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written for Outlook Money December 2003 Sebi acts against Ketan Parekh Timeline 2003 -- Stock Market Regulatory and Systemic Events |
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Sebi acts against Ketan Parekh December 2003 In the end, it was just one particular stock's rise of 270 per cent in a four-month period that got Ketan Parekh. The Securities and Exchange Board of India (Sebi) chairman, G.N. Bajpai, on December 12 passed on order prohibiting Ketan Parekh, his cousin brother Kartik Parekh and seven companies that they managed from dealing in securities or associating in any manner with the securities market for a period of 14 years Lupin Laboratories, a listed company doing pharmaceutical business, had shot up by 272 per cent from Rs 160 in early September 1999 to Rs 596 in end of December 1999. During that period the Nifty index had moved up by 19 per cent and other pharmaceutical industry stocks like Glaxo, Novartis and Cipla had moved up in a range between eight per cent and 60 per cent. Strange as though as it seems Sebi's perusal of such price movements of 1999 came about only in the wake of its investigations of volatile price movement in the stock market in one month period between mid-February 2001 and mid-March 2001. A prime focus of the Sebi investigations was the dealings of Ketan Parekh and his associates and companies. Sebi took data pertaining to their dealings from the Bombay Stock Exchange and the National Stock Exchange. This data contained the order and trade logs. The Sebi order reveals many details from the analysis of this data. It brings out the fact of circular trading by—and synchronised deals between—Ketan Parekh and Kartik Parekh through the companies they managed or were associated with. This, according to the Sebi order, was done with a view to create artificial trading volumes and rig up the share prices and goes on to compellingly show this took place at least the case of their dealings in Lupin Laboratories. For instance, Classic Credit, one of the seven Parekh-controlled entities, Classic Credit, bought 25,000 shares of Lupin at Rs 411 through BSE broker C.J. Dalal just three minutes after the market opened on 14 October 1999. At exactly the same minute and second, it sold 25,000 shares of Lupin at the same price of Rs 411 through another BSE broker Parvin Shah. Obviously these two trades were counter-orders to the same trade on the stock exchange and were synchronised to be such. The price of Rs 411 of Lupin was 7.5 per cent higher than its previous day's close of Rs 382.25 almost touching the eight per cent price band that applied to Lupin stock on that day. Such cross deals meant that with limited funds and shares Ketan Parekh, through his entities, could rig up the share price. Moreover, the Sebi order brought out details of how the trading volume in Lupin during the four-month period was largely dominated by the Parekh-controlled entities. The Sebi order which can be viewed at http://www.sebi.gov.in/cmorder/ketan1.pdf?uc_sub_sec_id=22&uc_sec_id=2 also brings out other interesting details of how Ketan Parekh and his entities went about their dealings in other stocks. The ban order by Sebi on the Parekh brothers and their seven companies is made under Sebi (Prohibition of Fraudulent and Unfair Trade Practices relating to Securities Market), Regulations, 2003. It can only be welcomed by the investors as a "better late than never" action. Timeline 2003 -- Stock Market Regulatory and Systemic Events December 2003 January: Selection of two executive directors by Sebi forced to be rescinded by the finance ministry as there were complaints from outside Sebi about the integrity and past track-record of the two appointees. February 17: Sebi issues new regulations on delisting which among other changes lets investors decide the exit price through a book-building process by companies wanting to delist. Four days before, Sebi tries to abrogate its and stock exchanges' regulatory authority by creating a new statutory Central Listing Authority which will approve or disapprove listing applications of companies before they go to the stock exchanges. February 28: In the budget it is stated that dividends will not be taxed at the shareholders' hands but companies declaring dividends will have to pay dividend declaration tax of 12.5 per cent. Long term capital gains tax is also abolished for equity investments made from April 1 onwards. April 1: No fooling business for the stock exchanges anymore as they move from T+3 (trade day and three days after it) rolling settlements to T+2. You get your shares or funds when you sell or buy faster by one day. May 8: Sebi bans backdoor buy-backs by companies by asking stock exchanges to amend their listing agreements with companies such that companies can no longer resort to easy provisions of the Companies Act that allowed them to buy back shares bypassing the rigorous listing conditions. June 1: NSDL's changed rule allows DPs to send you transaction statements on your demat account once in a month only instead of the earlier once a fortnight requirement. June: Interest rate futures on government securities introduced on the NSE. June: Trading volumes in derivatives overtake that of cash market on the NSE. For the month, NSE registers a daily average derivatives traded value of Rs 3,012 crore as against daily average traded value of Rs 2,933 crore in the cash market. July 23: After weeks of complaints of heavy illegal trading by operators outside the regulated stock exchanges Sebi takes action against one broker by suspending his trading rights. September 1: The BSE starts calculating its 30-stock Sensex index on a free-float capitalisation method instead of total market capitalisation method. "Free float" definition susceptible to undesirable consequences. Selection of stocks for inclusion in Sensex continues to be on total market capitalisation and not on free float one. October 30: Amid rising concerns of Indian hot money is coming back via the FII route, Sebi releases a break-up of the categories of investors that make up for FII investments. Sebi rejects the concerns but doubts persist as the released figures show that only 49 per cent of FII investments are from foreign mutual funds and investment companies; the rest being from private companies and other miscellaneous categories. November 3: A Securities Appellate Tribunal (the statutory body to which persons or entities aggrieved by Sebi's orders can appeal to) ruling in the case of a Sebi's order against Rakesh Agrawal, managing director of Baroda-based ABS Industries for indulging in insider trading has the effect of legalising insider trading if insider trading done without intent to derive secret personal gain. November 20: Sebi notifies new regulations requiring market intermediaries, listed companies and specified investors to acquire unique identification numbers based on biometric fingerprinting. No deadline set though. December 12: At last Sebi takes action against Ketan Parekh in a 1999 case of price manipulation by banning him from the market