SEBI moves SC against SAT order on Indiabulls Securities

Passing an order on 25 February 2009, SEBI had fined Indiabulls Securities of Rs15 lakh after finding manipulative and fraudulent practices in the futures and options (F&O) by the firm during January-March 2007. However, SAT 26 October 2010 set aside SEBI's order after observing that there was no fraudulent practice

New Delhi: The Securities and Exchange Board of India (SEBI) has moved the Supreme Court challenging the sectoral tribunal Securities Appellate Tribunal's (SAT) order that set aside a penalty slapped by the capital market regulator on Indiabulls Securities for rigging in the derivatives trade, reports PTI.

SEBI's petition would come up for hearing tomorrow before a three-judge bench headed by the Chief Justice SH Kapadia.

Passing an order on 25 February 2009, SEBI had fined Indiabulls Securities of Rs15 lakh after finding manipulative and fraudulent practices in the futures and options (F&O) by the firm during January-March 2007.

However, this was challenged by Indiabulls Securities before the SAT, which on 26 October 2010 set aside SEBI's order after observing that there was no fraudulent practice.

In its order, the capital market regulator had said that Indiabulls was engaged in reversal trade in 23 F&O contracts and violated various provision of SEBI Prohibition of Fraudulent and Unfair Trade Practices Relating to Securities Market (FUTP) and code of conduct prescribed under the Stock brokers Regulations.

According to SEBI, its probe in transactions in the derivative segment of NSE between January-March 2007 revealed that some brokers were buying and selling almost equal quantities of contracts within the day.

After preliminary examination, the market regulator found that certain entities, including Indiabulls, had executed irregular and non-genuine trades.

SEBI found Indiabulls had executed 23 non-genuine and reverse trades on behalf of 15 clients in 21 futures and two options contracts on 22 different underlying scrips and one bank Nifty futures.

It also found that in several cases the same stock-broker appeared on the buy side as well as the sell side. Some of these transactions, which included stocks like Bajaj Auto, PNB and GE Shipping, constituted over 50% of the market volume.

SEBI held Indiabulls guilty of violating Regulations 3 and 4 of the FUTP Regulations.

This was challenged by Indiabulls before SAT, which held "the trades in this case were only for tax planning and do not manipulate the market and nor are they fictitious or non-genuine. All the appeals are allowed and the impugned orders set aside with no order as to costs."

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Funds sitting on cash caught off-guard by late-March rally

This illustrates the perils of market timing by funds and is one of the key factors that explains the difference in fund performance

One of the key tenets of mutual fund management is to stay fully invested-or almost fully invested-at all times. This idea is in turn derived from another belief of the fund management business. Fund managers argue that you simply cannot time the market-to enter of exit at what you think is the opportune time. The market will always get you. That is, when you move significantly into cash, the market, or rather the stocks that you sold off to buy back later, may take off. So as not to miss that unanticipated rally, you must stay invested in all times.

But do fund managers practice this regularly? Let's see what they did at the end of February 2011, when it looked like the market was headed down.
Diversified equity funds had, on an average, 8.38% of their assets allocated to cash as of end-February 2011, according to Mutual Funds India data. The market remained comatose for the first three weeks of March. And then suddenly took off, rising by 2,000 points on the Sensex in a matter of 10 days.

This is precisely among those events that underline the wisdom of staying fully invested at all times. At least that is what fund companies would preach. Fine logic this, provided that they were fully invested on 21st March, to take advantage of the flare-up on the morning of 22nd March. Data on daily cash levels in funds in March is not available. But we can take a guess by looking at February end data. In short we can assume that cash levels in funds were similar on the morning of 22nd March as they were end-February.

So, how much cash did equity diversified funds have at the end of February 2011? We had only looked at the growth funds universe of 222. On an average, 93 equity diversified growth funds had around 13.5% of their net assets in cash. Of this, 30 funds had more than 14% of their money in cash, that is 14% of the total universe.

Some of the large and well known funds like Reliance Small Cap, UTI Variable Investment Scheme and UTI Wealth Builder were caught by surprise. Edelweiss Nifty Enhancer fund - Plan A and Plan B, both had around 29% of their net assets in cash, whereas Escorts Growth Plan had around 33% and Escorts High Yield Equity Plan had around 29.50% of their net assets in cash at the end of February 2011. Sundaram Select Midcap had around 17% and Sundaram CAPEX Opportunities had 16.24% of their net assets in cash at the end of February 2011. There were six other Sundaram schemes, such as Sundaram Equity Multiplier, Sundaram Growth, Sundaram India Leadership, Sundaram Media & Entertainment Opportunities Fund - Ret, Sundaram Rural India, and Sundaram Select Focus that had an average of 12.24% of their net assets in cash. Not to our surprise, as many as six JM funds had on an average 12.30% of their net assets in cash. This is not something unusual, because as Moneylife has pointed out earlier, JM has proved to be the worst fund house in every situation.

