The Hindu Business Line : SEBI action makes manipulators pay

Mumbai, Nov. 23 A set of traders and 34 investing entities charged by the Securities and Exchange Board of India earlier, as having indulged in a clever form of market manipulation, have now applied to the regulator seeking a settlement of their offences, sources close to the SEBI investigation process revealed.

The development is clearly being seen as a victory for SEBI’s regulatory initiatives against such actions. It also comes on top of these entities having already deposited, in an escrow account with the stock exchange, a sum of approximately Rs 65 lakhs. The sum represents the amount of undue profits that SEBI contended as accruing to these entities from their manipulation. In effect, they would appear to have not only parted with their gains without demur, but also sought to have their offences settled under SEBI’s scheme for “Settlement’ of ongoing investigations.

These applications are being processed by SEBI for putting up to the empowered committee for approval, these sources further said.

Case history

The SEBI investigation related to a case where a Netherlands-based investor had instructed UTI Securities at various times during November 2006 and June 2007, to sell in excess of 60 lakh shares that it held in Ballarpur Industries. SEBI charged a dealer employed by UTI Securities as having leaked the information to a sub-broker of Emkay Shares and Stock Brokers and to a director of Prayas Securities, another registered broking firm. These two, in turn, caused to set up 34 investing entities who sold shares in Ballarpur Industries which they did not own, at prevailing market prices and later ‘short covered’ (buying) these at reduced prices to earn a profit for themselves.

The SEBI investigation revealed that these entities were able to do so by timing their sales ahead of the Dutch investing institution hitting the market with its ‘sell’ order, thanks to the tip-off provided by the dealer at UTI Securities who was privy to the Dutch order. After the Dutch institution’s order hit the market, prices began to slide with the UTI Securities’ dealer helping the process along by disclosing the full extent of the Dutch selling interest in the stock all at one go. The normal practice in the case of large orders would be to disclose only a portion of the selling interest lest the full disclosure cause the price to fall further.

SEBI contended that the action resulted in the Ballarpur Industries shares trading at an artificial price, thereby undermining the investor belief in the ability of the market to discover the true price without market manipulation.

SEBI had also pointed out in its order that the latest instance of market manipulation was unique in the sense that it was undertaken with the aid of a vast network of investing entities whose actions were being orchestrated by a master mind. This is in contrast to past instances of manipulation often involving a handlful entities at the front end of trading action.

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