* First probe of foreign investor to set precedent
* Follows staff reinforcements, technology upgrades
* India ranks 7th out of 11 Asian markets for oversight -
By Himank Sharma
MUMBAI, June 17 India's stock market watchdog,
long lambasted as toothless, has more resources than ever before
to spot rogue trades. Even though it has singled out a hedge
fund as the target of its first major trading probe, detractors
What they need to see is a high-profile bust.
The Securities and Exchange Board of India (SEBI) hopes it
will achieve just that after accusing Hong Kong-based
multi-asset fund Factorial Capital Management Ltd of shorting
L&T Finance Holdings Ltd using information allegedly
leaked by bankers on a cut-price share offering.
"Nobody takes their investigation seriously, they are a
paper tiger," said J.N. Gupta, a former SEBI director who now
runs a shareholder advisory firm. "But if they can set a
precedent in this case, it will work like magic for their
SEBI has a dismal track record on fighting insider trading.
Until now, it has never probed a foreign investor for illegally
seeking to acquire and profit from market-moving information not
yet made public. Almost all of SEBI's cases have been against
penny-stock dealers. Many of them were settled by payments of
Lax regulation has deterred long-term investors who would
like to bet on India, leaving the market prone to the whims of
short-term speculators. Indian stocks hit record highs this
month on promises by India's new prime minister, Narendra Modi,
of economic reform. But only last year they were roiled by the
winding down of U.S. economic stimulus policies.
Under the leadership of U.K. Sinha, appointed in 2011, SEBI
has built its capacity to identify suspicious trades, insiders
and analysts say.
It has more than trebled its annual spending to 2.81 billion
rupees ($47 million) over the past six years. The regulator also
recently hiked transaction fees, which Sinha said is to commit
greater resources to enforcement and surveillance.
The 62-year-old chief, whose term was recently extended by
two years, has a record as an effective administrator. He pushed
through banking and capital market reforms at the finance
ministry, later running India's oldest mutual fund.
OPEN AND SHUT CASE?
In a seven-page order, SEBI said it had established that
Factorial was approached by Credit Suisse to gauge
interest in a potential sale of L&T Finance shares, after which
Factorial built a big short position in the stock. Short sellers
seek to profit from price falls.
The SEBI order said Credit Suisse employees had discussed
the expected pricing of the share sale in chatrooms, and that
the information could have leaked to outsiders. SEBI did not
accuse Credit Suisse of any wrongdoing.
"Factorial was aware of or at least had an indication of the
pricing and they blatantly abused that information," said one
SEBI official, who has worked on the case, requesting anonymity.
"We think this is an open and shut case."
Factorial has said SEBI's allegations, made on June 5, are
without merit. It has 21 days to respond.
SEBI could ban Factorial and fine it up to 250 million
rupees, or three times its illegal profits, subject to a
possible court challenge. It could also seek jail terms,
although it has never launched criminal proceedings in an
insider trading case.
The regulator has also reserved the right to investigate the
local unit of Credit Suisse Group, alleged to be the source of
the leak. Credit Suisse has declined to comment.
The SEBI official said the regulator receives about 100-200
alerts related to suspicious trading activity on a busy day,
which are then followed up by its officers.
"Our systems have become more sophisticated over the years.
We are constantly upgrading algorithms used to track suspicious
trading, and learning from past mistakes," the official said.
SEBI has revamped rules to improve transparency in Indian
markets over the past year, launching new corporate governance
guidelines and disclosure rules for companies.
Sinha has also won greater powers to monitor telephone data
records and carry out searches against suspects without a court
But new legislation to combat insider trading, to replace a
two-decade-old law, is stalled.
"We still find enforcement relatively weak - we don't see
huge improvement there," said Jamie Allen, head of the Asian
Corporate Governance Association, which has ranked India seventh
out of the 11 markets it monitors for quality of oversight.
SEBI's inability to counter securities fraud has driven away
retail investors from India's markets in recent years, with over
$5.15 billion leaving stock funds in the last four years alone.
Jonathan Schiessl, an India fund manager at Ashburton Asset
Management said his firm steers "as far as possible" away from
Indian small and mid-cap stocks due to apparent manipulation of
their stock prices.
($1=59.60 Indian rupees)
(Editing by Douglas Busvine and Ryan Woo)