Questions SEBI's report may not ask (15 April 2001)
FOR over five years, stock exchanges have been gloating about how the Indian capital market has caught up with the developed world. We have heard endless paeans to the efficiency of automated systems, margining methods, corporate brokerage firms, capital adequacy norms, trade guarantees, on-line surveillance systems, depositories and paperless trading. We were told that the system was now completely safe and constantly monitored.
It required only Ketan Parekh, a one-man-destruction-squad to shatter the illusion. An image which was carefully built by BSE President Anand Rathi, through the steady stream of VIP visitors, listing ceremonies and other gimmicks.When the bubble burst in the middle of March, Parekh was not the only one in the dock. Rathi himself stood charged with insider trading and the First firm to be granted ‘deemed FII’ status was under a cloud. Yet, many aspects of the market manipulation continue to remain under wraps because stock exchange officials are scared and tight-lipped.
n Cheques as margin: Payment problems at Kolkata were settled under the direct supervision of SEBI, by the simple expedient of canceling ‘collusive’ trades, invoking bank guarantees and selectively holding back payout. SEBI also sacked the broker-directors of the Calcutta Stock Exchange (CSE). But will someone now tell us what happened to the Rs 500 crore trade guarantee claimed by the exchange in the beginning of March? According to reliable sources, the guarantee shriveled to a meagre Rs 78 crores or so, because the bourse had followed the shocking practice of collecting post-dated cheques as margin payment and was stuck with fast depreciating HFCL shares as margin money. When problems surfaced, these cheques were not worth their paper.
Under-reporting carry-forward trades: Another problem being suppressed is the obfuscation of carry-forward trades. Investigations into the payment crisis show that brokers may have been under-reporting carry-forward deals to the extent of Rs 800 crores. They have been netting off sale and purchase positions of clients within their firms and only carrying-forward the balance. Often, they have collected margins from buyers and sellers and invested the money in vyaj badla.
Misuse of broker pool accounts: Under the Share Depository system, the payout of shares is first credited to broker pool-accounts and later transferred to clients. This procedure is identical to that under the physcial delivery system. However, after the payment crisis in March, several clients found that brokers had raided the pool accounts to meet their own market liabilities.
Stock Holding Corporation of India Ltd: There have been frequent allegations about the misuse of SHCIL’s schemes offering cash against payout or lending of shares, which were launched to impart liquidity into the system. SHCIL on its part has strongly denied such allegations. However, its fracas with IndusInd Bank over the DSQ Industries shares indicates that at the very least, SHCIL has been extremely naive in its choice of clients and the shares eligible for its schemes.
On May 4, 1992, the then Finance Minister, Manmohan Singh had referred to a meeting with stock exchange Presidents. At that meeting he had impressed upon bourses the need to take urgent steps in the following areas: capital adequacy norms for brokers, uniform trading hours, faster clearance and settlement of transactions, increasing corporate membership and checking insider trading and price rigging. Three of these five areas have been addressed, while two others have been ignored for nine years and have played an important role in the present crisis too. Uniform trading hours would include uniform accounting periods in the context of automated nationwide trading systems. However, the smaller exchanges including Kolkata have resisted such a move because it would kill liquidity generated through arbitrage deals; SEBI has not pressed the issue.
According to stock exchange officials, it is the roll-over of trades from one bourse to another which camouflaged the massive manipulation and price rigging in stocks such as Cyberspace Infosys and Amara Raja Batteries. Insider trading and price rigging are two other areas where SEBI is squarely responsible. It refused to react to the Ketan Parekh’s blatant manipulation and has also failed to check insider trading. Almost every major takeover deal announced over the last year has been preceded by a sudden spurt in share prices and trading volumes. Nonetheless, except for a couple of investigations announced recently, SEBI has been unable to nail a single instance of insider trading.
While it is all very well to blame SEBI for regulatory lapses, the broking community is aware that it will have to pay the biggest price, in terms of loss of credibility. Scam 2001 shows the rogue brokers were abetted by scores of unscrupulous ones. The clean up now will not be restricted to sacking broker directors from stock exchange boards, there is also a demand to end broker Depository Participants. The more difficult task however would be to clean up the system and rebuild lost credibility.