Disequilibrium: No time for a bummer
Market watchdog Sebi, under a new chairman Ajay Tyagi, has to unshackle itself and be more proactive to ensure fail-safe mechanisms
When an unstoppable force meets an immovable object, it obviously makes a loud noise. More so because at the end, it is very much like gravity and all that is required is a push to alter the axis. The news, coming out of the somnolent Sebi over the last few days, is that the new regulator is busy cracking down on the ills that afflict the securities market. Two quick decisions, long pending of course, have shown that the new man wants to move expeditiously, yet adroitly to clear the backlog. First the banning of RIL in the decade-long Reliance Petroleum case from the equity derivatives market for a year along with a Rs 1000 crore penalty, followed by Amadhi Investments getting it in the neck for 10 years for manipulation malfeasance in specific IPOs. For years, now we have seen a completely turgid Sebi not willing to do anything constructive as the overarching securities market boss when a virtual casino was being run in front of its eyes, making one wonder how deeply ensconced the regulator was in the arms of Morpheus. As someone said, it was akin to this thing you wanted which you thought you wanted, but it is not something that you really wanted. Confused, well so was Sebi. Markets want order and transparency. And the regulator, its centrifuge was for most part looking away, if not asleep at the wheel.
Ajay Tyagi, whose own appointment was mired in controversy, given that he was first appointed for five years and then a week later another notification cut his tenure to three years, appears to be well intentioned and seems out to untangle legacy issues plaguing the regulator. Both the recent decisions were a decade and 12 years old respectively. Anyway, it is a good beginning in terms of heightened vigilance levels. Over a three year period between 2010 and 2012, I personally highlighted how rogue and barred stock broker Ketan Parekh was using circular trading through front companies to manipulate prices in cohorts with promoters for the companies. Using both print and electronic media to highlight these shortcomings in the equity markets, at best, all one got was a strangled reaction from Sebi that they were watching Parekh. Finally one got fed up of doing these stories, though the inputs were rock solid and everyone in the top echelons of government was in the know. For three years running, I was fortunate to get what was potentially a bombshell - Director Intelligence Bureau writing personally to the PM and other top functionaries on the jiggery-pokery taking place in the equity markets. The web of brazen skulduggery fronted by someone who was banned by Sebi itself till 2017 made one wonder what was going on? The damaging IB reports, submitted to the topmost echelons of the government, suggested that Ketan Parekh popularly known as KP and his associates were driving up share prices through the creation of false volumes.
In July 2012, the 'top secret' IB document stated that these manipulators were brazenly continuing 'their illegal activities using circular trading, insider trading and use of front entities to rig up prices'. Apart from KP and his cartel, some of the stock market players whose names figured in the IB report were Piyush Sampath and Raju Shah. According to it, the manipulating cartels had been using illegal means to buy shares so that the prices rise in the run-up to an IPO or a qualified institutional placement (QIP). These cartels bought select shares in volumes that ranged from lakhs to millions on a single day, causing the stock prices to shoot up despite the bearish trend in stock markets.
The shares were then offloaded after the QIP or IPO got over and this led to a sharp fall in the prices of the stock. The IB document also revealed that the cartels claim to have been in touch with a senior LIC official and some insurance companies to sell the shares to these cash-rich entities. It is intriguing that if the IB had so much evidence against these manipulators, why was SEBI not actively cutting off their trading lifelines? Posers with no answers and poor me sitting and wondering what all this was leading to. The extent of the involvement of manipulators as detailed by the damning IB report showed that rogue brokers such as KP were hyperactive despite having been banned. As mentioned even in 2011, the IB had spotlighted broking cartels led by KP being active. Several companies were named in the report signed by DIB Nehchal Sandhu.
According to the report, one of the manipulators claimed that he had been asked to place the shares of a company with insurance firms for which the promoter was willing to give 7.5 per cent of the amount as placement fee. Going into the granularity of the manipulation, the report threw into stark relief how various corporates had ramped up their shares using these KP fronts. According to the IB findings, the shares of one company rose by 47 per cent in April from Rs79 to Rs116. During this period, the KP cartel continued to be active in the counter to accumulate a large volume of shares. Modus operandi of KP and those in cahoots with him was spelt out in extensive detail, names and numbers of players, exact trades and amounts, even phone calls traced and tracked were all provided in what can only be described as a cast iron document. After all, it was meant for the PM.
In another instance, KP had also shorted 18,000 Bank Nifty during the early part of the month, out of which they eventually covered 8,000 Bank Nifty. The IB has also found that another market player had received insider information that the results of LIC Housing were expected to be poor and the non-performing assets (NPAs) of the company were on the rise. And yet, nothing happened other than cognizance of the fact that KP was active in the markets by SEBI. All the overwhelming evidence merely a diatribe for SEBI, or perhaps an alphabet soup.
