A 'parallel' crisis in CSE

Uncertainty prevails among the broking community as the Calcutta Stock Exchange tries to pull itself out of the payment shortfall crisis.

SUHRID SANKAR CHATTOPADHYAY in Kolkata

THE Calcutta Stock Exchange (CSE) at 7 Lyons Range was engulfed in one of the country's worst-ever payment shortfall crises when 10 defaulting brokers or broking firms belonging to three major players failed to pay up a total of Rs.106.93 crores to the bourse against their obligations in three consecutive weekly settlements (numbers 148, 149 and 150).

The crisis made the CSE's Settlement Guarantee Fund (SGF) poorer by Rs.48 crores and depleted the general reserves to the extent of about Rs.20 crores. The overblown unofficial badla or carry forward market brought the exchange to its knees. The CSE, which until February-end enjoyed an average daily turnover of Rs.1,500 crores, saw the volume shrink to less than Rs.100 crores in the second half of March as the operators became nervous and cautious. According to Ajit Day, former president of the CSE, the loss for all the parties put together would be around Rs.800 crores. More than 70 per cent of the broking community, especially small and medium brokers, were devastated. Many lost their lifetime's savings. Abhisekh Banka, 22, a sub-broker, is reported to have committed suicide by drowning. His wife killed herself by jumping off a multi-storied building. The crisis precipitated the resignation of all three elected broker members - Dinesh Kumar Singhania, a director on the CSE board, Harish Biyani and Ashok Kumar Poddar - from the governing committee, paving the way for demutualisation.

The crisis has its roots in the operations of Mumbai-based bull trader Ketan Parekh, who used some CSE brokers as his conduits for official and "unofficial" deals in the ICE (information, communication and entertainment) shares. According to market observers, the elaborate price rigging operations in the technology counters conducted by Ketan Parekh's associates in Kolkata had begun more than a year ago. But Ketan Parekh and Co. suddenly got trapped after a gang of bears hammered down the ICE stocks across the board on March 2. With the drastic fall in the market, Ketan Parekh found himself unable to keep his commitment to his fronts - Singhania, Biyani and Poddar - in the CSE.

"When the local bulls could not off-load their stocks in the official market, they succeeded in transferring it to the unofficial badla system," said S.K. Kaushik, a broker. The Rs.3,000-crore unofficial badla market in the CSE is the largest in India. The system prevalent at the CSE is popularly known as the "1-2-3 system", by which brokers transfer stocks among themselves. Although the transfer takes place through the official market, the system ensures that the stocks go to the transferer's choice. Two brokers place buy and sale orders at the same time and at the same price. Then they contact each other over the phone and at the count of three, hit the enter button of the trading terminals simultaneously, thus ensuring that the orders hit the market at the same time. The price of the shares is "fixed" slightly above the market price by the operators concerned.

"With the unofficial market destroyed by the recent developments, the brokers who borrowed heavily from there and routed it through the official market, and the financiers have been badly affected," an expert told Frontline. According to him, the returns in the unofficial badla market is on an average 25 to 30 per cent, as against 18 to 20 per cent in the official market when the going is good.

According to Tapas Dutta, CSE executive director, on March 8, at settlement No.148, there was a shortfall of Rs.32.6 crores. It was for the first time that a default of such a huge proportion had taken place in any major bourse in the country. Defaults were mainly in the HCFL counter and in the DSQ software scrip.

CSE officials claim that the pay-in shortfall was a rare phenomenon since the introduction of on-line trading and Securities and Exchange Board of India-approved modified carry forward systems. Even if there was any shortfall, it was never more than a few lakhs. "The shortfall was then quickly adjusted against the defaulter's margin deposits," a top CSE official said.

The CSE authorities attempted to bridge the pay-in shortfall by encashing bank guarantees and fixed deposits of defaulters placed before the exchange as margin (sort of an advance payment or collateral against outstanding positions) worth around Rs.70 crores. It also sold shares, which were brought in by some of the defaulting brokers. However, the gap could not be filled.

Dutta said that after utilising these funds and drawing from the SGF, on March 15, there was a shortfall of Rs.13.08 crores for settlement No.149. On March 22, another 40 brokers failed to keep their commitments for settlement No.150, as they were hit by the chain reaction of the earlier defaults of Singhania, Biyani, Poddar and their respective companies. However, the shortfall was again bridged by adopting the same method used in the matter of the two earlier settlements and by recovering Rs.28 crores by cancelling "dubious" trade deals.

On March 26, the CSE formally declared 10 brokerages owned by Singhania, Biyani and Poddar as defaulters. It also initiated criminal proceedings against some of them under Section 138 of the Negotiable Instruments Act for presenting cheques worth around Rs.55 crores which were dishonoured by the drawee banks. The 10 arraigned persons are: Dinesh Kumar Singhania and Co, Doe Jones Investments and Consultants Private Ltd, Arihant Exim Scrip Pvt Ltd, Tripoli Consultancy Services Pvt Ltd, Harish Biyani, Biyani Securities Pvt Ltd., Ashok Kumar Poddar, Prema Poddar, Raj Kumar Poddar and Ratan Lal Poddar.

The CSE authorities came under attack for not being able to prevent the crisis and "allowing it to blow out of proportion". One broker blamed the ineffective surveillance mechanism. Ajit Day said: "It is obvious that the CSE authorities did not apprehend that things will take such a turn." The CSE management, however, avoided fixing responsibilities for the crisis.

The majority of the brokers demanded the resignation of the elected directors of the CSE governing committee. On March 30, the eight elected members - president Kamal Parekh, vice-president K.K. Daga and six directors - resigned. Dinesh Singhania had resigned earlier following the payment crisis . On April 2, a new management sub-committee comprising six public representatives, three SEBI nominees and the executive director was formed by the governing committee. The subcommittee is headed by Dipankar Basu, former chairman of State Bank of India, and includes Roopen Roy of Pricewaterhouse Coopers, Brij Gopal Daga of the Unit Trust of India (UTI) and Professor Gopal Reddy of the Indian Institute of Management, Kolkata.

The new board decided that the CSE would primarily seek to replenish the depleted SGF, the erosion of which has been more than 25 per cent of the last audited corpus. If not replenished, according to SEBI guidelines MCFS would be disallowed, and that would mean the end of the CSE and all those who depend on it. Currently the main concern of the management is restoring the CSE's financial position. Pratip Kar, SEBI executive director in charge of the secondary market, is reported to have said that CSE would eventually emerge as a demutualised entity, with a clear division between ownership and management.

However, Ajit Day sees a dark future for the CSE as the payment crisis has created confusion in the market and a drop in business.