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.

life in financial markets: takeover norms' double whammy for investors

It is is not the first time that I have come across an incidence of a clever twisting of logic, or a cunning interpretation of law, by an appellate authority that hears appeals to orders passed by a enforcement authority. To make it worse, the law enforcement authority itself attempts to keep specific provisions of the law ambiguous enough to allow for discretion by their officials.

I noticed this recently in the financial marketplace with regard to Indian securities market regulator, Securities and Exchange Board of India (Sebi) and the securities market appellate body, Securities Appellate Tribunal (SAT). SAT was hearing an appeal (among many it hears every day/week/month) by Tata Tea against a July 2007 Sebi order, invoking its Sebi (Substantial Acquisition of Shares and Takeovers), in the matter of Tata Tea's acquistion of a company called 'Mount Everest Mineral Water.'

SAT ruled in favour of Tata Tea on 15 September. You can read the order uploaded here [it is not possible to link to the order on Sebi's user-unfriendly (deliberately, in my view, to deter easy research into its activities) website].

SAT gave the benefit of doubt to Tata Tea thereby ruling against investors' interest. At the same time, it upheld Sebi's right of discretion in the matter under dispute. Giving discretionary powers to Sebi, particularly where a concise elaboration of conditions can take out the need for such discretion, is not healthy.

Anyway, I recently wrote about the matter in the magazine I presently work for. Here is what I wrote:

Discreet

Even as the Securities and Exchange Board of India (Sebi) has set up a committee to entirely review its takeover norms, pending tussles between companies and Sebi's norms continue.

Problem areas in Sebi's takeover norms were yet again highlighted in a recent verdict by Securities Appellate Tribunal (SAT) on an appeal by Tata Tea against a Sebi order that it add Rs 9.64 to the Rs 140 per share 20% stake-acquiring open offer made to shareholders of Mount Everest Mineral Water (MMEM) in July 2007. This was due to non-compete payment by Tata Tea to MMEM's promoters.

SAT accepted that Sebi had discretionary powers to decide on the genuinesness of all contentions of non-compete payments and, if not, add it to the offer price in an open offer. But it ruled in favour of Tata Tea stating its non-compete payment was proper.

Discretionary powers need to be replaced with objective criteria. For instance, Sebi can fix a lower than the presently-allowed limit of 25% of non-compete fee to the acquisition amount above which acquiring company has to pay the same to target company's shareholders.

life in financial markets: oversmart citibank, icici bank....

Citibank's extra-brilliant and massively-remunerated top management and young, savvy, highly-qualified senior managers, went for a bailout to the US government agencies with a begging bowl in one hand and a gun in the other. "Please please give us aid or else I will shoot you!" is perhaps what the sophisticated goons of the financial world told the sophisticated puppets of the regulatory/government world! Read here and also read the comments section there (one guy writes "At this point the mindless debt addicted bailout bulls are a menace to society. Stock bugs want to do their thing on the taxpayer's dime. That is their only argument now and they have no shame. At this point anyone who promotes a "stimulus package", i.e. more debt, should be pelted with rotten fruit..")
Meanwhile, here in India, the securities market regulator, Securities and Exchange Board of India, has finished preliminary investigations into ICICI Bank's ludicrous allegations of its stock being hammered down. I had written about the witch-hunt against sellers (short or tall!) on 29 October.
Sebi has found nothing unusual in the trading in ICICI Bank. I give Sebi's full press release of 20 Nov '08 below. All this leaves an egg on ICICI Bank's face. The other cry baby, Unitech and their promoters Chandras, also better learn a valuable lesson and that is to stop crying when the going is tough particularly when you were never humble when the going was terrific.

Sebi's press release:
www.sebi.gov.in/press/2008/2008266.html
PR No.266/2008

Trading in the shares of ICICI Bank Ltd.

