Top Sebi official lists out the oft-used modus operandi to commit financial frauds; Check details

Capital markets watchdog the Securities and Exchange Board of India (Sebi) is constantly enhancing its technology and surveillance prowess but frauds still happen due to the ill intention of people even as the regulator has been regularly plugging loopholes, said a senior Sebi official.  

“Frauds can happen anywhere, whether it is the listed or unlisted space. It depends on the intention of the people,” said Sebi whole-time member S K Mohanty. 

“At some point, they want to do fraud to divert funds or to siphon off funds… it is a menace that we are facing and the regulator is doing what it has to do, constantly updating itself in terms of technology and surveillance,” said Mohanty while speaking at the ‘Corporate Frauds: Governance and Risk Management’ seminar organised by industry body CII. 

He further highlighted the fact that related party transactions or RPTs are the most commonly used way to commit fraud with the regulator coming across instances of assets being transferred to subsidiaries followed by another chain of transactions through which funds come in but without any real monetary or business gains.  

Corporate guarantees, diversion of funds through subsidiaries, and loans to entities linked to promoters are also ways in which frauds are perpetrated, he said. 

“Related party transaction is one of the most favourite modus operandi, which gives a lot of scope to people to commit frauds… Predetermined credit risk or default risk has been taken over a period of time and meanwhile promoter is divesting his shares,” he said. 

He further added that these factors assume significance especially at a time when there are more than 10 crore demat account holders as an increasing number of retail investors have become active in the stock markets. 

Fake transactions to inflate sales and expenditure is another great method of showing off that you are doing well, he said. 

He also said that there are many instances of promoters bullying the independent directors to get a particular person of their choice on board while highlighting the fact that Sebi plugged a regulatory gap by bringing in a rule that any reappointment of a director who has been rejected earlier by the shareholders can happen only after prior approval of the shareholders. 

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