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

 BOX 1: THE ACCUSED

 On May 2, Anand Rathi’s petition before the High Court against Sebi’s ban on his broking businesses was dismissed, leaving him to move on to the Supreme Court. A couple of hours later he spoke to Asiamoney at his Mumbai headquarters.

The case revolves around a telephone conversation between Rathi and the surveillance department of the Bombay Stock Exchange on March 2. When asked to talk us through his version of the events on that day Rathi was keen to explain that he himself had installed the recording system – that it was not a Sebi requirement that it existed. He therefore knew that all of his calls, including the one made on that day, were recorded.  

When the Sensex fell sharply, and unexpectedly, on March 2 Rathi says that it was his duty to find out why the fall was happening and whether any corrective measures were required. He says that he tried to telephone the person in the surveillance department he would normally speak to in such circumstances but found him absent. He was then passed to someone else in surveillance, who had only started work there 15 days previously. Rathi says that he had asked the member of staff why technology stocks in particular were falling and whether institutional sales were involved, but that he was given information he had not asked for in reply – though he insists that the information he was given was general in nature and involved no information on price, quantity or outstanding positions.

[When Sebi was passed a copy of the tape, it debarred him as a director of the exchange and banned his brokerages from trading, sending the notice to his home at 10.30pm on March 12.]

 On the day of your conversation, the volumes of your securities companies were…

Nothing. After my conversation there was no change in the index prices. My companies’ volumes did not change. My company only does client transactions. We don’t do proprietary trades, we are not traders ourselves. 

 You have institutional clients?

Yes.

 Big ones?

Yes.

 Who?

Many: 60, 70 institutions. But after that I don’t think we had any institutional business. In any case I did not communicate to anybody what I talked about. And the information itself was not price sensitive.

 What about the trades on March 5? [Sebi alleges irregularities in trades performed by a Rathi-owned brokerage on March 5]

On March 5, can you do any trade based on any information on March 2? The whole world moves in three days.  Sebi mentioned that that my son-in-law’s firm sold stocks  worth Rs36 million, which is less than 0.2% of the day’s market share. But this was only part of the story. They did not tell the court that the firm had carry-forward outstanding positions from an earlier day of about Rs30 million and new buying of about Rs22 million. So against combined buying of Rs52 million there were sales of 36 million. It was the last day on the National Stock Exchange that day, so all clients who had bought earlier in the week wanted to square up their positions on that day. Our entire trading was represented by 1,600 trades that day.

 Before this did you have any trouble with Sebi?

Never. In fact I had been on the largest number of committees at Sebi. I think the contributions I made to Sebi over the last two years would be the maximum.

 You said you hadn’t spoken to the individual in surveillance before, but was it common for you to speak to surveillance at all?

No, it was the first time, and this happened because it was such an extreme position – that after a good budget you had such a big fall. I was getting calls from the Sebi chairman and others saying: what is happening, why is the market going down? Anyone who is in a position like this has to know that – the finance minister, the Sebi chairman, the president of the exchange.

 The Sebi chairman called you?

Yes, that morning he called me. It is not unusual. They never call anyone else at BSE other than the president.

 It seems that everyone knew that market manipulation was going on. Surely the Bombay Stock Exchange could have acted.

That cannot be a role of an exchange because the exchange does not have any power to ask a broker his source of funding. Banking supervision should have found it out. Is there any process anywhere in the world where the broker has to explain his source of funds to the exchange?

 This question of a bear cartel…

In all the orders given to me by Sebi there is not a single word written that we are part of a bear cartel. If Sebi thought I was part of a bear cartel wouldn’t my name have been included on day one? We are agency brokers.

 What do you think about the removal of your colleagues [the other broker-directors at the BSE]?

On what charge have they been removed? This is very shocking, that you remove elected brokers… after all BSE brokers are also regulators. Is it not a very sad story that broker members are removed just because of a suspicion in somebody’s mind? Brokers are members of the governing board.

Your ex-president said that when he become the president he exited from the broking business.

