neither admits nor denies the findings of facts, but agrees to abide by the settlement order. “A few market participants may still opt to pay a higher settlement fee (as compared to penalty) as they will want to avoid the stigma of a penalty order against them and prefer an early resolution of the dispute without admitting or denying guilt. The scheme is useful for marquee players to avoid loss of reputation and the negative impact on their businesses due to an adverse order issued by Sebi,” said Anil Choudhary, partner, Finsec Law Advisors.

Sebi on August 20 had put out frequently asked questions on the scheme’s nuances. Citing parameters, Sebi shared a link where an entity can check eligibility and the settlement amount by entering its PAN details. It can also see the calculation of artificial volume and non-genuine trades executed by it. 
 

Sebi has considered three parameters — artificial volume, the number of non-genuine trades and the number of contracts resulting in the creation of artificial volume — to arrive at an indicative settlement amount. It also clarified those against whom a notice was issued by the adjudicating officer could also avail of the scheme. It further said those ignoring the scheme shall be liable to legal action.