Mumbai: Even as officials of the Life Insurance Corp. of India (LIC) are under investigation by government agencies for their role in the bribes-for-loans scam that rocked share markets in late November, the country’s largest financial institution has become the target of a separate probe launched earlier this week by the Securities and Exchange Board of India (Sebi).
India’s capital markets regulator is taking a close look at large secondary market share deals involving LIC, which has equity investments in more than 1,000 companies and a share portfolio valued at Rs.3.75 trillion as on 30 September.
Two persons with knowledge of the investigation said that Sebi has begun scrutinizing all bulk and block deals done by the state-run insurer in the past year on the Bombay Stock Exchange and the National Stock Exchange. Both persons requested anonymity because of the sensitive nature of the matter.
“The probe will primarily try to find out whether there has been any price manipulation in the stocks of the companies bought or sold by LIC and if there has been any irregularity in the trading patterns of these stocks,” said one of the two persons. The other said the Sebi probe is likely not related to investigation by the Central Bureau of Investigation into the bribes-for-loans scandal.
A Sebi spokesperson declined comment on the issue. Responding to an email, an LIC spokesperson said that he was not aware of this probe.
One strand of the Sebi investigation will be on whether broker cartels pushed up the prices of shares through circular trading and then drew LIC into block deals at artificially high prices.
Information on block deals and bulk deals are also used as trading cues by other investors and, hence, advance information on such large deals could benefit traders. Stock exchanges disseminate information on all block deals and bulk deals for the day only at the end of trading hours.
“Since all bulk and block deal transactions are disclosed on the exchanges, it can potentially lead to an upward or downward movement in shares, depending on the background and the track record of the buyers. If a buyer in a bulk or block deal has a good track record, then the price of the stock tends to go up. In a block deal it is possible to ascertain the identities of the actual buyers and the sellers, but in a bulk deal the same is difficult,” said V.K. Sharma, head (private broking and wealth management) at HDFC Securities Ltd.
A bulk deal is a single transaction or a set of transactions in which the total quantity of shares bought or sold under any single client code is more than 0.5% of the number of equity shares of a listed company. A block deal refers to one where a minimum of 500,000 shares or shares worth at least Rs5 crore are traded through a single transaction.
According to existing norms, all orders for such block deals have to be placed at a price within 1% of the ruling market price or the previous day’s closing price.
LIC did bulk deals worth Rs321.42 crore on the two main stock exchanges during 2009, and it did bulk deals worth Rs2,459.07 crore and block deals worth Rs448.39 crore so far in 2010, according to data from Capitaline Database.
“Often, a cartel of market manipulators corners a chunk of shares of a company and jacks up its price through circular trading to attract large institutional investors such as LIC and place them at a higher price. This is done because a block deal can be done only at a price that is within a band of 1% from the market price of a certain stock. In many cases, the stock prices often tend to fall to their fair levels after the completion of the bulk or the block deal. This may cause significant losses for the buyers in such deals. This has to be examined carefully,” said one of the two persons cited earlier because of their knowledge of the Sebi investigation.
This means that Sebi’s probe on LIC’s bulk and block equity deals may disclose discrepancies in the stocks bought by the insurer, and also give clues on unfair and fraudulent trade practices by a group of stock brokers.
Probing a case of price rigging or market manipulation is a time-consuming process and the investigation may be a long-drawn-out affair. Mint could not ascertain how long the investigation would go on.
Mint had reported on 16 November that a three-member panel constituted by the finance ministry is closely looking into all investments made by LIC in 2008 and 2009. Tarun Bajaj, joint secretary (insurance and banking), department of financial services; Sanjeev Kumar Jindal, director, department of financial services; and Ravneet Kaur, joint secretary (banking and insurance) are the members of the panel.