Regulator asks exchanges to move on 45 ‘common irregularities’.
The market regulator has asked stock exchanges to crack down on “common irregularities” such as brokers’ involvement in the ‘grey’ market and unregistered trading terminals.
Grey market means trade through channels which, while legal, are unofficial or unauthorised.
In a circular on March 17, the Securities and Exchange Board of India (Sebi) asked stock exchanges and clearing corporations to initiate follow-up actions — “remedial, penal and disciplinary” — within six months.
The grey market in small towns of Gujarat, Rajasthan, Maharashtra, West Bengal and some north Indian states has revived of late. Sebi found grey market operations by intermediaries such as stock brokers and merchant bankers which often misled investors, who got influenced by the high premium on an issue before it opened in the official markets. After listing, punters (mainly high net worth individuals) who bet on the issue in the grey market buy shares on the exchanges to settle grey market trades and the share price witnesses a spurt. This results in widespread price manipulation.
Sebi found a total of 45 commonly observed irregularities by stock brokers and trading members. Some of these include pledging of shares of clients without their consent.
Another common finding was unregistered trading terminals. Some time ago, Sebi and the National Stock Exchange (NSE) had conducted raids on top Kolkata-based stock brokers and found a huge unauthorised trading terminal network. Further, trade details found during the raids led to transactions that did not have any NSE order or trade numbers or trade time —indicating these were done off the floor.
On several occasions, Sebi got evidence to suggest that illegal trading was conducted under the cover/auspices of membership of bourses, with active assistance of the brokers concerned.
Small transactions entered into by those involved in circular trading are squared off by the close of the day. Some of the net receivables are as marginal as 70 paise to a few rupees.
Stock brokers say a large number of trading terminals are being operated by those who are neither members of stock exchanges nor qualified to operate these. The use of unauthorised trading terminals is mainly by operators involved in circular trading and sources say there could easily be over 1,000 such terminals in India’s small towns.
For every registered trading terminal, a broker has to pay a fee to the stock exchanges. Sources say Sebi and the exchanges plan to inspect trading members’ operations to get more information.
According to Sebi sources, instances of creation of false markets, misuse of exchange mechanism for securing financing transactions and entering into fictitious trades and illegal transactions by market players have increased.
Another common irregularity was relationship managers acting as portfolio managers by entering into verbal agreements with clients for trading on the latter’s behalf. There have been several cases of clients being asked to pay for loss on trades done by their relationship managers. In several cases, clients also filed police complaints.
