With over 6,000 scrips listed on the Bombay Stock Exchange (BSE), it has become relatively easy for unscrupulous players to pick up a small capitalised company and rig the prices to make a fast buck. Says a sub-broker at the BSE involved in the scam: "For each such hick-town company, a sub-broker like me could easily make Rs 5 lakh to Rs 10 lakh in two months."
According to financial analysts, the total amount of these manipulations would far exceed Rs 1,000 crore over the past year. Realising the scale of the problem, the Securities and Exchanges Board of India (SEBI), has launched a multi-pronged action programme to trap price manipulations in over 45 scrips. Last month, SEBI directed the BSE to holdback the auction proceeds of shares of Jyoti Resins, SVA Udyog and Magan Industries, apart from probing other companies.
The BSE issued an auction notice for 5.51 lakh shares of Jyoti Resins when several sellers of the scrip could not deliver the requisite number of shares to the buyer. (In such cases, the Exchange asks holders of the scrip to auction the required shares off to defaulting parties). The Jyoti Resins scrip's price shot up from a little over Rs 10 in mid-September last year to about Rs 70 by early October. Between October 2 and 6, the scrip was rigged to such an extent that the price shot up to over Rs 180 at which point the BSE put the scrip 'on spot', that is, the scrip could be bought only against ready cash. After the auction was announced in February, the price spiralled to Rs 200. By freezing the auction of three scrips, the SEBI wants to punish both the price-riggers and the short-sellers. The former jacked the price up to unrealistic levels, and the latter attempted to push the price down by promising delivery of the scrips at a price far lower than the ruling market price.
Says L.K. Singhvi, SEBI's senior executive director who is in charge of the investigations: "From now onwards, if any short position continues after the first auction, the whole lot will be cancelled at thelast highest price."
The SEBI is also investigating BSE Vice-President J.G. Shah who had offered 1.12 lakh shares of Kamakshi Housing Finance stock for auction and is suspected of rigging its price which went up several fold to over Rs 310 over a period of a few months. The stock exchange regulator is also intensifying its probe into stocks like Arpan Leasing, Adeshwar Cotton and Vora Construction where the involvement of another top BSE office bearer is suspected.
According to Singhvi, this is the first time that the Board has used its powers to search premises using a warrant. If need be, he says, SEBI will also attempt to get the errant brokers arrested. Last month, SEBI officials searched a couple of broking firms at the Heera Panna shopping complex in Bombay which deals in smuggled goods. Its investigations of Synergy Shares and Stock as well as Spectrum Financial Services have revealed evidence of rigging prices of shares of a host of companies.
The SEBI has also investigated Arihant Securities and its proprietor Dimple Shah, who is believed to be involved in price rigging in Gujarat Cotex and Ishwar Medicals. Many of these investigations are almost complete. The BSE board is also probing a broker, Chandrakant Shah, who is reported to have purchased 1.4 lakh shares at an average price of Rs 40 to be delivered at the auction at Rs 200 a share.
This sudden spate of revelations has forced BSE President Kamal Kabra and SEBI officials to initiate a drive to weed out dubious companies from the BSE. The governing board of the BSE has just cleared a proposal, giving itself and the executive director the power to close outstanding positions which have not been offered for auctions. Admits a BSE governing board member: "Very often manipulators deliberately do not offer shares in auction to shoot the price. This move will now stop the manipulation going on for months at end."
The alarming extent of the rise in price-rigging can be fathomed from the host of far-reaching measures that the BSE has announced over the past few months. It has decided to introduce weekly settlements in the A group shares and a specified set of 450 B group shares. The minimum capital requirement for listing has also been raised to Rs 10 crore from Rs 5 crore, to keep dubious small-capital companies out, and unclutter the trading system. The renewed carry forward system in group A will operate on a weekly instead of the fortnightly cycle it used to follow. The governing board has also decided that the auction procedures for both A and B groups will have to be completed within one trade cycle of one week. By the second half of the year, almost 800 scrips will be included in the specified group of weekly settlements. Says Kabra: "The large number of scrips in group B, lack of computerisation and the labour-intensive settlement system were the main reasons for the early settlement." Adds a senior BSE broker: "The stringent conditions at the BSE will at least improve the quality of scrips. The least it would achieve is make monitoring of companies easier."
Whether that will prevent the price-rigging manipulations, however, remains to be seen.