Eight years after it was indicted by the market regulator for "profiting from advance knowledge" of news website Tehelka's market-moving exposés, brokerage house First Global says it has procured documents under the Right to Information Act that show how the regulator fabricated a case against it.
The documents obtained by First Global from the Securities and Exchange Board of India show that the brokerage's name does not figure in the list of the top-50 sellers from mid-February to mid-March 2001, the period which was investigated by the regulator to determine the cause of the market crash in that period.
The Bombay Stock Exchange Sensitive Index had fallen 177 points on March 3, 2001, wiping out nearly Rs 35,000 crore (Rs 350 billion) of market capitalisation.
The charges against First Global were serious - On September 12, 2002, Sebi cancelled the registration of First Global Stockbroking as a broker and portfolio manager after the regulator held it responsible for the stock market crash on March 2, 2001.
The action against First Global became a political controversy because 10 days after the crash, Tehelka.com ran a series of exposés on a defence deal scandal that nearly brought down the Atal Bihari Vajpayee government and led to the resignation of the then Defence Minister George Fernandes. First Global held 14.5 per cent stake in Buffalo Networks Pvt Ltd, the company that owned Tehelka.com.
Shankar Sharma, First Global's director and chief global trading strategist, was arrested three times, including once for allegedly threatening a law-enforcement officer.
First Global appealed to the Securities Appellate Tribunal, which set aside Sebi's order on December 3, 2004.
The point of argument of the case was the validity of Sebi's order, as it was not passed within the regulated 30 days after considering the reply to a show-cause notice. The regulation that governs these orders originally said the Sebi board is "mandated to pass orders as soon as possible but not later than 30 days from the receipt of the reply to show-cause notice". Coincidentally, in 2002, this regulation was modified with the words "as soon as possible" without a specific time limit.
The tribunal had taken note of the fact that the then Sebi chairman G N Bajpai persistently refused First Global's requests for an oral hearing along with its written submissions. Also, instead of dealing with the matter in accordance with the law, Sebi engaged a solicitor to send a lawyer's notice to First Global's written replies.
"This we find a little unusual in view of the fact that the enquiry was pending before Sebi. A regulator does not send lawyers' notice when the matter is pending in enquiry," SAT's order had noted.
When contacted, Sharma said his company had said from the first day that the investigation was "politically motivated, post the Tehelka exposé, and Sebi's objective was to frame us by any means, however illegal".
Sharma said the same data was always available with Sebi, but the regulator refused to share it before the RTI Act was passed. "The documents procured under the RTI Act are clear and incontrovertible data-based evidence of how a so-called independent regulator acted at the behest of the powers that be," he said, adding "Deliberate suppression of data is a serious moral and legal offence, and here the regulator itself has been guilty of that."
Bajpai did not comment on the issue when contacted on Friday evening and Saturday. When called on his mobile phone, Bajpai wanted to know the issue and said he would call back, but did not do so. He also did not reply to text messages explaining why Business Standard was trying to contact him.
The Sebi order against First Global at that time cited the findings of Sebi's investigating officer who said Sharma used Nirmal Bang to trade. Nirmal Bang Securities Pvt Ltd figures prominently in the list of top sellers during the period that was under Sebi's investigation.
"The trading pattern of Shankar Sharma through Nirmal Bang and others were highly irregular and resulted in building up of concentrated positions to avoid detection. It is alleged that the circular trading between First Global and the Nirmal Bang Group for the proprietary trades of Shankar Sharma, have been structured by synchronising the order entry in the system with a view to manipulate the market," the officer said.
The Sebi order said First Global had indulged in large trading transactions in Global Telesystems, HFCL, DSQ Software, Zee Teleflims, Wipro, Satyam Computers, SSI and Sterlite Opticals with a view to artificially depress the prices of the scrips, which in turn was responsible for the market fall.
The order said First Global adopted a pattern, which includes large carry forward sales, sales in these scrips on specific dates, sales in particular time slots when the scrip's prices registered substantial fall, portfolio operations disguised as structured arrangements in the garb of arbitrage trades, routing of proprietary trades through non-descript unregistered sub-broker. This establishes a concerted attempt to manipulate the prices of the scrips.
Sharma, however, said the Sebi order was against First Global and not against Shankar Sharma. "I traded through Nirmal Bang in my personal capacity to the tune of Rs 50 crore, which also includes buying and not only selling during 2001 and this was also disclosed. Several others apart from me also would have used Nirmal Bang to trade. Also, in those days there were trading and position limits on brokers and so most of them used other firms to trade.
In his defence, Sharma also referred to an interview given by Goolam E Vahanvati, Sebi counsel at that time, in the recently released book Tehelka as Metaphor written by Madhu Trehan. Vahanvati, who was also the Advocate General of Maharashtra at that time, has been quoted in the book as saying he refused to appear on behalf of Sebi after one hearing as "his conscience didn't allow him to continue".
Contacted by Business Standard, Vahanvati said he appeared for Sebi in the first case, but refused to do so in 2004 when the case was revived. "I found that Shankar Sharma was asked to showcause on the items that were not mentioned in the reports earlier," he said.
On whether he faced political pressure, Vahanvati said "I am not a political person and there was no pressure on me even when I decided not to appear for the case. Even now I do appear for Sebi in various cases. As an insider to the case, I know a lot of things, but as a true professional, I do not want talk to the media about the details of cases on which I am appearing."