Trading in the futures and options (F&O) segment has become more convenient for stock brokers. The National Stock Exchange (NSE) has decided not to close the trading terminals of brokerages if they’d exceeded their position limit in any F&O scrip.
Instead, brokers will only be restricted from trading in a particular scrip under curbs and their positions in other scrips would also not be cancelled.
However, market experts also feel the move would be a boost for manipulators, since the penalty imposed for trading in scrips under an F&O ban is viewed by many as a “convenience fee”, rather than a deterrent.
Stock exchanges place a counter under F&O curbs when open interest (OI) positions in the stock cross 95 per cent of the market-wide position limit. Once the curb is in place, participants are allowed to trade only to unwind positions. New positions could be created only after the OI falls below the 95 per cent mark.
If any entity is found to be building further positions on stocks in the banned list, stock exchanges impose a penalty of Rs 1 lakh, irrespective of the profits made. Stock operators were increasingly exploiting this curb limit to manipulate share prices and it has been noticed that scrips with low floating stock often came under F&O curbs.
"Considering all this, the current norm of not closing down broker terminals and only restricting them from trading in a particular scrip will only make it more convenient for operators. Earlier, if the trading terminal was closed down, the brokers faced huge hassles, which discouraged breaking of rules," said a Mumbai-based lawyer, specialising in equity market related cases.
Instances
Ackruti City and Ispat Industries were the most glaring examples, where the share prices were rigged after getting the stock under (F&O) curbs. Also, in the recent past the repeated entry of a few counters such as Kingfisher Airlines (KFA), Deccan Chronicle Holdings (DCH), Videocon Industries, Orchid Chemicals, Aban Offshore and Suzlon, among others, are worrisome. These stocks have been under a ban period for 20-50 per cent of trading sessions in the past.
Consider this. Of the 121 trading days between January to June 2011, the counter of Kingfisher Airlines (KFA) was under F&O curbs for 57 trading days, which means no new traders could enter the counter to either buy or sell shares. This may have aided in avoiding a sharp decline in KFA shares during the period, as many wanting to short-sell shaes due to the company's debt problems would not have been able to do so. While the security is also traded in the cash segment, often its derivative determines its price, as futuristic bets are placed.
During the same period, DCH was under a ban for 38 trading days and Videocon had curbs for 35 trading days. All these shares did not fall sharply and moved in a narrow range, even while the indices they belonged to witnessed some sharp moves between January to June 2011.
In the case of DCH, only around 34 million shares are available in the market, after excluding shares held by promoters and institutions, who together hold nearly 86 per cent stake. In KFA, only a float of 110 million shares is available. According to stock brokers, even a large percentage of this float could have been cornered by investors and what is left could be a small trading stock.
Method
It is easy to rig shares with such low floating stock, as trades in the F&O segment can be done by paying only 20-30 per cent margin money. Once the stock is in F&O curbs, the operator starts creating a demand for shares in the cash segment, as there is no fear of any short seller in F&O after he had managed to get the counter under curbs.
Operators had used a similar technique to manipulate the share price of Ispat Industries in December 2010. The share price of Ispat rose sharply from Rs 16 to around Rs 24 while it was under F&O curbs, much ahead of any news that JSW Steel was buying the company. Ispat was put under F&O curbs at least 10 times in the few weeks ahead of the deal and the price kept rising, as huge long positions were created by operators, who may have known of the bids for the company. Considering the low share price and floating stock of Ispat, only Rs 40-50 crore were required for rigging its price.
In the case of Ackruti City, the share price doubled in five trading sessions in March 2009. It touched a lifetime high of Rs 2,145 on the Bombay Stock Exchange. Then, 90 per cent of the stock was held by company promoters and another 5.61 per cent by three institutions — DLF Retail Developers, Pacific Corporate Services and Citigroup Global Markets Mauritius. That left a very small amount of floating stock. The counter was under F&O curbs for 29 of the 40 trading sessions from January to March 2009.
