BT Corporate: The Bear Hunt

CORPORATE: MARKETS
The Bear Hunt

If Sebi is able to collect enough data to link Anand Rathi's calls to the exchange's surveillance department to his subsequent trades, the former BSE president is in big trouble.

By Brian Carvalho

C.M. Mehra has been one of the lower-profile executive directors of the Securities & Exchange Board of India (SEBI). Till now, that is. Last fortnight, Mehra was put in charge of what is now being referred to as 'the tapes episode'. The first set of tapes contains the conversation between former Bombay Stock Exchange (BSE) President Anand Rathi and the bourse's surveillance department, in which Rathi is heard asking for price-sensitive information regarding operator positions in certain shares. The second set of tapes recorded the subsequent discussion, six minutes later, amongst the surveillance officers.

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On March 28, Mehra started the day by grilling Arun Dhanawade, the surveillance officer who, as the tapes reveal, provided Rathi with the price-sensitive information. Dhanawade didn't have much to say in defense. Mehra then called in P.S. Reddy and Sanjay Pardiwala, both of whom tried to distance themselves from the affair. Last in was A. Tirodkar, Director (Finance), who also has additional charge as Joint Head of Surveillance.

Now, Tirodkar is the gentleman who's been captured on tape (the second set), saying that he was asked 'a 100 times' by the president for trading details, but had steadfastly refused to give them out. Sources within the BSE insist that the president has resorted to A.N. Joshi, the BSE Executive Director (who can ask for information from surveillance) for the information he needed. BSE officials object to BT calling the ed a 'conduit' between the surveillance department and the president. But they refuse to make a statement to the contrary. Joshi, for his part, wasn't available for comment...still. ''We have been open and transparent... Let SEBI make its judgement,'' says R. Vaidyanath, General Manager (Business Development & Debt Segment).

Last fortnight, following a directive from the high court (which Rathi had moved in protest against SEBI's decision to debar broker-directors on the BSE board from functioning), SEBI passed a "reasoned order", restraining Rathi and his firms from trading on the markets.

But that might just well be the proverbial tip of the iceberg. As BT went to press, Mehra was preparing to call in Pardiwala, Tirodkar, and Reddy for a second round of cross-examination. And the goose of the short-selling cartel could be really well done if SEBI is able to link the coterie's abuse of the stock-lending mechanism to the president's alleged insider trading activities that have been captured on tape. Also, can SEBI muster up the evidence to prove that with Rathi, Nirmal Bang, and First Global's Shankar Sharma, among others, were the other members of the short-selling menagerie?

The Bol-Madhavpura Connection

Big Bull Ketan Parekh: why does he remind you of Harshad Mehta? In 1992, Harshad Mehta used Bankers Receipts to channel money into the market and ramp up share prices. Nine years later, Ketan Parekh used pay orders and bankers cheques to do the same. A pay-order is issued after it is clear that the customer's account has sufficient funds; ergo, it is as good as cash. And it is usually cleared by banks even before it is discounted.

Ketan Parekh's modus operandi was to issue cheques drawn on Bank of India (BoI) to Madhavpura Bank, against which he would get the latter to issue payorders. These would then be discounted at BoI. This went on till the market crashed. The co-op bank, which then faced a run on deposits, refused to honour the pay-orders. But BoI had already discounted them and credited the accounts of three KP companies, Classic Credit, Panther Investment, and Panther Financial Capital. And the broker had transferred the money to his shell companies.

BoI's Chairman K.V. Krishnamurthy refused to comment, but it isn't just the bank that was at fault. The RBI is to blame too: BoI sent the pay-orders to the RBI for clearing on March 9; the central bank reprocessed them on March 15, and returned them on March 20. By then, BoI had released the money. The bank can perhaps take some solace from reports that SBI and Punjab National Bank may face similar problems. It was in connection with this investigation that KP was picked up by the CBI on March 30 and remanded to custody till April 9. In a double whammy of sorts, SEBI handed over an interim report on KP's use of GTB funds to fund his market manipulations observing that there was ''evidence of a nexus'' between Parekh and GTB's promoter Ramesh Gelli. It never rains...

-Roshni Jayakar

Just A Coincidence?

There's nothing illegal about stock lending, but the sheer volume of shares borrowed-reportedly 1 crore of a single company-points to the irregular nature of these deals. Stock lending by nature involves small quantities of shares, as its function is to help brokers protect the shares they've purchased but haven't yet received, from getting auctioned. But, as a broker points out, "nobody's going to borrow 1 to 2 crore shares, even 10 lakh, for this purpose. If the bears did so, then it suggests manipulation.''

Here's an example of how this manipulation happened. In early January, the bear cartel would have borrowed HFCL shares at Rs 1,200 from the Stock Holding Corp of India (SHCIL)-a subsidiary of the Unit Trust of India-after paying a 33 per cent margin (Rs 400). The bears could then dump those shares on a hapless market that was anyway falling. "Since these are borrowed shares, the sale of this huge amount will not be noticed, making it a clandestine deal. Thus, even the ban on short-sales was circumvented," points out a market player. In the process, Ketan Parekh, who was already feeling the heat of a falling market, was going down even faster, thanks to the hammering. And the tapes suggest that the former BSE president was seeking details of KP's positions in his favourite stocks-a few of which were subsequently borrowed, and many of which were hammered down.

Then, the money received at payout after selling the borrowed shares was used to buy more HFCL shares, by which time the price has come down to Rs 800 levels. So the next time the bears borrow the stock, they have already recovered the margin of Rs 400 they'd paid earlier, thanks to the erosion in value from Rs 1,200 to Rs 800. And by the time the HFCL stock touches Rs 200-as it did in mid-March-and if the bears did borrow 1 crore shares, their gains would be mind-boggling. Market estimates put the bear cartel's gains since the beginning of January 1 at anything between Rs 3,000 crore to Rs 6,000 crore.

With the scam unravelling, SEBI has plenty of work to do. So can the regulatory body collect enough evidence to suggest the bear cartel used the stock-lending mechanism to artificially depress prices, after being privy to inside information? If it can, a more severe punishment that could be dished out to Rathi and company is debarring them from trading for life. A softer rap would be to debar them from trading for three-to-five years. Along with these bans, SEBI could also disallow them from holding any public position in any public body that has anything to do with the stockmarkets. Watch this space.

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