The Securities and Exchange Board of India (Sebi) has finally taken note of an unfair practice that has been observed in the derivatives segment for long. The capital market watchdog is probing if a common set of brokers is allowing clients to take positions in the derivative segment even after a particular stock has reached its market-wide position limits.
According to current regulations, if the market-wide position limit (MWPL) hits 95% in any particular stock, entities are not allowed to create fresh positions. One can trade in the stock only for squaring off positions. The MWPL for each stock in the derivative segment is calculated based on the free float of the company in the cash segment.
According to a person privy to the development, Sebi has observed a trend wherein entities have been found trading in such banned stocks by paying the requisite penalty of a paltry R1 lakh to the exchange and the regulator is in the process of gathering more evidence.
The gains by indulging in such malpractices are huge. Not many investors would want to trade in a future contract that is in the banned list. This gives the handful of operators that ?specialise? in such activities a free hand. Further, brokerages are known to allow only their select ?trusted? clients to trade in such a manner and charge a fixed amount over and above the exchange penalty.
Exchange notices show that in the recent past stocks, such a Orchid Chemicals, Jet Airways, Aban Offshore, Suzlon, Alok Textiles, Core Education & Technology and Welspun Corporation, have all been part of the banned list in the derivative segment.
Incidentally, there are many instances of stocks witnessing an unusual rise in the cash segment when the counter is under the banned list in the F&O market. A section of market players feels that the lenient penalty system, which is not even compounding in nature, has indirectly aided in such malpractices.
?Levying the same charge for doing a violation, which could be for one lot or even 100 lots, is tantamount to creating a special privileged class of people. This should not be the objective of any market intermediary,? says Arun Kejriwal of Kejriwal Research & Information Services.
?The penalty of R1 lakh remains constant whether it is one violation or multiple. There is no compounding of penalties for habitual violators,? he added. Some market players are of the view that along with a penalty system, such trades should be annulled so that it acts a deterrent for potential wrong-doers.