Videocon and Sterlite are two other companies barred for three and two years respectively for colluding with Harshad Mehta's price rigging in 1998.
Harshad's manipulation took Videocon up from Rs 51 to Rs 168 (a 232 per cent rise) between April and June 1998 at a time when the BSE Sensex dropped 11 per cent. In the same period, Sterlite moved from Rs 272 to Rs 385.
The trigger for the Videocon price manipulation was the audacious creeping acquisition offer to retail investors, which was made by the company at twice its market price. Market sources say this too was Harshad's brainchild and it immediately kicked up the scrip.
Sterlite's manipulation began just prior to its daring takeover bid for Indian Aluminium and is seen as an attempt to put the scrip into play and attract attention.
Sebi's investigation again establishes the nexus between Harshad Mehta's Damayanti group and the Sterlite management, in cornering the shares as well as the bailout that followed the June crash.
Sterlite's shares manipulation, which began prior to its bid for Indal, was later dictated by the frequent upward revisions of its bid, when Indal decided to make a fight for it and announced a counter-offer.
Sterlite's first offer for Indal was at Rs 90 a share in February 1998; and was slowly revised up to a hefty Rs 221, which was part cash and part optionally convertible redeemable preference shares.
It also rashly promised a minimum conversion price of Rs 350 to Indal shareholders and was forced to rig up the Sterlite price to that level by April 1998, in order to make its offer credible and attractive. That the price collapsed to Rs 175 after the bid failed only proves the price rigging, says Sebi.
Sebi investigators found that Harshad Mehta's Damayanti Group had cornered a large chunk of Sterlite's floating stock. It found direct evidence from Harshad's handwritten note at his office at 1208, Maker Chambers V which led Sebi to El Dorado Finance, a stock broking firm which had purchased 300,000 shares of Sterlite with funds provided by the Sterlite management as a loan routed through its associate company Madras Aluminium.
El Dorado bought Sterlite shares as a negotiated deal, but could not provide names of sellers. Sebi, however, traced the sellers as brokers who held positions for Harshad's Damayanti Group. Some of these brokers sold shares to Dil Vikas Finance, an associate of El Dorado.
After the role that it played during the price rigging, Sterlite was naturally called upon to fund the bailout of the brokers trapped in the collapse of the Damayanti group.
Again, it was El Dorado and Dil Vikas who were roped in to buy these shares through a deal on the BSE on an 'all-or-none basis' at midnight on June 12, 1998.
Sebi also found that BSE office bearers, who were clearly aware of Harshad's manipulations, had approached Sterlite to bail out brokers. Though the deals were done by Dil Vikas/El Dorado Finance, Sebi discovered that the shares were delivered to Sterlite's associate Madras Aluminium which had also provided Rs 117.5 million for their purchase. The brokers bailed out were the same listed earlier -- R R Mohta, Lalkar Securities, GNH Global, SVS Securities, Sanghvi Brokers, S N Nanglia, KNC Shares & Securities, J H Patel, TCP Stock Brokers, M N Agarwal and P R Shah.
The fact that only brokers connected with the Damayanti Group were bailed out only corroborates the nexus between Harshad, the Sterlite management and the El Dorado/Dil Vikas companies, says Sebi. The price at which transactions were to be entered and the names of brokers to be bailed out were also provided by Harshad Mehta.
In 1998, Videocon promoters made a big splash by offering to buy two per cent of its outstanding shares at Rs 140 against a market price was Rs 62. A few days later, as the scrip started to soar, they revised the offer and offered and even higher Rs 165 per share.
At that time Sebi took the view that it would not interfere in a legitimate creeping acquisition even though the high offer price was distorting the market price of the share. The illiquid Videocon GDR also soared from $ 1.45 to $ 2.66 and electrified the stockmarket.
Sebi investigations later showed that Videocon International had given Rs 100 million to the Damayanti group to mop up the floating stock.
