December 06, 2009

life in financial markets: of spikes and regulatory opaqueness

That the Securities and Exchange Board of India (Sebi) is presently investigating a spike in prices and trading volume in the shares of Reliance Petroleum in November 2007 would not have as a surprise to the market participants. The spike was indeed rapid fast (see chart below, click on the image to see it enlarged & clear).

Sebi, while probing the largest traders in RPL shares in early November 2007, found out that about a dozen firms that were among the largest traders were linked to Reliance Industries. Spokespersons of RIL have, however, rubbished any allusions that the company violated any Sebi regulations.

RIL did, however, disclose on 23 November 2007 that it had sold 1804 lakh shares it held in RPL then (RPL was merged with RIL this year) at an average price of about Rs 223. RPL's share price had shot up by about 35% in a span of a week in early November 2007 although the broad market index, Nifty, had corresponding moved up by just about 4%.

It is now likely that RIL will file for a consent order with Sebi and this will push dirt, if any, under the carpet. Because, as I have written about problems with opaqueness in Sebi's consent order, the details of the violations are not given in the consent orders passed by Sebi. One never know what exactly happened and so one can never tell whether the monetary amounts collected under the consent orders are fair or not.

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