Company decides to hold board meeting for bonus shares and share peaks and then crashes

These days one hears that SEBI has tightened surveillance and investors need not get worried about manipulation been done by Promoters and so called market intermediaries or friendly associates. Here is an example of rampant manipulation where the company and its Promoters have committed murder of the investor. The question is will they get away or get caught?

The company announced on the 10th of October 2012, that the board of directors of the company would meet on the 18th of October for consideration of issue of bonus shares if any. The board did meet and declared a bonus issue of 1 share for every 5 shares held. The announcement of bonus shares normally has a positive impact on share price. In the case of Pradip Overseas Limited what is surprising is that the share price peaked out on the very next day of announcement of board meeting for bonus issue and the price began falling from the next day itself. The share reversed on the 11th of November and has been on a decline thereafter.

What is really surprising is the fact that volumes began to increase and so did the price. The BSE saw volumes increase from just less than 9000 shares increase 100 fold to just over 9 lacs. The price rose from Rs 82 to an intraday high of Rs 127.70and then the price fell even before the announcement of the bonus ratio to a low of Rs 49.65. What is really shocking is the fact that the bonus meeting announcement was made on 10th October and the share peaked and reversed on the very next day the 11th October.

Price movement and manipulation on the NSE was in no way less than what one saw on the BSE. Here the volume rose from about 11,000 shares to a staggering 31.64 lac shares and the peak volume was on the 11th of October. The volume rose a staggering 287 times.The price rise a similar Rs 82 to Rs 125 and then a low of Rs 50.15. One wonders what prompted the Promoters to take such a drastic step and what was the objective? Why rig the price and make innocent investors enter the share, make an announcement of holding a board meeting and then dump the share. This is a very serious offence and has certainly trapped innocent investors. The regulator must enquire and punish the guilty.

BSE Prise

NSE Prise

From the above table details of the daily price, quantity traded, weighted average and daily delivery details on the BSE and NSE are given since the 1st of October 2012. The table clearly shows how the investors have been conned by the Promoters acting in concert with persons associated with this white collar crime on investors.

From the above two charts one finds that the whole event has been planned meticulously and there was no need for any such bonus announcement. The share price has been quite consistent for the last few quarters in a broad range of Rs 70-90 and hovering around Rs 80. Why this jump to over Rs 124 coinciding with the bonus meeting and then post the actual bonus announcement crashing to Rs 50 or thereabouts. Who gained? Who lost? What was the objective of letting the share fall so sharply from the traditional Rs 80 range to the Rs 50 range? How did the promoters benefit and why the sudden bonus announcement?

Answers to these questions would be available only after a thorough investigation and in the interest of investors and their safeguard one would expect that the regulator SEBI does look into the same.

The week was dominated by discussions on the freak trade which happened on the NSE on Friday the 5th of October. Very clearly from details which have flown over the last 10 days it appears that a basket of NIFTY stocks were sold by a dealer at the institutional desk of the broker for a quantity which was much more than the ordered quantity. This triggered a false price in the market and in a span of less than 30 seconds; all fifty constituents of the NIFTY index had hit a low of 20%. This should have brought about a shutdown of trading on the NSE cash market because the exchange had crossed the circuit limit of 570 points on the NIFTY and actually touched a low of 900 points. What is surprising is that the exchange continued to deny any system glitch at their end though it clearly appears that the system not triggering a circuit when the NIFTY was down 570 points is certainly a lapse. What is even more shocking is the explanation that 59 orders caused the carnage when the system from one order creates orders for all 50 stocks. This could be treated as one order or 50 orders but the magical and mysterious 59 orders remains unexplainable.

NSE is an exchange which can do no wrong. It is the same exchange which was reprimanded for huge number of code changes to transfer profit and losses in a large number of cases and they denied any wrong doing. It is the same exchange where the Futures list is being pruned sharply as it had violated its own norms of futures when they were introduced. They had said that the basic criteria would be 0.5% of the average daily turnover should happen in that stock. We all know basic mathematics that 100 divided by 0.5 is equal to 200 or that this number becomes the maximum number of stocks in which futures could be introduced at any time. However there is another known fact that the top 50 stocks by trading volume account for anywhere between 70-80% of the traded volume. This futures segment should then have been reduced to somewhere around 100 stocks. Good sense will prevail in course of time when there is meaningful competition available to this exchange.

Whether NSE accepts its system had a glitch or not action taken by the regulator SEBI during the previous week indicates that the regulator believes that there was a glitch. We are all aware that SEBI reacts to events in a slow manner and takes its time to bring about change. In this case the speed with which they have reacted is indeed unheard of. They called a meeting, discussed the same and recommended to the exchanges that the current notional circuit of 20% in stocks included in the benchmark indices and those which have futures would be reduced to 8%. Besides the recommendation, the exchanges have been given seven days to comment on this issue. It appears that by this time next week the new notional limits would have been introduced.

The second issue on which SEBI is now veering around is to the annulment of trade. It wants to create some guidelines when and how trades created in unusual conditions could be annulled by the exchange. There have been instances in the past when globally such instances have been reversed or annulled. This happened in the US when a drunken investor kept on buying crude and pushed prices artificially high. It also happened on the BSE in currency futures. Within India as well the broking community is pushing the exchange that annulment be done and to help the beleaguered broker. The only possible reason why the exchange seems reluctant is the nagging fear that this would amount to admitting that their systems failed. The trading community believes that NSE is at fault and there is a system glitch.

Switching tracks to the markets one finds that in the last week we fell and rose on alternate days indicating a mixed trend and lack of clarity where we are headed. The election results in the by-elections in Uttrakhand and West Bengal are certainly an eye-opener. The seat vacated by the President was won by a margin of 1.22 lacs vote last time. This time around his son managed to squeak through with just 2,536votes. The Chief Minister of Uttrakhand’s son lost the seat vacated by his father by 22,694 votes. These two elections should act as a wakeup call for the scam ridden Congress.

Elections in Himachal Pradesh take place on the 4th of November and in Gujarat on the 13thand the 17th of December. Both these states are ruled by the opposition BJP and these elections could be treated as a referendum for the general elections due in May 2014 as scheduled or earlier. The markets would be choppy and would seek direction from the current result season. Infosys which declared its results on Friday the 12th of October saw its share price drop for the third consecutive quarter after result declaration. The share price dropped a steep 5.2% after the net margins dropped by 160 basis points and the net profit rose over 24% to Rs 2,369 crs. The future guidance in revenue terms did the share in. Results from banking companies HDFC Bank and Indusind bank were spot on and saw the shares end with minor changes.

The redeeming feature is the continuedinflows from FII’s who bought shares worth Rs 3,194 crs while domestic institutions sold shares worth Rs 1,225 crs. The Indian Rupee depreciated to Rs 52.81 against the dollar losing 0.97 paisa or 1.87%. Brace yourselves for a choppy and directionless week with a negative bias.