Sebi issues show cause to Price Waterhouse

This is the first time that the market regulator has sent such a notice to the statutory auditor of a listed entity, questioning it on the procedure followed while carrying out its duties

Ashish Rukhaiyar
MUMBAI
Feb 27, 2009

CAPITAL markets regulator Sebi has sent a show cause notice to audit firm Price Waterhouse, asking them to clarify on the processes and standards followed while auditing the books of Satyam Computers. This could be the first time that Sebi has sent out such a notice to the statutory auditor of a listed entity questioning it on the procedures it followed while carrying out its duties.

When contacted, Price Waterhouse confirmed the development, but didn’t elaborate. “Price Waterhouse confirms receipt of a show cause notice from the Securities and Exchange Board of India as part of its investigation into Satyam Computer Services. The notice is under examination. As this is an ongoing investigation at a preliminary stage, it is inappropriate to comment further. We continue to cooperate fully with the ongoing investigations into Satyam,” said the audit firm.

Price Waterhouse is being probed for its alleged role in the Satyam Computer financial fraud after former chairman B Ramalinga Raju, on January 7, admitted to falsifying the books of the software company for over seven years.

According to persons familiar with the development, Price Waterhouse has submitted documents and computer files pertaining to Satyam Computer, spread over the past seven years, running into over 60,000 pages of documents. This apart, the audit firm is also conducting its own investigation into the matter to find out how a fraud of such magnitude went unnoticed for so many years, the sources added.

Also, this is not the first time that Price Waterhouse has been issued a notice in the Satyam fraud. Last month, the Institute of Chartered Accountants of India, the apex body of accountants, served a show-cause notice to Price Waterhouse for allegedly not following standard auditing procedures.

ICAI officials said that the institute has taken a serious view of the alleged role of Price Waterhouse, due to the impact it has on the auditing profession. But, it is likely that the audit firm could get away lightly, as accountancy firms limit the extent of their liability in their contracts with clients. Typically, auditors restrict the quantum of their liability to the extent of the fees that they receive from the company. ICAI can only recommend blacklisting the audit firm.

Bulk trades in RTS under lens

Brokers Complain To Sebi, Allege Sellers Acted
In Collusion With Fraudulent Buyer

Ashish Rukhaiyar
MUMBAI
Feb 18, 2009

A GROUP of individual investors has left a few retail broking firms in the lurch by decamping after placing large ‘buy’ orders in RTS Power Corporation shares. The broking firms have filed a complaint with the capital market regulator, the Securities and Exchange Board of India (Sebi), and some of them have approached the police.

ET has learnt that the Bombay Stock Exchange (BSE) has blocked the payout of funds to those investors who sold RTS shares through bulk deals on February 11, 2009. This development could not be independently confirmed with BSE. An email sent to the bourse did not elicit any response till the time of going to press. The broking firms, which were duped, have alleged that some of the sellers in the bulk trade segment were acting in collusion with fraudulent buyers.

According to an official at a broking firm, Mukesh Konde — one of the entities named in the complaint — placed a large order amounting to nearly Rs 8 crore and then refused to pay the remaining margin. The ‘buy’ order was placed through various broking firms, including Geojit Securities, Networth Stock Broking, Sharekhan and Tata Capital.

“He was a regular client and so we allowed him to trade on a lower margin,” said an official with one of the broking firms (that has filed the complaint) on condition of anonymity. “He (Mr Konde) said he would square off the trade later in the day. He, however, vanished after placing the order,” said the official.

In other words, according to the official, he succeeded in creating large volumes at the counter, and pushing up the stock price, with the help of the margin money. Another official, when asked about the issue, refused to talk saying, “The matter is under investigation.”

Meanwhile, suspicion was further raised when a few other entities offloaded shares in large quantities on the same day. Bulk deal data clearly show that entities like Sophia Growth, Hetal Patel and Chetan Nimawat sold shares on February 11 and that the shares were bought earlier (not on February 11). Incidentally, the stock has almost doubled in the past couple of months, with sudden spurts in trading volumes on some days. On February 11, more than 15 lakh shares of RTS were traded on BSE.

“We believe the sellers are the real operators, as they had already cornered the shares before February 11,” said the broking official. “And to top it all, the sellers made sure that none of the buyside broking firms (Geojit, Sharekhan, Networth) were used to offload the shares,” he added.

