Stock Market: How Good Is SEBI's Case Against Anand Rathi?

STOCK MARKET
How Good Is SEBI's Case Against Anand Rathi?

The Bombay High Court may have upheld SEBI's action against Anand Rathi, but the former President of the Bombay Stock Exchange may have a strong case after all.

Enough has been written about the fallout of the Bombay Stock Exchange's Sensex by 175 points on March 2, a mere 48 hours after Finance Minister Yashwant Sinha presented a budget that seemed alright. For readers who missed all the fun, here's a quick recap of just the events relevant to this composition (that means we leave a certain Mr. Parekh out).

D.R.MEHTA, Chairman, SEBI: a tough task ahead

The Securities and Exchange Board of India (SEBI) finds out that, flouting its directives, BSE President Anand Rathi, spoke to Arun Dhanawade, an executive in the exchange's Surveillance Department on March 2. Citing powers vested with it under Sections 11 and 11B of the SEBI Act, the regulator, in an order dated March 12, directs Anand Rathi and his companies (Anand Rathi Securities, Navratan Capital & Securities, Rathi Global Finance, and Rathi Capital & Securities) to not undertake any trades. Rathi moves the Mumbai High Court two days later, against SEBI's order.

On March 30, SEBI issues a confirmatory order and mentions, for the first time, that the information Rathi sought and obtained from Dhanawade may be price-sensitive. Almost a month later, SEBI again issues a re-confirmatory order barring Rathi and his companies from trading suggesting that the information obtained on March 2 was the basis of some trades executed on March 5-the next trading day-and that it had obtained some prima facie evidence of price-manipulation. And on May 2, the Bombay High Court dismisses Rathi's petition and directs SEBI to complete its investigation within three months. There things stand.

Behind the facts

SEBI alleges...	Rathi defends...
Information sought by Rathi was price-sensitive	Information doesn't satisfy SEBI's own definition of price-sensitive
Navratan sold three tech stocks based on information	Navratan had existing and new purchase positions on them
There's prima facie evidence on price manipulation	There is no such evidence
Rathi had no business speaking to the Surveillance Department	The President of the exchange has the right to do this

SEBI shouldn't find it difficult to prove that Rathi's call to the surveillance department went against the spirit of two directives issued in 1995 and one in 2000, regarding the functioning of the Surveillance Department. However, Rathi claims that as President, he had every right to make the call everyone knows he did on March 2. That is neither here nor there, but the regulator may find it extremely difficult to make its charge about the price-sensitivity of the information sought and obtained stick. The reason? Transcripts of the conversation Rathi had with Dhanawade show that the information concerned the performance of some index stocks, not volumes or broker positions on these stocks. Significantly, in an order dated March 30,

ANAND RATHI, Former President, BSE: Case for defence?

SEBI mentions that information on broker transactions comprising details like prices, positions, and margins is price-sensitive. Going by this definition, SEBI will find it difficult to establish that the information transacted was price-sensitive. Then, of course, there is Rathi's contention that the surveillance and recording system was set up during his tenure as president and that he was aware that his call was being recorded when he spoke to Dhanawade.

The regulator's charge that Navratan Capital sold Rs 3.6 crore worth of tech stocks (Satyam, Global Tele Systems, and Infosys) on March 5, on the basis of information obtained on March 2, may also not stand scrutiny. According to information available with BT, Navratan Capital had an outstanding 'buy' position of Rs 2.94 crore on these stocks and additional purchases worth Rs 2.04 crore on March 5 itself. Thus, the sales of Rs 3.66 crore were made against a combined purchase position of Rs 4.98 crore, a fact that has been ignored.

And although SEBI hints darkly in its reconfirmatory order of April 23 about its ongoing investigation into the 32 entities associated with Rathi, not much is likely to come out of this. Indeed, the regulator seems to have given up attempts to club Rathi with the three 'bears' it has barred from trading, Nirmal Bang, CSFB, and First Global. Given this, and given Rathi's repeated claims that his firm does not engage in proprietary trades, it will be interesting to watch whether SEBI can suddenly uncover some damning evidence against the former president of BSE.

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