Sebi probes insider-trading in shares of firms in loan scam

Sebi probes insider-trading in shares of firms in loan scam

Mumbai/New Delhi: Market watchdog Securities & Exchange Board of India (Sebi) has initiated a probe into possible front-running and insider trading in shares of over two dozen companies, including some blue chips, by entities and persons involved in the housing-finance bribery scam unearthed by CBI.

The initial findings, when corroborated with the charges made by the CBI, indicate towards a lage-scale front-running deals or shares being purchased or sold in these companies on the basis of prior knowledge about investment decisions being made by large institutional investors, a senior Sebi official said.

These large institutional investors could be LIC, whose secretary (investments) figures among those arrested by CBI in connection with the multi-crore scam, as also those investors who participated in share or debt placements arranged by investment banking and financial services firm Money Matters, sources said.

The probe would encompass large dealings and any irregular spurt in volumes or prices of shares of all the companies where these institutional investors had bought or sold shares over the past two years, they said.

The top officials of Money Matters, a fast growing entity that boasts of having served a number of top-level corporate entities in the past including the likes of Tatas, Ambanis and Birlas, have emerged as the focal points of the scam.

Sources said that though the arrested official of the country’s largest insurer LIC could have been used (by Money Matters) in terms of revealing the investment decisions already taken by the PSU, he might not have been in a position to know upcoming decisions by the company or influence its investments in stocks.

As LIC is not a listed company and is not obliged to disclose its purchase or sale of shares on day-to-day basis, the names of companies where it has invested or whose shares it has sold generally come to be known with a time-lag.

Besides front-running, the market regulator is also looking into possibility of insider trading by the top officials, and in some cases, promoters of the companies whose names have surfaced in the CBI probe.

Given the sensitivity of the matter and the probe being in preliminary stages, the official declined to disclose the names of the companies, while adding that the companies whose shares have been manipulated might not be themselves at fault.

The Sebi official said that the regulator had begun probing insider trading possibilities in many of these companies, even before the arrests made by CBI two days ago, as it had feared irregularities in their share dealings over the past few months.

However, it was only after CBI unearthed the scam that Sebi could relate the alleged insider trading with the accused of loan bribery case.

CBI has issued notices to 21 companies to provide all the documents related to the case and explain any benefits received by them and also favours extended to the accused persons.

Sources said that Sebi suspected the unscrupulous activities to have begun in these companies’ shares at least a year ago, when the stock market was still in dumps and the companies were finding it tough to raise funds due to extremely low valuations.

After shoring up the shares during the days of their distressed valuations, the accused entities could have started selling off these stocks to the unsuspecting investors at high valuations, they added.

On Wednesday, the CBI arrested five officials from state-run listed lenders, including the chief executive of LIC Housing Finance , accused of taking bribes to facilitate large corporate loans. Three senior executives from a listed private company were also arrested on charges of handing out the bribes.

Those arrested included senior officials at state-run Central Bank of India , Punjab National Bank and Bank of India - all major banks with operations across the country.

Shares in banks and real estate companies - the two sectors with companies that have so far been implicated in the graft probe - fell sharply on Friday as the scandal unfolded, underperforming a negative stock market.

Analysts said the scandal, which comes a few days after Prime Minister Manmohan Singh had to defend his government in the 2G spectrum scam, could harm investor sentiment.

“This is just unfolding at this point in time. These are very serious issues which impact investor sentiments," said Nitin Jain, Singapore-based principal of fund manager Kotak Mahindra.

“If we can clearly say that we have done something right at this point in time and do proper things at this point in time then it’s salvageable but otherwise it does have a potential to impact investor sentiments towards India from a medium term perspective," Jain said.

Investors, so far, remain keen to tap into a country with a young and fast-urbanising population of 1.2 billion. Economic growth is forecast at 8.5% in 2010-11, and then between 9 and 10% every year after that, levels rivalled only by China.

“Preliminary evidence points to the fact that the case is limited to individuals. So fallout is unlikely to be big," a senior CBI official, who did not want to be named, told Reuters.

The CBI official declined to provide further information, but since Wednesday, companies from the real estate, financial, banking and other sectors - including Suzlon Energy, Jaiprakash Power and Unitech - have said they have been contacted by the CBI. All have denied wrongdoing.

Finance minister Pranab Mukherjee has asked all banks, financial institutions and insurance firms to look into their exposures to firms named by the CBI in the case.

India was ranked 87th in Transparency International’s 2010 ranking of nations based on the perceived level of corruption. India lies behind rival China, which is in 78th place.

The bond and rupee market remained unaffected by the bribery scandal as traders did not view it as a risk to the banking system as a whole and as inflation, interest rates and fiscal conditions affected these markets more.