Investigation, Enforcement and Surveillance (IES)

With a view to strengthening investor confidence and integrity and safety of the market, SEBI has also taken several steps in individual cases of violations, defaults and market manipulation and at the systemic level. Some of the details are given below.

• Market surveillance
  A market surveillance division was set up in SEBI in July 1995, with a view to effectively monitor abnormal market activities and detect market manipulation. Since then several steps have been taken at the level of SEBI and the stock exchanges to improve the surveillance capabilities. Some of the steps were:
  
  
  1. the setting up of independent surveillance departments functioning directly under the executive directors of the stock exchanges
  2. submission to SEBI of daily, settlement and pre-issue monitoring reports from all the stock exchanges in formats prescribed by SEBI
  3. the system of circuit breakers/filter mechanisms was implemented at all stock exchanges
  4. the system of levying special and penal margins was implemented
  5. procedures for co-ordination among the stock exchanges on market related suspensions were put in place

  During 1996-97, market surveillance systems were further consolidated. Some of the developments in this regard are briefly given below:

• Formation of the Inter Exchange Market Surveillance Group
  The 22 stock exchanges have different trading and in some cases settlement cycles and at the same time scrips have multiple listing on these stock exchanges, resulting in abnormal variations in their trading. It was therefore felt that effective and meaningful co-ordination was needed among the stock exchanges for the healthy functioning of the markets. In order to promote meaningful interaction between the exchanges on surveillance related matters and improve the co-ordination between them, an Inter Exchange Market Surveillance Group was constituted in September 1996. The meetings of the group convened by SEBI, discussed the implementation of weekly caps, daily price bands, apart from deliberating on the market trends and other related issues. Representatives of Mumbai, National, Calcutta, Delhi, Bangalore and Jaipur stock exchanges are the members of this group.
  
  
• Weekly price cap and daily bands
  Due to differing daily price bands on the exchanges, it was found that there used to be wide variations in the prices of the scrips across different stock exchanges. This sometimes resulted in unhealthy market conditions. It was therefore decided that while the exchanges would have flexibility for deciding the daily price bands, a weekly cap of 25% was imposed. A decision was also taken to consider the previous day’s closing price as the uniform reference point for the calculation of the price bands. It was also decided to have uniform daily price bands of 10%. These measures coupled with strict implementation of margin monitoring and collection mechanisms proved to be useful in containing excessive volatility as seen from the actual market experience.
  
  
• Indefinite suspension of scrips
  With a view to bring some uniform structure regarding suspensions of scrips, it was decided that suspensions beyond three days should be with SEBI’s approval. It was also stipulated that such suspensions should be followed with immediate investigations at the level of the exchange. During 1996-97, in respect of 28 scrips (BSE 20; ASE 4; CSE 1; DSE 1; NSE 1; BGSE 1), SEBI has approved requests for indefinite suspensions. In some cases suspensions have been revoked after completion of investigations.
  
  
• Development of Stock Watch System
  A system of market monitoring and surveillance has already been initiated and exchanges are reporting abnormal price and volume movement to SEBI in prescribed formats. However, with a view to have more effective system of market surveillance keeping in line with international standards it has been decided to develop a “stock watch” system at the level of the stock exchanges under the initiative and oversight of SEBI. In October 1996, a paper in this regard was prepared and circulated to the exchanges and active discussions have taken place through the Inter Exchange Market Surveillance Group. The proposed system would trigger alert signals based on abnormal price or volume fluctuations of any scrip traded on the exchange on an on-line basis. A core group comprising of Mumbai, National, Delhi, Ahmedabad and Madras stock exchanges and OTCEI was formed to prepare the basic parameters for the system. Assistance of outside consultants having expertise of market surveillance systems is also being taken. The group will identify and prescribe the parameters for the system. The system at least in its basic form is expected to be implemented by all the exchanges by the end of 1997.
  