But I was not doing any business. I never looked after my broking business in the last few years of my company.

But technically you do control the broking business.

No, I have got the most professional set-up in this country among the brokers in India. I have 80 people working there, and I never control directly any day-to-day operations.

But they are accountable to you.

Naturally. I am chairman and MD so they are accountable to me. But I was not linked with the day-to-day activities.

So you don’t, as a matter of principle, see any conflict of interest between the president or a board member of the stock exchange also been connected with a brokerage?

You always have conflicts of interest in any fiduciary position. If you are a chairman of a company or director and you are looking at the accounts, you may have another business where you have conflict of interest. Your obligation is that anything you do in a fiduciary position should not be used to your personal advantage. This is what corporate governance is all about. Suppose I am on the board of Infosys. I am a broker; is there no conflict of interest? Suppose the chairman of the exchange is not a broker. He still gets information. Can’t he misuse it for his own advantage? Is it only a broker that can misuse information, and not a non-broker?

Combining all the broker members who have been removed from the board, how much trade do they account for?

It could be in the range of 2-3% between all of them.

Not enough to influence the market?

No way! Even if they had all acted together. If there is two percent market share can you influence the market? People want to hammer BSE. I am proud to say the BSE is the best run exchange in India today.

BOX 2: CSFB – IN TROUBLE AGAIN

 Of all the messy developments in the BSE scandal, the involvement of Credit Suisse First Boston (CSFB) has garnered by far the most international attention. Although details of the specific charges against CSFB are unavailable from either the brokerage or Sebi, Asiamoney has a copy of the report Sebi filed to finance minister Yashwant Sinha which devotes eight of its 94 pages to CSFB. In the main, it deals with transactions through CSFB on account of Luminant Investments, Panther Fincap & Management Services and Class Credit, all of them Ketan Parekh companies, and alleges that CSFB “acted in collusion with the Ketan Parekh Group brokers for synchronising the buy and sell orders to result in structured transactions at both BSE and NSE.” We believe that the letter Sebi chairman DR Mehta sent to CSFB on April 18 tells the brokerage that it is barred from trading not just because of this charge of collusion and market manipulation, but also on a separate charge of stock lending.

A source familiar with the hearing – not from CSFB – says that at an April 30 appeal, the brokerage launched a strong defence against the second charge in particular. This source says that Sebi’s charge of lending shares in an unauthorized manner is supported by a single instance in November 2000, and that CSFB claims that instance involved an erroneous credit of shares by the depositor – and that in any case the stock price didn’t move. Asiamoney has been told that Citibank, as custodian, has testified to this and provided documentary evidence in CSFB’s defence. Those close to the situation believe this charge is likely to be thrown out.

(However, when Asiamoney approached Citibank to verify this, Madhulika Gupta in the corporate affairs office in Mumbai insisted that CSFB India Securities did not have a depository participatory account with Citibank custody, and that Citibank had not provided any custody services for the company, nor did it provide any clarification for it. “As such our name has been erroneously mentioned.” It is likely, however, that the incident mentioned in the appeal involved P-notes – which allow foreign investors to participate in the Indian markets without holding FII (foreign institutional investor) status, but only through offshore vehicles – in which case the appropriate arm of CSFB would be CSFB Hong Kong, via its subsidiary account Kallar Kahar. Gupta confirms Kallar Kahar is a Citibank client but cannot confirm whether Citi has provided confirmations to it, citing client confidentiality. “Generally speaking, clients often ask us for confirmations, and those would be supplied.” Citibank does not offer securities lending services in India.)

The other charge, involving Parekh, is harder to examine. CSFB has never denied that it acted for Parekh, just like it acts for dozens of other clients, and Parekh would presumably have been drawn to deal with CSFB because, as a market leader in equity brokerage (at best CSFB’s market share has been estimated at 15 or 16%), it would have the ability to clear large transactions. It is thought that CSFB claims it only ever acted in transactions where Parekh was the seller, never the buyer, and that it had no way of knowing what else its client was doing. The brokerage is also believed to deny that it funded Parekh – if anything, it just gave him a cheque for stocks it had sold on his behalf. In India CSFB offers a service to some by which a cheque can be given to a client on the day of a trade rather than a week or more down the line.

