Regulations
SEBI bars Maharashtra minister from markets, asks Lokmangal group to refund money with interest
Market regulator Securities & Exchange Board of India (SEBI) has barred Maharashtra's minister for cooperation, marketing and textile Subhash Deshmukh, his Lokmangal group and its promoters and directors from markets for failing to adhere to guidelines. The regulator also asked these promoters and directors of Lokmangal Agro Industries Ltd to refund Rs74.82 crore with interest to about 4,751 investors.
 
S Raman, SEBI's whole time member, in an order passed on 1 August 2016, said, "I note that the Company (Lokmangal Agro) had commenced allotment of equity shares to the public since October 2011. It can reasonably be inferred that the directors and promoters of the Company namely Subhash Sureshchandra Deshmukh, Smita Subhash Deshmukh, Mahesh Satishchandra Deshmukh, Vaijnath Nagappa Lature, Anil Vasantrao Pandhare, Parag Suresh Patil, Audumber Sandipan Deshmukh, Shahaji Gulchand Pawar and Gurrana Apparao Teli were involved in the mobilisation of public funds through the issue of equity shares without complying with the applicable law, as discussed above."
 
Citing the Supreme Court judgement in the Sahara case, the SEBI order states, "Section 73(2) says that every company and every director of the company who is an officer in default, shall be jointly and severally liable to repay that money with interest at such rate, not less than 4% and not more than 15%, as may be prescribed."
 
All the promoters and directors of Lokmangal Agro are leaders from Bharatiya Janata Party (BJP) or associated with Rashtriya Swayamsevak Sangh (RSS). All except Mr Lature are based in Solapur district. 
 
SEBI said, "As per the data obtained from the MCA21 website, it is observed that the company has filed balance sheets till 31 March 2014. It is further observed that the Company has received share application monies during the year 2011, from about 3,626 farmers who supplied sugarcane to the Company's sugar factory. The company raised Rs72.52 crore from them during 1 October 2011 to 13 December 2011. Further, on perusal of the list containing the details of allotment of shares furnished by the company on 7 March 2015, it is observed that the company itself had admitted that it had collected an amount of Rs74.82 crore from 4,751 investors during 2009-2011."
 
As per the first proviso to Section 67(3) of the Companies Act, 1956, where the offer or invitation to subscribe for shares or debentures is made to fifty persons or more, then it is construed as a public offer and the entity is required to file prospectus or information memorandum. However, SEBI observed that even though the issues of equity shares made by Lokmangal Agro were deemed public issues, the company never filed any prospectus.
 
"Having made a public issue, Lokmangal Agro was required to register a prospectus with the Registrar of Companies (RoC) under Section 60 of the Companies Act, 1956, I find that there is no evidence on record to indicate that Lokmangal Agro has complied with the provisions of Section 60 of Companies Act, 1956. It is also observed that Lokmangal Agro in their reply vide letter dated March 7, 2015 categorically mentioned that ...the company has never prepared or filed any red herring prospectus or prospectus or information memorandum," the whole time member of SEBI said in his order.
 
Commenting on the SEBI order, Mr Deshmukh, the minister told media persons that the company reply to the market regulator within stipulated time. 
 
Separately, Vishwas Utagi, Convener of All India Investors Association and Vice President of AIBEA demanded resignation from the minister. "We want the Chief Minister (of Maharashtra) to sack him (Deshmukh) till he comes clean. Mr Deshmukh must refund the money with interest within 90 days to investors. Indian Laws are inadequate to catch hold of such money launderers, as we understand almost Rs10 lakh crore is the loot in the economy. Money must be recovered with interest in first place and deterrent criminal action must be seen visible," he said in a release.

User

SEBI’s informal guidance blurs distinction; covers discretionary portfolio manager within insider regulations
Market regulator Securities and Exchange Board of India (SEBI) in their order dated 4 February 2016 regarded ‘Facebook’ account as evidence to prove charges against an individual under the SEBI (Prohibition of Insider Trading) Regulations, 1992. SEBI continues interpreting this in a wider sense, now on the investment made by an insider through a discretionary portfolio manager (DPM) while the insider is in possession of any unpublished price sensitive information (UPSI) vide an informal guidance dated 25 July 2016 given to HDFC Bank Ltd
 
DPMs make investment in the securities market independent of their clients’ advice, i.e., the client does not have any influence or control over the investment decisions.
 
There exists two types of portfolio management services like discretionary and non-discretionary. The classification is based on the extent of control a client has over the investment made by the portfolio manager. There is absence of client’s control over the investing decisions in the case of the former and the presence of the same in the latter one. In the light of the same, the market participant investing through a DPMS is absolutely said to have no control or awareness of the investments that are made out of his funds by the DPMS. In such a case, the assumption and stand taken by SEBI that even a trade by DPMS for the insider’s account while in possession of UPSI will amount to insider trading, blurs the distinction.
 
