52-day Bull

Lehman Brothers had just shut shop. The global credit crisis was at its peak and an economic downturn of gigantic proportions had just begun. It was around this time, towards the end of 2008, when stock markets the world over were tanking and liquidity ran dry, that an unknown high net worth individual decided to swim against the tide. Welcome to the intriguing web of shadows and substance of Sanjay Dangi.

The 40-year-old, who had arrived in Mumbai from Rajasthan in the early 1990s, shot into the limelight on the Street when he took a long bet on the futures of Ackruti City, a Mumbai-based real estate developer. In 52 trading days, by mid-March 2009, the Ackruti stock galloped 250 per cent from`650 to more than `2,300. And this happened during a period when the benchmark Sensex fell by 10 per cent.

So out of the blue was the appreciation in the stock that it trapped a clutch of foreign institutional investors, or FIIs, with short positions in Ackruti. Dangi the bull was on a spree. And what made his task of mopping up the Ackruti stock even easier was the low free float in the market. The Shah family of Ackruti held almost 82 per cent of the equity.

The trapped foreign investors included a leading Hong Kongheadquartered brokerage house and a Frankfurt-based universal bank. Their options: either abandon their short positions and book huge losses, or keep depositing additional margins for every rise in the stock. There was a third option: treat this as a case of price manipulation and take the matter to the market regulator, the Securities and Exchange Board of India, or SEBI.

SEBI promptly intervened. It gave the FIIs an exit window for a brief period by restricting Dangi’s buying spree, and followed it up by taking the stock out of the futures and options segment in late March 2009. That move took the wind out of the Ackruti stock’s sails. Within a week, the stock crashed by half (it is currently trading at`250 levels). Dangi was suddenly saddled with losses worth crores.“Dangi was unstoppable until SEBI changed the rules of the game,”says a Mumbai-based market operator on condition of anonymity.

The Ackruti saga elevated Dangi from the minor league of operators into the (in)famous club of market movers. Also, what Dangi could do to stock prices was observed by promoters of mid-size companies.

The episode also put several investigative agencies on the money trail. The Income Tax Department of Nagpur discovered dealings between Dangi and an edible oil manufacturer in the city, Murli Industries. The department shot off a letter to SEBI, disclosing his links with the promoter family of the Nagpur-headquartered company.

In 2010, the Intelligence Bureau, or IB, started keeping close tabs on a dozen market operators, including Dangi (see Others on the Loose). Before the year ended, SEBI had received enough inputs to tighten the noose around him. In asuo motu 56-page order, the regulator barred Dangi and 24 group entities and individuals including his wife and brother from the stock market.

The IB report, which Business Today has a copy of, details Dangi’s hand in playing the stocks of a clutch of companies (see The Hand of Dangi) that had a combined market capitalisation of over`10,000 crore.

Dangi was punished by SEBI without a show-cause notice, or a hearing, for suspected collusion with promoters of Welspun Group, Murli Industries, Brushman India and Ackruti. Many are questioning the timing of the move that came soon after the 2G corruption scandal and the Niira Radia tapes came out in the open. Dangi, who BT met in his Nariman Point office, refused to talk about the SEBI order, but nodded in the affirmative when asked if he would contest it. “I am a value investor in the market”, is all he would say.

The watchdog, on its part, may not be barking up the wrong tree. Dangi, say people familiar with his operations, is not unfamiliar with circular trading, which broadly involves artificially jacking up prices by trading shares amongst a select group of operators.

Dangi arrived on the scene in 2002, a year after another market operator, Ketan Parekh, was slapped with charges of stock price manipulation. According to SEBI, Dangi was amongst a handful of operators who took part in circular trading in the shares of Granules India between December 2002 and January 2003. Dangi used his flagship company, Pacific Corporate Services, to buy a few lakh Granules India shares. C. Krishna Prasad, the promoter of the company, wanted to sell a part of his existing holding in the company. But it was feared that a sale would hammer the stock further down in view of its already low price and poor liquidity.

Solution: Create liquidity to facilitate offloading of the promoter’s shares. Dangi, according to the SEBI order, placed two buy orders of 100,000 shares each on a single trading day. By resorting to circular trading in the stock, Dangi and some other operators succeeded in pushing the Granules India stock from a low of`18 in December 2002 to a high of `52 a month later.

