The Securities and Exchange Board of India’s first insider trading case against a foreign institutional investor got the markets agog on Friday. Even though the accusations may not be strong, with a raft of disinvestment issues expected to hit the markets this fiscal, the regulator is sending out a signal to investors to be careful.
Sebi has alleged that Hong Kong-based hedge fund Factorial Capital Management had shorted an L&T Finance Holdings public issue based on privileged information it had, just before the company went public. The announcement of a discount on the issue was made in March this year.
Sebi has in its examination found out that the information about likely “steep discount” was being circulated amongst the members of equity team of Credit Suisse. It has noted in its order that, “At this stage, however, the channel of communication of the unpublished price sensitive information is not ascertainable as various stakeholders such as seller, Seller Broker, their employees, potential investors, etc. are involved in the whole process….This aspect needs thorough investigation so as to come to a definite conclusion”.
Factorial Capital Management traded in derivative contracts of L&T Finance through five different Foreign Institutional Investors. These five FIIs were Macquarie Bank, Goldman Sachs Singapore, Merrill Lynch CM Espana, Nomura Singapore and Citigroup Global Markets Mauritius Ltd.
Factorial has termed Sebi’s allegations as “without merit”. But it said it will fully cooperate in the investigation.
While there is nothing to suggest in the timing of the Sebi order to suggest any link with the government’s disinvestment programme, there is no doubt it has been noted by the markets. “It is a message to the market participants that the regulator is keeping a watch,” said a leading merchant banker on conditions of anonymity.
However, he added that there is a case of insider trading here but it seems that more responsibility lies with the merchant banker than the foreign entity.
Former executive director, Sebi, S Raman who was heading integrated surveillance department said it is a very good use of data warehouse facility built up by Sebi. “It has been done in a very short time which is very impressive”.
However, there were dissenting voices too. “I think Sebi may be overstretching in this case. Insider trading is a fraud but in this case there was no leak, information was shared with 70 odd people under a process. Even if they (Factorial) knew the details and took positions, there is no fraud,” said Sandeep Parekh, of FinSec Law Advisors.
There is also a likelihood of the capital markets regulator investigating the domestic unit of Credit Suisse to see if price sensitive information was leaked by the investment bank.
* The capital markets regulator might investigate Credit Suisse to see if price sensitive information was leaked
* Sebi has in its examination found out that the information about likely “steep discount” was being circulated amongst the members of equity team of Credit Suisse