Real Returns. Lessons from the SEBI order on fake SMS

Over the past year, many of us would have received SMSes that promised bumper profits if money was invested in little-known stocks traded on the BSE, such as Alps Motor Finance or Birdhi Chand Pannalal Agencies. These messages would have screamed at you, telling you that you are about to hit a jackpot, you need to put your entire trading margin in this stock, it’s a sure winner, and so on. While many would have shrugged these messages aside as a crude joke, there have been a few who took them seriously, only to regret later.

In the last week of April, SEBI passed an interim order against 28 entities, prohibiting them from buying, selling or dealing in securities for influencing investor behaviour in Kalpa Commercial, a micro-cap stock traded on the BSE, through bulk SMSes. A closer look at the order throws light on the modus operandi of the perpetrators of such scams, and can provide some important learnings for investors.

The Kalpa case

Kalpa Commercial Ltd (KCL) — whose current market cap is ₹8.5 crore, and revenue and net profit in FY17 were ₹5.8 crore and ₹11 lakh, respectively — witnessed a flurry of trading activity between October 10 and 17, 2017. On receiving complaints from market intermediaries that some unknown entities were using their names to send fake SMSes, misguiding investors to invest in the stock, SEBI undertook an investigation of the trading pattern in the stock during the period when the SMSes were sent. There was a sharp surge in both price as well as volume during the investigated period. The average daily volume on the BSE then was 5,06,460, compared with just 1,793 shares traded during the pre-SMS period and 1,537 shares in the post-SMS period. Currently, there are many days when the stock is not traded at all. While the stock price ranged between ₹26.60 and ₹33.45 when the SMSes were sent, it currently trades at ₹8.3.

During that period, around 3.42 crore bulk SMSes were sent, through Bharti Airtel’s network, recommending buying the KCL stock. On digging deeper, it was found that a group of people used the SMSes to create investor interest, after which they offloaded their holding in the company through multi-layered off-market transactions.

Not a lone instance

KCL is not the only stock to witness such action over the past year. SEBI had put out a circular in August 2017 in which it said that there were complaints from various leading brokerages about unidentified persons sending stock recommendations through SMS, using the brokerages’ names. SEBI had then decided to join hands with telecom operators to access messaging data to identify the true senders so that the malpractice could be checked. The KCL order is a result of this collaboration.

The BSE website has published a list of 17 stocks on which bulk SMSes were sent to influence stock prices. These are all micro-cap stocks. The low market cap makes it easy for manipulators to corner a bulk of these shares and then exit them when trading volume increases due to these bulk messages.

An examination of the SMSes sent on a few other stocks reveals that volumes spurted significantly on the days when the messages were sent.

For instance, SMSes were sent on April 16 recommending using full margin to buy Aplaya Creation at ₹3.02. The target was cited as ₹5 and above. The volume on that day spurted to ₹66 lakh, in an otherwise illiquid stock. It is currently trading at ₹1.68, down 44 per cent from the recommended price.

Similarly, recommendation to buy Millitoons Entertainment, was sent on March 20, when the stock price was ₹31.5. The target was given at ₹41.5. The stock price declined to ₹25 by April 3, after which it spurted to ₹38.5 by April 16.

 

 

What’s the takeaway

Around 4,000 stocks are traded on Indian stock exchanges, and barring the top 500, liquidity in the rest is extremely poor. The smaller companies are especially prone to circular trading and price manipulation, given the lack of liquidity in these counters. While SEBI has the daily trading data at its disposal, it does not have the manpower to go after all the miscreants operating these stocks.

It is, therefore, up to the investors to take due care and stick to the basic lessons learnt in investment. One, don’t fall for tips, through SMS, email, friends, neighbours, whatever. You would most likely be the last person hearing about it and could be left holding a lemon.

Don’t lose sight of the company’s fundamentals while investing. Most of the stocks on which fake SMSes were sent, barely had any profit. A quick look at the financials would have revealed that they are best avoided.

Don’t get lured by stocks with low stock prices. Many find the prospect of doubling or tripling the money through investment in penny stocks alluring. But you need to realise that these stocks are trading at rock-bottom prices due to their bleak prospects.

It’s best to stick to liquid counters while investing. As the above instances show, most of these were illiquid stocks where price manipulation was relatively easy.

And finally, it is best to avoid direct investing in stocks if you are a novice investor; take the mutual-fund route to equity market, till you understand the big bad world of stock markets.

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