The Securities and Exchange Board of India (Sebi) on Wednesday took to task seven companies and 10 foreign institutional investors and sub-accounts in an interim order following prima facie evidence of manipulation in the GDR (global depository receipt) market.
The seven firms have been barred from issuing equity shares or any other instrument convertible into equity shares or altering their capital structure, in any manner, till further directions. The FIIs and sub-accounts have been barred from dealing in Indian securities, derivatives, ADR and GDRs. The companies are Asahi Infrastructure & Projects, IKF Technologies,Avon Corporation, K Sera Sera, CAT Technologies, Maars Software International and Cals Refineries.
The regulator has detected trends that point to an ?elaborate scheme to manipulate markets?, it observed, including a common set of initial investors in a GDR, the relatively large size of the GDR issue vis-?-vis the size of the issuing company as also a high proportion of cancellation of GDRs repeatedly by a set of FIIs/sub-accounts.
In a 44-page report, the capital markets regulator said the companies often had unimpressive financials and added that the GDRs were sold on Indian exchanges with the majority of the securities going to the same group of clients, which were then offloaded by them. This indicated a pre-arrangement between parties to transactions at various stages of this complex scheme, Sebi noted.
Sebi observed that the beneficiaries of such a scheme are GDR-issuing companies that end up with a surge in net worth and the sub-accounts that purchase GDRs, at discounts, in an illiquid foreign market and exit such investments, in the domestic market. This was done, the regulator explained, with the active connivance of related counterparties that make the market in the scrip in order to generate signals of volume and depth that attracts domestic investors. The other beneficiary, Sebi said, was the lead manager, which earns commissions for providing services.
The modus operandi, as described by Sebi, is typically one in which an arranger first facilitates the issue of a GDR to particular foreign entities. Subsequently, a substantial portion of the GDRs are converted into shares and sold to a set of counterparties, on the domestic exchanges, who in turn sell to retail domestic investors.
Therefore, given the immediate large-scale conversion of GDRs, it is retail investors ultimately who end up holding the shares. As such, the ultimate source of funds for a high proportion of the GDR issue is provided through investments by the retail investor. For instance, it was discovered that Arun Panchariya-related group entities buy shares from sub-accounts like India Focus and later sell them to retail investors. This sets up a funds flow from retail clients to Panchariya-related counter parties and then to sub-accounts which take the money outside India.
The capital markets regulator believes that retail investors in India have probably made losses since the the scrips are not sufficiently liquid and as such a sale of a large quantity of shares leads to a steep fall in the price.
As the volumes in the scrip are supported by the group, they may drop once the sub-accounts or FIIs are done with their selling and there is no need to sustain volumes or the price of the scrip, Sebi points out.
?On a few occasions, shares are issued to GDR investors at a discount to the prevalent market price in the Indian stock exchanges. This also leads to the loss to the investors,? the regulator observed. Further, Indian investors suffer an asymmetry of information with regard to the cancellation of GDRs and the pre-arrangement of trades between sub-accounts and the groups involved, which denies them opportunity to trade on complete market information, Sebi said.