· In the backdrop of a global crisis in the financial sector and amidst liquidity fears, the share prices of several leading financial services companies across markets suffered a sharp decline. Rumours of financial trouble have caused a run on the banks in some overseas jurisdictions. The main spillovers have occurred in financial markets, reflecting the relative integration of such markets in the global financial system. In India, since January 2008 there has been decline in shares prices across sectors.
· ICICI Bank had vide letter dated September 17, 2008 made a complaint to SEBI alleging that “a malicious rumour is being spread to the effect that some of the top management have been selling ICICI Bank shares for the last few days”. The price of the shares of ICICI witnessed a fall of 12.5% from Rs. 640 on 15/09/08 to Rs. 560.30 on 17/09/08.
· ICICI Bank, on September 16, 2008 disclosed to the public through a press release about ICICI Bank UK PLC exposure to Lehman Brothers i.e. “ICICI Bank UK PLC is holding investment of Euro 57 million ($80 million) in senior bonds of Lehman Brothers Inc. ICICI Bank UK PLC already holds a provision of about US$ 12 million against investment in these bonds. Considering a 50% recovery estimate, the additional provision required would be about US$ 28 million”. On September 17, 2008, ICICI Bank Ltd informed the exchanges that "A malicious rumor is being spread to the effect that some of the top management has been selling ICICI Bank shares for the last few days. These rumors are baseless and irresponsible, and no shares have been sold by members of the top management of the Bank during the current year. ICICI Bank is taking up this matter with regulatory authorities for necessary action against those responsible for the rumors".
· The shareholding pattern of ICICI Bank for the quarter ended on June 30, 2008, shows that around 68% of the shares were held by FIIs/Foreign entities (ADR). Similarly figures for the next quarter that ended on September 30, 2008, show that around 65% of the shares of ICICI Bank were held by FIIs/ Foreign entities (ADR) Rest of the shares by Indian Public including institutions. FIIs have reduced their holding in ICICI Bank between the quarter that ended on June 30 and Sep 30, 2008 by around 3%. The underlying shares against ADR held by Global Custodian also show a fall of around 20.5 million shares during the period representing Jan 1, 2008 to Sep 30, 2008 indicating an increase in the shares available in the Indian Market.
· It is seen that the prices of ICICI Bank fell by 49.52% from Rs.720.45 on September 8, 2008 to Rs. 363.65 on October 10, 2008. During the same period, prices of ADRs of ICICI Bank saw a fall of 53.25% from Rs.717.77 on September 8, 2008 to Rs.335.55 on October 10, 2008. The prices of ADR has fallen more than the shares of ICICI Bank in Indian market. During this period NIFTY and SENSEX witnessed a fall of 26.82% and 27.3% respectively.

Trading pattern of the shares of ICICI bank was analyzed for the period September 8, 2008 to October 10, 2008:

1. The client category-wise breakup of turnover in the shares of ICICI Bank in the cash market shows that FIIs accounted for 23.57% and 18.61% of the value of shares sold and bought respectively whereas rest of the investors accounted for 76.5% and 81.4% of the value of shares sold and bought respectively.
   

2. Top 20 investors in ICICI Bank both on net buy and sell basis in the cash market shows that majority of them were FIIs (Net Buy: FIIs-14, MF-4, DII-1, Others-1) (Net Sell – FIIs -17, MF – 2, Others-1)
   

3. None of the major seller were observed to be placing orders successively at lower price
   

4. There was no pattern observed regarding placement of successive orders at lower price by sellers to hammer down the price.
   

5. There was no pattern observed of booking intraday profits by major clients or brokers during this period.

By and large, the trading patterns are consistent with the shareholding pattern of ICICI with predominant holdings by FIIs, the general buying and selling behaviour by FIIs and the broad movements of the market during this period. While SEBI continues its surveillance of the stock exchange trading in various securities, SEBI did not find evidence of manipulative trading in the ICICI Bank shares during the period referred to above.

Mumbai
November 20, 2008

life in financial markets: killing the access to trading in small companies' shares

Killing a good concept due to one's false assumptions is commonplace. Take the latest example, seen in the Indian financial markets. The Securities and Exchange Board of India (Sebi), announced, last week, its regulatory framework for stock exchanges to set up trading platforms for small and medium enterprises (SMEs). It opened its doors for Rs 100 crore-net worth stock exchanges to apply for setting up the SME trading platform. But the spoiler is the clause where it pegs the minimum trading lot size to be Rs 1 lakh.

An earlier Sebi discussion paper for SME trading platforms had recommended zero restrictions on size and track record for SMEs to raise equity capital but had recommended a minimum application size of Rs 5 lakh in a SME's primary equity issue. All this is meant to deter retail investors from burning their fingers with fly-by-night operators.

But in the process, it is likely to drive away liquidity-supplying day traders, speculators and arbitrageurs as they would not want to place orders of Rs 1 lakh and more for a company whose share capital might not be more than Rs 1 crore. This, many market traders say, is going to kill the liquidity from day one of listing itself.