New Delhi, June 26 -- The Securities and Exchange Board of India is investigating suspicious stock market activities across more than a dozen listed companies in a wide-ranging probe that has uncovered multiple shell firms and so-called mule accounts to run a pump-and-dump operation, three people aware of the matter told VCCircle.
The capital markets regulator has conducted extensive search operations across Ahmedabad and Mumbai over the past few days and seized more than 150 mobile phones, dozens of cheque books, and copies of PAN and Aadhaar documents that are suspected to have been used to create shell firms and mule accounts to manipulate stock prices, the people said on the condition of anonymity.
Mule accounts are bank and trading accounts created by fraudsters, often without the knowledge of the actual accountholders, for illegal transactions including money laundering and facilitating pump-and-dump operations.
The people said that the regulator suspects fraudulent activities across a wide set of listed companies, including Harshil Agrotech Ltd, Spright Agro Ltd, ARC Finance Ltd, Shangar Decor Ltd, Franklin Industries Ltd, and Blue Pearl Agriventures Ltd. The people added that profits of more than Rs 200 crore were made from just two scrips.
"This isn't just a manipulation of one-two stocks. There is a clear pattern across dozens of listed entities -preferential allotments, fudging books, fake financials, round-tripping of funds, and pump-and-dump exits targeting retail investors," said one of the persons, who is close to the investigation.
Indeed, a quick analysis by VCCircle shows the share prices of the companies cited above jumped as much as 75 times over a one-year period.
Many of these companies subsequently announced stock splits, rights issues or other actions that later reduced the price of their shares. The broader stock market correction, after the benchmark indices touched record highs in September last year, also helped to pull down these scrips.
Moreover, the promoters of these companies have also reduced their shareholding in these companies. In most of these cases, the promoter shareholding is either already nil or has drastically reduced over the past few months even as the number of retail investors and their total ownership percentage jumped.
The people cited above said that SEBI's search operations also covered several individuals associated with these companies. These included Ajit Santoki and Sarth Santoki, directors of Global House Wealth Management Pvt Ltd; Pathik Thakkar, who holds stakes in multiple companies being examined; and Sanjay Joshi, who is believed to be an associate of Thakkar's.
SEBI, Thakkar and companies mentioned above didn't respond to VCCircle'a queries till the time of writing this article. Sarth Santoki, who is Ajit Santoki's son, acknowledged that SEBI contacted him as part of an ongoing investigation. But he added that SEBI's communication didn't mention the names of any specific companies.
"Prior to receiving our merchant banking license, my father, Mr. Ajit Santoki, was a practicing Company Secretary and, in that capacity, provided compliance advisory services to various companies, including at times to the companies you mentioned," Santoki said.
He added, "No other work-financial, promotional, or otherwise-has been conducted for Harshil Agro or Spright Agro by him or my firm. This is evidenced by the fact that no documents pertaining to either company have been received or processed by us in our merchant banking capacity, nor have been found in possession by us during the entire investigation."
The modus operandi
According to the people cited above, the regulator's preliminary findings indicate that two people acted as a link between promoters and stock market operators, facilitating fraudulent activities at multiple levels.
They are believed to have helped fudge books of agro-trading companies. "Agriculatural trade is lightly regulated and is often outside GST. This made it easy to fabricate sales and profits," the first person cited above said.
"The two helped structure preferential and rights issues in such a way that they were allotted to benami accounts managed by the duo. They arranged for dummy accounts to be infused with capital and later emptied after selling pumped shares. They then brought in market operators who executed the artificial price and volume manipulation," the person said.
The person also said that the market operators then allegedly ran synchronised or wash trading to inflate daily volumes. Synchronised or wash trading is when a group of related entities buy and sell among themselves to create a false impression of investor interest and market activity.
The person added that the operators then ran social-media promotions on various platforms including Telegram, YouTube and WhatsApp, and ran bulk SMS campaigns that "falsely projected insider tips and multibagger calls".
"The victims in this racket were thousands of unsuspecting retail investors, who believed the tips and fell for the trading momentum only to suffer severe losses. In many cases, operators dumped the shares after a 300-1,000% rise," the person said.
A second person aware of the investigation said that initial findings suggest that this is more than just a pump-and-dump operation, and that it also likely includes identity theft, setting up of shell companies to route money out of listed entities, and even money laundering with cash used to fund various transactions.
The third person cited above said investors who received unsolicited tips in these scrips can file complaints with SEBI, the Enforcement Directorate, and cyber crime cells. "Agencies must act swiftly to freeze assets, debar individuals, and initiate criminal prosecution to ensure investor protection and market integrity," the person said.
Published by HT Digital Content Services with permission from VC Circle.