“In this market in most cases you don’t know who the buying broker is, let alone the client,” says one broker in Mumbai.

There is another puzzling element. CSFB put out a 28-page research report on March 1, the day after the budget and the day before the disputed market collapse, giving an “overweight” recommendation – a buy – on the back of the budget. The report was called: “Mr Sinha delivers – get bullish.” It does seem extraordinary to suggest that CSFB, while telling its clients to buy, would simultaneously be taking part in a cartel  to drive down the market. CSFB has refused to say what proportion of its business Parekh accounted for, but one can assume it isn’t enough to warrant wanting to imperil every other client it had in India. CSFB still had a buy recommendation on India in its May 7 research report.

That said, Sebi’s report makes it clear that the post-budget market crash is no longer the sole focus of the investigation, but the earlier bull run too. The table on p26 is taken from that report, and shows CSFB selling 1.5 million ZeeTelefilm shares in 10 trades while one of Parekh’s brokerages, Triumph, bought them again seconds later. The report details similar trades involving Adani Exports on January 1, Shonkh Tech on January 30 and Global Trust Bank on March 2, and says the cumulative value of sales by the Ketan Parekh group through CSFB at the BSE and NSE between January and March this year reached Rs18.1377 billion. It  comes down to a single issue: should CSFB, or any broker, have noticed what Parekh was doing and stopped doing business with him (even gone to the regulator about it), or is a broker under no obligation to police its clients? (See also The big bull in bigger trouble).

Not all of the report seems fair in an international context. If you are a broker, read the next two sentences and see if you can think of a single brokerage that shouldn’t therefore be in trouble. “Since CSFB has large trading on behalf of institutional clients, the possibility of front running in their own account and in the account of Kallar Kahar on order by these clients cannot be ruled out. CSFB has also released a large number of research reports, which are company specific or general in nature. The impact of such research reports on trading by their clients and the general investors also needs to be examined.”

In view of assertions like that, some believe CSFB is a scapegoat, the foreign name that happened to be singled out for investigation, and guilty of nothing more than bad client selection or, at worst, turning a blind eye. The fact that JM Morgan Stanley trades are examined in the Sebi report, but that the US-India joint venture has not been debarred while investigations continue, supports CSFB’s sense of injustice. If so that is spectacularly unlucky, but it may well sound a little too familiar for some market observers’ liking. CSFB feels it was also the unlucky bank to be singled out in the derivatives scandal in Japan in 1999. Hot on the heels of problems in London (the banning of the ‘Flaming Ferraris’ team for manipulation of the Swedish Stock Exchange), Russia (colossal losses in the debt crisis) and the US (two employees suspended over a probe into IPO share allocations), this has not helped confidence in the investment bank’s activities. In the meantime 35 CSFB staff – out of a total of 38 in the whole operation in India – can’t trade. The bank could lose millions in revenue.

If CSFB does not clear its name, one casualty could be the prized advisory mandate for the privatization of India’s corporate crown jewel – telco VSNL. When Asiamoney met minister for disinvestment Arun Shourie in May, he said he was developing guidelines on violations that would preclude a company from participating in a privatization, in the wake of the controversial Balco sale. We asked if that would affect CSFB. “That is a matter being examined by the law ministry,” said Shourie. “My only view on this matter is that for advisors the criteria have to be even stricter than for potential bidders.”

 BOX 3: THE BIG BULL IN BIGGER TROUBLE

 Ketan Parekh was arrested on March 30 on charges of defrauding the Bank of India. He is also at the centre of Sebi’s detailed report on market manipulation, which was filed to finance minister Yashwant Sinha on April 15. It is quite a fall from grace for the ‘big bull’, a man once credited with enough influence to move markets on his own.