for 14 years. Delays in derivatives policies December 2003 The finance ministry has reportedly told Sebi to reduce the minimum size of the derivatives contract (at the time of introduction) from Rs 2 lakh to Rs 1 lakh. When index futures—the first derivatives product—was introduced on NSE and BSE in June 2000 Sebi was under a fiat of a parliamentary committee on finance to restrict participation in derivatives trades by small investors by having a minimum contract size of Rs 2 lakh. So it comes as no surprise that Sebi had to await that it had to get a green signal from the central government to reduce the minimum contract size, and which it has now got. But what has come as a surprise is the reported another finance ministry directive to Sebi to introduce physical settlement of futures and options contracts on individual stocks. This is unusual because it a policy matter that Sebi can decide on without government approval Reduction in contract size. The reduction in minimum contract size that required governmental approval and which has come now is a step in the right direction though not taken fully. Reducing it from Rs 2 lakh to Rs 1 lakh will still leave out small investors having a portfolio of less than Rs 1 lakh but who want to hedge, or entering into such derivatives deals which enable them to temporarily lend the shares they already hold in their portfolio and earn a return out of it or which enable them to lend funds to earn the interest rate as prevailing in the premium commanded by futures prices over spot prices. The idea behind a restrictive contract size is that small investors should not get carried away by the atttraction of high leverage for speculative purposes. But it ignores the possibility of such gullible investors still getting lured despite a Rs 1 lakh or Rs 2 lakh contract size limitation since they have to shell out only a margin of only 15-20 per cent of the contract value. Thus, an investor having just Rs 20,000 in his pocket will be lured and will be forced to take a minimum exposure of Rs 1 lakh. If the contract size restriction is done away with completely and the market lot is made one like in the cash market then such an investor would have the choice to take an exposure of not more than Rs 20,000. At the time of going to press, Sebi was yet to act upon the finance ministry's green signal and issue a circular to the stock exchanges allowing for a reduction in the minimum derivatives contract size. Physical settlement. The futures and options contracts on stocks are currently settled by cash instead of delivery. When you buy or sell a stock futures or a stock options contract and when you settle it you ought to be receiving or delivering the shares. This is imperative because many hedging and other strategies are dependent on your being able to deliver or receive shares. Settling in cash forces you to have a corresponding position in the cash market thereby exposing you to an unavoidable gap between the settlement price of your derivatives contract and the cash market trade price. When stock options was introduced in July 2001 Sebi chose to make the stock exchanges settle the trades by cash and not delivery. But it had stated that it will shift to delivery-based settlement by December 2001. That came and went and a year later in December 2002 Sebi chairman G.N. Bajpai, during a private summit on derivatives, cited the lack of a stock lending and borrowing mechanism but promised that "we are working on these matters at a fast pace". A year later Sebi's "fast pace" has reached nowhere. Which is probably why the finance ministry has taken the unusual step of directing Sebi to introduce the delivery-based settlements. However, the ministry has left the schedule to Sebi's discretion, which means another year could pass by before Sebi actually implements the directive. December 2003 Stock market intermediaries, listed companies and some investors will soon have to offer their thumb and index finger of both their hands. No, not to the police. But towards a new database of market participants being set up by Sebi under their SEBI (Central Database of Market Participants) notified on November 20. For better monitoring and post-scam investigations, Sebi wants easily track market participants through a unique identification number that will be based on the usual identity and residence proofs but more critically will be based on biometrics which will be in the form of fingerprinting. Fingerprints are unique to each individual and uptil now in police records no two persons' fingerprints have been found to be identical. Sebi has appointed NSDL (National Securities Depository) as the service provider responsible for creating and maintaining the database and managing the systemic infrastructure for collecting the details of market participants including the biometric scanning of their two hands' thumbs and index fingers. NSDL, in turn, will get these done through entities called 'points of services' that its managing director, C.B.Bhave says "will be qualified to do the technical job". At present, these include the following entities—Alankit Assignments, CMC, Geojit Securities, Integrated Enterprises, Karvy Consultants—who have been given different zones in the country to process the applications for unique identification number allotments. Under its new regulations, Sebi has to notify which intermediaries, listed companies and investors have to mandatorily acquire their unique ids and the deadline for doing so. Sebi has stated that in the initial phase those intermediaries like brokers, stock exchanges, depositories, depository participants, merchant bankers and others who are registered with Sebi as 'intermediaries' will be required to get their unique ids. But, says Sebi chairman G.N.Bajpai, "we have not fixed a deadline yet; we want to give the market time." Mutual funds are the only class of investors also included in this list. Listed companies and investors like FIIs, corporate and individuals are not included in the initial phase. Retail investors are not envisaged to be brought in this gambit any time in the near future. So you would not be required to get your unique id. As per Sebi's regulations, when intermediaries and listed companies acquire their unique ids they also have to ensure their associates and relatives (spouses, dependant children and dependant parents) have acquired unique ids. The cost of a acquiring a unique id will be Rs 300 for—and have to be paid for by—all those who are required to acquire the unique ids. As and when Sebi issues deadlines and a database is fully ready, Sebi and the stock exchanges will use it for tracking and investigation purposes. However, according to NSE's managing director, Ravi Narain, "these unique ids will not be required to be put at the time of entering trades on the trading terminals; their utility will be at the back end where we map the trades of the brokers and their clients to their respective unique ids". That kind of empowerment of Sebi and stock exchanges will, however, kick in only when Sebi starts issuing deadlines for all market participants. |