Sucheta Dalal :SEBI’s indulgent ‘warning’
Sucheta Dalal

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SEBI’s indulgent ‘warning’  

March 7, 2011

SEBI has been quietly letting off a few hundred chosen price manipulators and offenders with a simple ‘administrative warning’ that depends on the whims of investigation officials. Such capriciousness can only breed corruption and brew a scandal that is bound to hit the finance ministry some day

Sucheta Dalal

In the past few weeks, many media reports have lauded the Securities and Exchange Board of India’s (SEBI) allegedly tough action against a few big corporate names. Moneylife has not been a part of this ridiculous chorus—for good reasons. We have found that SEBI has been routinely letting off a few hundred chosen price manipulators and offenders with simple ‘administrative warnings’, even if their actions—price manipulation, bear hammering, circular, synchronised or structured trades—have led to steep payments under the ‘Consent Scheme’ (without admitting or denying charges) or stiff penalties, including cancellation of registration of intermediaries, in scores of other cases.

What are these administrative orders? And who is entitled to this special treatment? These administrative warnings, unlike other regulatory actions, are not reported on SEBI’s website and do not have to be mentioned in offer documents and other applications.

Moneylife has access to a stack of sample ‘administrative warning’ letters which show that some offenders have been repeatedly let off. All SEBI letters merely say that the transactions ‘give an impression’ that ‘they are not genuine’ and asks the entities to improve systems and ‘be careful in future’.

Some orders are detailed, others seem deliberately sketchy. We asked CB Bhave, when he was still SEBI chairman, for the process of deciding which violations qualify for ‘administrative warnings’ and which ones are sent for consent or adjudication proceedings. The query was also directed to several board members and executive directors in charge of secondary markets and investigation. Despite a reminder, there was no response. The orders were all issued in the past three years under Mr Bhave’s rule. Consider these.

• On 15 June 2010, four brokers indulging in synchronised trades and creating artificial volumes in Godawari Power & Ispat Ltd were let off. The four—OPG Securities Pvt Ltd, Inventure Growth & Securities, Prashant Jayantilal Patel and HJ Securities manipulated the shares in August 2008 for a set of common clients (Deepak Desai, Dhiren Panjwani and Rhidhi Panjwani). Inventure has been let off at least thrice and there is no explanation for the leniency.

• On 15 June 2010, SEBI also let off three other firms for creating ‘artificial demand’ in the shares of Nandan Exim in 2006. These were Religare Securities for clients Tejas and Devan Patel who created a fake impression of liquidity in the scrip by placing large ‘buy’ orders below market price and updating them frequently. Inventure was also part of this racket and the third was Anand Rathi Securities, which manipulated the scrip through one Manoj Kalantri on the listing day. The SEBI order explains the modus operandi. The firm placed two buy orders for 1.10 crore shares at just Rs0.05 while the ruling price was above Rs50. This ensured the price was not hit but showed a huge, artificial demand for the scrip. Why did it not merit sterner action? Inventure was let off again, it was issued a third warning for manipulating shares of TCI Industries (order on 18 September 2008) with no explanation for this repeated sympathy.

• On 19 September 2008, repeat offenders were let off for ramping up the price of Saarc Net Ltd in 2004-05. They were: Action Financial Services, Sunidhi Consultancy Services, Adolf Pinto and Pilot Credit Capital. Sunidhi Consultancy again got away with ‘structured’ deals in Moncon Investments through a 25 July 2008 order.

• On 15 May 2008, SEBI let off Harikishan Hiralal and Parklight Investments for artificially hammering down the price of Fourth Generation Information Systems. On the same day, it let off P Suryakant Share & Stock Brokers for ramping up the price of Genus Commutrade. These warnings do not even mention the date of the dubious deals.

• On 24 July 2008, three brokers, who manipulated (India) limited in 2004-05, were let off. They were: BR Mehta & Sons, Babubhai Purshottamdas and Apex Stock Brokers. Again, they helped create artificial volumes in the scrip through common clients Chetan Shah and Piyush Desai. SEBI’s order says that, at times, the fake volumes accounted for 25% of trading in the scrip; but it still didn’t merit even a consent proceeding.

• On 4 April 2008, SEBI let off Pragya Securities with a warning for massive manipulation in Dhanalaxmi Roto Spinners’s shares, although its client’s (Harmohan Singh Sabharwal) transactions accounted for 50% of the scrip’s volumes in 2006.

• On 27 January 2009, Arihant Capital Markets of Indore, Sam Global Securities and Integrated Master Securities were let off through three separate warning orders, despite working together in price rigging, creating artificial volumes and synchronised trading in the shares of Pondy Oxides & Chemicals. An almost identical warning letter, mentions Ankita Securities, ISF Securities and Cosmo Corporate Services as clients for all three brokerage firms. Their trades accounted for 22% of volumes in the scrip in 2004-05. This massive operation, conducted nationally, also didn’t merit sterner enforcement action.

• On 30 June 2009, PK Agarwal & Co, Toshit Securities and Pramod Kothari of the Calcutta Stock Exchange were let off with a warning for ‘cross trades and synchronized trading’ in the shares of GK Consultants Ltd; the order does not say when the mischief occurred.

• On 1 April 2010, SP Jain Securities was let off for ‘synchronized and structured trades’ in Gulshan Polyols through one Hemant Sheth. Hemant Sheth, and an entity called Shree Radhe, worked through two other brokerage firms (Arcadia Shares & Stock Brokers as well as Dani Shares & Stocks) to ramp up the price in 2006 and create artificial volumes. All three got only a warning.

• On 3 June 2008, three firms—ISJ Securities, Mahesh Kothari and Sovereign Securities, caught indulging in circular, synchronised and structured trades for clients in shares of Sun Infoways in 2001 were let off.

• On 30 May 2008, SEBI let off Nitin Goradia and the firm Shripal Jain Share & Stock Broker for ‘structured’ and ‘circular’ deals in the BSEL Infrastructure Realty scrip executed by their clients. There is no mention of when the dubious transactions occurred.

• On 12 May 2008, Ashika Stock Broking of Kolkata and Fortis Securities of Mumbai (now Religare Securities) were warned for synchronised and structured trades in HFCL Infotel (2004-05) for clients.

• On 22 May 2008, Religare Securities, UTI Securities and India Bulls Securities got warned for synchronised trading in Today’s Writing Products. All three seem to have a common set of clients doing the manipulation. Religare Securities got a second warning in 10 days but no escalation in enforcement action. Why?

• On 5 March 2008, Pioneer Intermediaries was warned for pushing Crane Software shares as a good buy while it was accumulating it in a proprietary account for over 10 months (in 2002-2003). Bakliwal Financial Services and BMA Stock Broking (25 June 2009) were let off for manipulation of Vipul Ltd; Balaji Equities (5 August 2009) and Pawan Kumar Choudhary (let off a second time) for manipulating T-Spiritual World (2004); Adolf Pinto and Galaxy Broking (Ahmedabad) were let off on 23 June 2009 for synchronised trades in Shalimar Production. Galaxy Broking was let off again in September 2009 for synchronised trades in Era Construction (during 2004) so was Sanchay Fincom of Indore.

These orders suggest that SEBI’s investigation, adjudication and enforcement action depends on the whims of investigation officials. SEBI does not feel that it owes the public an explanation for who is punished and who is let off. Such capriciousness can only breed corruption and brew a scandal that is bound to hit the finance ministry some day.

Sucheta Dalal is the managing editor of Moneylife. Subscribers get free help in resolving their problems with select providers of financial services. She can be reached at suchetadalal


-- Sucheta Dalal