In today’s Finshots, we talk about an alleged front-running scheme by the management of V-Marc India, a company making wires and cables, and how SEBI pulls up such frauds.

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The Story

Imagine how pulling up a stock market fraud before the tech era must have been for the SEBI (Securities and Exchange Board of India).

Someone would have to give the regulator a tip-off or a complaint. Or the folks at SEBI’s investigation team would have to closely monitor unusual stock price and volume fluctuations to actually kick off an investigation.

People would have to be questioned. But gathering proof would have been hard because most meetings or arrangements between the smart stock manipulators would have been in person. Even financial transactions would have been in cash. Heck! Shares themselves were dealt physically. So yeah, keeping trails was cumbersome.

It’s no wonder that before the demat account system started, SEBI could only pick up 2-3 cases for investigation a year. But with the paperwork dumped and shares being dematerialised in 1996 the number jumped phenomenally. For context in FY95 SEBI could only take up 2 cases for investigation. But just the next year that went up to 60. It was also around the same time that SEBI’s Market Surveillance System was set up. It would monitor abnormal market movements and detect manipulations.

But that was the 1990s. Today, SEBI has a lot more tech weapons in its arsenal. The digital world leaves trails everywhere.

And one such victim of SEBI’s tech sorcery is V-Marc India. Actually, it’s the culprit ― the manipulator of its own stocks. And all it took was one complaint from a shareholder to get caught. Oh, and a simple trail from another fraud which shook the mutual fund industry ― Axis Mutual Fund’s front-running case.

Let us explain.

When a shareholder in V-Marc complained to the SEBI of a suspected stock price manipulation, the regulator started a probe. This probe was backed by information from a phone that belonged to Prijesh Kurani. And this phone was confiscated way before the V-Marc probe began. That’s because SEBI had seized Kurani’s phone when it was investigating Axis Mutual Fund’s scam. And thanks to his WhatsApp conversations, bushwhacking V-Marc was made easy.

But how did V-Marc pull off this heist, you ask?

Well, it followed a simple 5-step recipe.

Step 1: Allot shares to relatives and allies so that they have the minimum number of shareholders to kickstart a public company. The Companies Act says that you need at least 7 shareholders to go public.

Step 2: Go public through an IPO on the special SME Index for small and medium enterprises — it’s not scrutinised as much as a regular IPO.

Step 3: Appoint an entity that’d act as the market maker. Think of this as someone who creates liquidity for the company’s shares in the market once it goes public. So they can buy shares from the public or sell them the shares they need. For V-Marc this entity was Richr Business Services, a Dubai-based business owned and operated by Prijesh Kurani and his family.

Step 4: Create multiple trading accounts and send over funds from allied individuals and entities to the Kuranis and the folks who’d got shares in Step 1 so that they can subscribe to the IPO issue and artificially create demand.

Step 5: Get relatives and allies to inflate stock prices after V-Marc’s listing by trading amongst themselves. This is called circular trading.

Okay, but now you’re probably wondering ― how does the stock price rise when a group of people trade between themselves?

So here’s the thing. The stock market works on a system of order matching. It simply means that if you want to sell a share at ₹y and I’m willing to buy it at the same price, the system automatically matches this order and the trade is executed. But something else happens with this transaction too. The LTP or the Last Traded Price of the stock changes. So if the LTP of this stock was ₹x, it now changes to ₹y. It could be higher or lower. Now imagine if a stock is illiquid, meaning it’s not traded much, and only a coterie of 10 people keep trading it. They can keep placing buy and sell orders at higher prices and nudge the LTP upwards.

Well, the folks who were internally manipulating V-Marc’s shares were doing exactly that. And with just a trick like that, SEBI alleges that they accounted for 70% of the higher LTP of V-Marc during the investigation period.

And when SEBI realised these price manipulations continued to happen even beyond the period of their investigation, which was April 2021, it decided to pass an interim order. It temporarily barred most of the accused from trading in the stock market. And is seizing over ₹6 crores in unlawful gains!

Now, V-Marc is just one of the hundreds of cases that SEBI may have pulled up this year, considering that it took up 144 cases for investigation in FY23. But ever wondered how SEBI zeroes in on them?

Well, it’s all about the tech upgrades, isn’t it?

It has had the Data Warehousing and Business Intelligence System (DWBIS) since 2011 that’s loaded with pattern recognition algorithms. In 2021, it created a special division called CRAC (Connection Research and Analysis Cell) that would rely on data analytics to recognise relationship patterns between individuals and entities while investigating complex cases. There’s Picture-based Information News Accumulator and Key Information Analyser  or Pinaka for short which is an AI tool that tracks stock recommendations on TV shows and checks for huge corresponding changes in stock prices and volumes which came out last year.

And it’s even working on a tool to analyse social media and internet chatter around stocks and the markets. That way it can keep an eye on social media influencers who are pumping and dumping stocks.

As you can see, SEBI’s really doubling down on its tech prowess. And it’s using its might to keep  tabs especially on SME IPOs. After all, these small listings have seen a massive boom of late — 135 SME IPOs in 2023 raised a whopping ₹3,500 crores! And with many of their share prices doubling in the blink of an eye, SEBI doesn’t want retail investors to be lured into a trap set by dubious operators.

Kind of like the V-Marc saga.

So yeah, with all the digital crumbs you leave behind and SEBI hoovering them up, you have to either be a diabolical genius or outright stupid to try manipulating stock prices these days, no?

Until then…

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