Sebi smells circular trading in Spice Comm rally

Regulator Begins Probe, Seeks Details Of Trade From SEs
On Three Days Since January 29 When Stock Surged 228%

Nishanth Vasudevan & Ashish Rukhaiyar
MUMBAI
Feb 11, 2009

THE Securities and Exchange Board of India (Sebi) is probing if there was any circular trading in shares of Spice Communications, which had risen sharply of late. A top Sebi official told ET that the market regulator has asked stock exchanges for details of trading in Spice shares in the three sessions since January 29, when the stock surged 228%.

“Prima facie, the trading pattern throws up a lot of questions. The case is high on our priority list,” the official said, while refusing to divulge further details.

The rally in this stock during this period stumped most market watchers, who said the low-free float, provided traders the ammunition to ramp up the stock. Free float means the shareholding of non-promoters, which is supposed to be at least 25% of the total equity, unless in exceptional cases such as public sector companies.

As per shareholding data on BSE, the floating stock in the company is only 80 lakh shares out of the company’s total equity of roughly 6.9-crore shares. This is because Telecom Malaysia India, which is a non-promoter, holds 49%, or 3.38 crore shares, while the existing promoter group, including Idea Cellular, owns 49.9% of the total equity, or 3.44 crore shares.

In the three sessions, when the stock rallied, the average daily volumes were 2.7-crore shares, against a daily aggregate of 7,000 shares in January. Market watchers said the list of shares, where prices have been ramped up in recent months due to “low-free float”, may not be restricted to Spice. Fund managers and brokers said the reason behind such stock price surges, through this method, is the absence of maintaining a free float in spirit, though it is present on paper.

“Today, there are a number of companies with lowfree float that can be manipulated and a lot of such trades are difficult to track down, as the participation of a wider range of people is ensured through spreading of rumours,” said a senior broker familiar with the process.

In another instance of alleged circular trading in the past couple of months, shares of a Mumbai-based realty company were driven up after a sizeable portion of the free-floating stock was cornered by friendly broker circles. The buzz in the investor community is that the move was aimed at countering the attack of bear traders on the stock.

Derivatives panel roots for physical settlement

Sebi-Appointed Committee Feels Physical Settlement In
Futures Will Limit Manipulation & Curb Excessive Speculation
Ashish Rukhaiyar
MUMBAI
Feb 10, 2009

IT IS an old and contentious issue, but a resolution appears nowhere in sight. The Sebi-appointed derivatives committee is learnt to have reiterated its suggestion of introducing physical settlement for trades in stock futures. This, the committee feels, will limit the possibility of manipulation and also curb excessive speculation. While the market regulator is yet to take a view, the recommendation has once again stirred a debate among market participants.

One section feels the right approach is to provide an option of physical settlement, while another section thinks the settlement of futures trades is anyway linked to the price of the physical shares and hence, the current rule (of settling only in cash) is fine.

At present, if a trader has bought stocks futures at Rs 100, and the price of that is Rs 90 on the settlement day, he has to pay up Rs 10. Likewise, a trader who has short-sold a stock future at Rs 100, will suffer a loss of Rs 10, if the price on settlement day is Rs 110. In case the physical settlement is allowed, the bullish trader can take delivery of the shares, if he is hopeful of the price going up soon. Similarly, the short seller can offer delivery of the shares, if he expects a decline in price.

Veteran market participant and managing director of Asit C Mehta Investment Intermediates, Deena Mehta, feels that in the absence of physical delivery, the system simply flushes out all trades at the end of the month when the contract expires. “There is no logical conclusion to the futures trade,” she points out.

Interestingly, this issue was first raised in 1997 by the first advisory committee on derivatives, headed by former Sebi member LC Gupta, who is now the director of Delhi-based Society for Capital Market Research & Development. “Sound principles say the outstanding of any deliverable asset should be settled by delivery and not by cash,” says Mr Gupta. “One also needs to bear in mind that the asset, in this case shares, is limited while cash is unlimited. That also explains the massive spurt in the volume of single-stock futures during the last bull run,” he adds.

Former whole-time member of Sebi, JR Verma, however, does not agree with Mr Gupta’s views. “It is an ideological issue,” he says. “There would not be much of a difference because in both the situations, arbitrage would bring the prices in line,” he explains. “Even in the current system, the settlement is linked to the price of the share, which is the underlying,” he adds. He, meanwhile, highlights the fact that futures contracts on many commodities have been moved to a cash settlement basis instead of physical settlement.

