MUMBAI: The Securities and Exchange Board of India(Sebi) has barred 59 entities from the market for executing fictitious trades in illiquid stock options for the purpose of avoiding taxes.
One of the barred entities is gold and diamond trader Riddisiddhi Bullions,promoted by Prithviraj Kothari.
Sebi said it came across several instances wherein a set of entities were consistently making loss by their trading in options on individual stocks listed on BSE.
"Trading of these entities appeared abnormal because they were consistently seen making significant loss by their trades which were reversed with the same counter parties either on the same day or the next day,"the regulator said in its ex-parte ad interim order passed on Thursday.
It's analysis of the stock options segment of BSE for the period April 1,2014 to March 31,2015 revealed that several entities consistently made significant loss,while others made profits by executing reversal trades in these options.
These entities were trading mainly in options on individual stocks which were thinly traded.On most occasions, the quantity of stock options bought and sold for a contract were identical.
"As the first leg of these reversal trades, these loss-making entities were mainly seen selling stock options without any corresponding offsetting position in the underlying scrip. In many cases, these options were sold at unreasonably low prices, even below the intrinsic value of the option..In the second leg of the reversal trades, the options once sold by an entity at unreasonably low prices were subsequently bought back on the same day or on the next trading day at substantially higher prices when compared to the first leg sell price," the Sebi order said.
The trading done by the loss-making entities accounted for 70% to 100% of total traded volume.These entities were seen trading repeatedly in deep in-the-money and deep out-of -the-money options on individual stocks,which were thinly traded,the regulator said.
Besides,for majority of entities, there was a very little difference between the total number of contracts and the total number of contract-days combination.
"It does not appeal to reason that whenever these entities place order, the counter parties appear to sell at irrational price. It is also improbable that whenever the loss-making entities place the order at irrational price, the profit- making entities would not only be able to place counter order but subsequently reverse with them on the same day or next day, unless there is a prior understanding or arrangement between the two," Sebi said.
The regulator also alleged that several of the entities had opened specific accounts for exclusively carrying out suspicious transactions in stock options.
"The reasons for executing such trades by these entities could be showing artificial volume and trading interest in these instruments or tax evasion or portraying artificial increase in net worth of a private company/individual," the regulator said.
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