The budget, the bull and the BSE: Asiamoney cover story, June 2001

 Ban

Rathi’s problems were just the start of a drama now engulfing the market. Sebi’s statement of March 12 didn’t just affect him, it also banned every other broker director from the board of the exchange “in the interest of investors and the orderly development of the securities market in India”. Including Rathi, that meant seven people. Among them was Deena Mehta, who had only taken over as acting president the previous Thursday. The ban meant that for the first time in the 125-year history of the BSE, it was not being run by brokers. A prudent arrangement, some might think – but the market dropped 114 points on March 12, and 227 the following day, accentuated by revelations by portal Tehelka.com that senior government figures had illegally accepted cash in relation to arms trading. That day Sensex hit a 22-month low on intra-day trading. The rupee fell with it.

But both Sebi and Sinha were undeterred. They were in the process of reinventing the exchange, whether it liked it or not. On March 13 Sinha announced to parliament his plans for the markets. These included corporatization and demutualization of the stock exchanges, more power for Sebi, and the movement of 200 stocks from the BSE’s A-list to rolling settlement by July 2. It was clear that the suspension of the BSE’s broker-directors was no temporary measure. Ownership, management and trading membership would be segregated.

This was revolutionary stuff. Only one functional exchange in India is not run by brokers – Delhi’s National Stock Exchange (NSE). Sinha’s new direction represented the reversal of the habits of a century in India’s introspective stock markets. He made it clear that all of India’s exchanges – there are more than 20 – would go the same way.

Two days later, on March 15, Sebi formally banned trading by stock exchange presidents, vice-presidents and treasurers. It announced – perhaps rather indiscreetly – that it had prima facie evidence against 20 firms involved in bringing the market down after the budget. The market swayed and wobbled, not helped by a growing payment crisis two thousand miles east on the Calcutta Stock Exchange that saw its entire management resign at the end of the month. Next, the income tax department raided 16 brokers including Rathi, Shankar Sharma (the president of local brokerage First Global) and another broker, Ketan Parekh. Parekh was then arrested on a separate scandal on the last trading day of India’s financial year, March 30, by still another regulator (see The big bull in bigger trouble). In the light of this latest development, anything that had happened earlier in the month was small fry: Parekh, known as ‘the big bull’, was India’s most celebrated broker, a man who could move markets on his own, such was his following among local investors.

Meanwhile, Sebi had been working on its report on the crash, which had by now broadened into an investigation on market manipulation in general. Sebi chairman DR Mehta gave his report to Sinha on April 15. This report is not public, and probably never will be, but its details have been plastered across India’s business press. “It seems to me that the only people who haven’t seen this thing are the ones who are named in it,” says one disgruntled insider. The report has also reached Asiamoney. It focuses very clearly on Parekh, his trades in  K-10 stocks and share price movements in Global Trust Bank (see The big bull in bigger trouble). It also names several brokers.

On April 18, 10 broking houses were debarred from carrying out broking business in India until further notice. Three of them were entities of Sharma’s First Global, another five were part of the Bang group, and the ninth was Palombe Securities. The 10th: CSFB. The case was about to hit the international headlines.

This marked the first time a foreign house had been punished in India and was a severe embarrassment for CSFB. The bank immediately let it be known it considered itself to have stayed well within market guidelines, but by and large has declined to comment further on the case. JM Morgan Stanley, a joint venture in India involving the US powerhouse, also appears in Sebi’s report, although the house has not been banned. Asked about the investigation, Morgan Stanley managing director Raju Panjwani says: “In the normal course of business we have been asked, as we have been asked before, information about certain trading activity within a certain period, which Sebi and other regulators have a full right to access, and that is exactly what we have complied with. That’s really it. I don’t think there has been any further discussion with us and Sebi has never told us we are being investigated.” But Asiamoney can confirm that Sebi’s report makes specific reference to trades in Satyam and Infosys on March 1 and 2, and that it states: “A limited review of the trading by the member [JM Morgan Stanley] shows instances of transactions which appear to be of a manipulative nature and could have impacted the decline in certain scrip prices. However, it would require a detailed analysis of the entire trading by the member over an extended period.” Since then Prakash Mani Tripathi, chairman of a parliamentary committee investigating the situation, has been quoted (by Bloomberg) as saying Morgan Stanley will be investigated, with the focus apparently on the mutual fund rather than the brokerage business.

CSFB and local brokerage Nirmal Bang appealed against the decision on April 30. No decision was made at the hearing before Sebi chairman DR Mehta (the same man who had written the debarring orders in the first place). At the time of writing, the brokerages were still waiting for a response. Meanwhile the third brokerage, First Global, did not bother to attend the hearing, having already filed in the High Court; First Global’s problems are complicated by the fact that owner Shankar Sharma has been arrested for threatening an income tax official and is also part-controller of Tehelka.com, the company that accentuated the crash with its arms trading revelations. In the meantime all three are sitting idle, unable to trade, awaiting further hearings and the findings of a Joint Parliamentary Committe appointed to make further investigations based on Sebi’s interim report.