Countering this view, Ms Mehta says: “For those who want to manipulate the market, it is easy to maintain the last day prices so that the settlement rates are high/low as desired. If all trades have to logically close, then such manipulations will have no place in the market.”

Meanwhile, brokers arguing for cash settlement say the volume would fall sharply if physical settlement is introduced. “The costs would go up if traders are forced to settle the contracts in shares,” said a broker, on condition of anonymity. “The cost would go up as traders would have to borrow shares,” he added.

Sebi may plug pledged share gaps

May seek details on the end use
of funds raised through pledging
Ashish Rukhaiyar & Reena Zachariah
MUMBAI
Feb 10, 2009

THE Securities and Exchange Board of India (Sebi) is planning to make it compulsory for promoters to disclose the end use of funds raised through pledging their shares with financiers, a move intended to increase transparency and provide more information to investors. Such information would help investors find out if the money has been used to fund comparatively risky activities, like property speculation, unrelated diversification or personal expenditure.

The regulator is also considering putting in place rules to prevent misuse of the holding company structure by promoters to get around the disclosure requirements. Often, promoters hold shares in the listed company through a privately-held company. Technically, it is possible for them to raise money by pledging the equity of the unlisted company, which holds the shares of the listed company.

While Sebi requires promoters to disclose the quantum of pledged shares in the listed entities, they are not required to make any disclosure of pledged shares in their holding companies, which, in turn, has a stake in the listed company. Many promoters, market participants said, may resort to the holding company structure to circumvent the norms on disclosure of pledged shares.

Meanwhile, market watchers have pointed out that the data on pledged shares put up on the stock exchanges’ websites do not reveal the full picture. Brokers said that the practice of pledging of shares by promoters is not new. But, the information relevant to investors is the purpose for which the funds were raised. Most promoters, who have disclosed details of their pledged shares, have said that the money was raised for meeting working capital requirements.

Sebi move may help check fund diversion
BUT, brokers said, there are many instances where the funds were used by promoters to raise their stakes in the listed entities through creeping acquisition, conversion of warrants or simply to prop up the stock price. It is believed that some promoters also used this route to acquire personal assets.

“It is an important piece of information to the public... so that promoters don’t divert the funds into non-core businesses. The first step towards disclosures has created awareness among investors... they can now ask promoters at general body meetings the purpose of raising funds through pledging shares,” said a person familiar with the development.

According to data compiled from the stock exchanges, promoters of over 90 listed companies have pledged shares to borrow money. Some of the big names in Corporate India, where promoters have borrowed money by pledging their shares, include Tata Steel, Godrej Consumer Products, Great Offshore, Aban Offshore, Asian Paints, GVK Power and Infrastructure, Gillette India and Tata Teleservices.

Prima Database managing director Prithvi Haldea said: “It is not enough for a promoter only to disclose the number of shares pledged. To make the information more meaningful, we need to know the end use of funds and do subsequent mapping of fund utilisation.”

Bear cartel role under Sebi scanner

Cos Allege Role Of Bears In Dramatic Fall Of
Stocks Even When Fundamentals Are Strong
Nishanth Vasudevan & Ashish Rukhaiyar
MUMBAI
Jan 23, 2009

THE Securities and Exchange Board of India (Sebi) is learnt to be examining the alleged role of a group of bear operators in the sharp fall of a few shares in recent weeks. A number of market sources say that the aggrieved companies have approached the market regulator to discuss the role of the ‘bear cartel’ in the decline of their shares. A top Sebi official told ET that the regulator is looking into the matter, without divulging further details.

According to market participants familiar with the matter, the bear cartel, led by two traders, has upped its ante in recent times, targeting shares that are relatively vulnerable to swift declines. Of these, one is a veteran market player who has returned to the stock market after being away for some time, and who, in the past, had battled some of the most famous bull operators on Dalal Street. The other is said to be a high-stake player, whose aggressive bets — mostly on the short side — have driven him to near ruin on a couple of occasions in the past.

It is not clear if the players are operating in tandem or separately. But their targets have been common. They are mostly companies where valuations are perceived to be ‘excessive’ or those firms whose promoters are believed by the market to have pledged shares with financiers.

“The bear cartel has used the most relevant topics such as balance sheet irregularities and triggering of margin calls, which have created huge panic in other stocks, as weapons to trigger panic in the targeted stock,” said a person familiar with the matter.

