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JPC indicts Sebi for Rs 19 billion ALBM withdrawal by Reliance

The Joint Parliamentary Committee has blamed the market regulator, Securities and Exchange Board of India, for lack of alertness that led to withdrawal of Rs 19 billion by Reliance from the automatic lending and borrowing mechanism in less than two weeks, leading to stock market crash last year.

"What is appalling to the committee is that Sebi never realised the role played by ALBM in the market crash of 2001 nor did it initiate any investigation of ALBM after the crash," JPC said in a draft report circulated among its members.

"Reliance Shares and Stock Brokers Ltd was the topmost participant in NSE's ALBM and BSE's Borrowing and Lending of Securities System," it said pointing out that the firm withdrew Rs 19 billion between February 28 and March 7 from ALBM, Bless and Vyaj Badla financing system of CSE.

In its response, the then chairman of Sebi (D R Mehta) said, "If one is entitled to put in money, if one is a registered entity, one is entitled to withdraw the money if the activity is legal, unless there is some additional factors to prove that this was done with some kind of intention."

Lambasting Sebi on handling the issue relating to the revised ALBM, the report said "the committee are concerned to note that no limit had been fixed on financing of ALBM which enabled single player to influence the market."

The ALBM system, facilitating corporate lending to share brokers at high interest rates, was modified within 10 months of its introduction in February 1999 without proper approval of the Sebi, the report said, adding that "it did not have risk containment measures that are normally required."

Referring to former Sebi chairman D R Mehta and big bull Ketan Parekh's depositions before the committee, JPC said withdrawal of funds on such a large scale could certainly influence the share prices.

Explaining the reasons for withdrawal of funds, Reliance Petroleum has reportedly said, "Our peak investment in ALBM segment was approximately Rs 16 billion. We brought our investment to nil in March 2001 in view of reduction in interest yield, our business requirements and as a matter of business prudence."

RPL said that decisions were made keeping in mind increased market perception about alleged payment problems in stock exchanges and increased volatility in markets, according to the report.

The return on deployment of funds in the ALBM was stated to be in the range of around 15-21 per cent as against 7-8 per cent in other short term instruments, the report said.

In his reply, Parekh had said "supposing Rs 20 billion was withdrawn in a span of 10 days in February-March 2001, it is inevitable that the bulls had to either liquidate their positions or take delivery. Since delivery could not be taken consequent to the falling markets and due to various factors the market reacted downwards."

To a query as to why Sebi had not investigated ALBM soon after the market crash, former Sebi chairman (D R Mehta) deposed that National Securities Clearing Corporation Ltd (NSSCL) "was the one body which we left out", the report said.

"The committee do not think that NSE was so naive as not to know that the revised ALBM was beyond the scope of the securities lending scheme and that it contained features of deferral products which required Sebi's prior approval for its introduction," the draft JPC report said.

It further said SEBI permitted withdrawal of securities from the clearing house under ALBM despite G S Patel committee, which went into reintroduction of 'badla,' recommendation in 1995 of not to permit withdrawal of securities under the modified carry-forward scheme.

Referring to the delay in submission of the Verma committee report on the modified ALBM, JPC said: "The committee are at a loss to understand the inordinate delay. The fact that ALBM was discontinued from July 2001, itself suggests that the scheme might not have been in conformity with the stock lending scheme."

"Sebi's handling of the issue relating to the revised ALBM leaves much to be desired," JPC said.

"The committee, therefore, desire that matter should be thoroughly investigated by the ministry of finance and responsibility be fixed on those who were responsible for this inaction in Sebi and NSE, who jeopardised the interest of investors and endangered the entire secondary market by embarking upon such a scheme," it added.

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