Introduction

The securities exchange board of India (SEBI) on 2nd of February has ordered to attach the bank accounts, mutual funds and Demat accounts belonging to a penalty defaulter in a bid to recover the penalty amount slapped on him for his involvement in a Global Depositary Receipt (GDR) manipulation case. The effort is being undertaken to recover the penalty amount of Rs.50 crore, which was imposed in June 2020 by the SEBI. Since then, the penalty amount along with the interest and recovery cost has amounted to a total of Rs. 53.24 crore. SEBI has also levied a total fine of Rs 10.25 crore on the firm itself and a fine of Rs 1 crore on its chairman and managing director for the manipulation case.

In further notices, the SEBI has also ordered attachment of bank and Demat accounts of 2 more firms to recover a total penalty of ₹1.65 lakh and ₹5.75 lakh. Similarly, SEBI has ordered to attach bank accounts, Demat accounts and mutual fund holding of 19 entities who are liable to pay a cumulative fine of Rs 1.2 crore imposed by SEBI for violating certain market regulations. SEBI has also asked for attaching even the lockers in possession of the defaulters.

SEBI has also issued guidelines to specifically halt any form of debit transactions to take place from the accounts. The regulator strongly believes that that the defaulter may try to avoid paying the fine by siphoning of the money in their Demat accounts to bank accounts which would result in delay and obstruction of the payment of the fine.

What is the GDR manipulation case?

The biggest fine collection which has been recently making the news is for a GDR manipulation case. To understand this case, it is essential to understand what is a Global Deposit Receipt (GDR). A GDR is a type of bank certificate that denotes shareholding in a foreign company wherein the shares are held in a foreign branch of an international bank. Private entities rely on GDRs to raise capital in foreign currency. Investors also have the option to trade GDRs in open markets.

In an investigation conducted in 2010, SEBI noted that a company had issued GDRs amounting to USD 10 million, which was solely subscribed by a single entity.

The entity in question obtained a loan from a leading international bank to fulfill this obligation. The security for this transaction was provided by the company who was issuing the GDR themselves by pledging their GDR receipts as collateral against the loan.

To add to this, over 50% of the GDR shares issued were done without adequate consideration.

To profit off this, It is estimated that FII’s were used to get the GDRs converted into underlying shares and sold off  in the Indian securities market to make a profit of Rs 18.20 crore.

Context of this move

In 2013, the government passed an ordinance that gave teeth to the SEBI to function as a strict regulatory body and take action against illicit pool schemes and frauds. The ordinance introduced several amends and empowered the Chairman of SEBI to authorise search and seizure of documents relevant to an investigation.

The most significant power provided to SEBI was that it was also permitted to attach bank accounts and property, and arrest and detain a person for his failure to comply with any monetary penalty. However, significant concern has also been expressed on what the funds collected would be utilised for and would people who have been duped by the accused at some point liable to get their money back.

The regulator since long has been wanting to prevent fine bearing entities from getting away without paying. As many as 1,677 defaulter entities and penalties worth more than Rs 189 crore till March 2018 were still unpaid, according to data published by SEBI.

The regulator has also introduced a policy of imposing and collecting fines before the final judgements are made, as the regulator wants to recover their penalties before it’s too late. It has been noticed that when appeals are awaiting final judgment, the penalised parties create third-party rights on properties and divert the money to other accounts, which makes tracking money and recovering it impossible.

Conclusion

The Security Exchange Board of India has become adept tackling defaulters who have been penalised by the board for regulatory violations and frauds. With over 189 crores of dues remaining unpaid, the board is trying to ameliorate the situation by actively pursuing defaulters and attaching their assets in the form of bank accounts, Demat accounts, mutual fund holdings and even lockers to recover their penalties. It is known that if there is a delay witnessed in collecting the fine, the accused can easily funnel their money, which would make the process of recovering the penalty almost impossible. Hence, even before final judgements on the case are made, the SEBI has a right to duly collect their fine and then act as per the judgements made. In the recent past, the regulator has been issuing several notices to attach the assets of defaulters who were penalised for frauds and illegal pooling systems.