Indian stock markets are hotbeds of manipulation. Promoters and operators are having a field day even as exchanges and the market regulator sit idle. Debashis Basu, Jason Monteiro and Aditya Govindaraj expose what is going on in BSE smaller companies, the futures & options segment of NSE and SEBI action (or inaction) regarding rampant stock manipulation

Debashis Basu with Aditya Govindraj & Jason Monteiro

The regulator is supposedly worried about it. The prime minister’s office (PMO) desperately wants to encourage it. The Budget of 2012-13 dangled a carrot to attract savers to it. And yet, nobody is biting it. “It” is retail investors’ participation in stock markets. There are many reasons why retail investors are shunning the stock market, the principal one being that the government has hobbled the economy with rampant corruption and poor policies. But there is another reason, which Moneylife has been highlighting frequently: rampant price manipulation and poor grievance redress system that inflicts losses on investors which also shatters their confidence in the fairness of the system.

Regulators may pretend that all is fine with the Indian markets but you would be astounded by the extent of price manipulation that goes on regularly under the nose of the market regulator Securities and Exchange Board of India (SEBI) and the two main stock exchanges, the National Stock Exchange (NSE) and the Bombay Stock Exchange (BSE).

In some cases, the Exchanges seem to deliberately turn a blind eye. In others, the regulator seems to be helping the process by handling repeated offences with kid gloves. The maximum instances of manipulation are in smaller stocks, the kind that fly below the radar. Most of these are listed on the BSE. This does not mean that the NSE is free from it; there a bigger game is played—in the way stocks for the futures & options (F&O) are selected and then driven up and down through false information, rumours and the like. Together, these cases make you wonder how fair the stock prices are in Indian markets.

Stock markets help companies raise capital for growth. In 1994-95, thanks to SEBI’s hands-off policy, thousands of companies could raise money easily. Many of these were shady companies, mainly listed on the BSE. There are over 7,000 stocks listed on the BSE alone, most of them small- and micro-cap companies that are unheard of and fly under the radar of individual investors as well as the analyst community. We have come up with just a few sample cases of rampant price manipulation that are ignored, shockingly, by the regulators. In each case, the share price rise (or fall) has nothing to do with the fundamentals of the company.

Prism Informatics was known as Akruti Holdings in 2010 and is supposed to be engaged in software development. At that time, the stock had been hitting the upper circuit with just one or two trades! It zoomed up 29348%, in just a matter of two years, all the way from a low of Rs0.29 on 15 September 2009 to a high of Rs85.4 on 22 September 2011, on a handful of trades. Volumes picked up only when the share price started to fall. It has fallen by 63% since. Who can make sense of this rollercoaster ride?

The fundamentals of the company are totally disconnected from its share price. For instance, after hitting the high and starting to decline, it reported increase in profits, but hardly any profits were reported during its astounding price rise. At one point during the price rise, operating profit was at a fixed Rs4 lakh in each quarter! Again using basic price-volume-analysis data from the BSE, it would be clear that the movement is downright fishy. Prism was traded only on 42% of all the trading days since 2007. Sometimes, such companies make announcements of an acquisition which have common director(s) between the acquirer and acquired, as in the case of Prism, when it announced that it will be taking over 40.29% stake in Idhasoft Ltd; Alok Udai Pathak sits on the boards of both the companies. Moreover, the company had violated shareholding pattern norms and was pulled up by SEBI. Of course, the company paid SEBI just Rs2 lakh and was allowed to go scot-free under the consent order route.

Indian Infotech and Software was known as Indian Leasers, and is supposedly in the business of ‘computer technology training’. It has been implicated for non-compliance with listing norms and was suspended by the BSE on 30 November 2007. It was also implicated for failing to submit its shareholding pattern under Clause 35 of BSE’s Listing Agreement for the quarter ended 30 June 2009. However, its suspension was revoked on 26 July 2010. This scrip soared a massive 2778% between 25 March 2011 and 12 June 2012. And, in as little as over a month, the price has fallen by 36%. Its price rise belies the fundamentals. The company has recorded losses in three of the past four quarters and almost zero revenues in two quarters; yet, its stock price soared.


