Hall of shame: Shooting stars put Sebi, exchanges to test

Price Fixers Play New Games To Escape
The Glare Of Surveillance Agencies
May 24, 2008
Santosh Nair & Ashish Rukhaiyar
MUMBAI

IT APPEARS to be a busy season for stock manipulators. On Wednesday, KGN Industries soared to an unbelievable price of Rs 55,000 on relisting after nearly seven years. A day later, another obscure firm — Sylph Technologies — which last traded at Re 0.80 per share at the time of its delisting five years ago, climbed to an intra-day high of Rs 800 on relisting, before settling at Rs 200. The common thread running across these cases being, both these scrips figure in the Bombay Stock Exchange’s Z group — the exchange’s hall of shame for firms violating listing norms. Both these companies have no fundamentals worth mentioning.

While these scrips made headlines because of the bizarre price levels they touched on the relisting day, brokers claim that price fixing is a routine phenomenon in quite a few Z and T group stocks, where only delivery-based transactions are allowed due to a lack of liquidity.

“In many stocks, the shareholding pattern disclosed to the stock exchange is not what it appears to be,” said a broker. “Shares held under the heading of ‘corporate bodies’ are usually indirectly controlled by promoters, either through their own holding companies or those owned by close relatives,” he added. As a result, actual public holdings are very low, making the stock an easy target for price rigging.

Brokers claim there are quite a few listed companies that have no core activity other than providing fictitious profits and losses to investors, looking to balance their account books. And, while it is hard to prove, there are also whispers of corruption. As regulators step up vigilance, manipulators, too, have devised newer ways to dodge the law.

Circular trading is relatively easier for surveillance officials to detect. So, scamsters have given up on this route. Instead, they use a chain of clients who are often registered with different brokers. The difficult part for investigators then is to prove that the clients are known to each other.

“The exchange has a wealth of information, but is somehow not allowed to use it in the right way,” says an industry source, adding that “exchanges have become a just channel through which the regulator gets all the trading data.” Every week at the surveillance meet, Sebi officials ask exchange authorities to get trading data on stocks that are under their (Sebi) scanner. Exchanges provide the data, and their job is done, he added. There is an urgent need to allow exchanges to come out with orders on their own.

Interestingly, Sebi officials, on conditions of anonymity, accept that most of their time goes into handling petty complaints against brokers and they would be happy to let exchanges handle them. There are some who are afraid that exchanges might be biased, as brokers are also members of the exchange.

Sebi to tighten surveillance systems
THERE are many who feel that the exchanges are themselves to be blamed when petty issues make their way to the regulator’s office. “The exchanges have a tendency to escalate every issue to Sebi so that they are not pulled up in the future,” said an official.

It is believed that the regulator is working on a system where most complaints against brokers are resolved at the exchange level and the guilty is punished. “We have our integrated market surveillance system (IMSS) that we intend to use to uncover bigger wrong doings. The data and systems that exchanges have are enough to catch most of the small fish,” says a source.

A stock exchange is the first level regulator, and ideally should be able to handle complaints against brokermembers on its own. However, that is not the case in India as the regulator is believed to be against the idea of delegating or sharing power with other institutions.

It is also said that operators are able to gather courage to rig prices because stock exchanges in India do not have a rich history of bringing such entities to book, say sources. That job is handled by the market regulator, who has other issues also to tackle. In effect, penalising nuisance creators is a long process.

BSE is probing into Wednesday’s transactions in the KGN Industries stock. But key players behind the price swings appear to have succeeded in their plan, at least for the time being. On Friday, trading in the KGN stock were frozen at the lower end of the 5% intra-day circuit filter at Rs 4,863.27.