SEBI's first take on market manipulation

THE investigation was undertaken by SEBI in the context of unusually volatile market behaviour around the end of February and the beginning of March, in view of apprehensions of possible attempts by certain entities to distort and manipulate the market.

This investigation broadly focuses on the factors responsible for the recent market behaviour, market manipulation and entities involved in such manipulation, the regulatory perspective and the role of the stock exchanges and systemic issues emerging therefrom.

The findings and the observations made in this report are arrived at a preliminary basis only and detailed investigations would be required to come to definitive conclusions.

Behind the fall: Though macro factors, international and domestic, have influenced the Indian market, the analysis made in the investigations indicates manipulative trends in recent market behaviour. The recent market behaviour, including the sharp fall in the Sensex on February 23, March 2 and March 13, was due to the unwinding of long positions, short sales, delivery-based sales including those of institutions and market sentiments. Such transactions carried out by certain entities are indicative of market manipulation, which is violative of SEBI Act and Regulations.

Ketan Parekh angle: The trading activities of Ketan Parekh and his associate entities reveal patterns of manipulations. He built large concentrated positions in select scrips such as HFCL, Zee Tele, DSQ Software and Global Tele. He could create and sustain such large positions by operating through a large number of entities across the exchanges. He also dealt extensively through CSFB Broking and also CSL Securities. There is also evidence of a nexus between him and promoters of some of the companies that provided large funding aggregating to around Rs 800 crore in January to March. These activities of Ketan Parekh and his associate entities aimed at creating an artificial market in certain scrips, amount to market manipulation and are violative of SEBI Act and Regulations.

Ketan Parekh also appears to have had a nexus with certain FII sub-accounts and OCBs, through which he has been able to carry out very large transactions in select scrips. The pattern and the manner of these transactions indicate the cornering of shares, circular trading, parking arrangements and structured arrangements leading to market manipulation.

Ketan Parekh and his entities have received substantial funds through the misuse of banking systems. These amounts as per the available evidence were Rs 1,200 crore in the last few months. There are indications that this money has been used in stock market operations aimed at market manipulation in certain scrips.

Global Trust Bank: Investigations in the price movements in the Global Trust Bank (GTB) scrip have prima facie established that prior to the announcement of a merger between GTB and UTI Bank, the GTB scrip was manipulated by Ketan Parekh and his entities. He also seems to have concentrated holdings much above the five-per-cent-limit. There are indications of a nexus with some of the promoters of the bank. Prima facie, this is violative of SEBI Act and Regulations.

Price depressants: The Nirmal Bang group of entities trading alongwith others appears to have acted in concert with the intention of depressing the prices. He also appears to have resorted to such irregularities as collusive trades. He had substantial dealings through CSL Securities and also through an unregistered entity, namely, Palombe Securities. This amounts to market manipulation.

Shankar Sharma's First Global group and their connected entities appear to have indulged in transactions with the intent of depressing the prices of some scrips that impacted the market trend. They also did collusive transactions through non-descript entities, indulged in circular trading, structural arrangements and irregular market practices.

Similarly the Shailesh Shah group, Ajaj Kayan Group, Radha Krishnan Damani group and BLB group appear to have done certain transactions possibly aimed at depressing the prices and also indulged in irregular market practices. However, detailed investigations would be needed to establish the exact nature of the manipulations regarding these entities. The role of JM Morgan Stanley Securities is also being examined.

CSFB's trades: Credit Suisse First Boston, a foreign broking firm, had indulged in irregular trades to facilitate the funding of Ketan Parekh entities by resorting to collusive trades with counter party brokers belonging to Ketan Parekh. One of the sub-accounts of CSFB has also been extensively used for transactions in select scrips and the transactions appear to be a part of the manipulative process.

What is to be done: The recent events have indicated that exchange surveillance mechanism could not properly detect excessive concentrations in the market.

*The surveillance and monitoring mechanism in the exchanges needs to be strengthened in terms of infrastructure system and manpower.

*The Calcutta Stock Exchange committed irregularities by not charging proper margins and allowing members to cross exposure limits in their trading. The exchange also failed to examine issues related to unauthorised carryforward despite specific communications to the exchange.

*SEBI's staff strength and infrastructure in surveillance: Investigation and inspection of the stock exchanges and intermediaries need to be immediately strengthened to achieve proactive and improved oversight in the areas of monitoring and surveillance done by exchanges and also for the expeditious completion of SEBI's investigations.

*Strengthening surveillance departments of the stock exchanges in terms of infrastructure, systems and manpower.

*Securing independence of surveillance and monitoring functions in the stock exchanges so that there is no management interference and influence.

*Introduction of Unique Client Identity for better risk management.

*Increase in cash component in the margins and mandatory charging of margins from the clients.

*Standardisation of the composition of settlement guarantee funds/trade guarantee funds across the exchanges.

*Impounding of one-third of hawala profits in carryforward segments, including ALBM/BLESS.

*Establishing centralised monitoring mechanism for fund flow from banking sector to the entities operating in the stock market.

*Prescribing norms for OCBs for transacting in the Indian stock markets.

*Enhancing investigation/penal powers under the SEBI Act.

Executive summary of Investigations in market manipulation in the context of recent market behaviour (Preliminary report) by the Securities and Exchange Board of India.