Sucheta Dalal :See No Evil
Sucheta Dalal

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See No Evil  

March 10, 2010

It is 10 years since the Ketan Parekh scam and the meandering joint parliamentary committee (JPC) report first examined and frowned upon synchronised trades. More recently, MS Sahoo, whole-time member of the Securities and Exchange Board of India (SEBI), passed an order saying, “I hold Mr Shankar Sharma guilty for synchronising the trades in violation of regulation.” Yet, believe it or not, it remains a rampant market practice. So much so that it is worrying lawyers of international firms.

The International Finance Law Review (IFLR) has put out a piece by Tom Young on 1 March 2010, titled “Shh! Don’t Talk about Synchronised Trading” which says, “Synchronised trading has reached such levels in India that bankers’ counsels are worried about market misconduct cases being brought by the country’s regulator.” But, then, this is India. It is a country where an entire market of smuggled goods can function for decades, in air-conditioned premises in the heart of a metropolis like Mumbai. And revenue and investigation agencies like the CBI, Customs, Excise and DRI can pretend that these are regular shopping malls—even as they harass and hound ordinary people at airports and legitimate, tax-paying businessmen.

It is the same with the capital market. Ironically, in 2004, the Securities Appellate Tribunal (SAT) decided that “synchronised trading itself is not illegal.” It will be considered illegal if it violates regulation and is “executed with a view to manipulate the market” or “results in circular trading or is dubious in nature and is executed with a view to avoid regulatory detection or does not involve change of beneficial ownership or is executed to create false volumes resulting in upsetting the market equilibrium.”

According to the IFLR, banks and their lawyers are worried because they execute huge bulk deals at a discount to the market, which clearly ought to be held as manipulative. But why should a legitimate transaction need to be conducted in a suspicious manner, where a buyer and seller need to key in a price and call ‘one, two, three, buy’ on a phone line, to synchronise the time at which they hit the enter button to execute the trade? If the regulator and the appellate body don't find it strange that ‘legitimate’ trades have to be executed in this dubious manner, then there is something drastically wrong with capital market regulation in India. Interestingly, the IFLR reports that “SEBI did not respond to repeated requests for information” on the correct legal position. That doesn’t surprise us either. The regulator can cry ‘Scam’ whenever it pleases.

-- Sucheta Dalal