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BUSINESS: STOCK SCAM
THE BEAR CARTEL
While Ketan Parekh has been the centre of the
scam and occupies place of prominence in SEBI investigations, the regulator
has also probed dealings of a few other Indian broking companies. They
are Nirmal Bang Group, Shailesh Shah Group, RK Damani Group, Ajay Kalyan
Group, BLB Group, Consortium Group and First Global Stock Broking (FGSB).
In the spotlight of investigation were FGSB whose directors Shankar Sharma
and Devina Mehra have been much in business news, and the companies of
Nirmal Bang group. Both FGSB and Bang Broking were found guilty of "indulging
in manipulative trades to depress the market". They were, according
to SEBI, doing just the reverse of Parekh-hammering the stock price down.
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Ketan Parekh's Sins
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1. Used a large number of broking
entities spread across exchanges to circumvent SEBI restrictions.
2. Used a network of FII sub-accounts
to create market interest in select shares.
3. Took funds from banks and promoter
groups to strengthen his market position.
4. Used presence of different settlement
cycles to shift from one exchange to another.
5. His activities were manipulative,
unprofessional and violative of SEBI regulations.
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FGSB, to which the SEBI report has devoted about
20 pages, was a net seller in almost all stocks between January and March
2001 on BSE and NSE that were studied by SEBI. "There were also instances
of unloading of previously build long positions (long-held shares), obviously
with the intent to hammer the scrip prices." For instance, FGSB sold
89,350 shares of Global Tele, and 2,12,876 shares of HFCL in one settlement
each. Similar offloading was done of Satyam, Zee Tele Films and DSQ Software
shares. SEBI also found collusive trading between FGSB and Nirmal Bang
group. "The trading pattern of Shankar Sharma through Nirmal Bang
is of highly irregular nature," it notes.
The pattern in which sales orders were made,
particularly when the share prices fell substantially, hints at price
manipulation. "The manipulative intent becomes even more grievous
since most of the dubious trades are conducted on behalf of FGSB's subbroker
Vrudhhi. There appears to be a pattern of circular trading and routing
of propriety trades through obscure and nondescript entities, obviously
with a view to escape scrutiny." The investigations have also led
SEBI to believe that FGSB could have used in-house research reports to
influence the market. FGSB acts have been found in violation of more than
one provision of the SEBI's Act.
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SELLING PRESSURE: First
Global directors Shankar Sharrma (left) and Devina Mehra. Sharma
was arrested on April 20.
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On April 19, SEBI barred broking firms of FGSB,
Nirmal Bang group and CSFB from undertaking any broking business till
the regulator issued further orders. Both CSFB and FGSB have denied having
broken any law of "either SEBI or any stock exchange". FGSB
has also decided to take legal advice on its options after the SEBI order.
The SEBI, however, seems in no mood to relent.
It not only barred the three broking firms on April 19, on the same day
it passed an order prohibiting BPL, Videocon International and Sterlite
Industries from entering the capital market for four, three and two years
respectively. That's the culmination of three-year case of rigging in
the price of these companies shares. If SEBI continues to be as tough
as it has been of late, small investors can hope for safer investments
in stocks in future.
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