Stock Manipulation Through Bulk SMS: SEBI Exposes Modus Operandi

SEBI has barred 135 entities from accessing the market for alleged stock manipulation in the securities of five companies through bulk messages.

These are Mauria Udyog Ltd., 7NR Retail Ltd., Darjeeling Ropeway Co., GBL Industries Ltd. and Vishal Fabrics Ltd. It also ordered the impoundment of Rs 126 crore that was made by them in wrongful gains, according to an interim order by the Securities and Exchange Board of India on Wednesday.

The scheme was undertaken by a person named Hanif Shekh, referred to as the kingpin of the scheme by SEBI.

Shekh sent bulk SMSes to unsuspecting investors, inducing them to buy these shares, only to offload them as the price rose. This was done for the benefit of Shekh, his connected entities and promoters in violation of the SEBI (Prohibition of Fraudulent and Unfair Trade Practices relating to the Securities Market) Regulations, according to the regulator.

The manipulation of all five scrips was undertaken broadly between 2018 and 2020. There was a discernible pattern in the trading of all these scrips, the markets regulator said.

There were three groups of entities that participated in the trading of all of these stocks. The first group, known as the price volume influencers, was in charge of influencing the share price and volume through inter se trades, according to SEBI.

The second group—off-loaders—dumped their shares to make substantial profit by dealing in the scrip. Lastly, the SMS sender—Shekh—orchestrated the entire scheme by sending bulk SMSes with buy recommendations and also through some websites.

The investigation period is classified into two phases—the pre-SMS circulation phase and the SMS circulation phase.

In this phase, SEBI said there weren't any relevant corporate announcements that would substantiate a sudden movement in price, nor did the companies have good fundamentals. These stocks did not have the liquidity that would warrant a substantial increase in price.

During this phase, PV influencers undertook significant trades to artificially increase the price of the stock. The trades were undertaken between entities connected by a common directorship, address or bank account and it was often undertaken in a circulatory or synchronised manner. This points towards a lack of genuineness in the trade, according to SEBI.

In some cases, such as in Darjeeling Ropeway, its Managing Director Himanshu Shah was himself engaged in artificially creating volume. In Vishal Fabrics' case, it was the promoter family that led the price manipulation.

Once these trades were undertaken, the price as well as volume rose significantly in all five scrips. For instance, in the case of Mauria Udyog, PV influencers artificially created a volume of 35.22%, out of which 17.38% is by directly trading with each other.

In the second phase, bulk SMSes with 'buy' recommendations were sent from SMS IDs and websites that were traced back to Shekh. He mainly used SMS headers, such as BT ZROHDA, BZ MGAINS, BT ICISEC and BH MGAINS, to send these messages.

These IDs closely resembled those of some major brokerage houses like Zerodha Broking Ltd. and ICICI Securities Ltd., according to the regulator. He also made use of two websites—midcapgains.in and mbstocks.in—to further publicise the recommendations.

Once the recommendations were made, the price and volume shot up substantially. In the case of Mauria, the volume increased by 1,638% and the price shot up to Rs 412 from the pre-SMS period price of Rs 255.

This was used as an opportunity by off-loaders to sell their shares. This included not just Shekh and his connected entities, but also promoters of several companies. In the case of Mauria, it was observed that the off-loaders were mainly employees of the company. SEBI identified 62 entities that were employees of the company and 37 entities with their addresses marked as Mauria Udyog.

The ultimate beneficiaries in this case were not the entities who offloaded, but the promoters of the company itself. In Darjeeling's case, Shah used this opportunity to exit the scheme, the regulator said.

The ultimate beneficiaries in all these cases were identified as Shekh and his connected entities. In the cases of Mauria and Vishal, this also included the promoter entities.

Entities are asked to disgorge the unlawful gains at an interest rate of 12%. As it's an interim order, the alleged entities are also asked to file their replies within 21 days. SEBI has also cautioned investors to be careful of such manipulative practices on account of this order.