SEBI chief wants to unveil new insider-trading norms by March 2015 while the market regulator ignores hundreds of cases of brazen stock manipulation

Market regulator Securities and Exchange Board of India (SEBI) is likely to unveil latest version of its insider trading regulations before FY15 end following recommendations of the NK Sodhi committee. Does this mean, SEBI's current insider trading norms have failed to safeguard investors? Or may be 'all is well' for the market regulator and there is not a single incident of insider trading, stock manipulation. Or may be SEBI and the stock exchanges, the first line of regulators just do not care about financial consumers?

Now see the statement from the top brass of SEBI. UK Sinha, the chairman of SEBI, while inaugurating FICCI’s annual capital market conference in Mumbai on Wednesday, said the market regulator is in favour of a soft enforcement regime coupled with risk-based supervision with all these measures coming in before the end of this fiscal.

Moneylife has been highlighting hundreds of cases of stock manipulation and insider trading. Yet, SEBI do not have time to even look into these cases, forget about investigating such matters on its own or punishing those responsible for it. It is no secret that Indian stock markets are hotbeds of manipulation. Promoters and operators are having a field day even as exchanges and the market regulator sit idle.

In some cases, the Exchanges seem to deliberately turn a blind eye. In others, the regulator seems to be helping the process by handling repeated offences with kid gloves. The maximum instances of manipulation are in smaller stocks, the kind that fly below the radar. Most of these are listed on the BSE. This does not mean that the National Stock Exchange (NSE) is free from it; there a bigger game is played—in the way stocks for the futures & options (F&O) are selected and then driven up and down through false information, rumours and the like. Together, these cases make you wonder how fair the stock prices are in Indian markets.

Take for example, in March 2014, Moneylife published a report about possible insider trading in AstraZeneca Pharma India Ltd, a day before the company's parent decided to delist the company. The sudden unusual rise in its turnover during three trading days, 28th February, 3-4th March 2014 appeared fishy. The stock rose by Rs77.75 a day before its public announcement and just the day after, it fell by Rs107.40. The suspicious spurt in volumes and price in this company required an investigation by the market regulator. But then while insider trading is rife in India, SEBI rarely acts, despite having spent Rs40 odd crore in sophisticated inter-market surveillance system.

Other example is when NR Narayana Murthy re-joined Infosys in 2013. On 1 June 2013, the company made the announcement. However, just a day before, i.e. on 31st May, Infosys scrip rose by 3.32% on the BSE, while the benchmark Sensex was down 455 points. Even its peer group companies like Tata Consultancy Services (TCS) and HCL Technologies ended 31 May 2013 flat. After reports from Moneylife and other media, SEBI sought clarifications from Infosys regarding the company's board meeting held on 1 June 2013 in which Narayana Murthy was re-appointed as its executive chairman.

In another example of possible insider trading, over six trading days, prior to the announcement of its acquisition by Pharmaceutical Industries Ltd (Sun Pharma) in $4 billion deal, Ranbaxy Laboratories Ltd shares rallied 34%. The deal was announced on 7 April 2014. Ranbaxy shares rose by as much as Rs116 (34%) in days before its made public announcement, a huge rise of 8.18% happening on the trading day before the actual announcement! Again, interestingly, neither the overall market (Sensex) no other pharma company stocks were rallying. It was only Ranbaxy that was shooting up, based on no news that could be related to the company. Again all this required investigation from the market regulator, but none happened.

Moneylife had written about suspicious trading activities in the AstraZeneca Pharma, LIC Housing Finance and Bajaj Corporation to name a few. There has been no action by SEBI.

Now, let’s see stock manipulation in smaller companies. Prism Informatics was known as Akruti Holdings in 2010 and is supposed to be engaged in software development. At that time, the stock had been hitting the upper circuit with just one or two trades! It zoomed up 29,348%, in just a matter of two years, all the way from a low of Rs0.29 on 15 September 2009 to a high of Rs85.4 on 22 September 2011, on a handful of trades. Volumes picked up only when the share price started to fall. It has fallen by 63% since. Who can make sense of this rollercoaster ride?

Changing the company name is a common practice to fool minority shareholders and to disguise past transgressions. Out of City Travel Solutions was Tilak Finance. The company was also suspended for non-compliance with listi ng norms. However, the suspension was soon revoked. The share price ballooned by 2268%—from Rs2.20 in July 2010 to Rs52.10 on January 2012.

Monotype India Ltd, supposedly into printing machines and allied equipment, was suspended from trading on the BSE in 2007 for non-compliance with listing agreement. However, it got its suspension revoked in April 2010. According to the document submitted to the BSE by the company, its printing operations have been suspended. After revocation, the company had violated SEBI’s SAST regulations and got away with an adjudication order of Rs1.50 lakh passed in July 2011. Despite such a host of violations and irregularities, the company merrily continues to be listed. Obviously, a lot of people are interested in the stock being listed because one can manipulate such stocks at will. Monotype India’s share price ballooned from a low of Rs5.05 to a high of Rs211.9, a gigantic 4096% move, over just one year— from March 2011 to June 2012. This is a company with no revenues whatsoever; which has been suspended in the past and, yet, whose stock is freely manipulated.

