Every big price fall is not manipulation

WITHOUT CONTEMPT

The nervousness built up over the weekend, leading to fears of a repeat of Manic Monday, and stock prices fell further last week.

If news reports are to be believed, there are good reasons for the fall""ranging from correction of inflated prices to the impact of the global hike in petroleum prices.

Just less than a year ago, a similar fall in stock prices led to a huge furore. Those were the days of political uncertainty, with politicians playing to the gallery and enjoying the new-found interest that the electronic media had for them.

The Securities and Exchange Board of India (Sebi) initiated a probe into the fall and started questioning virtually anybody who sold substantial stock on May 14 and 17 last year. Often in such situations, a seller is prejudged as a criminal whereas purchasers during a price boom are never questioned.

Only time will tell whether market intermediaries are in for a similar investigation this year for the price fall over the last weekend. While regulators should by all means keep a watch and investigate extreme price movements, they should be far more circumspect in bringing charges of manipulation and issuing show-cause notices.

The term "manipulation" by itself has not been defined in any provision of securities law. The Sebi Prohibition of Fraudulent and Unfair Trade Practices Relating to Securities Market (FUTP) Regulations, 2003 deal with market manipulation.

These regulations replaced a 1995 version of regulations, which the regulator felt were inadequate to secure convictions against persons accused of manipulation. The 1995 version of the FUTP Regulations required Sebi to reasonably demonstrate an inference of intent to manipulate.

With the new FUTP Regulations, Sebi believes it no longer has to prove intention. However, the very term "manipulation" can only involve a conscious attempt to distort the picture and create a price that is not a genuine market-dictated price through the inter-play of demand and supply.

Often regulators simply pick up the traded volumes within a time slot when prices fall, and find out who sold the most. Sellers in such time slots get accused of being the manipulators who caused the fall.

This is by far the most controversial of issues in administering the FUTP Regulations. Market behaviour is to often follow the herd. When prices fall, people sell even more to cut their losses. Therefore, such behaviour represents the effect of a fall in prices, but is often identified as the cause of the fall in prices.

Price manipulation is a serious charge. It is one of the shadiest violations of the securities law one can indulge in. This is precisely why when such a serious charge is levelled, there ought to be something far more credible than accusing a person of manipulating prices merely on account of being the largest seller.

There have been ludicrous instances of people who continued to hold substantial shares being accused of hammering the price of that stock by having sold a part of what they held"" why would anyone manipulate his own networth downwards?

There have been instances where in such time slots, persons who contributed to a small percentage of the total market volumes in that time slot get accused of being the cause of the fall.

Such charges would necessarily have to fail when a reasonable judge scrutinises the facts. Courts and tribunals are then perceived as not being supportive of strictness in the regulatory system.

The truth lies elsewhere. A charge wrongly levelled and lost in court can inflict far greater harm to the credibility of the regulatory system than stepping back. Every time the Sensex gyrates a few hundred points, a charge of price manipulation ought not to be levelled.

somasekhar@jsalaw.com  

(The author is a partner of JSA, Advocates & Solicitors. The views expressed are his.)