Cheques and balances by Sucheta Dalal

Cheques & Balances by Sucheta Dalal

March 25, 2000

Crisis far from over,
but Sebi busy hushing up problems

SEBI may also be asked why trader Ajay Kayan, a key figure in the 1992 securities scam, figures as a leading bear operator again without once encountering surveillance. Maybe SEBI was overawed by Kayan’s perceived closeness to MoF

It is almost three weeks since Black Friday (March 2) when the Indian stock markets got embroiled in a payment crisis brought about by unbridled speculation; and it is time enough for the situation to have been brought under control. The worst seems to be over for the Bombay Stock Exchange (BSE) and the National Stock Exchange (NSE), but the investigation unfortunately seems headed off in a different direction. This is mainly because the Securities and Exchange Board of India (SEBI) remains focussed on hushing up the problem and downplaying it.

Consequently, the revenue agencies have stepped in with a nationwide raid on leading brokers. It is reliably learnt that the Central Bureau of Investigation (CBI) and other enforcement agencies are also ready to move in for a piece of the action. This is the worst possible development at this stage. Various scams over the last 10 years have shown that the enforcement agencies rush in ham-handedly, strike terror in the market, fail to understand financial transactions, and are unconcerned about minimising monetary damage.

Even worse, their success rate in booking the guilty and having them punished is near zero - the securities scam, the CRB affair and the MS Shoes controversy are all good examples. Tragically, eight lives have already been lost in suicide pacts by bankrupt sub-brokers and their families - an already beleaguered government reeling from the Tehelka episode cannot afford to be seen ignoring investors’ losses and damage to public sentiment. This gives the CBI a natural entry as the guardian of the common man. At the systemic level too, the regulatory action is grossly inadequate. The Calcutta Stock Exchange’s (CSE) claim that it has resolved the payment problem is misleading and inaccurate. Over the last three settlements, the CSE has called in bank guarantees, dipped into the general trade guaranteefund and brokers additional base capital.

Although CSE officials now claim that there is a Rs 40 crore balance in the TGF this may be exaggerated. A business newspaper quotes bourse sources to say that the CSE has in fact dipped into the general reserve and encashed its fixed deposits. Whatever the truth of the CSE’s bailout, it is reliably estimated that at least Rs 60 crore continues to remain outstanding. The CSE along with SEBI have completed the settlement by canceling several transactions that were declared ‘collusive’. Several big brokers have been lumped into the speculative category and their payout has been held back - some of them are contemplating legal action to claim their money.

The question is, wouldn’t it be far simpler to shut down the CSE? Volumes have dwindled to negligible levels and the rampant illegal trading which was permitted within exchange premises, makes it a fit case for closure. Curiously, SEBI continues to be far more lenient towards the rogue CSE than was towards the BSE. The SEBI chairman is probably aware that when the immediate crisis is under control and the post-mortem begins, he will have to explain why he failed to check illegal trading at Kolkata for seven years under SEBI regulation. SEBI has always pretended that the illegal market does not exist, even though its volumes were considerably higher than those at the official market.

SEBI may also be asked why trader Ajay Kayan, a key figure in the 1992 securities scam, figures as a leading bear operator again without once encountering surveillance or supervisory action. May be SEBI was overawed by Kayan’s perceived closeness to the finance ministry. Is it any wonder that SEBI is as keen as the brokers themselves to minimise the Kolkata damage.

SEBI’s standards for dealing with Kolkata are also vastly different from those adopted for the BSE. At Mumbai, all broker directors were restrained after the President spoke to the surveillance department. At Kolkata, the broker President continues to be the voice of the exchange, even though he has contradicted himself every few hours. SEBI as a regulator needs to answer some other questions too. One of these is about Cyberspace Infosys, which notched up a Rs 35 crore default on the BSE and theNSE.

When the BSE began to investigate the ramping of the Cyberspace scrip two months ago, SEBI’s divisional chief (surveillance), Deepak Sancheti, cautioned BSE officials about the ‘powerful connections’ of Arvind Johri, the promoter of Cyberspace as well as Century Consultants, his brokerage firm which masterminded the price rigging and has vanished to the USA leaving behind a trail of anguished employees. The scrip, which had been ramped up to Rs 1,480, has crashed to Rs 27 and is still falling. Will SEBI be asked to explain Sancheti’s actions? SEBI has also curiously failed to announce a comprehensive investigation into Ketan Parekh’s market operations even though it is now clear that the reckless ramping of stock prices based on highly leveraged funds was far more damaging than the short burst of bear hammering.

Are SEBI and Ketan Parekh’s political friends continuing to protect him? Another rogue trader who continues to play havoc in the market is Dinesh Dalmia of DSQ Software whose scrip once ruled at over Rs 2,800. The company lends hundreds of crores of rupees to stock brokerage firms with impunity and brazenly seeks post facto clearance from investors. Even before the general body has cleared the previous loan, Dalmia has reportedly been defaulting on payments all over again. He claims to have lost heavily during the current crisis. So far, he too remains untouched. In fact, thanks to the regulator’s supervisory lapses, the two major stock exchanges have seen trading volumes shrink to a fraction. The NSE’s turnover has dropped from an average of over Rs 6,000 crore per day to just around Rs 1,400 crore, the BSE is down from Rs 5,000 crore plus to Rs 1,000 crore and the CSE has been recording a pathetic Rs 60 odd crore of trading volumes.

All those who argued against the ban on short sales and screeched about rolling settlements forcing volumes to crash are now silenced. Clearly, a market as shallow as ours needs adequate supervision more than it needs excessive trading volumes comprising speculative day trades. The last time that the SEBI chairman planned to introduce rolling settlement, he was persuaded by a leading market operator not to do so in a falling market. If DR Mehta had gone ahead and allowed volumes to shrink at that time, the payment crisis would have been far better controlled.

The finance minister has assured Parliament that 200 A-group scrips would be placed under rolling settlement from July 2001. There is a clear case for bringing it forward and introducing rolling settlements immediately when volumes are already so low. Both the BSE and the NSE were already geared to handle rolling settlements even when SEBI announced a postponement. But it is time to act now.

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