This group of operators, in recent weeks, has successfully targeted companies such as Educomp Solutions, Rolta India and Ruchi Soya. Another person close to the matter said that two of these three companies have approached Sebi, though this could not be officially ascertained.

In the latest case, shares of Educomp were hammered on Tuesday on market talks that its accounting practices were questionable. The company refuted these allegations and also filed a complaint with the economic offences wing of the Crime Branch, saying that some vested interests were trying to beat down the stock price by spreading false information. An Educomp spokesperson said that company officials would meet Sebi on this matter soon.

In the case of Rolta, shares fell 60% in a single day on speculation that stocks pledged by promoters have been sold by financiers. This has been repeatedly denied by company’s chairman Kamal Singh. Rolta CFO Hiranya Ashar said that his company wrote to Sebi on January 14.

“We have asked the regulator to look into the unusual trading pattern in our stock. We have reasons to believe that a group of people is trying to hammer our stock.” People familiar with the thinking in the bear circle said that the target list does not stop here and may extend to more companies whose accounting standards are suspect.

It is believed that the same group of operators was involved in the sharp slide in ICICI Bank in September because of speculation about bank’s exposure to stressed assets overseas. The private sector bank had approached Sebi to check if there was a ‘concerted attempt’ to drive its share price down.

PRICK & CHOOSE
The cartel has upped its ante in recent times, targeting shares that are relatively vulnerable to swift declines
The cartel targets cos with ‘excessive’ valuations or those firms whose promoters are believed to have pledged shares with financiers
Cos like Educomp, Rolta and Ruchi Soya have been victims

Sebi rakes in Rs 40 cr via consent orders

Regulator Settles Close To 400 Cases
In Just Over A Year Under The New System
Reena Zachariah & Ashish Rukhaiyar
MUMBAI
Jan 01, 2009

THE market regulator’s decision to put resolution of disputes on the fast track is working well. In just over a year after announcing rules for consent orders, the Securities and Exchange Board of India (Sebi) has settled close to 400 cases, a senior Sebi official said.

Although the new system of settling disputes in capital markets between a regulator and the accused through a penalty, or a fine, was introduced in April 2007, the whole process gathered steam in the last six months of the year. Sebi has garnered close to Rs 40 crore through the consent order system, through various cases such as market manipulation & price rigging, insider trading and capital “issue” related manipulation, among others.

The consent and compounding process helps reduce the backlog of pending cases both with the regulator and with the courts. The new system has been modelled on the lines of a similar system in the US. The Securities and Exchange Commission (SEC) settles over 90% of administrative/civil cases against market intermediaries by consent orders.

The regulator also took some other major policy initiatives this year. In August, a joint panel of RBI and Sebi decided to introduce currency futures in the exchanges to manage volatility in the value of rupee.

Mutual funds, which have emerged as one of the important class of financial intermediaries among investors, witnessed some tough challenges this year, especially the close-ended ones. The recent rush by large corporate investors in fixed maturity plans (FMPs) to redeem their investments resulted in considerable pressure on fund houses, forcing Sebi to review its norms relating to this product. The regulator recently imposed a ban on early exit by investors in close-ended schemes and made it mandatory for fund houses to list these schemes.

In order to address the asset-liability mismatches, the regulator said for closeended schemes, the underlying assets will not have a maturity beyond the date on which the schemes expires. Over the course of the past two years, FMPs had emerged as one of the most popular products offered by fund houses.

As part of the market regulator’s reform process for the primary market, it introduced an alternative mode of payment, applications supported by blocked amount (ASBA) in issues, whereby the application money remains in the investors’ account till the finalisation of basis of allotment in the issue.

This was a major departure from the current practice of retail investors paying upfront the full amount for the shares that have bid for, while large institutional investors need to put only 10% of the money. Sebi’s move implies that a retail investor can participate in a public or rights issue without the application money, actually leaving his bank account, thus eliminating the refund process.

However, the results couldn’t be ascertained as the IPO market fully dried up, due to the global credit crisis. In view of the current market conditions, Sebi also took a U-turn by doing away with the restrictions on issue of participatory notes by foreign institutional investors against securities, including derivatives, as the underlying.

VALUE PLAY
In August, a joint panel of RBI and Sebi decided to introduce currency futures in the stock exchanges to manage volatility in the value of rupee. MFs witnessed some tough challenges this year, especially the close-ended ones.