Mini Bulls And Their Fake Runs

Mini Bulls And Their Fake Runs

The number of scrips manipulated far outnumber those detected by SEBI

VEESHAL BAKSHI
Market analyst

Naorem Ashish

EVEN AS market pundits grope in the dark to find a digestible reason behind the recent unprecedented bull run, certain manipulative stock market operators have sneaked in to the market and made a killing. Market regulator Securities & Exchange Board of India (SEBI) has managed to nab some, but the number of scrips being manipulated today far outnumbers those that have been detected by SEBI so far. And the irony: authorities know about rampant price rigging in some stocks but are helpless as manipulators outsmart them time and again.

Want examples? Take the case of a Delhi-based market operator, banned by SEBI last year for manipulating prices of a company. He is back and openly rigging prices of nearly half-a-dozen scrips. So are some mid-sized and big operators based in Ahmedabad, Kolkata and Mumbai. How does this work? These operators typically zero in on low-priced scrips (priced between Rs 15 to Rs 125). There are two principal advantages behind choosing such scrips — the promoters of such companies are willing accomplices in facilitating the operators to rig their share prices. Secondly, small investors get easily lured to such scrips since they are psychologically more inclined towards investing in lowpriced scrips and don’t have the appetite and aptitude to buy high-priced shares.

Even as SEBI, the National Stock Exchange (NSE) and the Bombay Stock Exchange (BSE) are closely monitoring shares that have seen a sudden surge in prices and trading volumes, the operators have been a step ahead of these agencies. These operators are trading through a clutch of stock market brokers who execute the buy-sell orders through thousands of client accounts, majority of which are fronts for these brokers. So on paper, it all looks genuine.

When money is to be made at the cost of retail investors, the modus operandi is to create artificial price increase in shares and then spread the word about the stock among investors. As the gullible investors start buying, the operators continue to further rig the prices upwards. This creates confidence in the investors that the market information about the share price going up was genuine. As more and more investors join the bandwagon, the operators start off-loading their shares at higher prices. The profits generated are shared with the promoters.

The modus operandi is different when the shares are to be placed with institutional investors like mutual funds and foreign institutional investors (FIIs) or the company wants to raise fresh funds at a hefty premium on its shares. When the company wants to make a placement with the institutional investors, the promoter gives a mandate to a market operator to mop up liquidity from the market by gradually picking up shares from the market. After the shares have been purchased by the operator — through his associates and front entities — the price is rigged up. The company, in the meanwhile, starts making announcements that will have positive impact on the share price and paints a rosy picture of the company’s future. Institutional investors are led to believe that the share price has great potential in the future. The institutional investors are then sold the shares in the open market out of the stock which was cornered earlier by the operators at much lower prices.

IN CASE of fresh fund raising, the game is simple. Rig the price of the share over a period of time, manipulate balance sheets to show robust profit figures, paint a rosy picture of the future to justify the price rise, and then raise money through either a preferential allotment of shares to foreign and domestic funds or through issue of foreign currency convertible bonds (FCCBs), which are convertible into shares at a pre-agreed price within a period of five years from the date of issue.

Till the bull run is on, nothing seems wrong, for everyone is making money, even if it is notional wealth. But what goes up must come down. The current bull run will come to an end one day, though nobody knows when that would be. Whenever the market will take a beating, both retail and institutional investors will be left saddled with shares of scores of such companies. SEBI and investigating agencies will then swing into action. Some unscrupulous managements and market manipulators may be even caught and banned from the market, as it happened in the case of the Harshad Mehta and the Ketan Parekh scams. But will investors recover their losses? It’s virtually impossible. It has never happened at the Indian bourse. Nor will it happen.