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Sebi tells bourses to probe rise in penny stocks

Rakesh P Sharma & Janaki Krishnan in Mumbai

The Securities and Exchange Board of India has written to all the stock exchanges directing them to examine the trading of low-cap stocks and stocks that have, in the recent past, spiked after being traded below par. It has asked the exchanges to submit a report within two weeks.

Sebi has told the exchanges they should look for a recurring trading pattern in the scrips and examine the possibility of any common entities resorting to unfair trades in certain categories of stocks.

According to the watchdog, the absence of institutional players in the market, coupled with low floating stock in most of these companies, has made trading in such shares susceptible to manipulation.

Based on complaints received from some investors, Sebi in its letter has also given details of the modus operandi adopted by operators in these stocks.

In one scenario, operators connive with the managements of companies whose shares are illiquid and trading below par. They issue advertisements in newspapers proclaiming false results, including declaration of dividend, and naming some fictitious foreign firm that is apparently eager to enter into a collaboration with the company.

"Such advertisements are issued to create interest in the counter and lure investors to take a position. These unscrupulous persons then increase the price of these scrips till its par value by indulging in circular trading and then offload them to gullible investors," Sebi said in its letter.

In another scenario, brokers and fund managers form a cartel and appoint agents in various cities. These agents, in turn, appoint small brokers and sub-brokers in small cities 'luring investors and other small brokers.'

These agencies, along with the main brokers based in the metros, entice small investors to buy low value shares, assuring them returns upwards of 20 per cent per annum, along with a share in the profits.

"These entities then indulge in circular trading among themselves to manipulate the share price. At the end, the cartel offloads the shares to gullible investors at exorbitant prices," Sebi added.

With the stock market in the doldrums and stocks of large-cap companies being battered almost every other day, operators have turned their attention to "penny" stocks, which have suddenly appreciated out off proportion to their intrinsic worth.

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