The Securities and Exchange Board of India (Sebi), India’s market regulator, issued an order on Friday prohibiting fugitive businessman Vijay Mallya from participating in the securities market for three years. The action stems from revelations that Mallya used sophisticated operations to conceal his identity when transferring funds to the Indian stock market.
According to Anitha Anoop, chief general manager at Sebi, Mallya, former CEO of United Breweries and principal stakeholder of United Spirits Ltd (USL), devised a scheme to trade his own companies’ shares indirectly. The transactions were routed through UBS AG London’s bank accounts using the Foreign Institutional Investment (FII) route.
“Such acts are not only fraudulent and deceptive but are a threat to the integrity of the securities market,” according to the ruling issued by the regulator.
This is not Mallya’s first sanction; Sebi earlier restricted him from the securities market for three years, beginning June 1, 2018, for manipulating USL shares and engaging in unlawful transactions.
In the ruling issued on Friday, Sebi noted that Mallya had engaged in manipulative and fraudulent actions, as well as unfair trading practices, which were in breach of securities legislation. This prompted the regulator to extend the market restriction for another three years.
Based on evidence provided by the Financial Services Authority (FSA), the regulator launched an inquiry on its own. The investigation discovered that Mallya traded in the shares of his group firms, Herbertsons, and USL, in India through Matterhorn Ventures, a registered sub-account of FII—Matterhorn Advisory Singapore Pte Ltd. The cash was transferred to numerous beneficiary accounts at UBS before being channeled into the Indian stock market.
The Sebi order said that Mallya was the ultimate beneficial owner of several accounts, including Bayside, Suncoast, and Birchwood. These firms remitted a total of $6.15 million to Venture New Holdings Ltd, which Mallya also owned. The monies were promptly used to buy Herbertson’s shares. In 2006, Matterhorn Ventures got 633,333 shares of USL in return for 950,000 shares of Herbertsons, resulting in a 2:3 exchange ratio.
According to Sebi’s Anoop, Mallya’s violation of the FII regulatory framework was detrimental to investors.
“I find that Mallya’s actions, which involved misusing the framework of the FII Regulations and engaging in fraudulent dealings with securities of his group’s listed companies in India, were harmful to investors. By employing manipulative and deceptive practices, specifically in the buying and selling of securities of Herbertsons/USL, he intended to deceive market participants, violating the PFUTP Regulations.”
A non-bailable warrant has been issued
On July 1, a special CBI court in Mumbai issued a non-bailable warrant for Mallya in a loan default case involving Indian Overseas Bank for Rs 180 crore. The CBI claimed Mallya caused the bank a wrongful loss by “wilfully” failing to make payments.
India’s efforts at extradition
External Affairs Minister S. Jaishankar emphasized India’s strong argument for extraditing fugitive economic offenders. He asked the UK to take a responsible stance to avoid being perceived as a shelter for tax evaders and defaulters, emphasizing the UK’s reputational ramifications.
The mode of operation
The three UBS accounts, Bayside, Suncoast, and Birchwood, had transferred a total of $6.15 million to Venture New Holdings (VNHL), the beneficial owner of which was Mallya. VNHL then transferred this cash to Matterhorn Ventures in exchange for a subscription to one of its share classes. Matterhorn Ventures was discovered to be a registered sub-account of an FII, Matterhorn Advisory Singapore Pte, that was active during the examination.
The funds sent by VNHL to Matterhorn were used to purchase Herbertsons’ shares. Matterhorn also purchased 9.5 lakh shares in Herbertsons through block purchases on February 28 and March 3, 2006. Following Herbertsons’ merger with USL on October 27, 2006, Matterhorn Ventures received 6,33,333 shares of USL in return for 9.5 lakh shares of Herbertsons in a 2:3 ratio.