  
• Inspection of Surveillance Cells of Exchanges
  The surveillance departments of exchanges have been strengthened in terms of man-power and systems at the behest of SEBI. Since December 1996, the inspections of the surveillance cells are being taken up for the purpose of assessing the nature of surveillance done and improve the proactive surveillance capability of the exchanges. Surveillance cells of two exchanges have already been inspected and the short comings communicated to them for the improvement of the functioning of the surveillance cell. As a part of this program during 1997-98, surveillance cells of all the exchanges are to be inspected.
  
  
• Development of the stock exchanges as Self Regulatory Organisations
  As already stated, to further the goal of self regulation in the stock exchanges and enhance their capabilities of detecting malpractice, SEBI directed the exchanges to set up surveillance departments in the exchanges independently reporting to the executive directors. The exchanges have themselves also started taking up various investigations and sending the report to SEBI for necessary action against the persons involved in manipulations. The exchanges have on their own started developing cases for penal actions against their member brokers also. For example, The Stock Exchange, Mumbai, has suspended 9 brokers on charges of price rigging and market manipulations in 1996-97. These brokers have been suspended for varying periods ranging from three months to a year. Besides for margin defaults 48 brokers have been suspended by exchange authorities, apart from levying of penalties. As a part of market surveillance, exchanges have started administering trade halts, imposing price bands and exposure caps on members; and even deactivating brokers’ trading terminals. In the last few months of 1996-97, terminals of brokers were deactivated pending margin payments in more than 50 cases. These self regulatory steps taken by the exchanges under active oversight of SEBI have improved market safety and integrity. Some of the details of the actions taken by the exchanges as self regulatory bodies under the oversight of SEBI are given in Table 15.
  
  
• Interactive and Proactive Market Oversight by SEBI
  Market oversight by SEBI is on interactive basis with exchanges and there is frequent informal exchange of information and ideas to create purposeful market monitoring and surveillance. The efficacy of this system was demonstrated on occasions of market volatility. In order to contain market risk, SEBI co-ordinated a series of measures by stock exchanges which included prompt collection of margins, enforcement of exposure limits and application of price bands. These steps helped in protecting the markets from defaults. Tables 16 and 17 describe price movements during two such episodes. These movements are also described in Figure 9 below.
  
  
• Investigations
  From the year 1995-96, SEBI strengthened its investigation activities. This process has been facilitated by the enactment in 1995-96 of regulations prohibiting fraudulent and unfair trade practices, which bring persons who are not registered intermediaries, including investors or clients of intermediaries within the purview of SEBI.

   

  Investigations involve the identification of persons who might be involved in the violations, collection of elaborate data regarding primary issues, transactions in the secondary markets, trading details, followed by verification and analysis of the same. Cases are bifurcated into preliminary inquiries and formal investigations. Questionnaires are sent and inspections of books and records are recorded. As part of the investigative process, statements are recorded by way of evidence. On conclusion of the investigations, penal action under the Act and the various regulations are initiated by appointment of the Enquiry Officer and by issuing of show cause notices to persons involved. The investigations result in penal action varying from monetary penalties, warning, suspension and other directions, including even refund of the issue proceeds or impounding of the proceeds of manipulations.

  The powers bestowed under the SEBI Act, 1992 to summon and enforce the production of the documents and recording of the statement was effectively used to collect information from the investors also. In an important development, these powers were challenged in the Gujarat High Court of Gujarat. In this case, it was held by the Court that these powers can be used against any person who is associated with the securities markets, who may or may not be registered with SEBI, including an investor or client of an intermediary. Details of this case are given later in this Report.

  During 1996-97, investigations have been carried out in several cases of issue related manipulations, misstatements in the prospectus, fraud, price manipulation, take-over of companies without the compliance with the relevant regulations and insider trading. The details are given in Table 18 and Figure 10. As can be seen from the table, SEBI initiated investigations in 122 cases in 1996-97 bringing the total cases taken up for investigation to 182 in the last two years. These cases include preliminary inquiries and investigations launched. Out of the above 73 cases have already been completed. The break up of 122 cases taken up during 1996-97 is given in Table 19 and Figure 11. On completion of investigations, an enquiry officer was appointed in respect of 70 intermediaries who have been issued show cause notices under the provisions of the relevant regulations. The break up of the 70 intermediaries is given in Table 20. On the basis of the report of the enquiry officer, 3 brokers have already been suspended for a period of three months for their involvement in market manipulation. Show cause notices have also been issued to 103 non-intermediaries for debarring them from trading in securities for an appropriate period for market manipulations. These non-intermediaries include individuals, firms as well as corporates. In addition to the above, show cause notices have also been issued for launching prosecutions against the intermediaries and non-intermediaries involved in manipulation.

