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Operators exploiting F&O curb loophole

Palak Shah  |  Mumbai 

Stock market operators are increasingly exploiting the curb limits in the futures and options (F&O) segment to manipulate share prices. The penalty imposed by stock exchanges for trading in banned stocks is quite low, say market players. This has led to an increase in such unfair practices.

If any entity is found to be building further positions in stocks that are in the banned list, stock exchanges impose a penalty of Rs 1 lakh.

 This 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 and new positions can be created only after the OI falls below the 95 per cent mark.

While Ackruti City and Ispat Industries were the most glaring examples, where the share price was rigged after getting the stock under (F&O) curbs, the repeated entry of a few counters such as Kingfisher Airlines (KFA), Deccan Chronicle Holdings (DCH), Videocon Industries, Orchid Chemicals and Suzloan among others are worrisome.

“The sheer negligence of exchanges is the reason behind operators’ impunity. The selection criteria for F&O stocks should be reviewed. Also, the penalty for trading in F&O curbs is looked upon as a convenience than a deterrent,” said a Mumbai-based stock broker. “You just have to pay Rs 1 lakh to build positions in a stock that is in the banned list. Moreover, the penalty is not compounding in nature. So, irrespective of the profits, you just have to pay Rs 1 lakh,” he added.

Consider this. Of the 121 trading days so far this year, 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. While the security is also traded in the cash segment, often its derivative determines its price as futuristic bets are placed. DCH was under 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 this year, even while the indices which they belonged to witnessed some sharp moves.

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 in market. 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.

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 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 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 Mauritius — leaving a very small amount of floating stock in the market. The counter was under F&O curbs for 29 out of the 40 trading sessions from January to March 2009.

With contributions from Ashish Rukhaiyar & Sameer Mulgaonkar 

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First Published: Tue, June 28 2011. 00:55 IST
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