Among the funds that were fully invested, and therefore reaped the benefit of the rally, were three Tata funds that had on an average only 0.77% of their net assets in cash. HDFC Capital Builder and HDFC Growth had just 1.13% and 1.89% of their assets in cash, respectively. ICICI Prudential Focused Bluechip Equity Fund had 1.5% in cash and there were three Principal funds (Principal Growth Fund, Principal Large Cap Fund and Principal Services Industries Fund) which had on average only 1.11% in cash.

While being fully invested is only one of the many factors that determine performance (the main factor being stock selection), it is quite surprising that so many funds were trying to time the market by keeping so much of their assets in cash at the end of February.

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COMMENTS

madhukar sheth

6 years ago

Fund Managers advise public not to time the market and do S.I.P. But they try to time the market thinking that they will outperform. They sud remember that half the funds under perform their benchmark which is a passive index without expert fund managers and their research analysts.
Best thing is to play in those benchmark indices, paying hardly 20% margins and earning (or losing) 5 times. The only problem is Taxation.
Tax man says, When U play with your fund, U R a speculator and when fund manager plays with your fund, U R an investor

Saurabh

6 years ago

How much cash they can keep as per regulations? Do they Charge fund management/advisory fee on idle cash too?

Effects of fresh quake in Japan to result in soft opening for Indian stocks: Friday Market Preview

The US markets ended lower on Thursday but displaying resilience, markets in Asia were mostly higher despite the latest quake in Japan

The local market is likely to open soft this morning as effects of a fresh 7.1 magnitude, which had its epicentre in the sea off the northeast coast of Japan on Thursday, rattled markets worldwide. US markets ended lower on Thursday following the news and as a difference in opinion over the federal budget threatened to shut down some government offices. The Asian pack was mostly higher in early trade on the last trading day of the week taking the Japanese earthquake news in its stride. A hike in interest rates by the European Central Bank (ECB) on Thursday, the first in almost three years, also weighed on investors in Asia. The SGX Nifty was five points down at 5,897 compared to its previous close of 5,902.

Yesterday the market opened flat, tracking the mixed bias in the Asian region. The Sensex opened at 19,621, nine points up from its previous close, while the Nifty shed three points at the opening at 5,989. Profit booking amid a fair degree of choppiness ensured that the indices stayed in the negative for the entire morning session. The market touched the day's low at around 10.30am, with the Sensex retracing 75 points to 19,537, its intra-day low, and the Nifty touched 5,866, down 26 points.

The market inched its way up, and was back into the green at around 12.50pm. However, continued fluctuations saw the indices popping in and out of the red quite a few times. The benchmarks scaled their intra-day highs at 2pm, but could not sustain those levels on continued volatility. At the day's high, the Sensex touched 19,665 and the Nifty was at 5,906. The market closed in the red for the third day in a row, the Sensex falling by 21 points to 19,591 and the Nifty erasing six points to close at 5886.

The market is moving in a tight range after the recent rally. It has to break above the recent highs for the rally to continue. If not, the market will give up some of the recent gains.

US markets closed lower on news of the latest earthquake hitting northeast Japan. However, stocks ended off the day’s lows on positive economic news, which also offset concerns about the debt problems in the Euro zone. Initial jobless claims fell more-than-expected last week. Initial claims for state unemployment benefits slipped 10,000 to a seasonally adjusted 382,000, the Labor Department said. The previous week’s figure was revised up to 392,000 from the earlier figure of 388,000. A rise in same store retail sales lifted stocks like Costco Wholesale, Limited Brands and Kohl’s.

Meanwhile, the ECB on Thursday increased its benchmark rate by a quarter percentage point to 1.25% and said that it would resort to more hikes, if needed.

The Dow fell 17.26 points (0.14%) to 12,409.49. The S&P 500 shed 2.03 points (0.15%) to 1,333.51 and the Nasdaq was down 3.68 points (0.13%) to 2,796.14.

Markets in Asia were mostly higher in early trade on Friday as investors brushed aside news of the latest earthquake. Northeastern Japan was rocked by a magnitude 7.1 earthquake, the biggest since 11th March, causing widespread power outages through the north, shaking buildings in Tokyo and putting the country on alert for the safety of its nuclear power plants. The 0.25% hike in key benchmark rates by the ECB also raised concerns about lower spending in Euro zone nations.

The Shanghai Composite gained 0.17%, the Hang Seng rose 0.36%, the Jakarta Composite advanced 0.22%, the Nikkei 225 surged 0.91%, the Straits Times added 0.05%, the Seoul Composite rose 0.41% and the Taiwan Weighted was up 0.05%. On the other hand, the KLSE Composite shed 0.06% in early trade.

Back home, global banking giant StanChart yesterday projected India’s economic growth to slow down to 8.1% in 2011-12 in view of continuing inflationary pressure and high interest rates.

StanChart said that although private consumption has been on an upswing, the growth in investments has been hit by inflation, higher interest rates and increased risk in the area of governance like the recent political confrontations due to various scams

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