Now let me rewind to April 2011 when Director of IB Rajiv Mathur wrote to the PM and other top government personnel that Ketan Parekh -barred by the Sebi from any activity relating to securities transactions till 2017- was active and punting on a wide variety of counters. What had been whispered for some time now, was confirmed by the IB. The confirmation coming from the highest level. Rogue stock broker KP was back in the sandpit. He was operating from behind a maze of fronts and associates in order to escape detection, by masking his identity. Every media entity followed up on this big story written by this columnist, but Sebi maintained a deafening wall of silence other than acknowledging the fact that KP was active. Parekh, who was banned for his role in a securities scam between 1999 and 2001, and his associates were acquiring very large positions in petroleum companies such as Oil and Natural Gas Corp (ONGC) and Hindustan Petroleum Corp Ltd (HPCL).
The note to top government functionaries said, "They (Parekh and associates) have claimed to close associates that they possess insider information on the government's proposal to decontrol the sale of gas, which is expected to raise profit margins of these companies by about 20 per cent." This is exactly what happened subsequently in May. It may be recalled that Sebi for a change had approached the Enforcement Directorate (ED) in 2010, saying Parekh appeared to be trading in stocks through certain front entities. “It appears that he (Parekh) has conveniently used the connected clients at will as front entities for executing trades desired by him in the market,” Sebi had said. Parekh or ‘KP’ as he became known, made a name for himself by rigging up 10 key scrips, which led to the play on his name K-10 - Himachal Futuristic, Zee Telefilms, Adani Exports, Global Tele Systems, Ranbaxy, Shri Adhikari Brothers TV Networks, Shonkh Technologies, Padmini Technologies and Aftek. In 2007, Sebi had barred Parekh and 10 of his associates, including brother Kartik Parekh, for 14 years with effect from December 12, 2003.
The IB note said one of Parekh's associates is active through front entities in a core sector stock so as to take the price up to Rs 2,000 a share. The share closed on Tuesday down 3.55 per cent at Rs 1,181.20 on BSE. But, on four successive days in June, the scrip shot up by 18 per cent. The note also said that, "KP's associates claim to possess insider information about a deal initiated by between two pharma and healthcare firms (names with held by the writer now). They have been working on the scrip from March-April 2010." The deal, when it fructified, saw an MNC buy an Indian entity for $ 3.7 billion. The note further stated, "Parekh is also reported to have made huge profits earlier in the Dish TV scrip and now is again active in it, and companies like Parsvanath Developers Ltd. and Tatia Global Ventures Ltd scrips."
The other companies, according to the IB note where Parekh was reported to be active were Suzlon, IndiaBulls Real Estate Ltd, Siemens Ltd, Tata Motors, Reliance Natural Resources Limited (RNRL), and Tarapur Transformers Ltd at that time. .
Tyagi has an onerous mandate, not only does he need to look at pending cases, but he has to focus on recent scandals like the NSE algorithm trading systems, which were allegedly misused by certain brokers. Following Sebi's orders the embattled exchange (where to its credit it moved with alacrity for a change) had hired Deloitte, last year, to conduct a forensic audit. Similarly, Sebi has initiated an adjudication process against the brokers involved in the alleged NSEL Rs 5,574 crore scam. It is expected that Sebi will take a quick decision since the three-member committee (appointed to look into the NSEL case) will submit a report to the whole-time member. Soon after, the whole-time member will give personal hearing and pass the order.
More than all this, what is germane to Sebi's role and responsibility is to keep the capital markets clean and orderly. Manipulation and casino trading has no room in India's equity markets. Sebi needs to be more proactive like the Securities Exchange Commission (SEC) in the US as the market watchdog. The SEC doesn't allow drift, it takes punitive action against errant market participants, protects investors, maintains fair, orderly and efficient markets, targets insider trading and of course facilitates capital formation, so vital for a country's development. Destruction of shareholder wealth like the in the Tata-Mistry fracas or the Infosys founders vs management face off by not taking appropriate action, cannot be the way forward. It has to ring fence shareholders and investors rights by stepping into the puddle and getting its hands and feet dirty. A hands off approach isn't the way forward. And wrapped in inertia and lassitude is certainly not what India wants from its regulator. Tyagi's three year term promises much, given that liquidity is gushing and markets are near stratospheric highs. But this is when bubbles form and greed steps in. Ergo, the cats and dogs begin to move in synchronicity. Security protocols and firewalls are vital at this stage. India has a history of stock market scams, for human ingenuity knows no bounds.
Sandeep Bamzai