Galleon under Sebi watch

The Securities and Exchange Board of India said it is 'closely watching' investments made by New York-based hedge fund Galleon, whose Sri Lankan founder Raj Rajaratnam was arrested for alleged insider trading on Friday.

Top Sebi sources said there was no concrete evidence so far of any insider trading in the Indian market by the hedge fund, but the regulator would not leave anything to chance.

Prima facie, the regulator does not see much damage, as the hedge fund has investments in only three listed companies in India -- 7.04 per cent in Edelweiss Capital, 4.61 per cent in Shriram EPC and 0.22 per cent in Pipavav Shipyard, which listed recently. It also has investments in Reliance Telecom Infrastructure, but details are not known as the company is still unlisted.

Two of the stocks came under heavy selling in initial trade on the Bombay Stock Exchange today, but recovered towards the end of trading. For example, the Pipavav Shipyard  stock plunged as much as 16.6 per cent, before recovering to trade down 1.2 per cent at Rs 56.45. The hedge fund bought Pipavav shares as a part of its pre-IPO placement. The shares have a one- year lock-in.

The Edelweiss stock fell 3 per cent to close at Rs 504 on concerns that the shares held by Galleon might come up for sale. But the stock recovered from the intra-day low of Rs 494.50 on reports that the Edelweiss management was in talks with the hedge fund to buy back the stake.

While Edelweiss declined to comment saying it was in the silent period ahead of its second-quarter results, sources close to the firm said it had over 60 foreign institutional investors and Galleon's stake was the fourth largest. It has already received offers from 15 foreign institutional investors should Galleon want to sell.

The Shriram EPC stock, however, went up by 7.8 per cent to close at Rs 235.20.

The sources said most of the other investments by Galleon in India were in the form of participatory notes, which are derivative instruments used by investors or hedge funds that are not registered with Sebi to invest in Indian securities, so it would be difficult to ascertain the amount of such investments.  Since the fund is still active, the shares it holds via P-notes might come up for sale in the coming days.