PEPed-up Sebi steps up vigil before polls

The Securities and Exchange Board of India (Sebi) has stepped up its vigil to prevent the stock markets from being used for money laundering, ahead of the general elections. The focus of Sebi’s inspections this year is on socalled politically exposed persons (PEPs) and the transactions they have undertaken in 2018, said three people aware of the development.

A PEP is someone who holds a prominent public post, such as members of Parliament, leaders of big political parties, senior bureaucrats and heads of government agencies. People in direct contact with such individuals also fall under the category.

Such inspections typically take place ahead of elections but brokers told ET they have been more extensive than usual with several firms receiving notices from Sebi to provide additional information about the trading data of PEPs in the past five years and the knowyour-customer (KYC) documentation collected from them.

“Some PEP accounts have seen a steep increase in trading activity in the last one year. We have been asked to provide further information on such clients,” said a broker. “Most of the brokers have asked additional time until March 1 to furnish the details.”

As per Sebi rules, it is mandatory for both the brokerages and mutual funds to capture the data of PEPs and also collect additional KYC information from them. PEPs are considered highrisk customers by all types of financial institutions including banks and nonbanking finance companies (NBFCs). It is a global practice to track such clients since there is a greater potential for malpractice as they possess a higher level of information than others.

“Normally Sebi focusses on retail brokerages for annual inspections since they cater to high-risk clients. However, this year it was different as institutional investors and global custodians for FIIs (foreign institutional investors) also received requests for additional information,” said one of the persons cited above.

These inspections come amid speculation that the steep fall in the markets in late September and early October last year was on account of politically motivated trades. Sebi didn’t respond to queries.

A senior Sebi official said the regulator usually steps up the market surveillance near election time. “This time the scrutiny was higher given the market conditions and also tips received from other regulatory agencies,” said the person, who didn’t want to be named.

Market regulator Sebi is learnt to have received several alerts from agencies such as the Serious Fraud Investigation Office (SFIO) and the Economic Offences Wing (EOW) regarding such trades. Stocks of smaller companies are known to be prone to malpractices such as price manipulation and front running, experts said.

Sebi is said to have already pulled up several investors in connection with the alleged use of penny stocks for tax evasion. The regulator is also said to be investigating the use of illiquid stock options for money laundering.