The Securities and Exchange Board of India (SEBI), after repeated amendments to its statute, has emerged as the most powerful market regulator in the world—at least on paper. But, being empowered does not make the regulator effective, efficient or even rational in its actions. Nothing demonstrates this better than the manner in which SEBI deals with self-trades.
A self-trade occurs when the buyer and seller are the same entity with an identical permanent account number (PAN). According to market sources, such trades can be deliberate to manipulate the market; they can also happen inadvertently when someone has placed a buy and sell order to take advantage of a price difference and the orders get automatically matched. They can also occur when multiple algo orders of the same broker get matched or different traders in the same brokerage house place buy-sell orders, says a SEBI internal noting. Some affected parties have put together data to show that self-trades have occurred across market segments and affect 30%-40% of trading members.
However, the number of trades relative to the trading volume of a stock would easily indicate whether the self-trade is manipulative or just a mistake. These trades are, often, described as wash trades in the US and Australia and most regulators have a simple way of dealing with them. Not in India. The issue is dealt with in an arbitrary manner, with no time bar on investigating such trades. This is being done even after the stock exchanges put in place a PAN-based filter in 2015 which stopped self-trades at the systemic level.
Once this happened, all the earlier cases could have been quickly sorted through this mechanism and closed. This would free up SEBI’s investigation resources to focus on market manipulation cases that are brazen and current, like the Gitanjali Gems investigation that was buried or Vakrangee Ltd, where large traders are receiving calls to say how the investigation against the company has been closed due to pressure from high-level sources. I have specific knowledge of such calls and have alerted the SEBI chairman about it.
My question is: Why are SEBI adjudication and investigation officers still labouring over the self-trade issue even after 2015, when a clear policy decision on manipulative trades and inadvertent ones should be fairly easy to formulate? Consider these examples.
1. SEBI investigated Manasvi Trading for self-trades in the scrip The Byke Hospitality Limited, in 2013. It was accused of creating artificial volumes in the scrip. On 26 February 2018, the adjudication officer disposed the case without penalty after concluding that the volume of self-trades was so insignificant as to have no impact on the price.
2. Adroit Financial Services and AKG Securities were investigated for self-trades in the scrip Ujaas Energy Limited and creating a false market, in October 2011. The matters were disposed off in December 2017 and February 2018 after concluding that self-trades were miniscule compared to the total volumes to indicate any price manipulation or creation of artificial volumes.
3. RM Share Trading was accused of synchronised trading, market manipulation, self-trades, etc, in Prakash Constrowell Ltd from 4-10 October 2011. It was disposed off recently after no violation was established.
4. SPS Share Brokers was accused of manipulating Varun Industries Ltd in June 2011. The case was disposed off on 20 February 2018.
5. AKG Securities and R M Shares Trading were similarly accused of manipulating Rushil Decor’s shares, in two separate cases. Both were disposed off as unfounded in October 2017 and November 2017; no violation was found.
There are scores of such examples, where SEBI’s investigation officers are still labouring over cases involving highly liquid stocks where no manipulation is possible. A two-member panel of whole-time members was set up to look at all the on-going self-trade cases over a year ago; but the panel has not come up with a policy framework. This is a serious misalignment of important resources.
Since individual clients and brokers do not dare to take on the regulator, they seem to have approached members of Parliament (MPs) and their industry association for a clear solution. One such letter says that SEBI has investigated anywhere between 300 and 400 self-trades and provides data to show how many brokers are affected. The thrust of the complaints is that SEBI officials are selectively chasing some self-trade cases and are lenient with others. Decisions of adjudicating officers are also arbitrary and a few continue to levy a stiff penalty even for inadvertent violations that do not affect the price.
This raises another issue. Since Indian trading systems are now on par with the best in the world, is the issue of self-trades unique to India? If not, do regulators around the world waste time and resources on pointless investigations similarly? They do not. The issue has been discussed and resolved in most jurisdictions; but, in India, we don’t seem to go past discussions.
When SEBI’s secondary market advisory committee discussed the self-trades problem in 2014, it acknowledged that wash trades can occur when multiple algo orders of the same broker get matched or different traders in the same brokerage house place buy-sell orders for different clients. It recommended that SEBI should consider imposing a penalty only for manipulative self-trades, instead of working at preventing all self-trades (which is difficult).
SEBI came up with an ‘Enforcement Action Policy’ (EAP) in May 2017, which said, “entities who have been charged with self-trades may apply for settlement proceedings,” when there is no evidence of manipulation. The policy offers to prescribe a minimum settlement fee and allow any number of settlements without restriction. But each wash trade case would still need to be ratified by SEBI’s high-powered advisory committee that vets settlements.
The Association of NSE Members of India (ANMI) has taken up the issue and has written at least three letters, since December 2015, to SEBI seeking a policy on self-trades after the stock exchanges introduced a PAN-based filter to stop self-trades. In October 2017, ANMI wrote to Madhabi Puri Buch, SEBI’s whole-time director, pointing out how SEBI’s adjudication officials were flouting an internal enforcement action policy on what constitutes self-trades and have been levying hefty fines in a particular case. The letter says that “in August 2017, the SEBI board has decided to review all on-going cases of self trades” and requests that until that is done, requests all ongoing investigations into alleged self-trades to be put on hold.
Two MPs, Hemant Tukaram Godse and Gajendra Singh Shekhawat, have made similar requests asking SEBI to put all adjudication matters with regard to self-trades on hold, until it formulates a clear and unambiguous policy for dealing with them. Mr Shekhawat has also written to the finance minister to direct SEBI to “investigate four to five years of data and come to a conclusion that is consistent with the data and indeed punish cases of manipulation and fraud wherever found.” However, “upon analysis of such data, SEBI must take a clear, consistent and practical stand with respect to such activity,” which must be uniformly applicable to all parties. He also wants SEBI to look at how its counterparts, especially the OECD countries, deal with self-trades and enunciate a policy consistent with international best practices. This seems perfectly reasonable.
Clearly, SEBI needs to make a distinction between self-trades in illiquid stocks that lead to market manipulation and those of a technical nature; nobody is asking for market manipulators to be let off. It seems extraordinary that SEBI continues to deploy resources to conduct hearings and pass orders on pending cases of a technical nature, when bigger and more brazen cases of well-known and outright market manipulation go scot-free.
