FINALLY, SEBI ON SCAMSTER ALERT

Clones of Harshad Mehta and Ketan Parekh continue to manipulate the bourses at the cost of the gullible investor.

The Indian stock markets are on a reality check. Market regulator Securities and Exchange Board of India (SEBI) is concerned at what it calls the rise of unregistered portfolio managers pushing stocks that do not even merit a second look and which eventually collapse. This, in turn, is causing tensions among gullible investors — and at times, even foreign institutional investors — who are routinely losing money at the bourses.

SEBI chairman M. Damodaran calls it a credibility issue for the market regulator. Every day, he and his team are issuing suspension notices to brokers to check what could be another multiple-application scandal with initial public offers (ipo) ramping on the listing day. Consider the case of Ahluwalia Contractors, which issued its shares at Rs 54 and soared to Rs 611 on the day of listing. And theirs is not an isolated case. Al Champdany, Nissan Copper, Shree Ashtavinayak Cine Vision, MindTree Consulting, Pyramid Saimira — the list of companies is endless.

SEBI says it is happening because little-known trading firms are emerging as big punters. Investigations by SEBI — which has been suspending brokers by the dozen almost every day — showed small punters accounting for nearly 40 percent of the total volume in most ipos this year. “They target one particular stock in a day and push it up to attract gullible investors.

We have started tracking this abnormal volatility with all seriousness,” says Damodaran, adding, “We are looking into all instances of 50-60 percent price rise to check whether they are manipulations or speculations.”

Brokers and their manipulative tactics are one crisis. The other is unknown investment advisors. Currently, SEBI does not register and regulate investment advisors as a separate class of intermediaries. As a result, many — without any formal contract with SEBI — continue to render investment advice to specific clients.

Suspending brokerage firms is relatively easy but Damodaran realises that the regulation of all non-registered entities rendering investment will require enormous resources. India has over 22 lakh small advisors and distributors and it is not feasible for SEBI to regulate such a large number.

How does the nexus operate? Shree Ashtavinayak Cine Vision, a company with an ipo grading of 2/5, was listed on the bse and its turnover topped Rs 360 crore against mid-cap market capitalisation of Rs 227 crore. On February 5 this year, the stock witnessed intra-day volatility of Rs 64. Of the total quantity traded, about 41 lakh shares were traded by a number of firms that day. But late last month, when there was no bulk deal, the stock clocked a turnover of a mere Rs 50 lakh with a volume of 37,000 shares.

Similar is the case of Ashok Soota-promoted MindTree Consulting whose price rise was so sharp that the stock — listed at Rs 599 against an issue price of Rs 425 — touched a high of Rs 1,005 in five simple trading sessions. Why? It was traded in bulk by a number of brokers.

Not just SEBI, even the finance ministry is alarmed at the developments plaguing the Indian bourses. In fact, top officials — encouraged by Finance Minister P. Chidambaram and Damodaran — want a private sector self-financing regulatory organisation (RO) to check investment advisors.

“Typically, investment advisors deal not only in securities, but also other products such as insurance, commodities and pension products. Hence, the ro should regulate investment advice relating to all the products,” SEBI admits in a consultative paper circulated among its top brass.

Interestingly, a section of the Indian media is also a part of the SEBI worry list. “There have been concerns in India regarding misuse of investment advice, particularly in publicly accessible media... SEBI has had to take regulatory action against some investment advisors found to be misusing the media,” says the paper.

The Indian markets’ reality check now appears to be taking some shape. “But it will take some time because there is no definitive system in place, neither with SEBI nor with the finance ministry,” opines stockbroker Hemen Kapadia.

Many cite the example of Manish Marwah, till very recently associated with the soaring prices of several shares. Both SEBI and the finance ministry tracked him for more than a year but took no action. Only recently, the SEBI order on Atlanta Limited — which has changed its name and profile several times and had a rise from its offer price of Rs 150 to Rs 1,446 this January — confirmed Marwah’s hand in the stock’s meteoric rise and the nexus its promoters had with market operators.

Was Marwah fronting a banned big-time trader? No one has the answer.

“It is this nexus that SEBI wants to break since someone is unfairly maximising wealth at the cost of the lay investor,” Damodaran told Tehelka.

“The surveillance system of SEBI should have worked better. Why didn’t SEBI pick up Marwah earlier? Now that Damodaran is trying to clean the markets, the SEBI check system — hopefully — will function better than before,” quips stockbroker and analyst Alok Kejriwal.

Will it, will it not? No one in the market is sure . For the time being, the SEBI crackdown has surely put the rampant price manipulation mechanism on the backseat, at least for some time.