Market regulator Sebi has begun a probe into alleged share price manipulation at Amtek Auto's listed subsidiary Castex Technologies through forced conversion of foreign bonds.
In an interview to CNBC-TV18, Hetal Dalal, COO, IIAS, says the shareholders have a good chance of winning a case against the company.
Below is the verbatim transcript of Hetal Dalal's interview with Reema Tendulkar and Nigel D'Souza on CNBC-TV18.
Nigel: What is your view on this, what is the way out for a bond holder, what is the justice that he can get? Today we saw one monetary conversion on September 25, I am told that is another one, how can he appeal, how can Securities and Exchange Board of India (SEBI) do some justice?
A: If you look at it, the first tranche has already been converted and then reversing that is going to be much too complicated and practically impossible. So what bond holders can do is get together and ask for damages on account of the manipulative stock trading. What you have to understand here is that for the bond holders to be able to ask for damages -- they will have to establish that the stock price was manipulated by the company for which they will need SEBI to run an investigation. So the fact that SEBI has now formally announced they are undertaking and the investigation should help them at least if nothing else get a stay on the conversion, which is going to happen on September 25. So they can do some amount of damage control there. As far as the conversion for what has happened this morning already, I suspect that all they will be able to ask for his damages.
Reema: There is another tranche which is due on September 25, considering that SEBI has now responded to the complaint of the bond holder saying that they are investigating the matter in the interim is it possible that the Sebi can say let us just put a stay order in some form and not convert it until our investigation is complete?
A: I think that is a stand that SEBI should be able to take. SEBI does have the power under its own formation to be able to take some of these decisions. So if SEBI is able to stop the conversion that is great otherwise bond holders can look at a legal recourse to stop the conversion on 25th. What SEBI will have to do in a meanwhile is while the stock manipulation is reasonably blatant and to that extent defiant. What SEBI needs to therefore get into is to be able to link the stock manipulation to the company or its promoters and that is when bond holders will have a stronger case.
Nigel: There is some talk that let there be no circuit limit and let the market determine the price, do you agree with that, is that possible?
A: I think the fact that the exchanges do have a surveillance of stock prices and that they need to establish these triggers to ensure that there is no manipulative action, I wouldn’t be too quick to say that there should be no circuits at all. My sense is that over the years stock exchanges have strengthened their surveillance of trading volumes and of prices. What they now need to do is especially as Castex brings to light is to be able to link a lot of the stock price movement with market intelligence. If they are able to do that, the surveillance will be far stronger and I suspect that they will be far more proactive on some of these issues.
Reema: What we understand is a vast majority of foreign currency convertible bond (FCCB) issues in India do not contain the clause, which can enforce a mandatory conversion and this is one of those rare cases so because of the potential for misuse, do you see a fallout of this issue as the mandatory conversion clause, whatever it maybe 30 percent higher than the convertible price, 30 days prior, that clause being dropped henceforth in all these FCCB contracts?
A: In FCCB contract while it is signed between the company and the bond holders, one can say that the bond holders know what they are getting into. Whether the mandatory conversion clause is there -- it is not often used, I agree with you but it is there in some of the contracts. What you need to prevent in terms of protecting the bond holders is the stock manipulation, not necessarily the clause. At the end of the day the clause is also there so that bond holders can also benefit from the upside. They have brought a coupon of 6 percent and a 2.5 percent also because at some level they are hoping that the conversion will help them from the stock price movement on the upper side. So it gets driven by what works for bond holders and the company as mutually beneficial but I think the larger issue here is how do you prevent or proactively tap the stock price manipulation.
Reema: You are saying that the bond holders have a fairly strong legal case to at least get a stay order on September 25 conversion and SEBI should not have a problem?
A: It is possibly for the lawyers to say on how strong the case is but SEBI has formally opened an investigation on the possibility of stock price manipulation does strengthen their case substantially.
Reema: You spoke about the bond holders perhaps getting some damages, if it is proved that there has been some price rigging but what happens to other investors, for the ones who have invested in the JP Morgan AMC, is there any recourse at all to other investors who have been hit on the wrong side in this case?
A: No, I think that has been the tricky piece. Once the analysis on the manipulation investigation gets conducted and concluded that is when we will know what is going to happen to all the affected investors. The fact that JP Morgan has invested in this paper and they have invested in December -- it raises questions on what is their investment principles but whether the mutual fund holders will have recourse or not is open at this point in time.
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