Sucheta Dalal :Let Off with a Gentle Rap?
Sucheta Dalal

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Let Off with a Gentle Rap?  

July 15, 2009

Retail investors are always agitated at stock market scams because they lose money when stock prices crash, but how many bother to find out what happens to those who are accused of unfair trading practices? I have frequently argued that SEBI’s flawed consent mechanism is letting manipulators walk free with a paltry penalty and sometimes just a warning. SEBI’s consent orders are patchy on detail and explanation and we know from SEBI insiders that, although the same names keep surfacing in different investigations, there is no attempt to club the cases and arrive at a larger picture of organised market manipulation across a bunch of stocks. It is also a matter of constant speculation why some consent orders are extremely detailed and spell out the allegations against the applicant at length while others are so sketchy that they appear intended to keep facts out of the public domain. The consent mechanism was not meant to provide market manipulators a smooth exit for a small fee and no admission of guilt. But SEBI’s extremely sketchy orders of June 2009 have one wondering. These cases pertain to the period of the Ketan Parekh scam and its aftermath. One of these pertains to Nirmal Bang Securities, a firm that was extensively investigated during the Ketan Parekh scam. In June, SEBI cleared its consent application for unfair trade practices in Sun Infoways limited; it paid a paltry sum of Rs4 lakh and the order provides few details. We don’t even know if this is the last pending case against Nirmal Bang Securities. Similarly, Mangal Keshav Securities is among those investigated for having ‘aided and abetted’ Ketan Parekh in manipulating the shares of Zee Telefilms, Global TeleSystems and Himachal Futuristic Communications. The process of letting it off probably began in 2005 when the SEBI inquiry official had quietly recommended no penalty. SEBI’s consent order seeks a payment of Rs3.5 lakh, but provides almost no detail. Pratik Stock Vision, which makes news regularly, also got its consent order for manipulating Global TeleSystem shares during the same 2000-01 period – it was apparently accused of hammering the shares – and has now walked free by paying Rs1.25 lakh with no other detail.


Meanwhile, cases pertaining to the IPO scam of 2006 continue to be settled at great speed in order to wind up the investigation. Among these was the case of Gautam

N Jhaveri whose Ahmedabad-based firm, Rajesh N Jhaveri, has been among the biggest operators in any IPO-related manipulation for well over a decade–whether it is the creation of a grey market or making multiple applications. The firm, which was under investigation for several cases of manipulation, was allowed to escape by paying a hefty Rs2.7 crore, the bulk of which was disgorgement of unlawful gains.


Will it have a lasting deterrent effect? One will have to wait for the IPO market to revive in order to find out.


Reviving the BSE


Although an initial public offering (IPO) from the Bombay Stock Exchange (BSE) doesn’t look imminent, its investors are a lot more upbeat about the initial actions of Madhu Kannan, the new chief executive officer. For the first time ever, the BSE has a senior management team whose combined international experience surpasses that of any other bourse or even the regulator. The team comprises James E Shapiro (formerly at the NYSE), head of market development, Dr Sayee Srinivasan (from the Chicago Mercantile Exchange) and Nehal Vora (formerly at DSP Merrill Lynch) to head planning and policy. The difference is already apparent to market watchers. In the past couple of years, the BSE had little to contribute at SEBI meetings; it had even been dropped from some committees giving the National Stock Exchange an overwhelming influence on policy. Now, the BSE often has a strong presence and is being heard. Its currency derivatives exchange – the BSE SX-- went defunct soon after it was launched, but is being rejuvenated and has reportedly attracted four banks as new members.

With BSE raring to go and waiting to increase turnover and MCX working hard for permission to enter the equity markets, the stage is set for some genuine competition in the capital market. But the regulator may need to make some changes to encourage innovation to foster healthy competition while remaining strongly focused on regulation and supervision. For starters, it needs to come up with clear rules for self-listing as well as fair play rules to ensure smooth listing on rival bourses. As far as product innovation is concerned, only the NSE had been allowed to do it with the Advance Lending Borrowing Mechanism (ALBM), which came under stringent scrutiny by the Joint Parliamentary Committee following the Ketan Parekh scam. While media reports have suggested that the BSE has sought permission to launch a version of the ALBM, the fact is that SEBI does not, as a policy, offer product exclusivity to bourses. Will SEBI change its policy when we have three aggressive exchanges fighting for market share? Possibly; but we at Moneylife would much rather see the bourses working at market expansion through investor education, investor protection and better grievance redressal rather than merely increasing market share.

-Sucheta Dalal


-- Sucheta Dalal