The informal guidance infers that Regulation 4(1) of SEBI (Prohibition of Insider Trading) Regulations, 2015 (Regulations, 2015) which reads as follows, gets attracted even if the dealing in securities is through a DPM. Such a trade shall be assumed to be motivated by the awareness and knowledge of UPSI:
 
“No insider shall trade in securities that are listed or proposed to be listed on a stock exchange when in possession of unpublished price sensitive information:”
 
However, the possibility of such a motivation to the market participant is highly circumstantial, but generalizing the assumption to all cases will be a reason to worry for the DPMs. The investment made by DPM qualifies as one of the exonerating circumstance for insider trading. The portfolios managed by these DPMs are standard in most of the cases and are not specifically altered for an investor. Further, the investments made through DPMs are easily identifiable as they are mandatorily held in separate demat account with power of attorney in favor of the DPM.
 
Clause (ii) of proviso to Regulation 4 (1) provides for an exemption in case of non-individual insiders if the following conditions are met:
 
“(a) the individuals who were in possession of such unpublished price sensitive information were different from the individuals taking trading decisions and such decision-making individuals were not in possession of such unpublished price sensitive information when they took the decision to trade; and
 
(b) appropriate and adequate arrangements were in place to ensure that these regulations are not violated and no unpublished price sensitive information was communicated by the individuals possessing the information to the individuals taking trading decisions and there is no evidence of such arrangements having been breached.”
 
Such exemption should hold good in case of DPMs too. This was very well discussed in the NK Sodhi committee report, reproduced as under:
 
“Non-insider decision-maker for trades 
 
59. While trading to take advantage of the possession of UPSI should be outlawed, it is equally important to make provision for the ability to disconnect the two aspects of the matter i.e. the possession of UPSI and the decision to trade at a certain price. In any business group comprising multiple entities discharging multiple roles, if it is possible to ring-fence the persons who are in possession of UPSI from those who are responsible for the decision-making necessary for the trades, the rationale underlying the prohibition of insider trading would not be attracted. In situations where the person in possession of the UPSI is different from the person who takes the trading decisions and the two are segregated by effective arrangements, the purpose of the prohibition would not be attracted. Consequently, if it can be established that adequate arrangements were in place to ensure that the persons taking decisions on the trade are different from the persons having possession of the UPSI and there is no evidence of such arrangements breaking down, a valid defence ought to be available. Likewise, if the trades are made by a duly authorised person other than the insider without any reference to or prior knowledge of the insider although the trades may have been made on behalf of the insider, the defence ought to be available. This is the principle on which the concept of “blind trust” is adopted worldwide i.e. where a person is given complete authority to trade – say, a discretionary portfolio manager who is himself not in possession of UPSI. In such a fact situation, the Committee believes that a valid defence should be provided.”
 
The market regulator has specified that its views should not be construed as decision of the Board on the question. However, such informal guidance depicts the interpretation of the SEBI to some extent and accordingly influences the actions of the companies.
 
(Vignesh Iyer works at Vinod Kothari and Company)
 

User

SEBI Tries To Fix the HFT Issue without Closing the NSE Probe
Six years after it allowed the National Stock Exchange (NSE) to introduce high frequency trading (HFT) and algorithmic (algo) trading without any debate, rules or regulations, the Securities and Exchange Board of India (SEBI), on 5th August, put out a discussion paper on “Strengthening of the regulatory framework for algorithmic trading & co-location”. The paper is interesting, for several reasons. It comes in the aftermath of a detailed investigation into three letters from a whistle-blower which pointed to serious irregularities in the HFT and algo trading at the NSE. Yet, there is no mention in the discussion paper about the series of events and investigations that were triggered by the publication of these allegations and have led to the attempt to fix HFT and algo problems. 
 
Instead, SEBI’s paper suggests that it is merely reacting to global concerns among regulators to the following: that HFT and algo trading give unfair access to powerful traders at the cost of long-term investors; rogue algorithms seem to trigger flash-crashes that can destabilise markets; and regulators’ own ability to supervise the sophistication of complex algos. 
 
Indeed, global regulators have gone beyond debating the issue of unfair access. In June 2016, Securities Exchange Commission (SEC) approved Brad Katsuyama’s ‘Investors Exchange’ which specifically aims to neutralise the ‘unfair advantage’ gained by high-frequency traders. There is also serious research in the US which challenges the claim by HFT proponents that their trades add volume and liquidity to markets. Clearly, SEBI, as a regulator, needs to stay in step with international developments. 
 