Changing the company name is a common practice to fool minority shareholders and to disguise past transgressions. Out of City Travel Solutions was Tilak Finance. The company was also suspended for non-compliance with listing norms. However, the suspension was soon revoked. The share price ballooned by 2268%—from Rs2.20 in July 2010 to Rs52.10 on  January 2012. So one would get the impression that it must be generating fantastic profits. Well, it reported net sales of Rs2.3 crore (March 2011), Rs8.6 crore (June 2011), Rs3.51 crore (September 2011) and just Rs1 lakh (December 2011); its net profits were: Rs1 lakh (March 2011), zero (June 2011), Rs4 lakh (September 2011) and a loss of Rs22 lakh in the December 2011 quarter.

One of the directors of the company, Girraj Kishor Agrawal, is a director of Five X Finance & Investment. We have written a lot about Five X in the past, on our website. After the de-merger between Octant Industries and Five X Ltd, Five X Ltd still remains to be listed and its shareholders’ hard-earned money is stuck. Girraj Kishor Agrawal, who is a signatory to Five X, doesn’t have a squeaky-clean record. In fact, he has been investigated and, not directly, implicated in the past. We sought to dig up extra information on his past and came up with interesting findings. He was (still is) a director in the following companies: Socrus Bio Sciences, Concurrent (India) Infrastructure, Handful Investrade, Golden Steel Industries, Kayaguru Health Solutions, NCL Research and Financial Services, Kayaguru Wellness, Kayaguru Insurance Broker, Keystone Stockfin, Shree Nath Commercial & Finance, Axon Infotech, Out of City Travel Solutions, GSR Techno Consultancy and Banas Finance and Esaar (India) .

As you can clearly see, Out of City Travel Solutions and Handful Investrade Pvt Ltd are connected through Mr Agrawal. Tilak Finance (i.e., Out of City Travel Solutions) had been implicated and was fined just Rs7.5 lakh by SEBI, for certain non-compliance, when Handul Investrade Pvt Ltd—made an open offer to acquire Tilak Finance Ltd. The company then changed its name to Out of City Travel Solutions but has nothing to do with travel. If you check its website, you will be surprised to find that it isn’t into ‘finance’ either. It is actually into ‘power project business’. GK Agrawal was charged by SEBI for insider trading in the case of Socrus Bio Sciences and was let off with a fine of just Rs1 lakh.

In some cases, we found that such companies operated from the same postal address or building. Take the case of Shree Nath Commercial & Finance, supposedly engaged in the commercial finance business. What do Shree Nath Commercial & Finance, Indian Infotech & Software and Five X Limited have in common? Well, all of them are located in the same building—Crystal Plaza, in Andheri (Mumbai). We had written about Shree Nath Commercial & Finance in November 2010, when we found the price movement fishy. At the time of writing that piece, the price had soared 1,698%. We had mentioned that the poor and erratic financial performance clearly had nothing to do with the humungous rise in its stock price. But there was no stopping it there. From 7 October 2009 to 25 January 2011, the price had soared by 4544% in just over a year, from a low of 90paise to a high of Rs41.80. As in the cases of all such stocks with pumped up prices, the uptrend does not last long. The price crashed to Rs25 and eroded nearly half of the shareholder value.


