As a rule, Moneylife advises readers to steer clear of highly volatile penny stocks that thrive on our bourses and dupe the gullible. They fluctuate between a few rupees to a few hundred rupees in a matter of months and there is little sympathy for retail speculators who lose their hoping to turn millionaires by finding a hidden diamond in online tip-sheets. Why does this go on unchecked? Because the regulator doesn't care.
We know that the Securities and Exchange Board of India (SEBI) spends crores of rupees on its market surveillance software. It also claims to use artificial intelligence to track social media for insider trading. This is quite laughable when SEBI seems reluctant to use simple native intelligence. As a result, fake news websites, complete with cooked up research reports, operate openly through message boards of large media companies or with names that sound similar to well-regarded value investment forums.
We must remember that this brazen manipulation is happening in listed entities on national bourses, which are technically subject to very strict reporting requirements, disclosure rules and corporate governance standards.
Ironically enough, they appear to be using the very disclosure rules to misinform and manipulate, because neither the stock exchanges nor the market watchdog want to investigate or look at the quality of disclosures.
Well, here’s a case study of how SEBI treats informants attempting to expose wrongdoing and judge for yourself. The company, Urja Global Ltd, is listed on both, the National Stock Exchange (NSE) and the Bombay Stock Exchange (BSE). Our whistleblower, Surendra Singh Rao is at pains to point out that it is just one among hundreds that use the same modus operandi.
Urja Global calls itself a leading non-renewable and renewable energy developer and operator which is ‘an approved’ channel partner by the relevant ministry. Its website lists an impressive range of projects and announces a global tie-up every few months.
And, yet, the stock price is low and extraordinarily volatile. It rose from around Re1 in October 2017 to a high of Rs11.43 in January 2018 and was down to Rs2 by October 2018. It again started to rise in November 2018 but has been on a long decline since then to Rs1.75 as of 24 December 2019.
The price movement seems trivial but is sharp in percentage terms. It is usually accompanied by focused hype and glowing ‘research’ reports on several investment websites. But more about that later.
Why does Mr Rao link the stock manipulation with the management? Consider these curious corporate announcements by Urja Global.
On 13 July 2019, Urja Global informed the BSE about entering into an agreement with Nippon Shinyaku Co Ltd, of Japan, to supply a product called Zacobite for five years. This would help it develop a domestic and international market, it said.
Mr Rao was suspicious about this claim, given the company’s propensity to make such disclosures that didn’t seem to materialise (these include plans for green bonds, e-rickshaws and e-cars and a university, among others). So he looked up Nippon Shinyaku and wrote to the Japanese company asking about the Urja deal.
In less than three days, Nippon Shinyaku sent him a categorical response. It neither knew Urja Global nor was it involved in the Zacobite business. It went on to say, “we think the information on Zacobite seems to be fake.”
Nippon Shinyaku also put an announcement on the homepage of its website warning people to ‘beware of fraudulent information’.
What Did the Regulators Do?
Excited at the developments, Mr Rao filed a complaint with SEBI’s online complaint system (SCORES) and also wrote to the entire SEBI top brass informing them about his finding (note the number of officials marked in the email above). He expected a full investigation into his findings about the company’s disclosures.
Instead, the SCORES lived up to its reputation of acting as a post-office. It forwarded the complaint to the BSE which, in turn, wrote to Urja Global asking it to respond to the investor with a copy to the Exchange. Neither the regulator nor the bourse was interested in investigating the matter on their own or issuing a show-cause notice to the company.
Urja Global’s company secretary accused Mr Rao of filing a false complaint and didn’t even bother to address the issue, since he was not a shareholder and unwilling to provide his folio number.
But Urja was probably rattled at Mr Rao’s probing. Less than a month after the announcement, it filed a shady ‘clarification’ with the Exchanges. Its letter first says that it will supply the product (Zacobite) only when it receives advance payment from the Japanese company. In the very next paragraph, it says it was ‘withdrawing’ the agreement to “to avoid any further misunderstanding between the stakeholders and the Company.”
The BSE accepted Urja’s response without a murmur and forwarded it to SEBI which was even worse in its mindlessness.
It wrote to the investor that he was not a shareholder and treated the matter as closed, since Urja Global had ‘clarified’ that the agreement was withdrawn. What is worse, Mr Rao says that, since his information has been disclosed to Urja Global, he has been harassed through repeated calls from the company.
SEBI’s response makes you wonder whether its officials have even a rudimentary understanding about the reason why such detailed and copious disclosures are mandated under its repeatedly tightened corporate governance and disclosure rules.
In 2018, Urja Global had announced two tie-ups with Chinese companies. In March this year, it disclosed to the BSE and NSE that it has a MoU (memorandum of understanding) with the Andhra Pradesh government to manufacture electric cars and lithium ion batteries in the state. Given its finances and how the stock price is languishing, that, too, seems like a tall claim.
Urja’s other disclosures to the Exchanges also signal that all was not well internally. For starters, the three key executives—chief executive officer (CEO), chief financial officer (CFO) and company secretary and compliance officer don’t seem to have lasted more than a few months. In January 2019, its CEO, Bharat Pranjivandas Merchant, resigned. At the end of May 2019, it appointed Ms Priya Bhalla as the new CEO, who resigned in four months (23 September 2019). Another CEO—Dhiraj Sisodia was appointed in November. The company secretary and compliance officer also lasted less than a year and the CFO is also new.
This article would not be complete without a word about Urja Global’s finances. The company’s latest numbers show a tiny net profit of just over Rs1 crore on a turnover of around Rs130 crore and hasn’t paid a dividend. And, yet, the moneycontrol.com website lists it as a stock that 60% of its users are recommending as a buy and is listed among ‘stocks in the news’. Will someone ask how and why?
Mr Rao’s attempt to speak to SEBI officials or meet them has been rebuffed every time. He is not alone.
Angry youngsters, fed up with the brazen manipulation of stocks and the regulator’s refusal to act, have begun to make YouTube videos and post them online to warn people of the market manipulation fraud. There are hundreds of listed companies whose stock price continues to be manipulated with audacious impunity. For more than six years, Moneylife has documented more than a hundred such cases. But SEBI couldn't care less.
Even as I write this article, SEBI has created a brand new ‘Office of Informant Protection’ (OIP) and introduced new guidelines under the prohibition of insider trading rules. Will they work at encouraging and protecting informants or be another desk that sees and hears no evil?
Given how SEBI has handled the Urja case—with callousness and disdain—can we expect any better from SEBI’s OIP which presupposes a far greater empathy and understanding?
(Note: We have written to the BSE, SEBI and Urja Global for their response to the issues raised here. We will update this article with their responses, if we hear from them).