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Our Bureau

Mumbai , May 17

THE Securities and Exchange Board of India on Tuesday barred UBS Securities Ltd from issuing offshore derivative instruments for one year, following the investigation into its activities on May 17, 2004, the day the stock markets collapsed.

Significantly, the order was published on the first anniversary of Black Monday. The Swiss broking house, its affiliates and agents have also been prohibited from renewing or rolling over any of the offshore derivative notes already issued, against the positions held by it in the Indian securities market for a period of one year.

SEBI has directed UBS to establish highest standards of customer due-diligence process in line with the requirements of FII (Foreign Institutional Investor) regulations.

UBS spokesperson, Mr Matthew McGrath, said UBS is seeking further legal advice and intents to appeal the regulatory decision. However, complying with the order, the FII has stopped issuing derivative instruments against underlying Indian securities held by UBS in the Indian market, he added.

While the equity portfolio of UBS was Rs 2,956 crore in May 2004, market players speculate that the Participatory Notes (including offshore derivative instruments) business of UBS currently is to the tune of Rs 8,000 crore.

On Black Monday, the stock exchanges witnessed an unprecedented fall with trading being halted twice as circuit filters were activated. Over Rs 2 lakh crore of market capitalisation was wiped off on that day.

UBS, a SEBI registered FII, has been accused of accentuating the selling pressure on May 17, 2004 without any reasons linked to the fundamentals of scrips or their performance. The order also says that the FII might have earned substantial gains from its actions on that day.

On May 17, 2004, UBS sold securities worth Rs 188.35 crore, which accounted for three per cent of the traded value for the day. However, on the previous trading day of May 14, the FII had only effected gross sales of Rs 42.65 crore.

"The strategy of UBS appears to be that while its largescale sale in cash market would depress the market and thereby result in likely losses in the securities sold in cash segment, simultaneously the short positions in the futures segment held by UBS would turn profitable. The data obtained from UBS reveals that, while UBS incurred a loss of Rs 17.54 crore on account of its sale in the cash segment, its short positions in futures (derivative) segment earned it a profit of Rs 59.37 crore resulting in a net gain of Rs 41.83 crore," says the order.

SEBI also details that UBS did not furnish information sought by it during investigations into the market crash. The charges contained in the show-cause notice include that UBS has failed to furnish the complete information in respect of its clients as sought by SEBI. Whatever information was made available by UBS was obtained after repeated follow-ups involving a great deal of regulatory persuasion, according to the order.

The SEBI Chairman, Mr M. Damodaran, emphasised that information sought during the investigation process must be provided. The punishment was consistent with the offence committed by the FII, according to him. SEBI had sent show-cause notices to 12 entities, this is the first order to be passed.

The order also accuses UBS of a deliberate attempt to obstruct the process of investigations by giving certain non-descript documents under the veneer of seeming compliance. The order says that even the requests of the SEBI Board Member, Mr G. Anantharaman, during the course of personal hearing were not promptly and properly complied with by UBS.

"UBS does not believe that the description of its conduct or intent as contained in the judgment is fair," the UBS spokesperson said.

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