It is not unusual to see companies operate through interrelated companies. Unfortunately, our regulators do not make an effort to check such possibilities. Take, for instance, Splash Media & Infra, erstwhile known as ‘Indus Commercials’, which is now engaged in media advertising, realty and construction. We found some interesting facts about this company with regard to its shareholding and a series of interrelated companies. A company called Bhrosemand Commodities (mark the name!), holding a promoter stake in Splash Media and Infra, had made bulk deals in Odyssey Corporation. Now there is another company—Alacrity Securities Ltd—which holds promoter stake in Odyssey and a certain Jaiprakash Jaswantrai Jindal was a common director. Alacrity holds a 2% stake in Splash Media and Infra. Also, Splash and Bhrosemand have common directors. The financial performance of Splash has no correlation with the rise in its stock price which was rigged up with impunity. The price zoomed from a low of Rs2.48 (on 24 July 2009), by a whopping 5265%, to a high of Rs133.05 (on 5 November 2010) before crashing to around Rs35 in just three months. It finally ended up at Rs25.35.{break}
Incorporated in 1995, Odyssey is engaged in providing services in areas like solar energy, property and financial management, fit-outs, interior design, project management and international property sales. Its fundamentals are terrible. For unfathomable reasons, the stock has soared 1826% between 31 January 2007 and 19 July 2011, from Rs7.70 to Rs148.30. Soon after, the price crashed to 3/4th the high price. Splash has been pulled up in the past for failure to submit the corporate governance
report and Odyssey was accused of manipulating share prices of a company called Mega Corp Ltd but was let off by SEBI without a fine as the latter did not have concrete evidence, which speaks volumes for the regulator’s incompetence in punishing wrongdoers.

Two more companies with the same director and erratic price movements are Monotype India and Diamant Infrastructure. A director by the name Naresh Manakchand Jain sits on the boards of both the companies. This is a very common arrangement. Interestingly, Monotype did not report any sales; that’s right— ZERO—and reported a string of losses in the past few quarters. Monotype India Limited, supposedly into printing machines and allied equipment, was suspended from trading on the BSE in 2007 for non-compliance with listing agreement. However, it got its suspension revoked in April 2010. According to the document submitted to the BSE by the company, its printing operations have been suspended. After revocation, the company had violated SEBI’s SAST regulations and got away with an adjudication order of Rs1,50,000 passed in July 2011. Despite such a host of violations and irregularities, the company merrily continues to be listed. Obviously, a lot of people are interested in the stock being listed because one can manipulate such stocks at will. Monotype India’s share price ballooned from a low of Rs5.05 to a high of Rs211.9, a gigantic 4096% move, over just one year— from March 2011 to June 2012. This is a company with no revenues whatsoever; which has been suspended in the past and, yet, whose stock is freely manipulated.


 Diamant Infrastructure, which has the same director as Monotype, has undergone several name changes. For instance, it changed its name from Diamant Carbon & Graphite Products Ltd to Diamant Investment and Finance Limited and is presently, Diamant Infrastructure, presumably because infrastructure is the next ‘big thing’. The company has been pulled up for not submitting the shareholding pattern. Diamant has exhibited a pattern similar to that of Monotype India. It shot up 4204%, from Rs1.53 to Rs65.85 over four years (from June 2007 to January 2011), before crashing 94% in just one year.

Sometimes, the most obvious signals will come when you look at the qualitative aspects of a company. Santowin Corporation and SVC Resources are two such examples. Santowin Corporation had been hauled up by the BSE in the past for non-compliance with listing agreement. The company got its trading suspension revoked by a lenient BSE in October 2010. Since re-listing, it has split its shares not once but twice within six months. After this strange action, in just a year, the price shot up by 2549% from October 2010 to October 2011. And in the following eight months the price fell as much as 85%. This isn’t surprising. This is what happens when the BSE and SEBI are not interested in controlling market manipulation. SVC Resources followed a similar price movement when it went up from just Rs2.13 to Rs120.36, a gargantuan 5551% price rise within four years prior to falling off the cliff soon thereafter, resembling the typical pattern of ‘pump & dump’ before resuming business as usual.  

If you think SEBI is out to protect you against habitual offenders and the stock exchanges are there to monitor listed companies, perish the thought. Anil Kulbhushan Barar and Atul Nripraj Barar were both directors of Barar Industries. Barar Industries had been pulled up for default of dues and, finally, had to be wound up. They are directors of Innovative Tech Pack which has been pulled up for not submitting the shareholding pattern and corporate governance report. It has also been suspended from trading for not complying with the listing agreement. Between August 2010 and March 2012, it rocketed 4487% on very erratic sales. Its profits resembled a seismograph, going up and down, in an unpredictable fashion; yet, the stock price charted a dizzy rise. The stock plunged by nearly 75% within just four months.

