A 160-fold rise in a stock’s price in four years without analysts tracking it and few funds owning it should have triggered alarm bells at the surveillance departments of stock exchanges and the market regulator. It did not.
That was Money Matters Financial Services , the company in the thick of the loan-for-bribe scandal that has led to the arrest of eight executives, including its chief.
It rose to Rs 700 in November 2010, from Rs 4.20 in January 2007. New investors such as funds owned by Goldman Sachs , Fidelity , Wellington Asset Management and Morgan Stanley bought into the company in a placement at Rs 625 apiece last month.
Regulatory pussyfooting in banning participatory notes, or PNs, is also partly to blame for the sharp practices in the private placement market, say brokers and fund managers.
PNs are contracts issued by foreign institutional investors, or FIIs, registered with SEBI to their offshore clients wanting to invest in Indian shares. These offshore clients either cannot meet the eligibility norms to invest in India, or do not want to register with SEBIfor some reason. PNs enable the overseas investors to buy Indian equities through the FIIs without their identity being revealed.
In 2007, SEBIChairman M Damodaran had put restrictions on PN issuances by FIIs and eased norms to encourage overseas investors to register with the SEBIdirector. But those restrictions were reversed the following year amid the global financial crisis, when FIIs sold Indian shares in a big way.
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