FROM BUSINESS WORLD OF 15 AUGUST 2006
This victim has
a case
Various
regulators get known for different things. Reserve Bank is known for its
ponderous utterances, TRAI for its consultation papers, and Insurance
Regulatory Authority for its inactivity. The same cannot be said for Sebi. It
makes news frequently. Sometimes it is on account of some rule it has jiggled;
more often it is for the punishments it hands out.
The most recent
is the one-month trading suspension invited by Credit Suisse First Boston
(CSFB). The story that emerges from Sebi’s convoluted order is that over some
unspecified period of eight months between June 1998 and May 1999, the price of
South East Asia Marine Engineering and Construction or Peerless Shipping and
Oilfields – it is unclear what the company was then called – rose from Rs 15 to
Rs 389; the order is silent on what happened in the other four months. During
that eight-month period, 52.4 million shares of the company were bought and
sold. Of this turnover, CSFB bought 2.02 million shares and sold 1.80 million;
it accounted for less than 4 per cent of the turnover. It is not Sebi’s case
that CSFB bought shares and their prices rose; on the contrary, it bought
shares whenever the prices fell. Sebi is studiously silent about who accounted
for the other 96 per cent of the trade. If it punished every investor who
bought when prices fell, hardly any investor would go unpunished.
During the
period, Sebi observed that when prices were falling, “CSFB was continuously
executing buy trades for the smaller quantities at the next higher prices, even
when the rates of scrips were falling.” This is impossible, since the BSE and
NSE computers execute trades at the market price or the nearest buy or sell
price out of the orders on the board. Although one cannot be sure of Sebi’s intentions,
it presumably means that CSFB bought at falling prices and that the fall was temporarily
reversed while it bought. From this to conclude that CSFB was interested in
raising prices requires mind-reading abilities that can be Sebi’s alone.
Except that it
was not CSFB’s mind at all. Of the 2 million shares it bought, it bought 1.6
million for C Mackertich of Calcutta, owned by Ajay Kayan; of its sales of 1.8
million shares, 1.57 were for the same firm. So if at all there was a
connection between the transactions and the rise in price, it was Mackertich
that was responsible. This is the Mackertich that Sebi had suspected of being a
part of the clique that in its view, had caused a stock market meltdown after
Yashwant Sinha’s budget of 2001. It could not prove that, but it still
suspended Mackertich for six months in 2002 for having indulged in badla. In
the present case too, Mackertich told Sebi that it had done the trades on
behalf of Ajay Kayan. Why then, did Sebi not punish Mackertich or Ajay Kayan this
time?
That is because
Mackertich could have executed the trades itself, being a member of both BSE
and NSE; but instead it chose to use the computer of CSFB as its sub-broker.
Why did it do so? Sebi refrains from asking. The obvious answer would be that
it wanted to conceal its identity. That is quite all right with Sebi; what it
finds wrong is that CSFB allowed Mackertich to hide behind its skirts.
It would not
have found out but for the fact that CSFB raised the question. It asked NSE
whether letting Mackertich trade through its computer was all right. NSE said
no and fined CSFB Rs 15,000. This pittance raised Sebi’s hackles; it mounted
its own investigation.
The investigator
actually cleared CSFB. He found that CSFB on its own had bought 2600 shares and
sold 2700, and that there was no collusion between it and Mackertich. But G
Anantharaman, the Sebi member in charge, chose to disagree with him. Why? The
reasons are not clear, but as a result, he has been able to shift the blame
from Mackertich to CSFB.
We have had
occasion earlier to criticize Sebi’s investigations of share manipulations.
When it is out to prove manipulation, it deliberately avoids the proportion of
transactions for which its victims are responsible; it finds even an
insignificant sale or purchase sufficient to indict them. Such shoddy
argumentation served a purpose when Sebi barred brokers who had fallen foul of
the powers that be; no matter that years later, Sebi’s verdicts were reversed
by higher courts. But in the present case, Sebi has not only relied on poor
evidence; it has chosen to look away from where the evidence points. That
raises doubts, not only about its competence, but about its impartiality. The
government should ask itself whether this is the regulator it meant to set up.