While defining the role of stock markets, economists and finance experts emphasise only this function—that it provides capital for companies. But markets have to function for companies as well as investors, including retail investors. It is for this very reason that regulators are set up; and SEBI got its statutory teeth for the same reason. The regulator’s job is to ensure a level playing field for companies and investors alike and provide a safe environment for investors. Unfortunately, often, this isn’t the case. In all these examples, the market regulator and the stock exchanges could have acted on their own because they have a whole department that is supposed to monitor suspicious price movements. But, they have not bothered.{break}
Derived Benefits

In late July 2012, some stocks in the futures & options (F&O) segment were thrown into turmoil as market regulator Securities and Exchange Board of India (SEBI) stepped in to change the criteria for choosing stocks that would be eligible for the F&O segment. In one stroke, 51 stocks were thrown out of the F&O list. Why was this drastic change needed? Two days later, a host of mid-cap stocks crashed by as much as 30%-40%. Since no catastrophic event had happened to any of these companies, what was it that made these stocks crash overnight? One word: manipulation.

For more than five years the F&O segment of stocks, in which NSE has 100% share, has been a fertile ground for manipulators. Promoters of shady companies, in league with market operators, have been having a great time rigging prices up and down, often aided by rumours and even wrong information submitted to the exchanges. This was known to the entire market. What were NSE and SEBI doing about it? Nothing, until SEBI’s July action.

The derivatives market has a short history during which SEBI has left it alone, allowing the NSE to add illiquid stocks and stocks of shady companies to the F&O list. This served the common interest of all the players—NSE, company promoters, stockbrokers and manipulators, according to market reports. What was the common interest? More volumes.

The genesis of this goes back to early 2000 when the NSE desperately needed speculative volumes to beat the Bombay Stock Exchange (BSE) at its own game. The BSE had badla which was widely popular. In June 2000, the NSE introduced index futures which, apart from Advanced Lending & Borrowing Mechanism (ALBM), was NSE’s answer to badla. Adoption of index futures was slow. In June 2001, index options were introduced, all forward systems (badla and ALBM) were scrapped and, after July 2001, single stock F&O arrived in some 30 stocks. Many advanced stock markets have avoided single stock futures. Indeed, late Dr RH Patil, founder MD of the NSE, a true visionary, opposed the introduction of stock futures but was ignored. Dr Patil continued to be on the NSE board silently watching the metamorphosis of NSE from an institution of social infrastructure to an aggressive for-profit entity, until he passed away earlier this year.

SEBI set two key norms for including stocks in the F&O list. These were: median quarter sigma order size (QSOS) and market wide position limit (MWPL). QSOS is defined as the order value that can change in the stock price at least by one-quarter of a standard deviation. This size was set at Rs5 lakh. The smaller the size, the easier it is for one to manipulate a stock. The MWPL was driven by a formula but was effectively set at Rs50 crore. Stocks also had to be among the top 500 in market-cap. This was too lenient, since there are too many among the top 500 companies that are run by dubious promoters.

By 2004, there were volumes in index futures but not in stock futures and certainly not in options because of NSE’s foolish rule of allowing brokers to charge commissions on the strike price too instead of only on the option premium. This meant that options brokerage was simply too exorbitant for anybody to make money by trading options. This writer pointed out this practice which had resulted in the options market being stillborn, to the NSE MD in 2002-03, but nothing changed for the next three-four years. Volumes in index futures picked up slowly.

In July 2004, the NSE lobbied to dilute the norms for stocks to be included in the F&O list. We were also a year into a long bull market, although the market had just got a rude shock in the surprise defeat of the BJP-led alliance. In a dramatic dilution of standards, QSOS was lowered to Rs1 lakh from Rs5 lakh. Strangely, this was done when the market was already up 60%-70% since the rules were formulated in 2001. What was needed was an increase in QSOS to Rs10 lakh, not lowering it to Rs1 lakh! Despite the fact that many stocks were up more than 100%, MWPL too was not revised until 2006. In 2007, thanks to the low threshold that continued even as the market leapt upwards, the NSE added 73 stocks to the list, after having added some 35 stocks in each of the two previous years. BSE’s F&O volumes were non-existent. By this time, India was the darling of the world, Indian promoters were raising money and buying companies easily and a rising market-cap and entry into the NSE’s F&O list had become symbols of success.

