Sebi to bring settlement scheme for brokers facing action in illiquid stock option cases

Capital markets regulator Sebi will introduce a settlement scheme for stock brokers against whom enforcement proceedings have been initiated and are pending for executing trades in illiquid stock options on BSE.

The settlement scheme shall commence on December 19, 2022, and end on January 19, 2023, (both days inclusive) or such other date as approved by the competent authority, according to a Sebi notice.
"SEBI has decided to introduce a Settlement Scheme for 150 stock brokers, 2022 (Scheme 2022) for Stock Brokers against whom enforcement proceedings have been approved/initiated and are pending for executing trades in illiquid stock options at BSE. Such entities may avail the Scheme 2022 as per its terms and conditions," the market watchdog said in a public notice on Friday.

The present scheme has been made easier as the entities can apply online instead of submission of physical papers. The scheme was also made attractive so that many entities could avail the same. Most of the entities can settle their proceedings by paying only Rs 1 lakh as a settlement amount.

The scheme provides an opportunity for the entities who have executed reversal trades in the illiquid stock options segment from April 1, 2014, to September 30, 2015, and against whom enforcement action initiated by Sebi is pending to settle the case.

This came after Securities Appellate Tribunal (SAT) passed an order in May this year on the matter of illiquid stock options. In market parlance, trades in which a person buys a particular stock and sells it back to the same person are referred to as reversal trades.

As many as 1,018 entities, allegedly involved in the manipulation of illiquid stock options, had availed the benefit of its one-time settlement scheme. The cases were settled against the entities after they paid settlement charges in the range of Rs 5 lakh to Rs 42 lakh. As part of the ongoing surveillance, the Securities and Exchange Board of India (Sebi) had come across several instances wherein a set of entities was consistently making losses by their trading in options on individual stocks listed on BSE.

It noted that the trading of these entities appeared abnormal because they were consistently seen to be making significant losses by their trades, which were reversed with the same counterparties either on the same day or the next day.

Accordingly, an analysis of the stock options segment of BSE for the period April 1, 2014, to September 30, 2015, was carried out.
It was observed that there were several entities that consistently made significant losses, whereas there were others who consistently made a significant profit by executing reversal trades in stock options on BSE.

Out of 21,652 entities that executed trades on the BSE stock options segment, a total of 14,720 were involved in the generation of artificial volume by executing non-genuine or reversal trades on the same day.
Out of these 14,720 entities, Sebi initiated adjudication proceedings against 567.

Meanwhile, the SAT, through an order in October 2019 in the matter of RS Ispat Ltd, directed Sebi to consider holding a Lok Adalat or adopting any other alternative dispute resolution process with regard to the illiquid stock options.

Accordingly, Sebi decided to introduce a settlement scheme in illiquid stock options cases.