FIIs’ pre-results stock buying spree under SEBI scanner

The average quantum of stock-purchase activities in the days before companies announce their quarterly results has been much more than the daily average for other parts of a quarter, leading to a case for suspicion by the market regulator. SEBI has initiated a probe whether this upsurge in FII buying activities was due to any insider information about the corporate results

New Delhi: Suspecting a possible foul play by some foreign investors in the stock market, the Securities and Exchange Board of India (SEBI) is probing into a strange upsurge in their buying activities days before the companies announce their quarterly results, reports PTI.

Companies generally begin announcing their financial results after about a week of the end of every quarter and it is common for investors to base their investment decisions on these figures.

However, in a strange pattern noticed for the past few quarters, foreign institutional investors (FIIs) are embarking on an above-normal stock buying spree during days before the start of the corporate earnings season.

This buying spree generally begins about 10 days before the earnings season and stops 2-3 days before the results start coming out.

The average quantum of stock-purchase activities in these days has been much more than the daily average for other parts of a quarter, leading to a case for suspicion by market regulator SEBI, sources said.

While the investigation is in initial stage, it is being probed that whether this upsurge in FII buying activities was due to any insider information about the corporate results, they added.

There have been only 4-5 days during such periods in past one-and-a-half year when FIIs have been net sellers of stocks.

This strange trend has been noticed for past few quarters, when corporate results have not been very good due to factors like soaring inflation, economic slowdown and rising interest costs.

In this backdrop, SEBI is investigating whether FIIs are getting any prior information about the companies not being able to post a strong set of results. It is being probed that whether the shares are being purchased with an intention to sell in a pre-earnings rally, which generally builds up a day or two before the quarterly results.

A senior official said that the daily average for net purchase by FIIs so far in 2011 stands below Rs100 crore, but they have been purchasing shares worth an average of more than Rs1,000 crore during the 5-10 days before the beginning of quarterly results.

A similar pattern was noticed also for the figures for 2010, when the average daily FII inflow into stocks stood at about Rs500 crore but the last 5-10 days before the earnings season was an average net inflow of close to Rs1,000 crore.

Besides, the daily stock purchase by FIIs during these days has also been generally higher than the average figures for the respective months since 2010, with only exception being the days before the earnings season for the July-September 2010 quarter, sources said.

In many cases, the FIIs have turned net sellers soon after the beginning of the earnings season, after purchasing heavily during the days before the result announcements.

A recent brokerage report from Kotak Institutional Equities also said that it has noticed "a peculiar phenomenon of large FII inflows into the Indian market in the last 5-6 trading sessions of quarter-ending months."

It said that these flows were always positive and disproportionately large compared to the rest of the month, and were also significantly higher than those during similar periods in other months.

"We do not have an answer to this phenomenon but would be curious to understand the reasons for the disproportionate flows," the report said.

Kotak said that "over the past six quarters, the Indian market has seen average inflows of $1.1 billion in the last five trading sessions of the quarter-ending months (June, September, December and March)."

"This compares with about $400 million of average monthly inflows over the past 18 months and only $58 million of net inflows excluding the quarter-ending months," the report said.

"It would be too much to expect that our observation is just mere coincidence. However, we do not have an explanation for this currently," it added, while ruling out factors like low valuation for this strange trend.


Will PHFI be any different under Narayana Murthy?

After Rajat Gupta’s exit, the Public Health Foundation of India has a new chairman. This ‘public-private partnership,’ however, has been a sneaky and unaccountable organisation that has a lot to answer. This, the first part of a four-part series, discusses questions on the formation, functioning and accountability of PHFI

On 11th July, NR Narayana Murthy of Infosys, an ardent advocate of transparency, accountability and ethics, agreed to become the new chairman of the Public Health Foundation of India (PHFI), a 'public-private partnership' (PPP) that does not submit itself to the RTI Act 2005 and the audit by the Comptroller and Auditor General of India in spite of having received hundreds of crores of rupees from the central and state governments.

If you have never heard of PHFI, that is how it is meant to be.
PHFI has no public character even though it has been silently influencing public health policy, such as advising the Centre on how the National Rural Health Mission (NRHM) should be run and how the proposed 'universal health coverage' should be funded. PHFI also runs four public health schools-Indian Institutes of Public Health (IIPHs)-in Hyderabad, Delhi, Gandhinagar, and Bhubaneswar.

