What is a mule? Well, it’s a hybrid of a donkey and a horse typically used to carry or move things from one place to another. The word is also used as a slang to describe a person who smuggles things. And then there are mule accounts in the capital markets that too “carry” or “move” stuff, but they do it with the ulterior motive of artificially influencing stock prices.
That is the reason they are high on the regulatory radar, with Securities and Exchange Board of India (Sebi) Chairperson Madhabi Puri Buch saying that rules regarding front running need to be tightened to address the menace of mule accounts.
Simply put, mule accounts refer to those trading accounts that are opened to carry out front running activities, or temporarily park shares, before they can be used to perform so-called ‘pump and dump’ activities. Here, certain entities collude with brokers to jack up stock prices and then, sell or dump them in the market after gullible investors have been hoodwinked into buying those shares in the wake of the swift price rise. All of this essentially falls in the realm of manipulating stock prices. And mostly, such accounts are used by entities other than those in whose name the accounts are actually registered.
Incidentally, last month, Buch had said that while most broking firms have put in place systems to minimise instances of mule accounts, there is still a “small minority” of market participants who collude with wrongdoers to facilitate opening of such accounts. “Brokers are showing great responsible behaviour, but we need that to be implemented across the board because equally the feedback… was that while we have all these very good practices, we also have some brokers, a very small minority, who are constantly colluding in the opening of mule accounts… and [are] basically facilitating all kinds of pump and dump [activities],” she had said, while addressing the media post a board meeting on March 29.
More importantly, she highlighted a few instances of enhanced checks and balances put in place by broking firms that were brought to her attention. Citing a particular instance, she said that a large broking firm once told her that they always checked the age of the client and matched it with the date of the issuance of the PAN card and if there was a huge gap between the two, it was flagged. “So, if the age of the customer is 40, 45 or something like that and the PAN card is very recent, it is an immediate red flag to them that this is likely a mule account which is being set up for misuse because a person who is 45 and who is having a first-time PAN card, where is the wherewithal for him to be trading in the market and hence most likely it is a mule account. [Hence] they refuse to open the account,” said Buch. She further said that many large tech-based broking firms use technology to identify such mule accounts.
Interestingly, as part of its attempts to mitigate the risk of such accounts being created, the capital markets regulator has amended the rules governing stockbrokers and brought in provisions that put increased responsibility on the brokers to monitor any activity related to market manipulation.
This assumes significance as, over the years, Sebi has come out with important orders highlighting the so-called ‘pump and dump’ operations and barred hundreds of entities from participating in the markets. The most high-profile regulatory action on this matter came in April 2006 after Sebi conducted an exhaustive investigation into all initial public offers (IPOs) between 2003 and 2005. As many as 24 key operators and more than 80 financiers were identified and barred from the stock markets. Further, the probe saw well-known names like NSDL, CDSL, Karvy Stock Broking, HDFC Bank and IDBI Bank, among others being ordered to disgorge large amounts of money from the entities that were found to be indulging in such activities, though some of those players later challenged the Sebi order and managed to get certain reliefs.
More recently, the regulator has barred many entities for their alleged pump and dump activities in a matter that even saw Bollywood actor Arshad Warsi along with his wife Maria Goretti being named. But the couple managed to get relief by challenging the order in the Securities Appellate Tribunal.
The watchdog has also amended the Sebi (Stock Brokers) Regulations, 1992, recently, to bring in provisions regarding systems for surveillance of trading activities and internal controls, obligations of the stockbroker and its employees, escalation and reporting mechanisms and also a whistle-blower policy to prevent such shenanigans in the future.
While the new rules will kick in from October 1, it will be interesting to wait and see how effective the increased monitoring will be, as history is replete with examples of wrongdoers finding innovative ways to circumvent the rules and trap gullible investors.