A number of companies run by dubious promoters, hand-in-glove with market manipulators, found their way into the F&O list in the bull market. What was the regulator doing? SEBI, under successive chairmen, made no attempt to listen to those who could provide unbiased feedback. The NSE and the BSE were part of the game. Apart from poor norms, what aided this expanded F&O list was the change in the ownership pattern and business focus of NSE and BSE. Both Exchanges had become for-profit entities in which private equity investors had a stake. They were keen to increase volumes at any cost. They had no incentive to cut down or clean up the F&O list. Indeed, by then, they had an incentive not to clean up the list.

How illiquid was the stock F&O market? Take a look at the table. More than half the companies did not trade more than 50 option contracts on a given day (24th July) and more than half the companies did not trade more than 1,000 futures contracts a day. The big balloon of volumes was built up by options and that too index options, a balloon which BSE is making even bigger by adding its own (dubious) volumes of the Sensex options. If you add shady companies to such a market, what do you get?

The quality of scrips in the F&O list was exposed in the crash of 2008, when many mid-size companies’ propped up manipulated futures positions, found no takers. As prices crashed, financiers liquidated the futures positions, pushing the stocks down further. Promoters’ dreams, stock manipulation and the quality of SEBI’s surveillance and NSE’s F&O list, all stood exposed. Action? None. SEBI, NSE and BSE continued with their ‘see no evil, hear no evil and speak no evil’ stance. Only 16 stocks were removed from the list. The F&O threshold in the bull market was that low and flawed. SEBI has a secondary market advisory committee, members of which (chosen by the whims and fancy of the chairman) sat through the 2003-08 period, ignorant of what was going on. In December 2008, SEBI’s committee on derivatives stirred itself to suggest that QSOS be raised to Rs5 lakh from Rs1 lakh. Remember, by January 2008, Nifty had gone up seven times from its low in 2003 April and so QSOS should have been Rs35 lakh. MWPL was raised to Rs100 crore from Rs 50 crore, a level decided in 2002! But, by all accounts, the NSE lobbied to stall even this. Under CB Bhave, whom the mainstream media has hailed as the messiah of the small investor, SEBI hiked the median quarter sigma order size to Rs5 lakh and MWPL to Rs100 crore, but only for new scrips added to the F&O list. For existing ones, QSOS was inched up to Rs2 lakh. This led to some 65 stocks being dropped. But, thanks to the low threshold, more and more scrips were added in the next two years. How were the stocks being manipulated? Many promoters pledged their shares with financiers and used the money to play the F&O market with the help of market manipulators.

Under SEBI’s changed F&O criteria, QSOS would now be Rs10 lakh and MWPL would be Rs300 crore for new stocks and Rs200 crore for existing stocks in the list. This will weed out a lot of dubious stocks. But is it enough? 

The Fundamental Issues

What could SEBI do about the two fundamental issues here? One, the bourses are for-profit entities where top managers are paid globally competitive salaries. They have a natural incentive to increase revenues through traded volumes. SEBI’s regulatory action on F&O skirts this fundamental problem within the system. If SEBI has to be effective, it has to take away all regulatory responsibility from the Exchanges and treat them like market intermediaries. Second, the bigger problem is public apathy about stocks which got hidden in the frothy volumes racked up by the derivatives segment. Notice from the table that illiquidity in stock options and futures is not correlated to the quality of companies (often, a poor quality company in which an operator has a deep interest would be highly liquid). Indeed, one of the most illiquid companies in F&O is also one of the best-run multinationals in India – Bosch. It only reflects deep apathy of retail investors towards the stock market—a state of affairs for which the regulators are primarily responsible.