SEBI: How the market moved...

THERE has been a downtrend in the indices the worldover and in the Indian market from mid-2000 onwards. However, the downtrend was pronounced in late February and March. The Nasdaq came down from around 2,500 on February 15 to around 1,900 on March 15.

The Indian market also had a significant downward swing, though on certain days there was no correlation. The share price of Infosys in India also moved down in tandem with the ADR movement. It may be noted that the Infosys scrip has a large weightage in the Sensex and the fall in the Infosys price affects the Sensex substantially.

These broad factors may not explain all the relevant factors, and hence, in the preliminary investigation detailed analysis has been attempted which could provide some answers. The analysis of market movements revealed that the following factors contributed to a fall in the market at the end of February to early March:

*Short sale (sale without possession of shares);

*Unwinding of long positions;

*Sales based on delivery, including sales by foreign and domestic institutions and mutual funds;

*Market sentiments.

Short sale: It was observed from the analysis of the trading data that short sale positions increased considerably in Infosys Technologies in settlement 7 (ending on February 20) and 9 (ending on March 5) at NSE from 5.4 lakh shares to 9.7 lakh shares. An increase in the short sale position was also observed at the BSE in the corresponding period. A price fall from Rs 6,261 to Rs 4,794 was witnessed on the NSE and from Rs 6,254 to Rs 4,940 levels on the BSE.

In Zee Telefilms, an increase in the short sale position was also noticed from 7.9 lakh to 15.8 lakh shares in settlement No 7 to 10 (ended on March 13). Likewise on the BSE. The short position increased from 5.70 lakh shares to 18.5 lakh shares in settlement 47 (ending on February 17) to 49 (ending on March 3). In the next settlement, this short sale position increased up to 30 lakh shares. The Zee Telefilms share price fell from Rs 231.50 to 109.25 on the NSE and from Rs 230 to Rs 117 on the BSE in this period.

The increase in the short sale position was also noticed in the other momentum stock -- HFCL. The short sale position increased from 3.4 lakh shares to 9.4 lakh shares in NSE settlement No 7 to 10. The price fell from Rs 868 to Rs 235. At the BSE, during settlement 47 to 49, the short sale position increased from 1.14 lakh shares to 1.78 lakh shares which impacted the scrip price. It moved from Rs 909.5 to Rs 605. In the next settlement, the price fell to Rs 327 though the short sale position decreased slightly. It may be mentioned that the momentum stocks also influenced the sensex scrip due to overall sentiments.

In Satyam Computers, the short sale positions increased from 7.24 lakh shares to 13.21 lakh shares in settlement No 7 to 10 at the NSE. The price fell from Rs 371 to Rs 200. A similar phenomenon was observed at the BSE, where the short sale position increased from 4.35 lakh shares to 12.63 shares in settlement 47 to 49. In this period, the price fell from Rs 370 to Rs 245.

In the Global Telesystem scrip, the short sale position increased from 2.96 lakh shares to 8.8 lakh shares in settlement No 7 to 10 at NSE. During this period, the price fell from Rs 583.65 to Rs 161.70.

At the BSE, in settlement 47 to 49 the short position increased dramatically from 0.9 lakh shares to 68 lakh shares. The price in this period fell from Rs 609.52 to Rs 312.50. In the next settlement, it fell to Rs 225.50, even while the short sale position fell to 2.36 lakh.

Unwinding of long positions: Another factor that appeared to have contributed significantly is the unwinding of the long positions. It was noticed that in the NSE there was a long position of around two lakh shares in Infosys Technologies in settlement No 7. This position got reduced in settlement No 10. This scrip has a substantial weightage in the Nifty and Sensex. The price in this period fell from Rs 6261.65 to Rs 4,192 at the NSE. Likewise, at the BSE there was unwinding of long positions. In settlement No 49, there was liquidation of positions from 2.58 lakhs to 1.91 lakhs. The position outstanding at the end of the settlement No 47 was 2.25 lakh shares. The price fell from Rs 5,599 to Rs 4,817 in settlement No 47 to settlement No 49.

Similarly, it was noticed that there was a

long outstanding position of 75.54 lakhs shares in settlement No 7 of the NSE, which fell to 23.90 lakh shares by settlement No 10. Thus there was a total unwinding of 44.60 lakh shares. The investigations reveal that a substantial portion of this was on account of the unwinding by Ketan Parekh Group entities. A similar trend was observed at the BSE. The outstanding long positions of 93.31 lakh shares reduced to 44.52 lakh shares in settlement No 47 to settlement No 50. Around 43 per cent of the unwinding was because of the Ketan Parekh Group entities in settlement No 48. The price in settlement No 7 to settlement No 10 at the NSE fell from Rs 231.50 to Rs 109 and from Rs 230 to Rs 117 at the BSE in settlement No 47 to settlement No 50.

In the HFCL scrip, there was a similar pattern of unwinding of long positions. In settlement No 9 of the NSE, there was unwinding of positions to the extent of 4.5 lakh shares. Substantial unwinding was on account of the Ketan Parekh entities.

At the BSE, outstanding long positions were reduced by 5.45 lakh shares in settlement No 50. There was overall unwinding of around 7 lakh shares in settlement No 50. The total unwinding of the Ketan Parekh Group was 5.70 lakh shares in settlement No 50, which was more than the net unwinding across the exchanges. These details have been given in the tables in the Annexure -- 3B.

Delivery-based sales: It has generally been observed that delivery sales affect the market in a very significant way. In Infosys Technologies, there were large deliveries on the BSE and the NSE (about 25 lakh shares) of which there were large institutional sales of about nine lakh shares.

In Zee Telefilms, there have been substantial deliveries by mainly foreign institutional investors.

Market sentiments in 2001: In stock markets, market sentiments play a very significant role. During this period there was general scepticism in the market. This was due to such factors as unfavourable projections in the Economic Survey 2000-2001, melt down in Nasdaq, and later on March 13, an expose by an Internet Web site Tehelka.com regarding Defence deals. Such market sentiments also led to the withdrawal of large amounts of vyaj badla finance from the market. This created a negative sentiment and aggravated the downward trend.

The possible factors for the fall of the market on specific days -- February 23, March 2 and March 13 -- when the intra-day high-lows were very sharp and the falls from the previous closes were very substantial.

The overall view: To sum up, it may be mentioned that we are in a dynamic market situation and in an environment of electronic trading that provides a certain degree of anonymity. Further, the market has a number of players, including foreign players and has volumes of several thousand crore spread across several exchanges and through different settlement cycles.

There are also transactions among the players outside the exchange systems. In such a scenario, it is difficult to pinpoint any single cause as the reason for the market behaving in a particular way. However, the analysis of various data indicates that:

*The market behaviour was largely on account of a combination of factors that included delivery sales, short-selling, unwinding of long positions and market sentiments.

*Some of the transactions mentioned are prima facie indicative of market manipulation, which amounts to violation of SEBI Act r/w SEBI (Prohibition of Fraudulent and Unfair Trade Practices relating to Securities Markets) Regulations.

Reasons for the price fall in February-March from the Investigations in market manipulation in the context of recent market behaviour (Preliminary report) by the SEBI.