In a significant regulatory development, the Securities and Exchange Board of India (SEBI) has taken stringent action against the ‘Shares Market – Alternative Investment Fund’ (AIF), imposing a ban on the acceptance of new investments. The move comes in the wake of critical lapses in disclosure on the part of the asset management company, shedding light on a complex web of regulatory violations involving the sponsoring stock exchange, Shares Bazaar Private Limited (SBPL).

Background

The genesis of the regulatory intervention can be traced back to an investigation conducted by the National Stock Exchange (NSE) in 2020, revealing damning revelations about SBPL. The stock exchange was found to be orchestrating a Ponzi- and multi-level marketing (MLM) scheme, deceiving investors who believed their funds were being directed toward legitimate securities market investments.

Key Findings:

Lack of Disclosure by Asset Management Company:- SEBI’s action stems from the non-disclosure of crucial information by the asset management company, particularly concerning regulatory actions against SBPL. The regulator highlights that Shares Bazaar AIF’s custodian, Orbis Financial Corporation, obtained registration for trading/demat without fulfilling the necessary disclosure requirements.

Illegal Fund Raising and Advisory Activities:- SBPL is accused of engaging in illegal fund raising activities, a violation it had previously assured SEBI it had ceased. The stock exchange allegedly provided advisory services and portfolio management services without proper registration, promising returns ranging between 18 to 48 percent.

Category-3 AIF Registration and Fund Closure:- Despite its tainted history, SBPL managed to secure Category-3 AIF registration for Shares Bazaar AIF in April 2023. The AIF made its first closing in November 2023, garnering a total capital commitment of Rs 21 crore.

BSE Ban and Previous Regulatory Action Concealment:- Shares Bazaar AIF failed to disclose pertinent information during the AIF registration process, concealing its ban by the Bombay Stock Exchange (BSE) and previous regulatory actions against it.

SEBI’s Response:- In his order, SEBI’s whole-time member Ananth Narayan underlined the severity of the lapses, especially the failure to disclose crucial information during the registration process. As a punitive measure, the regulator has prohibited any debit or credit transactions in the bank account associated with Shares Bazaar AIF.

The SEBI’s action against ‘Shares Market AIF’ serves as a stark reminder of the critical role that disclosure plays in maintaining the integrity of the financial markets. The case brings into sharp focus the need for stringent oversight to safeguard investor interests and uphold the credibility of the regulatory framework. As the saga unfolds, market participants will be closely monitoring the fallout, and the incident is likely to fuel discussions around bolstering regulatory mechanisms to prevent such lapses in the future.