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OCBs, FII sub-accounts major channels for siphoning: SEBI

Our Bureau

NEW DELHI, May 17

THE preliminary investigation report on recent market manipulation carried out by SEBI has sounded a warning note on the possibilities of money being siphoned out of the country by overseas corporate bodies (OCBs) and through sub-accounts of foreign inst itutional investors (FIIs).

According to the report, in respect of at least three OCBs -- Brentfield Holdings Ltd, Kensington Investment Ltd and Wakefield Holdings Ltd -- the holdings of these OCBs and that of sub-accounts in select scrips associated with Mr Ketan Parekh point to a nexus between the stock broker and these entities.

To illustrate this, the SEBI report has said that 24 lakh shares of GTB were sold by Brentfield through the broking entity of CSFB to Vidyut Investments on November 7, 2000. But the delivery was given from the account of Kallar Kahar, a FII sub-account o f CSFB. Vidyut Investment has a prima facie connection with Mr Ketan Parekh, the report said.

``Thus, the patterns of investments and trading transactions, the timings, the inter-connections all point towards prima facie misuse of the OCB and FII sub-account route including market manipulation in the form of circular trading, parking of shares, s tructured transactions and concentration of holdings,'' the report said, while noting that it also provides channels for the repatriation of profits based on the manipulated prices and possible siphoning of money out of the country.

Another significant phenomenon noticed during the course of the preliminary investigation was that of large transactions having been done in some of the scrips such as HFCL, Zee Telefilms, DSQ Software, Aftek Infosys, Silverline, Global Trust Bank, Masco n Global and Lupin Laboratories, all identified with Mr Ketan Parekh through some of the OCBs.

Five such OCBs, all of them registered in Mauritius, figure in a series of transactions of these scrips going by the initial investigation of SEBI. They are Brentfield Holdings Ltd, Kensington Investments Ltd, Wakefield Holdings Ltd, European Investment Ltd and Far East Investment Ltd.

According to the SEBI report, while the quantum and value of the transactions was very large, the issued and paid-up capital of these OCBs were strikingly insignificant. The paid-up capital was $5,000 in the case of three of them and just a paltry $10 in the case of two of them -- European Investment Ltd and Far East Investment Ltd.

Compared to their inward remittances, these OCBs were repatriating large amounts out of the country, the report said.

SEBI has also mentioned the possible misuse of the investment and automatic repatriation facility in the Indian market given to FIIs through the system of Participatory Notes (PNs). Under this system, an entity which intends to purchase equity shares in India approaches the subsidiary of a pension fund incorporated in the US and registered as an FII in India.

The foreign broking house executes order for the sub-account of the FII which is actually for the benefit of the Participatory Note holder. This mechanism is used by FIIs by entering into transactions by the clients who are otherwise not eligible for reg istration as FII to trade in Indian markets or those who may or may not be eligible but want to hide their identities.

Since the identity is not known, this PN allows the participant to trade in the scrips of Indian companies anonymously and also provides opportunities for indulging in malpractices in circumvention of law, including the takeover code, concentration of tr ading with the motive of manipulation, parking of these shares and other structured arrangements.

It also opens the possibility of repatriation of profits based on the rigged prices and in the process causing foreign exchange drain.