Sucheta Dalal :Who Checks Implementation?
Sucheta Dalal

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Who Checks Implementation?  

July 1, 2009

The capital market regulator earned kudos for its meticulous investigation of the Pyramid Saimira case, which exposed how company management, brokers and even journalists collude to manipulate stock prices. The aftermath of the Pyramid Saimira order, issued on 23rd April, and the on-going investigation is turning out to be equally eye-opening and has raised some serious systemic issues.


For instance, on 2nd June, SEBI issued another order against Anugrah Stock Broking for permitting Banty Dinesh Shah of Balaji Corporation – both entities banned in the Pyramid Saimira case – to continue trading and offloading their portfolio. This is separate from the order issued by the regulator to permit Anugrah’s clients to close out derivative positions. SEBI has discovered that Anugrah did not even have proper risk management systems to block the two entities from trading. The regulator has now appointed an official to investigate the brokers’ risk management system. But the issue may be far bigger.


SEBI routinely issues orders barring scores of entities from trading in the market. It has done so for almost a decade. This is the first time that it has actually caught a broker brazenly flouting the ban order. Does this mean that Anugrah alone had lax systems or was bold enough to flout SEBI’s ban orders? Obviously not. Anugrah was the only one caught. Sources at the regulator confirm this. In fact, the regulator has no process of ensuring that its ban orders are properly implemented by stock exchanges -- the first line of regulation. This means that, over the years, hundreds of entities accused of market manipulation or worse would have already used these systemic deficiencies to evade regulatory action or financial losses. SEBI has now written to stock exchanges to find out how they are ensuring that brokers comply with the regulator’s orders.


The regulator has also discovered that know your customer (KYC) verification is not foolproof. It has found that some 80-odd cases  have simply not provided Permanent Account Numbers (PANs) and nobody barred them or ensured compliance. In fact, in one instance, the address of a table space rented by an entity was accepted as address proof, along with an electricity bill which had an entirely different address. In this case, it found that the entity seemed to have a nexus with a particular manager at a reputed private bank and the account moved with him, every time he was transferred to another branch. This has been brought to the attention of the Reserve Bank of India.


Similarly, SEBI’s own investigations are conducted in narrow silos headed by specific investigation officers with no attempt to link or explore the activities of these entities across other investigations. For instance, sources say certain dubious groups, repeatedly figure across multiple investigations, but SEBI has no system of picking out these entities and clubbing them together to verify if a common modus operandi was used to manipulate dozens of shares. Is it any wonder then that SEBI’s investigation seems slow and ponderous while agile scamsters invent new ways to manipulate stocks and amass ill-gotten wealth?


-Sucheta Dalal

-- Sucheta Dalal