The Securities and Exchange Board of India (Sebi) investigation report on the "abnormal" price rise and the alleged insider trading in the Bank of Madura scrip in the run up to its merger with ICICI Bank, on December 8, 2000, has thrown new light on the sale of BoM shares held by Spic chairman AC Muthiah. Muthiah and his associates were holding around 5 per cent stake in BoM.
According to the report, B Arunkumar Capital & Credit Services Pvt Ltd (BACCL), the Spic group of companies, Bharat J Patel and Ashish Dhirawani (Ishita Investments) had the maximum number of transactions in the BoM scrip between December 1 and 11, 2000. The merger was announced on December 8 and the swap ratio was decided on December 11.
However, Sebi says on Page 21 of its report: "Muthiah... had stated under oath that he along with his associates were holding 5 per cent stake in BoM. He wanted to dispose of these shares as he was in need of liquidity. Accordingly, he had approached Ramesh Gelli (former Global Trust Bank chairman) to find a prospective buyer.... Gelli in his statement under oath had stated that he (Gelli) had contacted Mahendra Doshi (director, LKP Share & Securities Ltd) and asked him to look for a prospective buyer."
However, on the same page, the report says: "Muthiah said emphatically that he had never dealt with Doshi and never asked or authorised Gelli to sell shares of BoM. He contended that Gelli sold these shares unauthorisedly."
Elsewhere, the Sebi report said that B Arunkumar Capital & Credit Services Pvt Ltd had purchased 5,08,270 shares through LKP at Rs 96.25 on December 6,2000. The broker, as well as Arun Kumar Mehta, the director of the company, informed Sebi that Doshi of LKP had approached Bimal Parekh, a BACCL director, with an offer to sell around 5 lakh BoM shares.
"It is pertinent to mention here that Gelli is known to Arun Mehta. Mehta had applied in the promoter's quota in Global Trust Bank. He had also lent Rs 2.5 crore to Gelli and his associates in June 1994. As indicated... Muthiah alleged that shares were sold by Gelli unauthorisedly. The nexus between Gelli and Arun Mehta in this connection assumes significance though Gelli has denied of any role in the sale of shares. It was mentioned by Gelli that he merely referred Doshi of LKP to Muthiah and it was Muthiah himself who sold these shares," the report said.
Gelli through his public relations firm said: "I am neither a seller nor a buyer. I have nothing to do with the deal." Muthiah was not available for comment.
According to the report, Bharat J Patel had purchased 42,000 shares between December 1 and December 11, 2000. Patel had placed large orders on December 6 and December 7 before the opening of the trading session. "Keeping in view of such large orders at the price touching the upper circuit value for the day in a illiquid scrip like BoM raises a doubt that these transactions were done with some kind of insider information," the report said.
Ishita Investments had also placed large orders on December 6, 7 and 8, before the start of the trading session. The total transactions done by Ishita was put at 44,950 between December 4 and December 8, 2000.
According to Sebi: "It is not possible to prove how the information was communicated/leaked by the person who was in possession of unpublished price sensitive information. It is quite likely that purchasers knew about the possible swap ratio."
The BoM scrip was thinly traded and was listed in the Madras Stock Exchange, Bombay Stock Exchange and National Stock Exchange.
On the BSE, the average volume of the scrip between September 4 and December 1, 2000, was at 1,550 shares per day with the average price hovering in the range of Rs 70 to Rs 90. However, from December 4, 2000 the price started moving up by 8 per cent every day to reach Rs 142 on the date of declaration of swap ratio (December 11, 2000).
According to Sebi, LKP Share & Securities Ltd had done the majority of the trades on December 6, 2000. "On further analysis of the transactions of this day, it was observed that transactions just prior to the announcement of the proposed merger between BoM & ICICI Bank were highly abnormal appeared to be based on insider information," the report said.
Sebi has asked BSE to keep the transfer of shares in favour of -- B Arun Kumar Capital Credit Services Pvt Ltd, Bharat J Patel, Ashish Dhrwani -- on hold till further order.
Sebi is in favour of carrying on the investigation. Its other recommendations include:
* Enquiry proceedings need to be initiated against LKP Securities for abusing the trading system and violating Sebi regulations and stock exchange guidelines.
* BSE (where the negotiated transaction was put by LKP on December 6,2000) may also be asked to consider annulling the transaction (for 5,08,270 shares) as per their bye-laws.
* Show-cause notices may be issued to Ashish Dhirawani, BJ Patel/associates and Ajay Baxi asking them why suitable directions under Sec 11B of the Sebi Act read with regulation 11 and 12 of Sebi Regulations 1995 in the interest of investors should not be issued to them for their attempt to manipulate the prices.
