First Global refutes Sebi price manipulation charges

Virendra Verma

Mumbai, May 14: FIRST Global Stock Broking (FGSB) owner Shankar Sharma has refuted a majority of the allegations, including that of price manipulations, made by the Securities and Exchange Board of India (Sebi) against him. Since mid-April, Sebi has barred the brokerage firm from conducting stock broking and other related activities—citing its involvement in price manipulation in general.

Further, FGSB has also alleged that Sebi has relied on some false data in its investigation report which led the regulator to bar the firm from conducting its activities.

Mr Sharma had challenged the Sebi order banning FSGB from conducting its legitimate activities in the Bombay High Court, which earlier this month, had quashed the ban saying that it was not an order but only a show cause notice to which FGSB has to reply to and appear before the Sebi chairman for a personal hearing. In the meantime, FGSB has voluntarily submitted to the court that it will refrain from conducting stock-broking activities till the hearing is over. The firm will present itself for the hearing on Friday.

In its reply forwarded to Sebi, FGSB has said that the negative exposure limit that the Sebi has filed in its affidavit with the Bombay High Court is ‘impossible’. Under stock-broking activities, the concept of negative exposure simply does not exist, Mr Sharma maintains. “Either a brokerage has an exposure outstanding on the stock exchange or there is no exposure. There is no concept of negative exposure.”

“If what Sebi means when it says that we had a negative exposure, is that my factory has a negative capacity to manufacture cars, it is simply not possible, and is therefore, ridiculuous,” he says. According to Mr Sharma’s reply to Sebi’s highlighting instances of apparent ’large net sales’ on the National Stock Exchange (NSE) in various scrips across different settlements, “more than half the transactions cited are wrong,” he says.

For example, net sales in HFCL in two settlements are shown to be 60,000 shares and 75,000 shares whereas the actual position was net purchases of 5,000 shares and zero respectively.

FGSB has also questioned a Sebi charge which said that the firm had resorted to manipulation, which in fact was nothing but “cancellation of trades”. “How can cancellation of trades be termed as manipulative?” asks Mr Sharma.

Substantiating its side of the story, FGSB states that there have been seven cancellations during the period of consideration including those of orders for 100 shares of Wipro, 1000 of Global Telesystem and 6,000 of Satyam Computers.

It further says that Sebi’s investigation has found the firm guilty of resorting to price manipulation through arbitrage trading, ie purchase of shares on one exchange (say BSE) and sale on another (say NSE). But the fact is that Sebi focused only on the sales as a proof of manipulative intent and neglected the purchase part of the trades.

Similarly, while examining trades across different settlement periods, Sebi highlighted the times when there were net sales and ignored the number of times that FGSB had net purchases of even higher proportion of ’net sales’.

On the allegations of shifting proprietary trades termed as circular trading, Sebi says that the firm used to shift part of its proprietary trading through another brokerage—Bang Equities, whenever it felt its own limits would be required for client trading.

“This is a perfectly legitimate activity, permitted in India and also internationally,” says Mr Sharma. “Further, Sebi has not objected to this per se, but alleged that shifting position from FGSB to Bang Equities in a ‘synchronised’ manner constituted circular trading.”

According to Mr Sharma, circular trading is known to be conducted in more than one (or two) obscure and illiquid stocks, involving continuous churning like trading activity with a view to ramping up prices and unloading on unsuspecting buyers. Nowhere in the world, including in Sebi’s own experience, has it ever been used for manipulating prices downwards and that too in the most liquid and actively traded stocks in the market by doing one or two transactions sometimes spread over many days.

HIGHLIGHTS
Refuting the Sebi Allegations of Price Manipultions
* Sebi investigations shows negative gross exposure limits.
* Wrong/non-existence instance of trades to prove contention.
* Shifting of proprietary trades termed as circular trading.
* Sebi investigation focus on only sell side of arbitrage trades.