Price Manipulation in Stocks: Evidentiary Problems

SEBI last week passed an order in relation to an investigation involving the promoters of Zee Telefilms Limited. This was under the SEBI (Prohibition of Fraudulent and Unfair Trade Practices Relating to Securities Markets) Regulations, 1995 (the SEBI (PFUTP) Regulations).

SEBI alleged that the promoters of Zee Telefilms Limited (now Zee Entertainment Enterprises Limited) provided funds to the Ketan Parekh (KP) group of companies so as to enable it to manipulate the price of the Zee stock and maintain it despite the drastic fall in global stock markets in 2000-2001. This was allegedly to ensure that one of the Zee promoters was able to sell off its stake when the price was high and also for Zee itself to justify its issuance of shares to a financial investor at a high price.

Although the order by SEBI’s whole time member considers the complex transactions that occurred between the parties, there was indeed no direct evidence to establish stock manipulation within the facts of the case. Hence, Zee’s promoters were let off with only a warning. Here are some excerpts:

“I am conscious of the fact that there is no direct evidence of the involvement of Zee and its promoter companies in manipulation of the scrip of Zee. I also note the contention of Zee that the transactions entered into between them and KP entities did not have the effect of manipulating the market price of Zee and synchronised trading per see is not violative of SEBI (PFUTP) Regulations. However I am also conscious of the fact that in almost all manipulation cases, considering the market dynamics involved, it is always difficult to prove the intention and the same has to be inferred from the mass of factual details, sequence of events, accompanying circumstances, conduct of the parties and the overall impact of such transactions etc. When seen from this angle, on balance it is difficult to infer that Zee group entered into transactions with KP entities with the intention of manipulating or maintaining the price of Zee at a particular level.

A cumulative view of the aforesaid findings, therefore, persuades me to conclude that though the noticees were not involved directly in manipulating the scrip of Zee but their conduct and actions give an impression that they aided and abetted KP entities in large scale market manipulation of various scrips including Zee.

Now therefore, I in exercise of powers conferred upon me under Section 11 and 11B read with Section 19 of the SEBI Act, 1992, hereby warn Zee Telefilms (since changed to Zee Entertainment Enterprises Ltd.) and its promoters viz., … I also direct Zee Telefilms Limited and its promoters to note that any similar activity and/or instance of violations or non-compliance of the provisions of Securities and Exchange Board of India Act and the Rules and Regulations framed there under, in future, shall be dealt with stringently.”

The order by SEBI’s whole time member is important as it demonstrates the difficulties faced by regulators in proving market manipulation actions against market players (relevant portions highlighted). This is because manipulation involves multiple layers and series of transactions imposing a strong burden on the regulator of proving the chain of causation. On the other hand, it is left for the defendants merely to establish a break in the link. The tone of SEBI’s order in this case suggests acute suspicion on its part of manipulation by Zee’s promoters but inability to prove the same. Hence, it had to settle for warning rather than penalty.

About the author

Umakanth Varottil

Umakanth Varottil is an Associate Professor at the Faculty of Law, National University of Singapore. He specializes in corporate law and governance, mergers and acquisitions and cross-border investments. Prior to his foray into academia, Umakanth was a partner at a pre-eminent law firm in India.

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