If you think SEBI is out to protect you against habitual offenders and the stock exchanges are there to monitor listed companies, perish the thought. The regulator’s job is to ensure a level playing field for companies and investors alike and provide a safe environment for investors. Unfortunately, often, this is not the case. In all these examples, the market regulator and the stock exchanges could have acted on their own because they have a whole department that is supposed to monitor suspicious price movements. But, they have not bothered.

Rampant Manipulation of Small Stocks    

The bigger scandal in smaller companies with poor fundamentals, which are going up 10-100. Prism Informatics was known as Akruti Holdings in 2010 and is supposed to be engaged in software development. At that time, the stock had been hitting the upper circuit with just one or two trades! It zoomed up 29,348%, in just a matter of two years, all the way from a low of Rs0.29 on 15 September 2009 to a high of Rs85.4 on 22 September 2011, on a handful of trades. Volumes picked up only when the share price started to fall. It has fallen by 63% since. Who can make sense of this rollercoaster ride?

Changing the company name is a common practice to fool minority shareholders and to disguise past transgressions. Out of City Travel Solutions was Tilak Finance. The company was also suspended for non-compliance with listing norms. However, the suspension was soon revoked. The share price ballooned by 2268%—from Rs2.20 in July 2010 to Rs52.10 on January 2012.

Monotype India Ltd, supposedly into printing machines and allied equipment, was suspended from trading on the BSE in 2007 for non-compliance with listing agreement. However, it got its suspension revoked in April 2010. According to the document submitted to the BSE by the company, its printing operations have been suspended. After revocation, the company had violated SEBI’s SAST regulations and got away with an adjudication order of Rs1.50 lakh passed in July 2011. Despite such a host of violations and irregularities, the company merrily continues to be listed. Obviously, a lot of people are interested in the stock being listed because one can manipulate such stocks at will. Monotype India’s share price ballooned from a low of Rs5.05 to a high of Rs211.9, a gigantic 4096% move, over just one year— from March 2011 to June 2012. This is a company with no revenues whatsoever; which has been suspended in the past and, yet, whose stock is freely manipulated.

Stock rigging is not the only evidence of poor monitoring by SEBI. Companies often get away with blue murder, leaving shareholders in the lurch. Consider Geodesic Ltd, a sham internet software and service provider, that had run up liabilities of more than Rs1,200 crore and defaulted on payment of its Foreign Currency Convertible Bonds (FCCB) and loans. SEBI never took any action (http://www.moneylife.in/article/sebi-asleep-over-geodesic-scam/36523.html ) against Geodesic and finally the Bombay High Court issued a winding up order against the company (http://www.moneylife.in/article/geodesic-gets-winding-up-order-from-bombay-hc/38398.html ). Following orders from the High Court, the Registrar of Companies (RoC), Maharashtra, appointed an official liquidator to wind up Geodesic.

Do check out the Unquoted section of the magazine and website (http://www.moneylife.in/investing/unquoted ). You will be alarmed and shocked to see the ease with which price manipulation goes on in capital markets.

If you think SEBI is out to protect you against habitual offenders and the stock exchanges are there to monitor listed companies, perish the thought.  The regulator’s job is to ensure a level playing field for companies and investors alike and provide a safe environment for investors. Unfortunately, often, this is not the case. In all these examples, the market regulator and the stock exchanges could have acted on their own because they have a whole department that is supposed to monitor suspicious price movements. However, they have not bothered.

What is galling and equally scandalous is the fact that tens of crore have been spent by SEBI on a fancy Inter-Market Surveillance System (IMSS) to catch stock manipulators. In August 2014, SEBI Board discussed a report on all actions taken by the market regulator, as a result of its market surveillance.

This is the same SEBI, which last year in June, declined to provide information on its real time market surveillance system (http://www.moneylife.in/article/sebi-says-dont-have-info-on-surveillance-system-and-prosecution/33071.html ). Moneylife had filed an application under the Right to Information (RTI) Act on 9 April 2013, requesting information on SEBI’s surveillance statistics and had asked SEBI to disclose the number of suspicious cases its sophisticated Integrated Market Surveillance System (IMSS) and Data Warehousing Business Intelligence System (DWBIS) had detected till 31 March 2013.

In its reply, the SEBI said, “It is informed that the information sought by you is not available with the concerned department of SEBI.” This was impossible, because if the surveillance department did not have such information, then who did? Who was really in charge of monitoring the data captured by the surveillance department?

It must be noted here, that SEBI had spent a whopping Rs50 crore in installing the so called “state-of-the-art” surveillance systems: IMSS and the more modern DWBIS.

Coming back to SEBI's surveillance system, Moneylife had found out that 48 staff members are posted in the Integrated Surveillance Department (ISD) of SEBI, which houses the IMSS and DWBIS system, as of 31 March 2013. The IMSS contract value was found out to be Rs20.55 crore, out of which Rs6.52 crore went towards “capital expenditure” between 2007 and 2010. HCL Technologies was the vendor.

Then SEBI adopted another system known as DWBIS, which came into existence from 2010 onwards, and the contract value was found to be Rs34.38 crore and Tata Consultancy Service (TCS) is the new vendor. Out of this amount, over Rs11 crore has gone towards “capital expenditure” in the last two years alone. This is collectively over Rs50 crore of taxpayers’ money.

This is a lot of taxpayers’ money and nobody knows if SEBI is truly looking at cases triggered by the systems, if at all, let alone punishing offenders and compensating minority shareholders. Nobody knows how effective SEBI’s surveillance system is either.