At the peak of the bull-run in 2007, SEBI, following investigations over a long period, had first come down on these market operators for their role in allegedly rigging the stock prices of companies like Granules India. Two years later, however, Dangi emerged unscathed as SEBI felt “his order was too low to influence the share price”.

After Granules India — which Dangi apparently boasts to friends was his first major kill — he moved on to other companies. According to SEBI, Dangi operated in their counters via group companies like Sanchay Finvest and Sanchay Fincom. Both these companies have been penalised by the market watchdog over the past five years for manipulating the stock prices of Adani Exports, Gravity India, K Sera Sera Productions, Eltrol and Maharashtra Seamless. Dangi counters that Sanchay Finvest was a company acquired by his brother-in-law in early 2000, and he was just a copromoter with no say in the company’s day-to-day operations.

Like most market operators, Dangi’s rise has been from humble beginnings. He arrived in the commercial capital with a and completed chartered accountancy a few years later. He was soon referred to Anand Jain, one of Mukesh Ambani’s key lieutenants. Before he floated his own CA firm, S. Dangi & Associates, Dangi worked for Jain’s companies — all from a 400 sq. ft office in Mumbai’s Fort area — understanding balance sheets and the ways of the stock market.

Over the years, point out market men, Dangi went on to become a major player in the property market as well, especially in Rajasthan and Mumbai. One of his investment firms, Gold Flag Trading Company, is focused on property, and Dangi has close to 30 per cent of his funds in real estate.

Those who have been watching Dangi’s operation say he made two crucial mistakes that botched up the Ackruti transaction. One, he made two subsidiaries of Ackruti stakeholders in another group entity, Ivory Consultants. This was the firm that received Ackruti shares in an off-market transaction from one of the Ackruti promoters. “Such a transaction made the nexus very clear for everybody to see,” says an operator. Second, two directors of the Ackruti group were also shareholders in Dangi’s flagship Pacific Corporate Services, which again established the nexus. Both the findings are part of the SEBI order.

The success of Dangi’s appeal against the SEBI order will decide his fate. Dangi, on his part, has big plans. Speaking on the condition of anonymity, a senior partner at one of the Big Four consulting firms says that Dangi wants to set up a full-fledged non-banking finance company with operations ranging from equity research to distribution of financial products. In fact, a month before the SEBI order, Dangi had hired Accenture, KPMG and PricewaterhouseCoopers to make presentations on the road ahead. For the time being, however, that road is firmly blocked with few diversions in sight.

Others on the Loose

If the government’s top internal intelligence agency is to be believed, fallenfrom-grace stock broker Ketan Parekh is still active in the market, despite being barred from trading. He is apparently still doing what he did a decade ago — colluding with promoters to rig up stock prices. But Parekh is not the only market operator the Intelligence Bureau is keeping tabs on. A number of lesser-known names are working with company owners to manipulate stock prices. And what is interesting is that not all these operators are brokers —also colluding with them are a clutch of high networth individuals.

AnIB report prepared between June and September 2010 details how a Mumbaibased market operator, Vinod Rathod, along with one Syed Zafar, planned to push up share prices of an aluminium company owned by a large industrial house. The plan included fund flows from the promoter to operate the scrip — and in lieu of his services, Rathod was to gift Zafar a Mercedes.

To understand how such rigging works, consider how a cartel in B.K. Goenka group company Welspun Corp operated. After bolstering the scrip to a certain level, the cartel expected none other than Life Insurance Corporation to bite the bait and push it even higher. The operators also take an active interest in news flow and announcements like those regarding dividend payouts. For instance, the IB report claims Rathod, who was active in Hanung Toys & Textiles, advised promoters to push back a dividend announcement to facilitate a placement with institutional investors.

Of course, many take the IB report with an ounce of salt. One is tempted to do so when the report talks about Ketan Parekh rigging stocks like Reliance Industries via front entities. SEBI has used the IB report as fodder to ban Sanjay Dangi. But then you also have to wonder what fate awaits other operators — including one Raju Barter who apparently identified two foreign institutional investors for a promoter of a midsize company for a private placement —with an understanding to equally divide the proceeds from the sale of shares.