Description

SEBI imposes penalties on seven entities for executing circular transactions (three-way reversals) in illiquid stock options (OTM contracts) on NSE during February-March 2021, violating PFUTP Regulations.

Summary

SEBI has issued an adjudication order against seven entities - MVM Securities Private Limited, MVM Commodities Private Limited, Govinda Shares & Securities Private Limited, Navin Textiles Marketing Private Limited, Sureshkumar Khimajibhai Doshi, Epoch Synthetics Private Limited, and Trinetra Company Private Limited - for executing three-way reversals (circular transactions) in illiquid Stock Options segment contracts (Out of the Money contracts) on the National Stock Exchange of India Limited (NSE) during the period February 01, 2021 to March 25, 2021.

The investigation found violations of Section 12A (a), (b), (c) of SEBI Act read with Regulations 3 (a), (b), (c), (d) and 4 (1), 4 (2) (a) and (n) of SEBI (Prohibition of Fraudulent and Unfair Trade Practices Relating to Securities Market) Regulations, 2003 (PFUTP Regulations).

Key Points

  • Entities Charged: Seven entities including four private limited companies, one individual (Sureshkumar Khimajibhai Doshi), and two other private limited companies
  • Violation Period: February 01, 2021 to March 25, 2021
  • Nature of Violation: Execution of three-way reversals (circular transactions) in illiquid stock options (OTM contracts)
  • Market Segment: Stock Options segment on NSE
  • Adjudication Order Number: Order/JS/DP/2025-26/32005-32011
  • Legal Provisions Violated: Section 12A (a), (b), (c) of SEBI Act and Regulations 3 (a), (b), (c), (d) and 4 (1), 4 (2) (a) and (n) of PFUTP Regulations
  • Show Cause Notice: Issued on December 30, 2022 (SCN No. EAD-9/ADJ/VKV/NK/2022/64919)
  • Multiple AO Transfers: Case transferred through four different Adjudicating Officers before final order

Regulatory Changes

No new regulatory changes introduced. This is an enforcement action under existing SEBI (Prohibition of Fraudulent and Unfair Trade Practices Relating to Securities Market) Regulations, 2003.

Compliance Requirements

  • Market participants must refrain from engaging in circular transactions or three-way reversals in stock options or any other securities
  • Trading entities must ensure their trading patterns do not create artificial volumes or manipulate prices in illiquid contracts
  • Entities must comply with PFUTP Regulations prohibiting fraudulent and unfair trade practices
  • Brokers and trading members should implement systems to detect and prevent circular trading patterns

Important Dates

  • Investigation Period: February 01, 2021 to March 25, 2021
  • First AO Appointment: November 25, 2022
  • Show Cause Notice Issued: December 30, 2022
  • Second AO Transfer: August 30, 2023
  • Third AO Appointment: March 14, 2024
  • Current AO Appointment: April 04, 2025
  • Order Date: January 30, 2026

Impact Assessment

Market Impact: This enforcement action demonstrates SEBI’s continued vigilance against manipulation in derivatives markets, particularly in illiquid stock options contracts. The case highlights regulatory focus on circular trading patterns that can distort market prices and create false volumes.

Operational Impact: Market participants, especially those trading in stock options, need to ensure their trading systems and compliance frameworks can detect and prevent circular transaction patterns. The case serves as a deterrent against using illiquid contracts for potential manipulation.

Segment-Specific Impact: The focus on Out of the Money (OTM) stock options indicates regulatory scrutiny of trading in illiquid derivative contracts where price manipulation may be easier due to lower trading volumes.

Precedent Value: This adjudication order sets a precedent for enforcement actions against coordinated circular transactions across multiple entities in derivatives segments, reinforcing that such practices violate fundamental market integrity principles under PFUTP Regulations.

Impact Justification

Enforcement action against manipulation of illiquid stock options through circular transactions. While involving multiple entities and significant regulatory violations, impact is limited to specific market segment and period (Feb-Mar 2021). Sets precedent for monitoring circular trading patterns in derivatives.