Privileged and unregulated

Each of the IIPHs was built through the 'PPP model', which required the state government to provide land (at least 40 acres) free of charge and incur 20%-50% of the 'project cost' of about Rs140 crore per institute, excluding the cost of land.

The IIPHs run on public money. They primarily admit "in-service candidates nominated by the government" for flagship one-year, post-graduate diploma courses and charge the government a cool Rs2.5 lakh per candidate.

That there is no merit-based system for admitting students or hiring teachers and IIPH courses are not approved by the Medical Council of India, or AICTE, or any other statutory regulator, are mere matters of small print.

They would probably constitute a big educational scam in the case of an organisation not as privileged as the one that Narayana Murthy now heads.
The PPP autarchy

Since being "launched" by prime minister Manmohan Singh on 28 March 2006, PHFI has received over Rs100 crore in financial support from the central government. Taxpayers are not supposed to know how this "autonomously governed PPP" has spent their money. In over five years of its existence PHFI has never published a report on its finances and functioning.

But then the PPP agreement, presumably signed between the public and private partners, and PHFI's memorandum of association and registration details have never been made public. The citizens are not supposed to know whether the selection of the private partners was made in compliance with the PPP guidelines, such as competitive bidding-not to mention whether granting of subsequent privileges to PHFI was in line with the rules.

They must also accept PHFI's sweeping "charter" (posted on its website: which seeks to develop a "vigorous advocacy platform to effectively communicate recommendations to policymakers." That is in addition to setting up "5-7 public health institutes, a national research network of public health and allied institutions, and an independent accreditation body for degrees in public health which are awarded by training institutions across India".

(As mentioned before, it is a matter of small print that PHFI's own courses are not recognised and accredited by any regulator.)

Questions chasing PHFI

1. Since PHFI has been described as a PPP, did the government conduct any competitive bidding to select the 'private partner'? Why are the details of the PPP agreement not in the public domain?

2. Under which legislation is PHFI being run, conducting its courses, and collecting money from students?

3. Where does PHFI draw the authority to conduct consultancy with government agencies? Are consultancy assignments given through competitive bidding?

4. Is PHFI directly accountable to any statutory regulator, CAG, the Parliament, or any state legislature?

5. How was PHFI granted the privilege of receiving a steady stream of government-funded students for its courses? Was any competitive bidding conducted in granting this privilege?

6. Does PHFI conduct any merit-based tests for the admission of students to its courses? What is the role of "recommendation letters" and "bonds" in admitting students and hiring faculty?

7. Since PHFI is itself unrecognised and unaccredited, who gave it the mandate-mentioned on its website-to "establish an independent accreditation body for degrees in public health which are awarded by training institutions across India"?

(Kapil Bajaj is a freelance journalist and blogger based in Delhi. He has worked for the Press Trust of India, Business Today and other organisations. His interests are democracy and public policy. The second part will appear on Tuesday.)



aditya chopra

5 years ago

my dream company

nagesh kini

5 years ago

Narayan Murthy ought to address each of the concerns raised by Mr. Bajal.


5 years ago

PHFI sounds like all Sonia owned foundations named after Rajiv, Indira, Nehru which are funded by govt, has bureaucrats deputed to the orgs but run as a private organisation with no accountability.


5 years ago

Thank you for this article. The issue of entities like PHFI not subscribing to the RTI Act of India is akin to the way the IOA/CWG behaved in 2005/2006 on the same subject. For what it was worth, the issue went the full route, from CIC to Delhi High Court and eventually resulted in a decision which is still extensively quoted - the definition of a "public authority" basis nothing else but the "substantially financed" clause in the RTI Act.

Certainly this decision is up on the internet, and in Due course can be quoted as well as cited (it is called Indian Olympics Association vs Veeresh Malik and others), but for now somebody needs to inform the good Mr. Narayan Murthy that as the head of this organisation, and as the successor of the colourful Rajat Gupta, that hiding behind the "RTI not applicable to PPP" argument will not detract from the eventual.

Good luck.

