Sebi censures BSE for OFS lapses; detailed probe underway

Finding BSE guilty of lapses while conducting Rs 6,000 crore share sale of PSU firm NMDC, Sebi on Thursday censured the bourse for its conduct and asked it to take necessary actions after an independent review.

Besides, the capital markets regulator would conduct a "detailed probe" into confirmation of bids, worth about Rs 682 crore, by Citibank placed for the Offer For Sale (OFS) that took place nearly two years ago.

In its order, Sebi asked BSE to engage "one or more independent consultants to review the entire sequence of events in the matter, the process followed, checks in place, systems employed while accepting the OFS bids by BSE."

The consultant would need to "bring out the shortcomings, if any, and suggest remedial measures within a period of three months. BSE shall then fix the responsibility internally, both in terms of processes and personnel, and take appropriate action," Sebi said.

The exchange would need to inform Sebi within further three months as to how the recommendations of the consultant, along with the regulator's directions, have been implemented.

The matter relates to the government selling nearly 39.65 crore shares of NMDC through OFS mechanism of the BSE and NSE on December 12, 2012. A probe by Sebi into the matter has now shown violations by BSE to Sebi's circular on operational guidelines for conducting OFS.

"I hereby censure BSE for its conduct as observed in this Order and direct it to be careful and cautious in its dealings in the securities market and comply with all the legal requirements that govern its functions as a stock exchange," Sebi's whole-time member Prashant Saran said in his order.

After the closure of the share sale that day at 3.30 pm, Sebi had sought bid data from the two exchanges, to which BSE first stated that the final cumulative bids received at its platform were for 29.91 crore.

In another intimation to Sebi later that evening, BSE revised the figures upward by 4.55 crore shares to state that the final cumulative bids received by it were for 34.47 crore shares.

Subsequently, Sebi sought clarification from BSE about the huge difference between the two figures.

BSE said that all the bids had come in before the cut off time of 3:30 PM on December 12, 2012, but it had received a facsimile request from one of its authorized clearing bank, Citibank, on behalf of custodian, Citibank NA at 3:55 PM in respect of updation of collateral of approximately Rs 902 crore with respect to the bid for 4.55 crore shares.

"However, due to high volumes of bids received prior to the expiry of the issue closure, the collateral deposit request of Citibank NA could not be uploaded on the exchange system in time," BSE said.

The exchange further submitted that Citibank was not in a position to confirm the bids received for the 4.55 crore shares at that time and therefore the data relating to these bids could not be communicated to Sebi in first letter.

BSE said it allowed Citibank to confirm the bids between 6.22-6.31 pm after updating the collateral received in the system and Sebi was subsequently informed about the revised final figures at 7:04 PM.

The exchange said it had considered that the submitted bids of Citibank NA were not, at any time, uncovered by margins and hence there was no compromise on the risk management.

BSE had rejected several institutional bids which were received from brokers prior to 3.30 PM (normal trading cut-off time) on account of non-availability of collateral in time from the custodians.

It was alleged that transfer of funds to the clearing corporation had taken place only at 05:09 PM on the OFS day and the bid was confirmed much later between 06:22 PM and 06:31 PM.

Also, it was alleged that the fund transfer as well as the confirmation of bids of the custodian, Citibank N.A appears to have occurred after the permitted cut off time.

Meanwhile, BSE did not respond to queries seeking comment on the SEBI order.

"The facsimile clearly mentions that the funds have been transferred to BSE... I have perused the bank account statement of the relevant bank account of ICCL (Indian Clearing Corporation Ltd) and find no separate credit entry for the amount of Rs 905 crore," Saran said.

The only large amount credit entry visible from the said bank statement is of Rs 1,394 crore at 05:09:36 PM, which as per the communication from BSE is for a total of 11 entries and Rs 905 crores is one of these 11 entries, the regulator said.

"Such credit entry at 05:09:36 PM is clearly well after the permitted time of half an hour after the closure of bidding session i.e. 04:00 PM (or 04:15 PM as argued by BSE), it added.

Regarding the bids, BSE said it had received 3,136 bids (2 per cent per cent of the total bids) in the last half an hour (i.e. between 3-3.30 PM). Due to such high volume of bids received in the last minute, the collateral deposit request of Custodian, Citibank N.A. could not be uploaded on the exchange system in time on account of an inadvertent human error.

"In this regard, I note that BSE during the period of 3:30 PM to 4:00 PM had updated only three collateral requests received from the custodians in respect of the institutional bids. The amount involved in such bids was only Rs 30.18 crore, whereas the collateral request of Citibank N.A was of about Rs 905 crore," Saran said.

"Therefore, it can be said the confirmation of bids for 4.55 crore shares received from Citibank N.A. with available funds was clearly not concluded within the stipulated time of half an hour after post close session. All these were clearly in violation of the Sebi's Circular on OFS," the regulator said.