D.R. MEHTA: SEBI chief's swansong

"At times, over Rs 300 crore was kept at Parekh's disposal by the OCBs." SEBI report

They were set up for a few dollars and no more. And before they were banned from fresh investments on Indian stock exchanges in November 2001, overseas corporate bodies (OCBs) had merrily played the markets while India's financial regulators danced around in circles for six months trying to figure out who was the referee.

There was no clear answer. But on November 29 the RBI banned OCBs-entities set up abroad in which nris or persons of Indian origin own at least 60 per cent-from making fresh portfolio investments. They were, however, allowed to continue investing in shares of companies at the time of their public issues. The SEBI had, for long, no clue about such transactions and their effect on stock prices. The RBI too, it appears, had little wind that these OCBs were violating its guidelines and making a windfall.

BUSINESS THE ABC OF OCBS Overseas corporate bodies (OCBs) are incorporated abroad with at least 60 per cent ownership in the hands of non-resident Indians. There were over 500 OCBs operating in the Indian markets. More than 80 per cent of these were based in Mauritius. Many of these OCBs were found to have common addresses. Some had a paid-up capital of only $10 (Rs 480). One had a paid-up capital of just $1. OCBs colluded with Indian stock brokers and foreign institutional investors to rig share prices. 13 OCBs repatriated Rs 3,850 crore out of India between April 1999 and March 2001. They managed to have a free run for a long time because of the confusion between RBI and SEBI over who should regulate them. RBI clamped down on OCBs on November 29, 2001, but details of the multi-crore rupees scam are still emerging.

Before their game came to an end, 13 Mauritius-based OCBs with a total equity capital of less than $40,000 (Rs 19.2 lakh) had repatriated Rs 3,850 crore from India between April 1, 1999 and March 31, 2001. In all, there were more than 500 OCBs investing in the markets. The 13 OCBs are now under SEBI's lens and some startling revelations of price rigging have begun to emerge.

SEBI says these OCBs teamed up with big bull Ketan Parekh to rig prices of certain stocks before dumping these shares on Indian investors to make hefty gains. These gains were repatriated to Mauritius. In the process they flouted several RBI norms.

SEBI's latest investigation report, submitted last week to the Joint Parliamentary Committee probing the stocks scam, says that more than 80 per cent of the OCBs were registered in Mauritius. Most of them had common addresses. For instance, 67 OCBs have the same postal address-PO Box 1130, Remy Ollier Street, Port Louis, Mauritius. Another 57 OCBs share the address of Lescascades, Edith Cavel Street, Port Louis. Several addresses belong to chartered accountants who provide financial services to these OCBs. But it appears they provide merely an address, from which investments could be routed to India.

This raises doubts about the OCBs. SEBI has said that the chartered accountants conduct general body meetings over phone in some cases and merely file necessary papers in Mauritius. "It is difficult to believe that these OCBs genuinely operate from the registered office address and are controlled by persons mentioned as their directors or shareholders," says a SEBI official. Clearly, most of these OCBs were being used as fronts. The challenge for Indian regulators is to find the faces behind these fronts. SEBI has sought help from Mauritian authorities but confidentiality clauses are coming in the way.

SEBI first stumbled on certain "curious transactions" by OCBs during the probe into charges of insider trading in the Global Trust Bank scrip prior to its proposed (later aborted) merger with UTI Bank. In its first investigation report into the stock market scam submitted in April, SEBI listed seven OCBs which had alleged links with Parekh.

All hell broke loose as the amounts repatriated by these entities were found to exceed Rs 2,500 crore. Some of them had a paid-up capital of $10 (Rs 480). Delgrada, a Mauritius-based OCB owned by Zee Group Chairman Subhash Chandra, had a paid-up capital of $1 (Rs 48).

What facilitated the OCBs' free run was the complete lack of clarity on who regulates them. For over a month, a war of words raged between SEBI and the RBI on the issue. They kept passing the buck, with SEBI seeking to debar OCBs from trading and RBI and the Finance Ministry expressing reservations against an outright ban. Ultimately the regulator prevailed.

Meanwhile, SEBI managed to piece the links between OCBs and Parekh (see graphic). Its investigations revealed that in the case of three OCBs-Wakefield Holdings, Kensington Holdings and Brentfield Holdings-the introduction to their NRE account with Global Trust Bank was given by an employee of Parekh's firm Triumph International Finance. In the NRE accounts opened with HDFC Bank, the correspondence address was given as that of Triumph International. In the case of Symphony Holdings and Rafs Corporation, not only was Triumph's address given in the bank account opening form, but the OCBs had given the power of attorney to two directors of Triumph International.

More importantly, more than 60 per cent of the transactions carried out by these OCBs were brokered by Parekh's firms Triumph International and Triumph Securities. SEBI says that many of these transactions were too closely synchronised to be coincidental. The buying and selling orders were fed into the trading terminals at almost the same time. Often the buyer and the seller were both in the same office, making it a clear case of price rigging, says SEBI.

What is being considered as crucial evidence by SEBI is the fact that more than Rs 500 crore worth of shares and cash have not been delivered or paid by Parekh to these entities against sales and purchases carried out by his entities on behalf of these OCBs. At times, amounts in excess of Rs 300 crore were kept at the disposal of Parekh's firms by the OCBs. On other occasions payments were made by them even though there was a large credit balance in their accounts.

SEBI is now probing various transactions of OCBs in the past two year. While it suspects rampant rigging, its probe has revealed that several RBI guidelines were violated. For instance, RBI guidelines do not allow OCBs and NRIs to collectively hold more than 10 per cent of a company's shares. But SEBI says there were instances where a single OCB, Kensington Investment Ltd, owned more than 10 per cent of the equity in companies like Shonkh Technologies and DSQ Biotech.

The show ended on November 29. The credits are yet to roll.