The Securities and Exchange Board of India, or Sebi, on Thursday, barred 59 entities from accessing the capital markets for manipulatively trading in derivatives of thinly traded stocks on BSE to generate fictitious profits and losses, allegedly with the aim of evading tax.

While passing an interim order, pending investigation, Sebi whole time member Rajeev Kumar Agarwal said between 1 April 2014 and 31 March 2015, the regulator found several instances wherein these entities were consistently making significant losses by their trading in options on individual stocks, which were reversed with the same counterparties either on the same day or the next day.

“…the misuse of stock options not only displays an unreal picture of market activity to other investors but also defeats the basic premise of screen based electronic trading system and price discovery mechanism by repeated execution of pre decided reversal trades at irrational / arbitrary prices,” Agarwal said.

“Moreover, the impact of such trading on the traded volume and the price of stock options contracts is huge. Such activity deliberately or otherwise damages market integrity apart from presenting wrong picture of liquidity to gullible investors which could affect their trading/investment decisions,” Agarwal said in the order.

While Sebi is yet to ascertain the reason of such misuse of stock options by the entities, Agarwal recommended the regulator refer the matter to the Income Tax Department, Financial Intelligence Unit and Enforcement Directorate for investigation and appropriate action subsequently.

Sebi found that the loss-making entities were trading mainly in options of individual stocks which were thinly traded. “The trades by these loss-making entities, in many cases, contributed to 70% to 100% of total traded volume for the contracts on those days,” Sebi said. (LiveMint)