Despite efforts to bring about uniformity in accounting globally, financial information remains inconsistent

International accounting firms try to be accurate. But investors must be acutely aware of who produced them, where they are from, and who they work for. Blind faith in numbers insures only loss

One of the wonders of globalisation is the free movement of capital. One basic assumption of this movement is that the numbers are the same everywhere. This uniformity is supposed to come from accountants, the bean counters, who serve up financial information with the same uniformity that McDonalds produces Big Mac or Coke produces soft drinks. A balance sheet produced in Argentina should have the same quality as one produced in Thailand. The reality is that although distinctions in national cuisine are on the decline, the plates of beans served up by the accountants vary enormously, some certainly spicier than others.

In the United States, the strength of the regulators and the self-regulation are supposed to be strong enough to allow an accurate picture of the financial health of a firm. The system is backstopped by investigative journalists, multi-levels of watchdogs at different levels of government, and the possibility of a protected whistle blower exposing the whole game. None of this was sufficient to protect investors, or the entire financial system from the profligate ways of Lehman Brothers.

Lehman used 'reality cloaking' off-balance sheet transactions whose only purpose was to obscure the level of Lehman's leverage during reporting season. As soon as the time for reporting was over, Lehman's finances moved from solid ground to the edge of the cliff. Its auditors, Ernst & Young, were well aware of the issues, but since it did not believe that disclosure was required by any accounting rules, they remained silent and engendered a catastrophe.

Laws in different countries vary quite a bit, but accounting rules on the other hand are supposed to be uniform so we can compare the quality of investments in different markets. Of course, they are anything but. The International Financial Reporting Standards (IFRS) have been required of the listed companies in the European Union since 2005. The whole idea behind the IFRS was that they would be truly international and their use would be uniform among all countries. Certainly some countries use them, but like St Augustine, they want to have accounting uniformity, but not yet.

The countries that are supposed to use them include Australia, Canada, Hong Kong, India, Taiwan, Japan, Pakistan, Russia, Singapore, South Africa and Turkey. India was supposed to adopt IFRS in 2011, but they changed their minds. India is now set to transition to the new rules by April 2012. Japan is supposed to resolve all inconsistencies between IFRS and its system this year. Russia has been trying to adopt the IFRS since 1998. Of course the big holdout is the US which still clings to Generally Accepted Accounting Principles (GAAP). There has been a process of merger, convergence and now endorsement going on for years, but no agreement as of yet.

But the standards used are no indication of quality. According to Ambit, a research firm, the quality of accounting in India has been deteriorating for the past four years. Size apparently is no guarantee of quality. The top 50 companies by market capitalisation on the Bombay Stock Exchange 500 had the highest average decline. The best firms were transport equipment and telecoms. The worst were in tourism, textiles and media.

The recent scandals in China have brought its accounting foibles to international attention. China, for a number of years, has felt that international standards impinge on its national sovereignty. It has tried with limited success, to develop its own. The Chinese accounting standards are known as Accounting Standards for Business Enterprises (ASBE 2006), but their use is not a sign of quality. According to Fitch, the rating agency, use of Chinese accounting standards was a 'key weakness indicator'. "Companies which adhere to international financial reporting standards (IFRS)-and the audit trail that lies behind such scrutiny-would have more difficulty in perpetuating fraudulent statements compared with domestic standards."

Since 2005, Hong Kong has used Hong Kong Financial Reporting Standards (HKFRS) which are identical to International Financial Reporting Standards. This is changing. Despite questions, the operator of the Hong Kong Stock exchange allows Chinese companies listed on the exchange to prepare their financial statements using Chinese accounting standards and permits mainland firms as auditors. The stock exchange claims that there have been dramatic improvements.

This may be contrary to experience. According to Deloitte, the financial information supplied my mainland Chinese companies had become a "high-risk area". One of their employees was carrying a confirmation document about a company from a mainland bank and then "out of nowhere, people from the company suddenly appeared, grabbed the confirmation document and ran off."

The numbers produced by international accounting firms try to be accurate. But investors must be acutely aware of who produced them, where they are from, and who they work for. Blind faith in numbers insures only loss.

(The writer is president of Emerging Market Strategies and can be contacted at [email protected]  or [email protected].)


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