Sebi to crack down on 'mule accounts'

The regulator also plans to widen the ambit of 'deemed fraudulent activities'.
This will include misleading information on digital media, front running by non-intermediaries, mis-selling of securities, mis-utilisation of client account and diversion of client funds and so on.
Shrimi Choudhary reports.

Insiders who use front entities, such as drivers or domestic help, to benefit from price-sensitive information could find the going tough as the Securities and Exchange Board of India will soon introduce more checks.

Those who lend their names, trading accounts or execute trades on behalf of others will be subject to more scrutiny such as financial background checks.

Sebi could soon deem trades by investors beyond their verifiable financial sources as fraudulent.

The market regulator also plans to revise the definition of 'dealing in securities' to include those who assist or orchestrate dubious transactions.

The move comes in the wake of numerous instances where front entities were being used to carry out transactions to conceal the identity of the real beneficiaries.

During the note ban, several such entities were being used to swindle an estimated Rs 40 billion.

In some cases, the so-called front entities were not even aware that their names were being used to execute trades and create huge unaccounted wealth.

The proposal to do background checks are based on the recommendations of a high-level committee led by former law secretary T K Vishwanathan on fair market conduct, aimed to detect, prevent and punish such market conduct that leads to market abuse and manipulation.

The Sebi board, at its meeting held on September 18, approved the recommendations made by the Vishwanathan committee.

The regulator is also planning to widen the ambit of 'deemed fraudulent activities' under Sebi's Prohibition of Fraudulent and Unfair Trade Practices norms.

This will include misleading information on digital media, front running by non-intermediaries, mis-selling of securities, mis-utilisation of client account and diversion of client funds and so on.

Sebi is also planning to introduce so-called affordability index, which will be on the lines of Cibil score for individuals.

The index will be prepared based on the income or net worth of investors.

The affordability index score will help establish whether an individual is fit to deal in the securities market.

Interestingly, the regulator may not limit the investor's exposures but use the information for surveillance purpose to check whether they are 'mule accounts' used for carrying out fraudulent transactions or facilitate insider trading.

'The concept aims to enhance due diligence by market intermediaries in case of trading beyond specified limits (affordability index) to prevent the use of mule accounts. If the trading volume by any person is substantially higher than affordability index, then such trading account would be suspected to be a mule account, possibly used for manipulation of price or volume of securities or for insider trading,' a Sebi paper on the minutes of board meeting said.

The onus will be on the broker to calculate the affordability as per the investor's credentials and documents and share with the regulator as and when required, the Sebi paper added.

In a separate agenda of the board meeting, the regulator has approved most of the recommendation around Sebi's settlement mechanism proposed by the Justice Anil Dave committee and may soon make required amendment in the rules.

According to it, Sebi may reduce the deadline to file consent application from two months to just two weeks.

According to the current norms, an entity has to submit a consent plea in less than two months after being served with a show-cause notice.

The new settlement rule may also include the contravention of the provisions of any other law (such as the Companies Act, 2013) to the extent it is administered by the Sebi board within the definition of 'securities laws' in the regulations.

Further, the Sebi board shall not consider an application for settlement, if an earlier application for the same alleged default has been rejected, the audit or investigation or inspection or inquiry is not complete (except in case of applications for confidentiality) or if recovery proceedings have been initiated.