SEBI’s discussion paper puts out various options to allay the fear and concern of unfair and inequitable access and seeks market feedback on the efficacy of each of these. It is almost an attempt to crowd source the best possible mechanism for Indian markets. It is anybody’s guess which of these will finally be prescribed as new rules for HFT. Some of the issues put out for discussion include:
  • Review of the tick-by-tick (TBT) data feed and replacing it with ‘structured data’ that will provide a level playing field between high-frequency traders (who use TBT data for a fee) and other traders.  
  • Introducing a minimum resting time for orders to eliminate ‘fleeting’ orders that vanish in nano seconds in response to price data. If this is introduced, “orders received by the stock exchange would not be allowed to be amended or cancelled before a specified amount of time, viz., 500 milliseconds is elapsed.” If accepted, SEBI will be the first regulator to adopt this check. 
  • Introducing random speed bumps, through a randomised order processing delay of milliseconds to discourage ‘latency-sensitive strategies’. The paper lists global developments in introducing such random speed bumps.
  • Plans for randomisation of orders and the introduction of frequent batch auctions where sell and buy orders on the order book are bunched for a specific length of time (say, 100 milliseconds) and matched at the end of the time interval. This is expected to eliminate the ‘latency advantage’ enjoyed by co-located servers. The paper cautions that would need serious changes in market infrastructure. 
  • A maximum order-to-trade ratio requiring market participant to execute at least one trade for a set number of order messages sent to a trading venue. This is aimed at ensuring that a viewed quote is available for trade and reducing ‘hyper-active order book participation’.
  • There is also a discussion on a two separate queues and order validation mechanism for orders emanating from co-located servers and non-co-located systems. Orders from each queue will be taken up in the order-book in a round-robin fashion. Although the discussion paper says that “co-located participants would still be among the first to receive the market data feeds” due to their proximity to the exchange and use of sophisticated algorithms, this proposal is likely to see the strongest opposition by proxy from bourses. 
While SEBI has set a deadline of 31st August for submitting comments to its third discussion paper on HFT and algo trading, there is no timeframe set for implementing the new rules. But, even if SEBI does implement them quickly, there is a problem. Can SEBI simply brush under the carpet the saga that began on 19 June 2015 when Moneylife published a whistleblower’s letter (addressed to SEBI’s surveillance department and copied to me) alleging serious wrongdoing in the HFT or algo trading at the NSE? 
 
The NSE slapped a Rs100-crore defamation suit against us for publishing the letter and tried to gag us through a notice of motion, even while it refused to answer our queries about the letter, despite several reminders. The Bombay High Court, in an excoriating order, described the NSE’s attitude towards Moneylife as ‘egregious arrogance’ and imposed a penalty of Rs50 lakh. The NSE has appealed the order and obtained a stay against the payment. The case has been in limbo for a while and the Exchange is in no hurry to pursue its alleged defamation. 
 
Meanwhile, Moneylife received two more letters from the whistleblower which we brought to the attention of SEBI and the finance ministry. The last one (addressed only to me), made some serious charges about NSE’s violation of its own policy, in allowing a non-registered ISP (internet service provider) called Sampark Infotainment to lay a ‘dark fibre’ in its premises for various members.
 
SEBI referred these letters to the technical advisory committee. The committee’s findings, widely published by the media and accessed by us, reveal that an investigation by its sub-committee comprising experts from the Indian Institute of Technology, Mumbai, have confirmed most of the allegations of the whistleblower. The committee says it is clear that “NSE violated norms of fair access and allowed some brokers to benefit.” The committee wanted SEBI to initiate “immediate action for lapses on the part of NSE” and constitute a team of people with appropriate background to investigate the collusion aspect between NSE officials and OPG Securities.
 
Predictably, SEBI has not moved an inch in that direction. The NSE strongly refuted the charges of the SEBI committee too and the issue appears to be in limbo since then. Angry protests by some top institutional investors who felt short-changed also did not lead to a resolution. Instead, the regulator and the government seemed to believe that listing the Exchange (which has been under the control of the same two or three individuals for 25 long years), and tinkering with the composition of its board of directors, is the answer to increasing transparency. 
 
Media reports suggest that the NSE, despite its deep reluctance, may be heading towards listing around the same time as the Bombay Stock Exchange (BSE). We don’t know if that will happen. But how fair is it for a regulator to allow the largest stock exchange to seek public investment even as serious allegations against it remain unresolved? After all, the NSE is a first-line regulator and SEBI cannot take the attitude that mere disclosures about on-going investigation and pending litigation are enough, when it has adopted a far stricter attitude to clearing IPO documents of private companies. 

User

COMMENTS

Mahesh S Bhatt

1 year ago

There are technical ways at Network layer./application layers/web layers & security layers where compromises are not even detected.

Standard procedure of shoot the messenger is habit of CEO.

Lot needs to be done than marketing Make in India services Mahesh

Shrikant Dattatraya Sahasrabuddhe

1 year ago

Pl.alert successful investigators of previous scams and enlist their support as well.

M V Subba Rao

1 year ago

It might benefit the Exchanges and SEBI where they get more income (due to more automated volumes)but the common investor has to face highly volatile markets

1 year ago

I believe these recommendations are going to make markets much more complex and non-transparent. Suggestions like randomisation etc. will make things more opaque and in case of investigations, impossible to identify what went wrong. I think a lot of objectives can be achieved by just slowing down than introduce complex algo's with unknown downsides

We are listening!

Solve the equation and enter in the Captcha field.
  Loading...
Close

To continue


Please
Sign Up or Sign In
with

Email
Close

To continue


Please
Sign Up or Sign In
with

Email

BUY NOW

The Scam
24 Year Of The Scam: The Perennial Bestseller, reads like a Thriller!
Moneylife Online Magazine
Fiercely independent and pro-consumer information on personal finance
Stockletters in 3 Flavours
Outstanding research that beats mutual funds year after year
MAS: Complete Online Financial Advisory
(Includes Moneylife Magazine)