Suspecting illicit insider trading and market manipulation through misuse of the 'participatory note' route, the Securities and Exchange Board of India (Sebi) is probing a possible nexus between promoters of listed companies, investment bankers and foreign funds for such activities.
The probe follows several instances of shares in listed companies being possibly manipulated through concerted efforts of their promoters and market intermediaries such as investment banks and foreign funds during share sales.
Those under scanner include funds operating from the financial centres of Mauritius, Singapore and Hong Kong, while the role of some major financial institutions from the US, Europe and within India are also being examined, a senior official said.
Market watchdog Sebi is currently in the process of seeking details from these banks and the listed companies concerned and some of these entities have promised full cooperation in the matter.
The probe so far has suggested that foreign funds, including well-known hedge funds that recently expanded their exposure to Indian markets, could have abused a lacuna in the disclosure-based regulatory regime to make illicit gains.
In many cases, trades were done through offshore derivative instruments, commonly known as P-Notes.
Sebi has tightened P-Note norms after coming across instances of misuse and has made it mandatory for registered FIIs issuing them to collect details of the real beneficiary owners of funds to be invested through this route.
P-Notes are instruments issued by registered FIIs to overseas investors such as high net worth individuals and hedge funds who wish to invest in the Indian markets without directly registering themselves with Sebi. Earlier, it used to be difficult to establish the real identity of the P-Note holders on whose behalf FIIs traded in India.
While FIIs are obliged to identify the real beneficiary owners of funds used by P-Note holders, its disclosure-based regime results in a time lag and Sebi gets to the end of the money trail only after conducting an enquiry.
There are no plans to revise P-Note rules as the current framework was prepared to improve ease of investing by foreign entities. Sebi is confident that its strong surveillance mechanism and cooperation by registered market intermediaries would help it effectively crack down on the manipulators.
Investments through P-Notes surged to Rs 2.12 lakh crore as on May 31, the highest level in the past six years.
Sebi is also counting on help from foreign peers in its widened probe into these suspected cases of manipulation.
In an ongoing probe, Sebi has barred a hedge fund managed by Hong Kong-based Factorial Capital Management from the Indian markets through an interim order on 'insider trading' charges in L&T Finance shares. .
A further probe is under way against other entities and to find out those involved in the flow of 'insider information' about the L&T Finance share sale price.
Factorial had traded in derivative contracts of L&T Finance with offshore derivative instruments through five foreign institutional investors in an "aberrant and suspicious" manner.
The FIIs were Macquarie Bank, Goldman Sachs Singapore, Merrill Lynch CM Espana, Nomura Singapore and Citigroup Global Markets Mauritius Ltd.
Sebi found that Factorial was involved as a potential investor in the market-gauging exercise undertaken by Credit Suisse as 'seller broker' in the L&T Finance share sale.
A Credit Suisse spokesperson declined to comment on the matter, while Factorial has said the allegations made in the interim order were "without merit" and it was confident of being fully absolved after a complete probe.
In another ongoing probe, Sebi prima facie suspects concerted efforts by a Swedish promoter of India-listed AstraZeneca Pharma India and a Hong Kong-based fund of global major Elliott Group in manipulative activity.
A spokesperson for AstraZeneca Pharma AB Sweden said, "We note the announcement from Sebi and confirm that at every stage of the offer for sale and delisting processes, AZ (AstraZeneca) has complied in all respects with the relevant Sebi regulations."
Elliott did not reply to e-mailed queries in this regard.
The probes in these cases have thrown open the possibility of large-scale fraudulent and unfair trade practices being adopted by other foreign investors.
Some hedge funds, operating through the fabled tax havens of Cayman Islands, Isle of Man, Bermuda and British Virgin Islands, may be routing Indian money back into the markets here to evade taxes, sources said.
It is suspected these funds are taking positions in the Indian markets with P-Notes to generate quick returns after getting access to unpublished price sensitive information.
Sebi and several foreign regulators are signatories to a multilateral memorandum of understanding for consultation, cooperation and exchange of information through a platform provided by International Organisation of Securities Commissions.
Besides, Sebi has signed bilateral accords with many countries for cooperation and information exchange.
The regulator is also looking into other market activities of Factorial, Elliott and at least 70 other entities, including foreign brokerages, hedge funds and FIIs.
The Factorial case is already being talked about as one of the fastest probes by Sebi. The incident took place on March 13 and irregularities came to the notice of the regulators on the same day. A quick probe has already resulted in an interim order being passed on June 5.