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Outstanding in HFCL, DSQ scrips cause of CSE crisis: Sebi

The Securities and Exchange Board of India has said that the payment crisis in the Calcutta Stock Exchange had arisen due to large outstanding positions of few brokering entities mainly in the scrips of HFCL and DSQ Software.

Four brokering companies each of D K Singhania Group and A K Poddar Group and two brokering companies of H Biyani Group were among the large top brokers of the CSE and D K Singhania, who had the largest default, happened to be a member of the Committee of Directors as an elected member.

Sebi recommended that CSE may investigate the books of those brokers who had large deliverable position to establish the bonafide of their transactions.

"While large positions in HFCL and DSQ were built up by the defaulting brokers, there was adverse price movement in the market in those two shares during the settlement number 149 particularly after March 1," Sebi said in its Interim Report on Investigations into recent market behaviour.

CSE followed an incorrect interpretation of Sebi directive of margin computations and allowed brokers to build up positions without paying proper margins, which are meant to contain the risks involved in position building in scrips, Sebi pointed out.

"All the three defaulting groups had violated on several occasions the Rs 100 million scrip-wise trading limit set up by the exchange around the period of 'payment crisis' for which CSE did not take any preventive action," it added.

Sebi said the size of the fund in security guarantee fund was too small to support the large turnover and concentrated positions in a few scrips like HFC and DSQ software.

The price of HFCL had fallen to Rs 388.6 on March 8 from Rs 758.5 on March one, while in case of DSQ the price had fallen to Rs 250 from Rs 366 during the same period.

"Such consecutive fall in the prices against large positions in those shares held by the brokers might have also contributed to the payment default by the brokers," the report said.

In view of the findings of the inspection, Sebi recommended taking immediate corrective action in the area of surveillance and risk management and responsibility be fixed on the officials for failure.

Recommending thorough review of the above mentioned function, Sebi suggested that this should be overhauled and strengthened by putting senior officers in the department.

"The surveillance department should activate all the alerts and have proper benchmarks, closely monitor the positions, particularly the large brokers and their trading, circular trading and shifting of positions within the same group of brokers.

The error in computation of margin should be corrected immediately and appropriate amount of margin should be collected from the members strictly in accordance with T+1 system.

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