• Fake stock invests
  It was noticed that many issues were being subscribed through the use of fake “stockinvests” and if these were excluded, issues were not subscribed to the extent of 90%. The stock exchanges were asked to ensure refund of all amounts collected on subscription in such issues. In 8 cases a refund has been ordered by SEBI.
  
  
• Issue related manipulations
  In 1996-97, SEBI took up 24 cases for investigation of issue related manipulation. These cases mainly pertained to allegations of grey market operations and acceptance of late applications, misuse of stockinvests, contravention of various SEBI guidelines and the provisions of the Companies Act, 1956. In one such case, after completion of investigations, the issue proceeds were required to be refunded.
  
  
• Bear hammering
  The Sensex movements from April 1, 1995 to October 31, 1995 reflected a downward trend which was particularly sharp in the period from October 16, 1995 to November 29, 1995 when the Sensex fell from 3,583 to 2,922. SEBI carried out an investigation to establish whether this fall was a result of market manipulation. As part of the investigations, 35 brokers belonging to three exchanges across the country were inspected and their clients interrogated. Investigations revealed that these brokers and their clients had indulged in illegal carry forward of transactions, which were not reported to the exchange and there was evasion of margin on these transactions. The elected directors of the exchanges had also indulged in similar violations. Based on the investigation SEBI took the following actions:
  
  1. SEBI superseded the governing board of a stock exchange where a significant proportion of this activity took place, and an administrator was appointed by SEBI. The elected directors of the exchange resigned pursuant to the show cause notice issued to them by SEBI. Further details are given in Part III of this Report.
  2. Enquiry officer was appointed in case of the brokers and show cause notices were issued to them for initiating action against them.
  3. Show cause notices were also issued to some of the clients of the brokers who had indulged in the unauthorised carry forward transactions and artificial depression of prices of certain scrips in the market, along with the brokers.
• Impounding of auction proceeds
  With a view to preventing manipulators from benefiting from undue gains arising out of manipulation several measures were taken for the first time. These included freezing of the proceeds of manipulation arising from auction and close out. The total amount frozen at the end of 1996-97 was Rs. 45 crore. After completion of investigations in 10 of these cases, the difference between the auction proceeds/close out proceeds and the standard rate was impounded with a view to prevent manipulators from taking undue or ill-gotten gains. The total amount impounded at the end of 1996-97 due to the directions of SEBI stood at Rs. 31 crore. These actions were taken under the overall regulatory powers of SEBI to protect the interest of the investors and the securities markets.
  
  
• Price rigging
  As mentioned earlier in Table 19, investigations were carried out in 67 cases of price rigging. Such actions coupled with effective market surveillance on the part of SEBI and the stock exchanges have resulted in significant reduction in cases of price rigging on the Indian stock exchanges.
  
  
• Prosecutions
  In continuation of its past efforts to enforce against violations by defaulting issuers such as delaying the issue of share certificates and transfer of shares, etc., SEBI launched prosecutions in 8 cases in 1995-96 and in 9 cases in 1996-97 bringing the total prosecutions launched so far to 17. 7 prosecutions were launched under the powers delegated to SEBI under the Companies Act, the details of which are given in Table 21. 2 prosecutions were launched under powers bestowed by the SEBI Act for violations of the SEBI (Substantial Acquisitions of Shares and Take-overs) Regulations, 1994. In 25 cases, 52 show cause notices have been issued to seek the comments from the defaulters, before launching of prosecutions. The break up of the same is given in Table 22.