Market regulator Sebi has banned five FIIs, five broking houses, six companies and several other related entities from the market for their role in stock price manipulation using the GDR route.
In its 44 page order, released on Wednesday, Sebi directed India Focus Cardinal Fund, MAVI Investment, KII Ltd, Sophia Growth (Somerset India Fund) and European American Investment Bank Ag-all FIIs or their arms registered with the regulator-not to deal in the Indian market, either directly in stocks or instruments with Indian shares as underlying, like futures, options, depository receipts, etc. Sebi also barred Basmati Securities, Oudh Finance & Investment, Alka India, SV Enterprises and JMP Securities, all brokers, from dealing in the market. Besides, the market regulator also ordered Asahi Infrastructure & Projects, IKF Technologies, Avon Corp, K Sera Sera, CAT Technologies, Maars Software International and Cals Refineries, all listed companies, not to make any fresh issue of shares or instruments linked to shares till further order.
A Sebi investigation found that these FIIs and the brokers were dealing heavily in the GDRs of these companies where mostly the FIIs were the sellers while the domestic brokers were the buyers. The trades were also done in such a synchronized manner that these entities together accounted for the majority of the trading volumes in these counters. The shares were sold after these FIIs converted GDRs of these entities into Indian shares, also called fungibility. It was also found that subsequent to these Indian brokers buying these stocks, they were further offloaded to gullible Indian investors at inflated prices after which the stock prices crashed, leaving retail investors with huge losses.
"(Trading) accounts were matching with the group entities as counterparty across different companies raising a suspicion of a possible pre-arrangement between group and (FII) sub-accounts due to the fact that most of the companies examined were illiquid companies and it would be difficult for the sub-accounts to sell their holdings without experiencing a major price fall. It was also observed that sub-accounts and aforementioned Indian clients were the major contributor to the volume in such scrips. When queried, KII and India Focus denied having any link or arrangement with any of the entities with which they traded in the Indian markets," the Sebi probe report said.
The Sebi investigations also found similar pattern in most of the GDR issues, like the same set of FII sub-accounts selling most of their holdings to the same set of counterparties, most of the GDRs were issued in 2009, same bank (Euram bank) where proceeds of the GDRs were deposited and these GDR issues managed/arranged by one Arun Panasia. The order also said that the role of India Focus, an FII, in particular, appears to be important.
"India Focus has denied, in its submissions to Sebi, of having any connection/agreement with the counterparties to its trade in these scrips," the order said. However, Sebi investigation showed that India Focus' submission was false.