Sucheta Dalal :Paradise of insider information This mockery of a JPC can hardly do justice to investigating guilty FIIs (7 May 2001)
Sucheta Dalal

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You are here: Home » Column Topics » Scam 2001 » Paradise of insider information This mockery of a JPC can hardly do justice to investigating guilty FIIs (7 May, 2001)
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Paradise of insider information This mockery of a JPC can hardly do justice to investigating guilty FIIs (7 May, 2001)  

If foreign banks were the prime target of the Joint Parliamentary Committee’s (JPC) scrutiny in 1992, then the JPC which will investigate the Scam of 2001 has to focus on Foreign Institutional Investors (FIIs) –especially those that have already been identified by the Securities and Exchange Board of India (SEBI) as having operated on behalf of stockbroker Ketan Parekh.

The SEBI investigation report has confirmed what has been widely known to the capital market – that several Indian brokers, industrialists and wealthy individuals have been using FIIs to route their undisclosed income into the Indian market. Why should this group, which already has its money stashed away abroad, want to invest in India and not in other international markets? The answer is simple. In India, they are betting on certainties. They have inside information and can easily manipulate stock prices.

SEBI’s investigation has thus far been restricted to Ketan Parekh and a few other operators and has identified Participatory Notes (a mechanism which allows individuals, who are otherwise disallowed form investing in India or want to hide their identities from operating in the market. It also helps them avoid Indian tax laws and takeover rules without detection) and Overseas Corporate Bodies (OCB) as the preferred investment instruments.

In doing so, SEBI has opened the doors for the Income Tax department to re-open its investigation into the misuse of the Mauritius double-taxation treaty and for the JPC to figure out how much of Indian money has gone abroad through the automatic repatriation process. SEBI says that the gross purchase and sale transactions through FIIs have been as high as Rs 1,47,000 crore in the last year-and-a-half and most of these have been put through by entities connected by Ketan Parekh. Also, the FIIs identified by SEBI have operated mainly in K-10 scrips and all the profits that accrued from the steep hike in prices would be sent overseas under automatic repatriation.

SEBI has identified four sub-accounts – Coral Reef Investments Co. Ltd., CAL FP (Mauritius) Ltd., DBMG (Mauritius) Ltd. and Kallar Kahar Investments LTD, which are registered with the FIIs – RP&C International, Credit Agricole Lazard Fin. Prod., Deutsche International Trust Corp C.I. Ltd and Credit Suisse First Boston (CSFB) respectively as big buyers of Ketan stocks. Of these, the most notorious and blatant operator has been the Kallar Kahar account which has also been a substantial buyer through the preferential allotment route in companies such as Shonkh Technologies.

SEBI also identified five OCB’s incorporated in Mauritius, many of which have a paid up capital of as little as $ 10 and have been actively operating for Ketan Parekh. They include –Brentfield Holdings, Kensington Investments and Wakefield holdings, all controlled by two individuals called T.L.Chandran and Meena Chandran whose bank account introductions were made by Parekh’s firm Triumph International. Two others called European Investment Ltd. and Far East Investment which are controlled by Harish Chandra Jethalal Premjee and Surinder Singh Bhalla respectively, who each hold eight shares worth a dollar each. Two others who hold one share each and the only others shareholders. Then there are Magnus Capital Corp and Thor Investment listed with CSFB which apparently belong to Kolkata operator Ajay Kayan.

In both these cases SEBI has made the serious charge that CSFB along with the brokers was manipulating the trading system by inserting synchronised trades, so as to provide short-term finance to these operators and transferring the risk to the settlement guarantee funds of the stock exchanges.

Ironically, when Dr. Manmohan Singh’s permitted FII investment in India in 1994, he had said that entry would be restricted to “reputable” foreign investors. At that time the subjectivity implied in letting in “reputable” FIIs had caused titters of amusement in the market because it was the government’s way of defusing fears about hot money entering the market through FIIs. Over the years, FII norms have been diluted to allow easy repatriation of profits and price manipulation.

The nine odd OCB’s and half-a-dozen FII sub-accounts unearthed by SEBI are only the starting point. It must be remembered that SEBI has only done a quick preliminary investigation which focussed on just a few key players. The uncertainty caused by the setting up of the JPC and doubts over the continuance of key officials had temporarily halted further investigation. This has provided an opportunity to all other shady sub-account holders to cover their tracks and eliminate audit trails.

Another area in which the SEBI inspection report has provided plenty of fodder for detailed investigation is the Unit Trust of India (UTI). SEBI’s report restricts itself to the comment that though most institutional investors began to unwind their holding in technology stocks after the global meltdown in new-economy sectors, some mutual funds such as UTI continued to maintain sizeable holdings in Ketan’s favourite scrips.

More seriously, SEBI has charged that UTI may have helped ‘bench-mark’ the prices of Ketan scrips like HFCL, Zee, Global Telesystems and DSQ Software by the timing of its purchases. The SEBI report has backed this charge with a detailed listing of UTI’s sale and purchases in key scrips such as HFCL, Zee, Global Tele and DSQ software on a monthly basis. An analysis of SEBI’s findings shows an inexplicably large purchase of UTI in certain months, and often the contradictory sales and purchases within the space of month at vastly divergent prices seem to have little to do with fundamental factors or research. Again, as SEBI itself has said, its findings are just the tip of the proverbial iceberg. UTI is not the only fund whose investments have mirrored the KP index. Others such as SBI Mutual Fund and IL&FS Mutual fund have equally large exposures to Ketan’s favourite scrips.

Unfortunately, the biggest set back to the investigation process will probably be the strange composition of the JPC that has been set up by the BJP government and okayed by the Congress. Not only is the JPC singularly lacking in members with even a nodding acquaintance with capital market, but many of them also have serious credibility issues. The members include Samajwadi Party MP, Amar Singh who was once throwing lavish parties to celebrate Ketan Parekh’s tie up with Kerry Packer – there are at least four others who are clearly there to pursue the agenda of specific brokers or companies involved in the scam. The Vajpayee government’s disdain for the opposition and its reluctance to initiate a clean up is clear from its temerity in setting up such a mockery of a JPC.
-- Sucheta Dalal