Sebi probes sharp fall in the midcap stocks amid unfair trade allegations

Sebi in consultation with stock exchanges has sought details of host of investors who have made bulk purchases or sales in these stocks between May and July

The market regulator Securities and Exchange Board of India (Sebi) has begun a preliminary investigation into the crash in share prices of small- and mid-cap companies in recent months.

Sources say the regulator is probing the abrupt price movement in close to 70 stocks, following red flags raised by its surveillance system. Shares of several companies dropped over 40 per cent in the past three months, which has raised suspicions over unfair trade practices.

Sebi, in consultation with stock exchanges, has sought details of a host of investors who made bulk purchases or sales in these stocks between May and July. Sources say some of the brokers, in tandem with select investors, could be behind the sharp price movements. 

“The regulator suspects that the prices of over 50 stocks were inflated during the past two-three months. Sebi has also prepared a list of people that includes promoters and directors of the companies whose stocks featured on its red-flag list,” said a regulatory official privy to the development. 

According to sources, the regulator recently met the surveillance teams of stock exchanges and directed them to collate information about price movements in the small- and mid-cap segments. The exchanges were also asked to provide details of suspicious investors who transacted in these stocks, along with their bank statements since the beginning of the year. Further, exchanges have been asked to provide all the undertakings given by investors and the promoter group during the period.

The exchanges would tally the information with brokers’ records to check if investors or promoters made the needed disclosures under the insider-trading and unfair trade practice rules.

The ongoing correction in the smaller stocks has been cause for concern for both Sebi and exchanges since a lot of retail money is riding on these stocks. 

“There is a lot of retail money involved in these stocks. Hence, any trading curbs will impact investors. We advise investors to exercise caution and consider the company’s financials before investing in the segment. There are some mid-cap and small-cap stocks that have fallen despite strong fundamentals. Investors should use the ongoing correction as an opportunity to buy such stocks,” said Motilal Oswal, managing director, Motilal Oswal Financial Services.

The BSE Midcap and BSE Smallcap indices have fallen over 10 per cent each in the past three months, with select pockets seeing even deeper correction. The additional surveillance measures (ASM) introduced by Sebi have only made things worse. In May, both the National Stock Exchange (NSE) and BSE moved 109 stocks to ASM and stocks that featured this list saw a massive decline in their share prices.

Some of the prominent stocks that were moved to this category includes Jaypee Infartech, Bombay Dyeing, IndiaBulls Ventures, Amtek Auto, Reliance Naval, GVK Power and Infrastructure.

According to Sebi, stocks that have been put under the trading curbs were selected on the basis of market surveillance and not on the financials of these companies. However, market participants have opposed Sebi’s move since companies with good fundamentals have also seen sharp declines. 

“The whole new surveillance framework proposed by the regulator is poorly designed, aimed to probably control tax leakage than to manage risk in the market. Looking at the implementation challenges and its drawbacks, the association has recommended Sebi to constitute a new committee comprising of expertise who knows the subject and accordingly revise the new margining system for the entire capital market,” said Rajesh Baheti, president, brokers lobby, ANMI. 

Despite widespread criticism, the Sebi has further tightened the rules for putting stocks in the enhanced surveillance category. The new rules will now consider a stock’s valuation, price to earnings ratio, client concentration and gyration in the price, over a period of one month and one year. Apparently, the new criteria has resulted into ASM being imposed in more marquee stocks, However, the exchanges clarified that the new rule will not be applicable to stocks that are already under the so-called graded surveillance measure (GSM).