MUMBAI: Amid concerns over misuse of stock markets for laundering of black money, including through P-Notes, regulator Sebi has said it has a strong surveillance system that generates over 100 alerts a day and all cases of manipulation are being dealt with sternly.
Sebi has put in place a strong deterrence to check any misuse of participatory notes and these can be issued only by well-regulated overseas entities such as sovereign wealth funds and pension funds of foreign governments.
Still, Sebi is open to further strengthen its systems and regulations, if required, to put additional checks against any possible misuse of this route.
The routes which were found to be more prone for being misused were IPOs, allotment of preference shares in secondary markets and the issuance of GDRs in foreign locations.
In a stern warning to those looking to misuse the market platform for conversion of black money, Sebi Chairman U K Sinha said the regulator has already busted a large number of rackets who were indulging in such activities and it is now very difficult to escape its surveillance systems.
"We have strengthened our surveillance systems. In our surveillance systems, all the trading that happens in our country gets captured. We get alerts for all the trading. We are getting at least 100 alerts per day from our systems," Sinha told PTI in an interview.
Stating that the manipulators are using various methods, including circular trading and marking the close, the Sebi chief said the regulator is getting alerts on all of them.
"Each and every alert is followed further. During these follow-ups we found that there are these companies where the price has gone up by 10-times, 20-times and even more in some cases. Our surveillance systems caught this signal and we started probing," Sinha said, while adding that action has been taken in these cases and further prosecution is underway.
After active deliberations, regulator had strengthened its P-Note regulations in 2011, after which restrictions have been put in place on who can issue these instruments and to whom these can be issued, while the information about the beneficiary owners needs to be mandatorily given to Sebi.
While Sebi has already put in place a robust system to check any misuse of the P-Note route, it is open to make any further changes if required, Sinha said.
He, however, clarified that neither the Special Investigation Team (SIT) on black money nor the government has suggested closing the P-Note route and it was a business requirement for a certain class of foreign investors.
P-Notes are typically Offshore Derivative Instruments issued abroad by Foreign Institutional Investors (FIIs) or their associates against the underlying Indian securities.
While norms have been tightened considerably for P-Notes over the years, they remain popular among foreign investors since they allow them to invest in Indian markets without undergoing the significant cost and time implications of directly investing in the India.
Following SIT's recommendations earlier this month to plug any loopholes that may allow misuse of the P-Notes, the stock markets had tanked sharply on concerns that any move to clamp down on these instruments might lead to huge outflow of foreign funds.
The Sebi chief further said that there were certain people who had "set up shops" in the IPO and GDR (Global Depository Receipt) markets and they were luring people with customised packages to raise funds from the investors and then divert the same for their personal gains.
Having 'busted' these cartels, Sebi has also put in place a stronger mechanism to check any further misuse of these platforms, he added.
Taking about the GDR market, Sinha said, "We realised that there are certain people who were asking the Indian companies to go and issue GDRs outside India and were also providing funding through some banks.
"Same people were doing funding, same people were merchant bankers too and the entire issue proceeds were being placed with the same banks."
He further said that Sebi had passed orders in one such case, which was later set aside by the Securities Appellate Tribunal.
"We went to the Supreme Court (against SAT verdict), which has now ruled that Sebi was right," he added.
Talking in detail about the modus-operandi employed by those trying to convert black money into legitimate-looking funds, Sinha said Sebi began probing in the cases where the stock prices had shown abnormal rise.
"We started asking if your share price has gone up ten times, has your business also grown. Has your profit, turnover, orderbook, etc grown? We found that there was no correlation in the price and the business of these companies.
"Then we went to the next step. We started getting into who were the buyers and sellers of these shares and from which bank account the money was coming.
"Then we realised that there was a racket going on. The same set of people were at play at all the levels and their intention was not just to manipulate the market, but their intention was actually to make the black money white. But they were doing it through our stock market mechanism."
While Sebi has taken interim actions against these entities, further prosecution is underway at its end and the cases have also been referred to the tax department and other agencies for necessary action at their end.
"You can see, as far as markets are concerned, one by one we are trying to curb the manipulation very successfully -- be it IPO markets, GDR markets or secondary markets. But I must also say that this is an ongoing battle and I cannot say that we have controlled every thing," Sinha said.