What is the bulk SMSs scam and why did SEBI bar 135 entities from markets?

The scam

The markets regulator initiated an investigation into the trading of scrips of five small-cap companies namely — Mauria Udyog Ltd., 7NR Retail Ltd., Darjeeling Ropeway Company Ltd., GBL Industries Ltd. and Vishal Fabrics Ltd — after it witnessed an abnormally sharp rise in their share prices and trading volume.

In the investigation, SEBI observed certain strong commonalities in the trading pattern followed by various entities in these five scrips. One common feature was that ‘buy recommendations’ for all five scrips were widely circulated through bulk SMSs. Certain websites were also used for recommending buying in all five scrips, except for Vishal Fabrics Ltd, the regulator noticed.

The period of SMS circulation coincided with an astronomical rise in the prices and volumes of the shares of these companies. However, in the case of Darjeeling Ropeway, only volume had increased and the price rise remained under control apparently because of specific surveillance actions that were imposed on the scrip by the stock exchange.

SEBI, in its investigation, found that certain identified suspected entities were allegedly involved in fraudulent acts that led to the abnormal rise in the volumes and prices of the shares of the five companies.

The regulator found out that 135 entities were involved in stock manipulation, and that they wrongfully gained Rs 126 crore by indulging in illegal activities. These entities have been barred from accessing the securities market by the regulator.

The markets regulator also issued show cause notices to 226 entities, including numerous mule accounts, for violations of regulations. It also indicated a possible requirement of disgorgement of Rs 143.79 crore from these 226 entities.

The modus operandi

SEBI said the entire stock manipulation happened in a pre-planned scheme by these entities, which was mainly centred around the circulation of bulk SMSs in the scrips of five companies with a ‘buy recommendation’ to investors.

It found that there were two distinct but connected phases of dealing with the scrips – one was the ‘pre-SMS circulation’ phase in which the scrips which did not have the backing of any significant corporate announcements or did not have very sound fundamentals, witnessed substantial movement in their prices.

The second phase kicked in with post circulation of bulk SMS with buy recommendations – SMS circulation phase – during which the trade volumes and prices of the scrips further rose as a consequence of the SMS circulations. In this, certain other entities who were either enjoying the connection with each other or with the company through its promoters, took advantage of the price rise and exited from these scrips after pocketing a substantial profit.

SEBI said the scheme involved three major sets of entities – PV (Price Volume) Influencers, SMS Sender and Off Loaders apart from using a large number of entities who were apparently mule or conduit entities to operate the fraudulent scheme in these scrips, the regulator said.

As per the first leg of the scheme, PV Influencers were found to have increased the price and volume of the five scrips through manipulative trades. This was followed by the circulation of buy recommendations via bulk SMSs in the five scrips by the SMS Sender- Hanif Shekh, the kingpin who was the mastermind behind the implementation of the entire fraudulent operation. His actions influenced and lured investors to trade in the scrips.

In the last leg of the scheme, the Off Loaders sold the shares of these five scrips (previously acquired by them) at elevated prices thereby making substantial profits. These profits were transferred through multiple layers and conduits to the ultimate beneficiaries of the scheme who were identified as promoters of some of the companies and Shekh, SEBI said.

“It was also observed that the entire operation which was being prima facie run by the kingpin (Hanif Shekh) with best of care to deceitfully hoodwink and delude the normal eyes, as a consequence of which Shekh along with his connected entities and promoters of some of these companies (scrips) had generated wrongful gains to the tune of around Rs 143.79 crore by way of dealing in the five scrips,” SEBI said.

Advise to investors

There have been many instances wherein investors are being misled by finfluencers or certain entities for buying or selling specific shares. These entities use social media channels like Telegram, Instagram and YouTube to provide wrong investment tips.

SEBI has time and again cautioned investors to be aware of fraudulent activities which are being carried out through SMSs, various websites and social media. It has also advised investors to deal only with registered intermediaries.