Share price rigging is rampant during bull runs. To see how it happens, let’s check the modus operandi

Business Ethics

Share price rigging is rampant during bull runs. To see how it happens, let’s check the modus operandi

CASE 2 (20 Marks)

Share price rigging is rampant during bull runs. To see how it happens, let’s check the modus operandi. The main format which evolved during Harshad Mehta’s time, involves three participants – promoters, operator and a broker syndicate. There are ancillary participants like fake bill-sellers, and also perhaps unscrupulous auditors and officials. The promoter first finds an operator or vice versa. The promoter should be interested in bumping up the share price, the motivation for which could vary from the basic – offloading his stake at a high price to gullible retail investors – to the more advanced – which comprises complex needs like getting better validation for a GDR issue or in an M & A. it works like this: the promoters commit to the operator not to sell the market while the operation is on. He gives about 10% of his stake to the operator of companies affiliated to the brokrs’ syndicate. The syndicate normally comprises 6-10 brokers, often dispersed in different cities so as not to arouse suspicion of SEBI or the stock exchange. Their role is to do circular trading which works like this: say broker A sells to B at Rs. 4.5; will sell to C at Rs. 4.65 and so on. The trades are designed to generate the impression of large liquidity. After taking prices to certain level, ‘news flow’ is created. The news is typically about large orders and capacity expansion. These days it is often about an acquisition or restructuring. Also, financial results need to show improvement. This is done by buying revenue. There are agents who sell fake bills at a certain commission, which could be between 0.5% and 10%. ET has learnt this market tends to boom at the same time as share markets. After the price reaches the target, the syndicate exits. The gains are split between the promoter, operator and syndicate members. In this artificially created bull run, there is a new element: people trying to convert black money to white.

Answer the following question.

 

Q1. Give an overview of the case.

 

Q2. Discuss the ethical issues in this case

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