Lax govt encouraging further circular trading: Experts

Here is a verbatim transcript of the exclusive interview with Debashish Basu and SP Tulsian on CNBC-TV18. Also watch the accompanying video. 

Q: What do you think from the likes of Spice Communications etc do you sense that some mischievous movements are afoot?

Tulsian:  I do not think that Spice Communications is a case of worry because we all know that this is a classic case of low floating stock, which maybe to the extent of about 1% or so.  In fact, these kind of movements that we have been witnessing in some of the PSU stocks like NMDC or NFL have a below 1% floating stock. But, coming to the point of the circular trading or the manipulative element involved in some of the scripts, I do not think that has really stopped. Now, with the fall in the market or maybe in the value of the shares this has got reduced but this is still continuing, maybe in some other stocks.

Q: What do you think and just walk us through how you would see the process happening for any stock that is probably low priced and has low float as well. How would the process work if it had to?

Basu: This has been part of the Indian market and will probably continue to be forever, simply because it is easy to do so. There was a lot of talk and a lot of noise about the Ministry of Company Affairs opening company's book or Sebi going and investing something somewhere. But I don't think Sebi has got anywhere in the most celebrated case let's say Satyam. I know this because a lot of important key people are being kept out of investigation, this is something for you to find out and this is what I hear.

For midcap stocks and smallcap stocks it is fairly an easy thing to do. A promoter can pass on a block to the operator and then the circular trading starts. Its done from different terminals, from different parts of the country and this stock goes up. There is a story which is circulated these days, there are press releases these days, there are Sebi orders which are fake and that hit the media, it might appear in some corner of the media maybe in a regional paper or maybe as smaller paper with a very small national circulation. The big medium might pick it up and say that it has appeared in this publication- what you have to say, so they ask the promoters and he denies. But then it becomes a big story and it gets a life of its own.

Now, the only way to stop this is for Sebi to track this trail, which by the way is very easy to do, it is for the National Stock Exchange (NSE), which is now a monopoly of sorts to stop this, which is very easy for them to do.

In this programme brokers are petrified of the NSE and its various actions and rules and the way they enforce it. But what I don't see is that any of these things happening. So, if you don't make an exemplary case out of one promoter or one operator, I don't see how this chain can be broken. If Sebi comes up and says that there is nothing wrong doing in Satyam for instances, which is what its opening reaction is or it just stands pat on something like Educomp for instance. It only emboldens the operators and the promoters, so you not only have an exemplary punishment, which I have been talking about on so many occasions. But there is sanctity to it with Sebi coming and saying that we haven't found anything in this or we don't think this needs investigation or simple silence.