Why is Sebi cracking down on mule accounts?

Some of the regulatory orders issued by the market regulator in the recent past indicate that certain bankers and wealth managers have been using mule accounts to inflate the subscription numbers of both initial public offerings and debt issuances

Market regulator Securities and Exchange Board of India(Sebi) has initiated a crackdown against mule accounts. Some of the regulatory orders issued by Sebi in the recent past indicate certain bankers and wealth managers were using mule accounts to inflate the subscription numbers of both Initial Public Offerings (IPOs) and debt issuances. Sebi suspects the bids from such mule accounts are either withdrawn by the time of final allotment or the applications are deliberately filled in a faulty way so that they get rejected. Money control explains the developments around such accounts.

What are mule accounts?

A mule account is an account created by one person but operated by another person. These accounts are often used for money laundering and tax evasion.  A mule account could be a bank account or a demat account where shares are held. Regulatory norms specify that any bank account or Demat account should be controlled and used by its beneficial owner, i.e., the person whose Know Your Customer(KYC) documentation was submitted during the opening of the account.

How are mule accounts being used in stock markets?

All initial public offerings(IPOs) come with a special quota of shares reserved for both retail and wealthy investors. In the last few years, the demand for IPOs has surged significantly, with the retail quota sometimes getting oversubscribed by 10-20 times the shares reserved for the category. Normally, an investor can only submit one bid for an IPO. However, it appears that some investors have been tying up with their friends and relatives and putting in multiple bids. The bid money is provided by the original investor to the mule account. If such accounts are allotted shares, they are sold by the beneficial owner on listing day and the proceeds are taken by that investor. The owner of the mule account receives a 20-30 percent cut for allowing his account to be used for the transaction.

Why is Sebi cracking down on mule accounts?

Sebi’s surveillance found certain investment bankers were using these mule accounts to inflate subscription numbers both in debt market issuances and IPOs. Normally, these offerings are open for public subscription for three days, and if the response from investors was not satisfactory on the first day, the bankers would use the mule accounts to put in bids. This created a false perception about the issue of receiving good subscription numbers, prompting many gullible retail investors to submit bids. Once the subscription levels reached a good level, bankers would withdraw the bids made from the mule accounts. Also, in some cases, Sebi has observed that bankers were deliberately making faulty bids through mule accounts. Since the application was faulty, it would be disqualified at the time of allotment.

Is the use of mule accounts illegal?

Investors using such accounts should be mindful that mule accounts are in violation of several rules. To begin with, mule account holders can be prosecuted under the Prevention of Money Laundering Act (PMLA). Also, such arrangements are illegal under tax laws. Even Sebi and Reserve Bank of India (RBI) rules say such accounts should not be used. In such cases, both the investor and the mule can be subject to regulatory action, say legal experts.