Penny drops on price rigging

Regulator increases surveillance to curb fraudulent practices involving small stocks

The Securities and Exchange Board of India (Sebi) has raised its guard against price manipulation in the shares of small companies. Sources said the market regulator had increased surveillance and alert-generation, keeping a close watch on any fraudulent practice in the stock market. This comes at a time when benchmark indices are trading near all-time highs. Several small companies, with limited track records, have seen their share prices increase manifold, often belying fundamentals. Also, heightened activity is being seen in several so-called ‘penny stocks’.

Sebi plans to ask stock exchanges to create a new trading category for shares of companies prone to market manipulation, according to people in the know. The margin requirements for dealing in such stocks are likely to be higher and these could be traded in narrow price bands. “A framework is being prepared to create a separate group for trading of penny stocks and stocks that are susceptible to high levels of manipulation. Our surveillance system is keeping a close watch on these stocks,” said a senior Sebi official.

MANIPULATION UNDER GLARE

• The regulator has enhanced surveillance and alert generation on penny stocks
• Heightened activity is being witnessed in several so-called ‘penny stocks’
• Sebi has asked exchanges to create new trading category to house shares of such companies
• Brokers have started warning investors who wish to deal in penny stocks

Last month, the regulator had consulted market players and exchanges to come up with a mechanism to deal with penny stocks and shares of companies with small market capitalisation. The stock exchanges had suggested for trade in such stocks, the margin requirement could be doubled. Creation of a new trading group (to be called ‘T+’) with higher checks and balances, was also discussed.

Currently, exchanges have a ‘T’ group of shares, for which intra-day trading isn’t allowed. Shares are moved to this category to curb speculative trading and safeguard investors.

Last year, after carrying out surveillance on speculative stocks across sectors, Sebi found penny stocks were being used to manipulate the market. It had acted against several operators active in these counters.

In recent times, Sebi has noticed increase in speculative activity, through e-mails, SMSes and several group messaging applications such as WhatsApp. Often, operators take large positions in several penny stocks and later, promote these stocks by citing positive news announcements related to these. After the stock reaches a certain level, operators start booking profits, trapping small investors.

Brokers said they had started cautioning investors seeking to deal in penny stocks that had already jumped manifold in recent months. “A lot of investors are drawn to such stocks, hoping to make quick returns. However, once the stock hits a downward trajectory, it is very difficult to exit investments,” said a broker.

Last year, Sebi had unearthed a large-scale SMS scam, wherein fraudsters were luring gullible investors with promise of daily returns of up to Rs 75,000, through SMSes.

The regulator had used its search and seizure powers for investigation. It had barred two individuals and four other entities from dealings in the securities market.