Personal Finance Monday, May 15, 2000


At last, the regulators are waking up

A stitch in time saves nine

The last few days witnessed great volatility in the stock market making many an investor lose his sleep. In fact, nobody is sure why the markets have been behaving the way they have during the last few days. All sorts of rumours have been floating in the market with fingers pointed at various directions. Of course, insider trading has been the bane of Indian markets and, even today, one can be sure that there are enough players indulging in insider trading. Naturally, investors, particularly the small investors, feel disturbed by such developments and wonder about the role played by the regulating authorities.

It is nobody’s case that the regulatory authorities in India are awake and up to the challenge posed by market manipulators and insider traders. But, by its very nature, tracking insider trading is not always an easy or simple task. It is not that the foreign markets are free of manipulators, but there the detection mechanism is very strong and the retribution is quite quick, unlike in India where nothing will happen for years. Such conditions invariably encourage unscrupulous persons to take undue advantage of the market.

For long, we have not heard of any action taken by authorities against guilty companies, barring some cases which have generated more publicity than action. Even if a company or its directors are punished it is poor consolation for an investor who has lost his hard-earned savings.He has only the satisfaction of seeing the guilty brought to book.

Fortunately, things have started changing, albeit slowly, and the regulatory authorities are waking up to the realities of the Indian capital markets. Recently, some interesting cases were reported in a set of press releases issued by Sebi. Investors should be happy to know that Sebi has indeed been busy taking action against defaulters and handing out punishment to them as permitted by law.

Investors will recall that two years back there were media reports about manipulation of share prices of three leading companies by certain interested parties with the connivance of the promoters of those companies. In the wake of the sudden payment crisis on BSE and NSE in the month of Jun.’98 and allegations of manipulation in the scrips of BPL, Videocon and Sterlite, Sebi conducted investigations.

Investigations prima facie revealed that some brokers, acting in a concerted manner with a common set of clients, built up unusually large positions in scrips resulting in a distortion of the market equilibrium and creation of an artificial market. The investigation also revealed that these common set of clients were acting as a front for Harshad S. Mehta, a suspended broker of BSE and an accused in the securities scam of 1992.

Two brokers, namely, Digital Leasing and Finance Ltd and Messers. Bharat J Patel were found to be involved in manipulation of the scrips of BPL, Videocon and Sterlite. In fact, as was known from the evidence available, these brokers dealt for a common set of clients who were first timers in the market and lacked professional expertise and financial soundness to enable them to deal in securities on a very large scale. Interestingly, the brokers did not charge any upfront margins from the clients.

In the course of its enquiry, Sebi found that these two brokers were acting in concert with other brokers and they had cornered a substantial number of shares of BPL, Videocon and Sterlite and thereby created an artificial market and manipulated the prices of these scrips. It was also found that these brokers made purchases which were not only excessive but beyond the financial capacity of their clients.

The brokers were held guilty of violating the provisions of the Sebi Act, 1992, as well as a few other Sebi regulations and also the code of conduct and by-laws of the concerned stock exchanges. Hence, Sebi ordered the suspension of the registration of Messers Digital Leasing and Finance Ltd. till 9 Jun. 2001. The suspension of Messers Bharat J Patel was only till 1 May 2000.

The other dimension to this case is that, in Jun.’98, when there was a sudden payment crisis on BSE as well as NSE in respect of all the above three scrips, there were some allegations that even some mutual funds were involved in the price manipulation scam. Investigations by Sebi revealed that Shriram Mutual Fund had purchased 1,20,600 shares of Videocon on BSE in Jun.’98. Interestingly, though the then prevailing market price of the scrip was Rs 63 per share, the mutual fund showed the purchase price as Rs 84 per share. The investigation also brought to the fore the imprudent behaviour of the mutual fund as it sold simultaneously shares of fundamentally sound companies in a falling market to pay for its dubious purchases.

Incidentally, Sebi officials also came across a memorandum of understanding between a Videocon group company and a Shriram group company showing that there was a buy-back arrangement between the two in respect of the said shares of Videocon being purchased by the mutual fund.

Eventually, Sebi concluded the investigations and in its words, the purchase of 1,20,600 shares of Videocon at a price much higher than the market price was not in the best interest of the investors and was made for extraneous considerations. Sebi also indicted the mutual fund for its lack of professionalism in handling transactions.

Sebi asked the sponsors of Shriram Mutual Fund to pay the corpus of the concerned schemes of the fund a sum of Rs 25,62,750 (being the difference in the purchase price, as explained earlier) along with interest @15 pa to compensate the loss caused to the unit holders of the mutual fund.

In addition, the managing director of the fund, Mr Gadgil, resigned from the fund as well as from other directorships of the Shriram group. Sebi has debarred him from holding any public position in any capital market-related public institution for a period of three years. Some other officials who were involved in the deal were also asked to resign.

Simultaneously, Sebi directed the fund to change the composition of its board of trustees, with three of the four trustees being asked to resign within a month and the remaining one trustee was asked to resign after one year so as to enable the fund to have a smooth transition. With this, ended the saga which had shaken the confidence of the market at that time.

Another interesting case relates to an investor complaint against Messers Xedd Telecom Ltd., a Hyderabad-based company. In this case, the company had failed to transfer the shares within the stipulated period of two months in utter disregard of the interest of the concerned investors. Sebi received numerous complaints against the company from the affected investors and was forced to initiate some action against the company. Surprisingly, the company did not bother to pay any heed to the repeated requests by SEBI to redress the grievances of the investors.

Failing to reign in the company, Sebi launched prosecution by filing a criminal complaint against the company and its directors in the court of the special judge for economic offences at Hyderabad.

The court convicted the company and its managing directors and sentenced each of them to pay a fine of Rs 53,150. In fact, the court also directed that in case the company failed to pay the fine then the managing director will have to undergo simple imprisonment for six months. Interestingly, the court also ordered that of the amount collected from the company and its managing director, a sum of Rs 5,000 should be paid to Sebi towards the cost of the proceedings.

Another issue that has been of concern to investors relates to vanishing companies which has been the bane of stock markets in India. It has almost become a rule that there should be a lot of pre-issue publicity about a company and its future plans. Once the issue is oversubscribed and the money collected, suddenly the promoters become scarce and getting response from the company becomes an uphill task. In fact, several allottees never see the shares for which they had subscribed nor do they get the refund.

This is possible due to the limitations of our regulatory authorities on one hand and the tardy judicial process on the other. Of course, there is no doubt that the greed of investors is the fuel on which manipulators thrive.

Some time back, there was a lot of hue and cry about vanishing companies and Sebi promised adequate response to win investors’ confidence and protect their interest. According to a recent press release issued by Sebi, it has issued appropriate orders against 57 companies and 216 directors prohibiting them from being associated with capital market activities in any manner for a period of five years. Due to constraints of space it is not possible to mention either the names of the companies or their directors, but they are all given in the press release.

Apart from the action taken by Sebi, even the Department of Company Affairs (DCA) has also initiated action against such companies and has been prosecuting them for violating the various provisions of the Companies Act,1956.

There is no doubt that regulators have at last started moving in the right direction to protect the interest of investors, but the action so far has been very limited to give solace to the harried investor. Moreover, what is really required is a very strong detection system and quick and effective punishment should be meted out to the guilty parties.

Today, Sebi has debarred several companies and hundreds of directors from approaching the capital market, but can it state with certainty that they will be detected and hauled up if they come to the capital market in a new avatar. It is quite unlikely.

by S D Israni
The writer is a member, central council, Institute of Company Secretaries of India. The views expressed by the author are his own and not those of the ICSI. e-mail: