UBS barred for 1 year

More convictions to follow: Sebi chief.

The May 17 stock market crash last year has claimed its first victim "" the Securities and Exchange Board of India (Sebi) has barred UBS Securities Asia Ltd from issuing any offshore instruments for a period of one year, following evidence of its involvement in the market bloodbath.

The Sensex had fallen by 568 points and the Nifty by 196.90 points on that day. The foreign brokerage house has also been prohibited from rolling over any of its existing overseas derivative instruments (ODIs) for a period of one year.

Passing the order, Sebi's Wholetime Director G Ananthraman directed UBS to "establish the highest standards of the customer due diligence process in line with the requirements of the FII regulations of Sebi". The one-year ban extends to affiliates and agents of UBS Securities as well.

The markets reacted nervously to the development and the BSE Sensex slumped 62.03 points or 0.95 per cent to close at 6,466. The Nifty ended 21.8 points lower to close at 1990.80.

Sebi Chairman M Damodaran said the UBS order was the first in a long line of convictions yet to come. He pointed out that no other probe had reached a final stage yet. "This verdict is unique to the conduct of a specific entity," he said.

"It is important in the context of anti-money-laundering and also if financial markets are not to see flow of illegitimate money. We have discomfort if we do not know whose money it is," Damodaran added.

He also said UBS Securities had not been forthcoming with information. It may be recalled that Sebi has issued show cause notices to at least 12 entities in connection with last year's market crash.

Mark Panday, Hong Kong-based spokesman for UBS, confirmed the bank had received the order and complied with it immediately.

"UBS does not believe that the description of its conduct or intent as contained in the judgment is fair. UBS is seeking further legal advice and intends to appeal against the regulator's decision," Panday said.

Sebi, during the course of its investigations into the cause of the market fall on May 17, found that UBS, dealing through its proprietary sub-account Swiss Finance Corporation, sold securities worth Rs 188.35 crore and was among the largest sellers in the market on that day. As on May 14, 2004, the equity portfolio of UBS was Rs 2956 crore.

Also, it was found that it had built up Nifty futures short positions of Rs 434 crore and stock futures short positions of Rs 292 crore.

UBS revealed that apart from trading on its proprietary account, it had also sold large values of securities on May 17 last year on behalf of various entities to which its affiliate, namely, UBS AG, London, had issued off-shore derivative instruments with underlying Indian securities.

The sum total of Sebi's investigations led to the conclusion that on May 17, 2004, UBS was among the largest-selling clients and had sold securities valuing Rs 188.35 crore.

This constitutes as much as 3 per cent of the market (BSE & NSE cash segment taken together) traded value of Rs 6092.03 crore. On May 14, 2004, the value of securities held by UBS was about Rs 3000 crore.

On the same day, it had built up Nifty futures short positions to the tune of Rs 434 crore and stock futures short positions of Rs 292 crore.

"Thus, it is seen that UBS was a significant participant in both the cash and the derivatives segment of the Indian securities market during May 2004," the order said.

"It was suspected that the steep market fall on May 17, 2004, could have been triggered as a result of UBS playing ducks and drakes with the market, accentuating the selling pressure for no reason linked to the fundamentals of scrips on the performance," the Sebi order said. "By indulging in the putative transactions, UBS might have earned substantial gains," the order added.

According to Sebi, UBS made false claims while the probe was on.

On this, the Sebi order said, "The egregiousness of UBS' behavior and non-cooperation with the regulator is based not on a stray instance but a slew of them, neither fortuitous nor serendipitous, holding out tell-tale strands of how it was fashioned as a deliberate strategy to obfuscate the proceedings."

"It has failed to exercise due diligence in dealing with its clients and with the regulator. It has failed to maintain the appropriate level of knowledge and competency and abide by the provisions of the Act," the order said.

It further noted that UBS had made untrue statements and suppressed material facts in the documents, reports and information furnished to Sebi, while seeking to wriggle out of the regulatory requirements imposed upon it.

UBS is among the top five stock brokers in India, and earlier this year it put through the biggest block share deal in Indian market history, valued at $561 million.

WHAT HAPPENED ON MAY 17, 2004

The fall: Sensex crashed by 568 pts, Nifty by 196.90 pts

The fallout: A Rs 122,921crore wipe-out of investor wealth in one day, the largest ever

THE ACCUSATION

UBS sold securities worth Rs 188.35 crore and was among the largest sellers in the market on that day. This constituted 3% of the market (the BSE & NSE cash segment taken together) traded value

UBS was not forthcoming with information during the investigation process and actually made false claims

THE DEFENCE

UBS says judgment unfair; may appeal against it