The Securities & Exchange Board of India (SEBI) claims to monitor social media, but isn’t it strange that it does not even have a presence to gather market intelligence or scuttlebutt? This leaves the field open for operators of various hues to whip up a surge or trigger a fall in any stock by spreading false news or peddling half-truths. Let’s look at what has been happening with Himachal Futuristic Communications Ltd (HFCL), a company with a notorious past.
In the second week of September, HFCL began to shoot up on rumours that it would merge with Reliance Jio giving a listing to the latter. The rumour mills further said that an announcement was imminent at HFCL’s general body meeting on 25th September. What gave credence to the rumour was this. HFCL’s promoters were the audacious front for Mukesh Ambani’s bid for broadband wireless spectrum licences in 2014. Infotel Broadband, an HFCL group company with no funds, was the highest and only bidder for the national licence at $2.75 billion.
Almost immediately, Reliance acquired a 95% stake in the company by having fresh equity issued and also paid the licence fee. Reliance got away with it, despite the Comptroller and Auditor General (CAG) saying that the auction was rigged. So, another repeat performance, this time a cheeky reverse merger to give Reliance Jio instant listing without the onerous IPO (initial public offering) route, was easy to believe.
HFCL’s announcement to stock exchanges (on 26th August), that it had issued convertible warrants to its old friend, stockbroker and market operator Shankar Sharma and six others including two promoter companies, further fuelled the rumours. Mr Sharma would have a 0.78% holding post-conversion. More about this later. The stock, which had hit trading at a 52-week low of Rs11.08 on 22 November 2016 (despite its Jio connection), suddenly began to inch up. HFCL, which was trading at Rs21.35 (5th September) started hitting the upper circuit after news that Grantham Mayo Van Otterloo (GMO), a reputed US fund, had picked up 1.95 crore shares in two bulk deals at Rs23.9 and Rs28.13, respectively.
On 15th September, The Hindu Business Line (HBL) wrote a report (titled “Rumours of merger with RJio draw traders to HFCL stock”) which put together all the speculation and developments at HFCL. Curiously, the report makes no mention of having contacted the HFCL management for a comment, a standard practice for the media these days. The bourses also did not bother with their standard practice of confirming rumours with the management, adding fuel to the price rally.
By 18th September, the stock had hit its 52-week high at Rs35.95 with media reports detailing developments adding to the frenzy. After market closed that day, HFCL sent an unusually strong denial to the bourses. It claimed that it had noticed the article by HBL only that day (hard to believe that the HFCL management, given its track record, did not seek to know what had triggered a speculative frenzy in their stock for two days).
It clarified that the rumour (about a merger with Reliance Jio) had ‘no substance’ and was ‘completely false and baseless’. Further, that it ‘strongly denies such types of speculations’ (sic). And, if that weren’t clear enough, its letter goes on to say: “We unequivocally reiterate that there is no such corporate event/development as reported” by the paper. There are several gaping holes in this intriguing scenario—especially the fact that neither our regulator nor the bourses questioned HFCL for two days. When the market opened on 19th September, HFCL hit the lower circuit to touch Rs34.20 after its denial of the merger.
If the media reports are one side of the story, the hype created by investment websites, such as some rakeshj-hunjhunwala.in (RJ.in) about Shankar Sharma’s investment is another. This website, with embarrassing prattle passing off as analysis, has nothing to do with Rakesh Jhunjhunwala, India’s most successful and famous investor. It calls itself a ‘fan’ site but seems to have tacit permission for the use of his name. Both, HBL and RJ.in, made it a point to mention Shankar Sharma’s prowess in spotting multi-baggers among junk stocks, but make no mention of HFCL’s very coloured history with the stockbroker. They did not probe either the public renewal of ties between the two. RJ.in’s article, titled “Is Shankar Sharma’s Latest Stock Pick The Next Apple, Amazon, IndusInd Bank?”, oozes superlatives about how he spotted mega multi-baggers like Apple, Amazon and IndusInd Bank before anyone else. It waxes eloquent about his formula for spotting such stocks and looking for the ‘spark’ to ignite a rally. It babbles on about how a CNBC TV18 journalist had spotted Mr Sharma’s investment (which was actually a routine disclosure to the exchange), allowing ‘novice investors’ to “rush in and pocket some of the stock before the aces grabbed all of them.”
Considering how detailed the report is, it is hard to believe that both the writers simply forgot that Mr Sharma had already discovered the stock 17 years ago, when it was trading at a crazy, ramped-up high. Or, that he had been barred by SEBI for a year for his involvement in rigging various stocks associated with Ketan Parekh, including HFCL. For those who have forgotten, a Reserve Bank of India (RBI) inspection report of 31 March 2000 had pulled up Global Trust Bank (GTB) for irregular funding of five associate companies of Mr Sharma’s firm First Global. The money sanctioned as working capital was used to invest in HFCL shares which were then pledged with the Bank. GTB was force-merged with Oriental Bank of Commerce to protect depositors when it seemed set to go belly-up.
In February 2009, SEBI barred Mr Sharma from trading in the securities market for one year. In 2010, the securities appellate tribunal (SAT), as well as the Supreme Court dismissed his appeal against the SEBI order. A review petition against the SAT order was also dismissed. He was held guilty of synchronised trading in several stocks ramped up by discredited market operator Ketan Parekh of which HFCL was very prominent. Remember, HFCL had traded at an incredible, Rs2,397 on 8 March 2000, before the Ketan Parekh bubble burst. And, yet, HBL
, the newspaper, and the website credit Shankar Sharma with discovering HFCL, as a junk stock.
The HFCL management was also investigated for its involvement with the scamster Ketan Parekh but managed to ‘settle’ the investigation in 2010 by paying Rs10 crore, under a virtual whitewash offered to all corporate houses involved with the scamster during CB Bhave’s tenure as the SEBI chief. Since there is complete silence from the regulators on the unusual activity in HFCL, it will be interesting to see how the stock moves over the next few weeks. It is difficult to believe that those making big investments in the company are taking a general bet on improved performance, especially when it has just declared a 44.5% decline in net profit, to Rs25.63 crore in the June quarter, despite a hefty 66% jump in net sales. Clearly, something bigger is cooking here. Either it has gone wrong, leading to the strong denial, or we will see more action shortly. Either way, it is something the regulator ought to be watching very closely, along with the fact that those who manipulate public information seem quite skilled at avoiding the regulatory checkpoints.