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Bourses rocked by worst crisis in a decade

Indian stock markets are reeling, swamped by a series of insider trading scandals and settlement payment problems that amount to the worst crisis faced by the nation's poorly policed equity market in nearly a decade.

Since March 1, the Bombay Stock Exchange (BSE) benchmark 30-issue Sensex has declined 13.06 per cent. The broader 500-share S&P CNX 500 index has fallen even more sharply, plummeting 17.94 per cent in the past 15 trading days.

The plunge has wiped out Rs 1.14 trillion in shareholder value, and severely undermined trust in the fairness and management of the nation's capital markets.

The slide began with a news report on March 2 saying that the Securities and Exchange Board of India (Sebi) planned to probe the role of certain brokers in hammering down the prices of a number of shares known to be among the biggest holdings of a major speculator.

The report said that the brokers were suspected to have been taking advantage of privileged information that the speculator was facing financial difficulties to trigger a slide in his favourite stocks.

That slide quickly developed into a market-wide avalanche by causing a number of brokers to default on settlement payments owed on the Calcutta Stock Exchange.

Fear quickly spread that settlement payment problems could affect other Indian exchanges, causing a wider decline as investors bailed out of a market viewed as badly policed and financially shaky.

The rush to exit was hastened by news exchange authorities were suspected of leaking the information that set off the initial decline, and by Sebi's ill-timed moves to crack down on insider trading to allay investor concern about market policing.

On March 12 the watchdog agency suspended all the broker members of the BSE board. Earlier, Anand Rathi became the second BSE chief in a row to bow out after a scandal.

Rathi, who has also been suspended by Sebi from acting as a broker, has denied any wrongdoing.

Reports quickly followed that Sebi was investigating possible insider trading in a number of stocks whose shares rose sharply ahead of corporate announcements, and other stocks whose prices are suspected of having been manipulated.

Insider trading

One Sebi investigation is focused on whether a group of brokers precipitated a sharp drop in a number of high-tech stocks by engaging in short-selling, or selling shares one does not own in expectation the price will drop by the time of settlement as much as five trading days later.

The shares involved in the investigation did indeed fall -- by between 20 per cent and 72 per cent between March 1 and Wednesday's close.

Himachal Futuristic, a telecommunications equipment maker, fell the most, plummeting 72.2 per cent. DSQ Software plunged 66.6 per cent, Silverline Industries sank 55.2 per cent, Global Tele-Systems tanked 48.8 per cent, Digital Equipment slid 24.3 per cent and Zee Telefilms, India's largest private television network, fell 20 per cent.

Sebi is also investigating suspected insider trading in the shares of UTI Bank and Global Trust Bank ahead of the January 24 announcement they will merge, creating India's largest private-sector bank.

Global Trust Bank's shares rose 13.7 per cent in January ahead of the announcement.

A leading Indian business daily on Thursday also quoted Sebi chief D R Mehta as saying the watchdog is examining the share price movement of Hitech Drilling, an oil drilling company, prior to the announced sale of a stake by Tata Industries.

A price rigging probe has also been launched into the stock of Amara Raja Batteries, an industrial and automotive battery maker. The stock trebled in price over five months to Rs 320 in early March before plummeting more than 70 per cent.

Another Indian business daily reported on Tuesday that three brokers manipulated the stock through circular trading -- colluding to arouse investor interest in a stock by buying and selling it amongst themselves.

The shares of Cyberspace Infosys are being investigated for the same reason.

Déjà vu

The current crisis is the worst faced by Indian equity markets since April, 1992 when Harshad Mehta, called the 'Big Bull' by the media, was involved in a $1.3 billion scam.

That scandal involved the illegal channeling of bank funds into the stock market through the collusion of bankers, brokers, and public and private sector companies.

In April 1995, Sebi itself was the focus of a major stock market scandal after three of its senior officials were implicated by police in an alleged plan to cheat investors. And in March 1999, the then president of the BSE, J C Parekh, was forced to resign for administrative lapses which benefited some brokers.

Crony clubs

Lakshmi Chandra Gupta, the director of the Society for Capital Market Research and Development, said that the management of Indian equity markets would greatly improve if only the exchanges would appoint independent chairmen, not member brokers.

Currently, 50 per cent of the stock exchange members are brokers and the rest non-brokers.

P N Vijay, managing director, P N Vijay Financial Services Pvt Ltd, said many Indian stock exchanges still feel like crony clubs.

"Why don't these problems happen on the National Stock Exchange? It is owned by the financial institutions and run by independent people," Vijay said.

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