Sucheta Dalal :How CSFB funded Ketan and Kayan (29 April 2001)
Sucheta Dalal

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How CSFB funded Ketan and Kayan (29 April 2001)  

Sebi’s report shows how CSFB funded Ketan and disguised the interest costs as brokerage — CSFB’s K R Bharat, by the way, is one of seven Citibankers asked to leave during the 1992 scam


WHEN SEBI suspended the brokerage operations of Credit Suisse First Boston (I) Securities Pvt. Ltd. (CSFB), it created waves around the international capital market. It is not that CSFB has not come in for stringent regulatory action elsewhere in the world; it was only that in India, FIIs and foreign brokerage firms have claimed to set higher ethical standards than their Indian counterparts. Yet, it has been an open secret that a lot of domestic money has is routed back to the Indian bourses through instruments such as subscription to Participatory Notes (PNs), setting up Overseas Corporate Bodies and opening FII sub-accounts. This paper had written about this trend in January .

The SEBI inspection report into the stock market crisis of 2001 has confirmed that CSFB was granting short-term finance to Ketan Parekh and recovering interest from him in the form of differential brokerage charges. CSFB has been found operating for Ketan Parekh through FIIs sub-accounts, OCBs, as well as domestic corporate bodies. The last category included his firms — Classic Credit, Panther Fincap and Luminant Investments and its prominent FII sub-account Kallar Kahar Investment.

SEBI found several instances where CSFB was willing to credit payment for sales on the payment date itself without waiting for the official stock exchange payout. In an Adani Exports case, a Rs 25 crore payment was made on the date of sale even though the share were credited the next day. This led to another interesting detail. All these deals were charged differential brokerage rates. It is only when SEBI correlated the brokerage paid with the time period between payment to the client and the receipt of funds from the pay-out, that it became evident that this included a financing charge. SEBI has provided several examples where Ketan Parekh obtained funds in this fashion.

These dubious sell-orders were then matched with the buy orders on the BSE. It found brokers operating for Ketan (Triumph International, Milan Mahendra, Hem Securities, Omega Equity, C.J.Dalal, Indsec Securities, Visaria Securities and Vyomit shares) had placed the buy orders so that they were exactly identical through deals which were synchronised to a few seconds.

Brokers call this the ‘1,2,3 system’ of manipulating the automated order matched system. Buy or sell orders for such collusive transactions are first keyed into respective computers, after which the dealers get on to the telephone and hit the buy/sell button on the count of three. SEBI unearthed such transactions in Adani Exports and Shonkh Technologies at the BSE and in case of Global Trust Bank and Zee Telefilms o the NSE— the cumulative value of such funding deals aggregated to Rs 1,813 crores in the January-March 2001 period alone. While payment was released through CSFB’s own funds, delivery of shares and repayment was ensured through the settlement mechanism of stock exchanges.

According to SEBI, CSFB claimed that these were normal transactions and that the brokerage firm had insured its risk by demanding immediate delivery of stock. However, it could not explain how the differential brokerage rates seemed to tally with funding charges on obviously synchronised deals. CSFB further makes the astonishing claim to SEBI that since Ketan Parekh’s trades were large, it asked him to find the buyer as well.

CSFB was found to have done similar deals with Calcutta broker Ajay Kayan too. Kayan is a broker who was investigated and accused in the Securities scam of 1992 and had close links with Citibank at that time. SEBI says the funds from CSFB could have been used for ‘manipulative stock market activities’. CSFB also conducted large proprietary trading on its own account and for Kallar Kahar, a Mauritius incorporated company owned by it and registered as a sub-account. Kallar had a $2 share capital at the time of registration, which was later increased to $ 100. The big chunk of its capital is in $ 267 million participating redeemable preference shares, as on April 12, 2001.

SEBI has found one specific transaction of CSFB selling 24 lakh shares of Global Trust Bank on behalf of its OCB client Brentfield Holding (a Ketan front company) on November 7, the shares for which were delivered through the beneficiary account of Kallar. Though Kallar has categorically denied lending of securities in India, SEBI has found that the stock lent to Brentfield was clearly a bail-out transaction intended to help Parekh honour his settlement obligations.

SEBI’s findings do not rule out front-running by CSFB on their own account and in the Kallar Kahar account. Another group with strong linkages to Ketan was the Consortium group, comprising CSL Stock broking, CSL Securities and Consortium Securities.

These had broking memberships at the BSE, DSE, and the NSE respectively. This group not only traded with Shankar Sharma of First Global and Ketan, but it also seems to have close ties with Palombe Securities a firm set up by a former associate of the late operator Manu Manek. These two entities also seem to have a close nexus with Nirmal Bang and his many group companies.

-- Sucheta Dalal