We need a Sebi 2.0, which can tackle head on the challenges that technology poses

Why have WhatsApp groups suddenly become a threat to orderly growth and development of stock markets in India? Has technology become overbearing on our bourses? Are there remedial measures to rescue the markets from the menace of these virtually connected groups that use encrypted messages to manipulate the market?

Well, these are difficult questions with no easy answers. Recently, Securities Exchange Board of India (Sebi) sleuths swooped down on brokers, analysts and companies executives, giving us a glimpse of the underlying menace that’s apparently rampant. Formation of WhatsApp groups with likeminded individuals from the market alone cannot constitute a crime. But what these 35-odd brokers, analysts, companies executives have done were unpardonable from investors’ point of view.

This new ring of sorts wanting to move the market have shared “price sensitive financial data of blue chip stocks and high yielding scrips” on WhatsApp platform much before the respective firms made public their numbers. Intent was obvious, to make money illicitly, move stocks, benefit from the entire operation run clandestinely. This tantamount to “insider or dabba trading” of sorts given that those in the ring hold key positions in top private companies whose shares were manipulated.

Sebi, under its current chairman Ajay Tyagi, had initiated a probe into large market players like Dr Reddy’s, Cipla, Axis Bank, HDFC Bank, Tata Steel, Wipro, Bajaj Finance, Crompton Greaves, Mahindra Holidays & Resorts, Mindtree, Mastek and India Glycols to unravel the truth.

Insider trading and front running with key financial numbers of widely traded stocks have been suspected within and outside the WhatsApp groups. This has also raked up suspicions of a larger ring that was operative on both NSE and BSE. Perhaps, the market watchdog will have to scan the other social media networks as well to ensure that price sensitive information or data was not being shared to gain distinct advantage while small and retail investors were left in the lurch.

Sebi might have to now hire services of social media experts and cyber security sleuths to break the nexus between brokerages, companies officials and fraudsters that are uniquely positioned to take undue advantage and make a killing on buying and selling of stocks.

Galleon group hedge fund founder Raj Rathinam’s case of fraudulent insider trades provide a significant insight into how these financial sector criminals tend to manipulate the market. Raj Rathinam made over $65 million after having traded on insider information.

Unfortunately,  since WhatsApp messages are encrypted, Sebi lacks the jurisdiction to act on the fraudster brokers and their cohorts in top companies. If required, government will have to empower the Sebi to intercept these secure messaging services to curb the menace.

WhatsApp groups were not the only ones that came under the scrutiny of the market regulator. In the last four to five weeks, there have been about half a dozen instances of clampdown owing to different irregularities. For instance, Sebi  cracked down on shell companies that continued to be traded on both NSE and BSE. Then came the issue of bitcoins where initial coin offers (ICOs) on the lines of Initial Public Offers (IPOs) were being floated without clearance or vetting by Sebi. The market regulator also had to deal with ponzy schemes floated by other virtual currency operators.

Manipulation of 80-penny stocks was yet another issue flagged by PMO on which Sebi had to zero-in to protect interests of small investors. Then came the listing of shell companies on which the Sebi had to deal with firmly.

Given the kind of market related crimes that are being attempted at, perhaps Sebi will have to reinvent itself. We need a Sebi version 2.0 that can take head on challenges thrown by technology and having capabilities to regulate markets real time, day and night, 365 days a year must take charge.