SEBI probes into fall

Securities markets regulator SEBI is probing the role of various market players, especially top foreign portfolio investors, in the stock market collapse on Wednesday when the BSE Sensex fell by over 1,700 points within minutes after market opening.

Confirming the development, a senior SEBI official told ET on condition of anonymity that the regulator has already commenced a “patch analysis” (jargon for an analysis of market movements in a short period, or a patch to check manipulation).

The record fall in Sensex within minutes after the market opened last Wednesday happened on the back of relatively small volumes. Trading was temporarily halted on BSE and NSE after the indices breached the first trigger point for the day’s circuit filter.

According to regulatory officials, this suggests the trades had deliberately been done at prices that were way off the market. SEBI has called for details of these sales transactions and is in the process of culling the necessary information.

Trading resumed an hour later after the circuit filters were removed and the market recovered 1400 points to close at 18,715.82, down 336.04 points over the previous day’s close. It is understood that large purchases were made by entities that are also among the largest issuers of participatory notes (PNs).

The probe will ascertain whether some of these players had indulged in price manipulation, sources said, as it is possible the same set of foreign investors who had put sell orders on opening were also the first to snap up stocks after the market reopened after an hour.

According to some market players, the events of last week seem to be a repeat of what happened on May.17, 2004, now known as Black Monday. That day, the Sensex plunged by 842 points intraday and trading was stopped twice on BSE and NSE. This was the time when the NDA government had been voted out and the new UPA government had not assumed office.

A SEBI probe later found that UBS Securities, a foreign portfolio investors registered with the regulator, had sold stocks worth Rs 188.35 crore through its proprietory sub-account in the cash market. A few days earlier, UBS had built up Nifty future short positions worth Rs 434 crore and stock futures and options aggregating Rs 292 crore. The regulator tried to ascertain whether the firm had violated its regulations relating to fraudulent and unfair trading practices.

However, UBS did not furnish details citing client confidentiality in some cases, leading to a SEBI order banning it from the market for a year. This was contested at the Securities and Appellate Tribunal, which struck down the order later.

Officials concede that gaining conclusive evidence to prove that these portfolio investors acted with the motive of manipulating stock prices could prove to be tough. This would call for plugging into hours of taped conversations in dealing rooms of brokerages and offices of the foreign portfolio investors and identifying the ultimate investors.

Not that such probes have not been carried out in the past. For instance, Deutsche Borse had punished a top global securities firm for indulging in unfair market practices in the bond market a couple of years ago.