Parekh started out as a modest figure running his father’s brokerage. But from early 1999, he began building up a portfolio of high growth, small capital base stocks that then went through the roof. These became known as K-10 stocks and included Global Telesystems, Himachal Futuristic (HFCL), Silverline Industries, Aftek Infosys and Zee Telefilms. Through his brokerage firms he held high proportions of these stocks: up to a quarter of the floating stock in Aftek Infosys, for example. These purchases were financed by borrowing from banks and corporates – some of which he then bought stock in with the same advances – using his shares as collateral. A large proportion of his trading was handled through sub-accounts of foreign institutional investors (FIIs).

As the markets rose through 1999 (700 points in the first few months), the K-10 shot up with them, pushed by Parekh and an army of brokers and fund managers who followed his every purchase. Aside from the BSE, he was particularly active in the (notably less well regulated) Calcutta Stock Exchange. Global Tele jumped by 200% between July and October 1999. Last year,  Kerry Packer was sufficiently impressed to launch a technology-focused venture capital fund with him.

But Parekh suffered in the tech stock crash of April 2000, then again in the slowdown in US technology shares later in the year, and this final drop in his stocks all but finished him, putting several Calcutta brokers into default as a knock-on effect. K-10 stocks dropped by between 40% and 70% in the crash that followed the budget, a far greater amount than most other stocks (but then the high level of the tech stocks beforehand was surprising given the fact that some of them were issuing profit warnings and the Nasdaq was dropping).

When arrest came, it had nothing to do with the stock price crash or the bull run that preceeded it, but allegations that Parekh had defrauded a bank, Bank of India, out of Rs1.37 billion (US$29.1 million) following a transaction involving Madhavpura Bank, a co-operative bank and heavy lender to Parekh that had suffered a run on deposits earlier in the month. Furthermore, Sebi was not the arrester – instead it was a different regulator, the Central Bureau of Investigation.

A week after this arrest, regulators went further and banned his firms – Triumph International, Triumph Securities, Classic Shares & Stockbroking and NH Securities  – from transacting on the stock market. The reason: alleged manipulation of Global Trust Bank shares prior to the bank’s merger announcement with UTI earlier this year, a transaction that would have created India’s largest private sector bank.

Allegations that Global Trust had been advancing capital to Parekh in order for him to use it to buy Global Trust stock, thus pushing up the share price, had been flying around the market for some time, and in April the merger was abandoned and the bank’s chairman, Ramesh Gelli, stepped down. The Global Trust incident, including the brokers that carried out trades involving its shares, is detailed in the Sebi report submitted to Sinha on April 15.

The report also features details of numerous trades in K-10 stocks, where Parekh would arrange for large quantities of shares to be sold while also arranging for his own brokerages to buy them back immediately. The table on p26 details trades of 1.5 million shares in Zee Telefilms in 10 trades in a single day in February, with CSFB the seller and Parekh’s Triumph International Finance  the buyer, with all trades coming within seconds of each other. “Both the buy and sell orders had been placed for the same scrip, quantity and price and their timing synchronised within a space of a few seconds,” says the report.

The brokerages that were banned on April 18 following the Sebi report were all banned in part because of their connections and business with Parekh; sources say Sebi chairman DR Mehta’s letter to CSFB that day specifically said: “Investigations reveal that Credit Suisse First Boston has indulged in large transactions on behalf of entities connected/associated with Ketan Parekh.”

Lurid tales have developed that a cartel of riled brokers had clubbed together to bring down the market and destroy Parekh’s wealth. It made for great headlines, but it hasn’t convinced everybody. “I am not convinced that there was a grand design to bring down the market or that anyone was taking revenge against some bull operator,” says UR Bhat at JF Asset Management. “Lots of players were watching Ketan Parekh and there was talk that he had reached a point where he could not sustain his buying spree. And when the opportunity arose, lots of players moved in with sales/short sales. I would tend to believe that they did it for profit, and for probably no other reason.”

Another broker adds: “I do not agree with this charade about some bear operators joining hands to take revenge on Ketan. There is no place for such emotion in the market: you are guided by nothing else other than the desire for profit.”