Crackdown On Badla, Short Sales

The entire governing board of the Pune Stock Exchange has also been served with a show cause, threatening supersession for serious violations by elected directors.

Most of the illegal carryforward operations were found to have been linked to short sales, with short positions being carried forward. Sebi has invoked the provisions of the Sebi Act, the Sebi Brokers' Regulations and the Fraudulent and Unfair Trade Practices Regulations for taking action.

Sebi's investigations department headed by senior executive director L K Singhvi had launched a nationwide investigation into alleged bear hammering late last year. It uncovered carryforward violations during the investigation.

 

Sebi has completed its first report on the investigations, essentially dealing with illegal carryforward, based on which these steps have been taken. These steps are also indicative of Sebi's resolve to crack down on short sales aimed at artificially depressing the market. The bear hammering is being probed further.

The violations established in the first report range from illegal carryforward, evasion of margins, non-reporting of transactions, and violations of other Sebi regulations. The five elected directors of Pune and the one of CSE have been asked why they should not be immediately debarred from continuing as directors and prevented from seeking a fresh term of two years.

Sebi has also issued show cause notices to two investment companies, Janhavi Investments at Pune and Mega Securities in Mumbai under the Fraudulent and Unfair Trade Practices regulations, since they acted as clients in these violations. The notices seek to debar them from trading in securities for a period. There is a close link between one of these firms and an office-bearer of the Bombay Stock Exchange. This is the first time that investment companies have been brought under the net for such major violations.

Singhvi told Business Standard: "Besides price rigging, we are also looking into the manipulations which undermine investor confidence and healthy growth of the capital markets. The present action is aimed at curbing such unauthorised transactions which endanger market safety."

At Pune, the five elected directors -- exchange president Rajesh Kasat, vice-president Jitendra Wagh, Pramod Shah, Anand Sathe and V Rathod -- and 20 others have been showcaused. In Mumbai, brokers Vinod Biyani and Ramesh Biyani come under the net. In Calcutta, CSE vice-president Subhas Pachisia and brokers Sonthalia and Co, Ashok Poddar, Prema Poddar, Vinod Kandoi and Prudential Stock Broking Services have been issued the notices. Jahnavi Securities, a broking firm in Pune, has also been slapped the notice.

Singhvi said short sales aimed at artificially depressing prices are unfair trade practices and therefore need to be checked in that light under the regulations.

Sebi has said that since prima facie there is gross negligence and even participation of elected directors, including office bearers of PSE, in carryforward transactions, non-reporting of trades and evasion of margins, a serious view had to be taken on this. The governing board, the regulator felt, appeared to have failed in its duty of protecting the interest of the securities market and ensuring proper and legal conduct on the part of its member brokers.

The show cause, therefore, seeks to know from the board why the board should not be superseded. This is being done under section 6 of the Securities Contracts Regulation Act. If the supersession finally takes place, Sebi will appoint an administrator to run the stock exchange.

The elected directors have been show caused under section 11B of the Sebi Act. The other brokers of PSE, BSE and CSE have been showcaused under the Sebi Brokers' Regulations. The investment firms Jahnavi and Mega have been issued the notices under both 11 B and the Fraudulent and Unfair Trade Practices Regulations.