Videocon International, says Sebi, routed the funds to the Damayanti Group through 'a myriad transactions and several bank accounts' through group companies such as Videocon Petroleum, Dombell Investments, Chambal Investments Pvt Ltd, Balganga Investments, Rajbal Investments, Joy Holdings, Equity Investments, Gandak Investments. Incidentally, Joy Holdings is not a Videocon company, belonged to its finance chief S K Shelgikar and is located at a Videocon address.
The modus operandi was simple. Videocon group companies purchased illiquid shares in 'spot deals' and each time the counterparty supplying the shares was the Damayanti Group. The transactions were not reported to the stock exchange. There was no genuine purchase of shares and the cheques from Videocon group entities were issued without specifying the payee. Sebi says this arrangement was clearly meant to create an alibi for transfer of funds to Damayanti Group entities.
Videocon's top officials -- its financial controller S M Hegde and S K Shelgikar who are authorised signatories for Videocon and some other entities -- signed the cheques. All the routing transactions took place almost on the same day.
Both Hegde and Shelgikar told Sebi they did not know the brokers and had acted on the instructions of Venugopal Dhoot, managing director of Videocon International. Dhoot in turn also denied knowledge about the brokers.
The documentation of these deals was obviously not perfect and Sebi found instances where brokers acting for Damayanti had sold shares to some Videocon group companies, but payments for the shares were made to some other brokers. All this was again under instructions from the Damayanti Group.
When the bubble burst, several brokers acting for Damayanti could not meet their liabilities and were bailed out through the infamous arrangements supported by the BSE top brass.
In the Videocon case, the bailout came from a group of brokers -- Madhukar Sheth & Co, Jaysukhlal Jagjivan, Springfield Securities and Ventura Securities. This was again done by opening the trading system late in the night and synchronising the buyer-seller deals on an all-or-none basis at pre-determined rates.
Again, Sebi discovered that Videocon itself had provided Rs 200 million for the purchase of these shares through Joy Holdings, one of its group companies named above. The money was routed through a complicated web of entities. These included an inter-corporate deposit of Rs 100 million sanctioned to Darshan Mehta of Integrated Finance Ltd who then operated through two of his finance companies, Sangath Investments and Sheth Integrated Finance.
Joy Holdings ostensibly gave loans and inter-corporate deposits to brokers to fund the purchase of its shares. It had a buyback arrangement with the brokers at a stipulated price. Significantly, Joy Holdings kept custody of the shares. Sebi concludes this was a ruse to circumvent Section 77 of the Companies Act, which prohibits a company from buying its shares.
In another action, Sebi initiated its harshest ever crackdown in the June crisis investigations against Shriram Mutual Fund, which had also purchased Videocon shares at well above market prices, with a buyback arrangement with the brokers. Sebi has asked for the entire board of trustees to be changed and also asked the fund to pay up Rs 2.5 million to make up losses to investors on account of its deals with the brokers.
It was further revealed that Springfield Securities, a Shriram group company, agreed to purchase 500,000 shares of Videocon to accommodate some BSE brokers who had large carry forward positions in this scrip. There was also documentary evidence of a memorandum of understanding between Joy Holdings and Shriram Investment Services and associates of the Shriram group at Rs 130 a share.
It also said that Videocon Leasing & Industrial Finance would recover Rs 36.8 million from Shriram Transport Finance Co. and Shriram Investment would not insist on recovery of the amount till the transaction between Joy Holdings and Shriram Investment was not completed. This agreement was signed by D A Gadgil, the fund manager of Shriram Asset Management, and Shelgikar of Videocon.
There were many other indicators of the nexus between Videocon and the Shriram group promoters.
The dealings only prove, says Sebi, that 'The promoters/company first connived with Harshad Mehta to build up large positions in the shares of Videocon, which facilitated market manipulation and later provided an exit route when the artificial increase in price was not sustained and some brokers belonging to the Damayanti group got trapped.'