The recent orders of capital market regulator Securities and Exchange Board of India (SEBI) indicate a ruthless and untiring team of investigators in SEBI arsenal. Whether it is the order related to Trafiksol or the Mishtann Foods Ltd (MFL), the tone, reasoning and depth of data mining is very clear. Whether the complaint is raised through SCORE by an individual or through some organization like SIREN, it has been taken up with same seriousness and investigated thoroughly. In this write-up, we would discuss evolving investigative pattern of SEBI and its repercussions.
SEBI is armed with ammunitions of Acts and Regulations: SEBI has mandate to investigate stock market participants like listed companies, broking entities and other stake holders pf securities market like Mutual Fund AMCs, Merchant Bankers, investors etc. As a regulator, SEBI enjoys enormous powers. It can regulate, execute, show cause and adjudicate. It is equipped with an Act called SEBI Act 1992 and several regulations like Prohibition of Fraudulent and Unfair Trade Practices relating to Securities Market Regulations, 2003 (PFTUP), Listing Obligations and Disclosure Requirements Regulations, 2015 (LODR) etc. Through these Acts and Regulations, SEBI keeps an eye over stakeholders of the bourses.
Patience and Penetration are key to investigation: SEBI Order related to Mishtann Foods Limited is an outcome of a complaint lodged through SCORE on September 16, 2022, inter alia, alleging circular/dummy turnover, Goods and Services Tax fraud, stock/inventory manipulations, excessive booking of electricity expenses, income tax fraud, bank fraud, etc. by MFL. The complainant also informed that Mr. Hiteshkumar Gaurishankar Patel, Managing Director (MD) of MFL was arrested by the GST Department for GST fraud amounting to Rs. 78 crore. Aforesaid complaint has several parts:
- Circular/dummy turnover
- Goods and Service Tax Fraud
- Stock/Inventory manipulation
- Excessive Booking of electricity expenses
- Income Tax Fraud
- Bank Fraud
- Suppression of information related to arrest of MD.
SEBI has investigated all the aforesaid parts of complaint with equal zeal.
Coordination with other Agencies: SEBI should be accoladed for investigating each part of the aforesaid complaint deeply and independently with data mining. It has coordinated with related agencies like GST and Income Tax Authorities in aforesaid investigation. The Order underlines having received a reference from the GST Authorities and says , ‘SEBI also received a reference dated October 4, 2022 from the Office of the Commissioner of Central GST & Central Excise, Gandhinagar (“GST Office” or “CGST Authority”), inter alia, informing that the company was involved in large- scale manipulation of its books of accounts, revenue, income, and expenditure details by creating fake/paper entities in the form of buyers/suppliers.’ Coordination with other investigating agencies and related authorities has sharpened the investigating skill and mechanism of SEBI.
Location tracking: In a recent order of WTM, the location of persons whom summons were not delivered and who were not cooperating with the agency have been tracked on real time basis. In the investigation related to Trafiksol, the officers of third party vendor TPV has been tracked and the order has quoted their real time location in the order. Location tracking has given new wing to the investigation department of SEBI.
Access to banking/demat details: SEBI has complete access to all the banking/demat details. Take an example of Mishtann Foods Limited. The regulator has identified 24 individuals/companies for investigation purposes. Their names have been mentioned with PAN number at the first page of the Order. SEBI has access to all the accounts held through a PAN Number. For instance, Hiteshkumar Gaurishanker Patel with PAN Number ASZPP4210E is one of the notices in aforesaid case. SEBI has access to all the bank accounts, demat accounts and digitized assets held through PAN Number ASZPP4210E. Mr. Patel can’t hide any of his bank accounts held with any bank. SEBI can freeze, defreeze, track all the bank accounts and demat accounts. It can even deactivate the PAN number. SEBI is perhaps the only regulatory Authority which has power to deactivate PAN, the financial identity of an entity.
Data Mining and Intelligence: The new tool of SEBI is mining of data available in digital space especially social media. The way some self-proclaimed market experts have been nabbed through social media data mining is praiseworthy. It’s worth mention that some of the proclaimed offenders have been nabbed through data analysis of Zomato and Uber. SEBI has developed several tools like tracking of IP addresses, use of VPN, verification and tracking of e-mail logs etc. The compulsion of using an e-mail id for mobile operations has made the task easier for investigating agencies.
The new caveat in SEBI orders: Whenever SEBI debars any entity from securities market through its Order, it writes ‘If the said Noticees have any open position in any exchange-traded derivative contracts, as on the date of the order, they can close out /square off such open positions within 7 days from the date of order or at the expiry of such contracts, whichever is earlier. The said Noticees are permitted to settle the pay-in and pay-out obligations in respect of transactions, if any, which have taken place before the close of trading on the date of this order.’ In the Orders prior to March 2019, these lines couldn’t be found. In certain cases, the capital market regulator debarred a Broker from capital market, disabled its terminals and didn’t provide any mechanism to squire off existing positions. This resulted into huge loss to the broker and its clients opening a web of litigations. Later on SEBI made it a point to mention aforesaid lines in all its Orders.
Securities market is evolving and so is the market regulator SEBI. It is a game of cat and mouse. Sometimes regulation follows a mishappening and sometimes mis-happenings are thwarted by timely regulations. Anyways, the show must go on.
