Source: The Hindu Business Line

Zero tolerance towards market manipulators will revive confidence in securities market

The apex court of India has delivered a verdict insulating the position of retail investors in the market, while unveiling yet another scam. Penalising Opee Stock-Link (Opee) in a matter concerning cornering of shares earmarked for the ‘retail category’ in initial public offerings (IPOs), the Supreme Court has held that the company was guilty of using benami/fictitious demat accounts to procure shares in a fraudulent and unfair manner.

The history of the case dates to SEBI passing a disgorgement order which held that in the Jet Airways IPO, 553 account holders who were allotted shares under the ‘retail individual investor’ category were mere name lenders who transferred the shares to Opee under a pre-designed manipulative scheme meant to deprive allotment of shares to genuine retail investors. Thereafter, Opee sold such ‘cornered shares’ at a price higher than the purchase price, bringing in windfall gains.

While dealing with the appeal, the Securities Appellate Tribunal (SAT) differed from SEBI’s findings recorded in its investigation. SAT, while deliberating on the issue, set out the elements of a scam — first, numerous name lenders under dummy dematerialised accounts would have to apply for an IPO subscription under the retail individual investor category. These shares would then be financed by the Financier through benami routes. Once the shares were allotted in an IPO, they would be transferred to a key operator through ‘off market’ trades, prior to listing and without availability of market price. The key operators would aggregate such shares and thereafter transfer them to the Financier, who would sell them at a higher price discovered in the market immediately upon listing. This is deviant behaviour by the Financiers, covered under the securities regulations on fraudulent and unfair practices.

Shady processes

However, based on the facts, SAT held that the key elements of the scam could not be established beyond reasonable doubt. For instance, the first element of the scam — bidding through benami demat holdings — was not established. While there were signature mismatches and common addresses for the demat holders recorded by SEBI, the fact that the accounts were benami or fictitious could not be established.

Secondly, there was no evidence on record to show that the shares were financed by the Financier. Accordingly, SAT held that as “trading and speculation” were the two main elements of a securities market transaction, the demat holders had done no wrong by selling their shares at a gain prior to listing. In any event, the price at which the shares were sold off-market to the key operator/Financier was higher than their allotment price. Just the fact that a number of account holders sold these shares to the aggregator at the same price in off-market transactions (at a price lower than the subsequent listing price) was not enough to show market manipulative behaviour by the Financier.

Accordingly, SAT set aside the SEBI disgorgement order and discharged the key operator/Financier from any penalty.

The judgment

The Supreme Court, however, saw through the scheme and held that the entire chain of the share transactions and the doubtful nature of the dematerialised account holders establishes that the transactions were manipulative. According to the court, it was highly unlikely that all benami account holders holding the same address was a coincidence. Also, the signature mismatches demonstrate that the applicants were not genuine retail bidders but were mere name lenders (even though the fact that the accounts were benami or fictitious could not be proved beyond doubt). Further, the court conjectured that no “normal” person would have undertaken an “off-market” transaction at a loss by booking the sales at a price lower than market price. The fact that 553 account holders sold their shares at exactly the same “off-market” price lent further credence to the deviant behaviour of the key operator/Financier.

Scams denude investor confidence and result in loss of faith in the market. Since investor protection laws are primarily aimed at protecting the rights of retail investors, such a scam can only bring disrepute to the Indian markets. At a time when markets are finally rebounding after years of bear run, such manipulations should be dealt with swiftly. The fact that the Supreme Court could go beyond the form and make a determination based on the substance of transactions is a victory for natural justice. This attitude of zero tolerance towards market manipulation will go a long way in keeping out tricksters from the markets.