Actionable insights on equities, fixed-income, macros and personal finance Start 14-Days Free Trial
Actionable investing insights Get Free Trial

Suckered: Manipulating Expiry Prices, Ruchi Soya Edition

SEBI has just passed an ex-parte interim order (meaning, without hearing the defence of the accused, and potentially more orders to follow) against entities it alleges to have rigged the price of Ruchi Soya, a listed edible oil manufacturer.

Investigations by SEBI seem to show that nine entities – Aventis Biofeeds, Moebius Credit and Capital, Sunmate Trade, Shreyans Credit and Capital, Vision Millennium Exports, Navinya Multitrade, Uni24 Techno Solutions, Betul Minerals and Construction, and Betul Oils and Feeds (all Pvt. Ltd.) – colluded together to manipulate the price on Sep 27, 2012, in order to earn a huge profit in the futures market.

The Idea

First, the concept. Ruchi Soya was being taken out of the "F&O” (Futures and Options) list in September, with all contracts expiring on September 27. All F&O positions would be settled at the closing price of the equity share, in cash, on the expiry date.

Remember that the closing price is the volume weighted average price (VWAP) of the stock in the last half an hour. To read more about how it’s calculated, I’d created a video which is useful here:

So if you take a position in the futures market, and put a huge buy order and a corresponding sell order in the market at a high price, just before the close, you can easily manipulate the “closing” price of the stock and thus, profit from your futures position.

The Evidence

SEBI claims this is exactly what happened. More than Rs. 5 crores were earned by the above entities, by taking the VWAP up by nearly Rs. 7 (or 10%) by co-ordinated buy and sell orders in the last three minutes of trading (3:27 pm to 3:30 pm). In (SEBI’s) pictures with my annotations:



Over 60% of the volume of the day comes in the last three minutes!


And finally, was this very different from normal? It seems so:



Modus Operandi

  1. Many of these entities placed buy orders at Rs. 64 at around 2:30 pm, and simultaneous sell orders for Rs. 88.20. Others placed just sell orders for Rs. 88.  Order quantities were as high as 30 lakh shares (implying a transaction value of between 20 and 27 crore rupees).
  2. At around 3:37, three minutes before the market closes, the buy orders were moved up to around Rs. 88, and all other sell orders in the market were executed all the way up to Rs. 88 including those of the selling entities involved.
  3. 62 lakh shares were bought, in total. Of these, nearly 12 lakh shares were traded between these above entities. (The rest were bought from unrelated entities). Most of the rest
  4. These trades took the VWAP price of Ruchi Soya up by Rs.8.15 according to SEBI.
  5. The gain wasn’t in these shares – since many weren’t sold. The gain was in the futures market – these entities had already taken long positions of 72 lakh shares which got the Rs. 8.15 benefit – thus earning over 5.86 crores as profit.

This can only be manipulation if the 9 entities are linked. Which they seem to be, considering many have the same address in Nariman point, or that they share directors, and in many cases, have the same phone number. There is definitely a good case.

Entities banned

Pending further investigation, these above entities have been barred from the market immediately. However, this comes around 5 months too late: it’s now Feb 2013.

The Promoter Link?

Ruchi Soya promoters haven’t been named in the SEBI order, but I hope SEBI investigates their link with the “price manipulation” allegations. Betul Oils, one of the “manipulating” entities (alleged) named in the SEBI order, has in the past been accused by the Forward Markets Commission of conspiring together with Ruchi Soya management, and manipulating guar prices, earning part of 1,291 crores of profit

Ruchi Soya’s promoters have also been accused, in the past, for share manipulation and other controversies and are supposedly well connected politically. (I’ve written about their steep drop after an IB investigation)

The To-Do

SEBI needs to investigate this thoroughly and, if the parties are found guilty, it must:

a) fine the entities with at least 2x the profits that were made by manipulation; just a ban will not suffice.

b) make such investigations faster through technology. Much of the above could be ascertained through intelligent algorithms.

c) return money to investors who lost on their futures trades, to the extent they did. This would do wonders to confidence in the regulator.

What would be defeating is to have this meander through bureaucracy, and a timid order passed a couple years too late. That would answer partly why retail investors don’t invest in equities – if you can’t even fine or discourage people who manipulate markets, what’s the point investing?

Disclosure: I have never owned or traded in Ruchi Soya, stocks or futures.

  • PrAvEen says:

    Nice info Deepak

  • Sachin says:

    In the ‘Modus Operandi’ section, the time should be 3:27pm and not 3:37pm

  • DJ says:

    And, then they complain that the retail investor does not participate in the stock market!

  • Shree says:

    Be away from products (F&O) that you don’t know.

  • Anil Kumar Tulsiram says:

    excellent one, thanks

  • arp says:

    I would suggest adding two more points …
    d) Make market manipulation a criminal offence, punishable by jail.
    e) Introduce the concept of “class-action” lawsuits in the financial markets.
    It is ironic that black marketing cinema tickets is a criminal offence, but market manipulation is not. Gambling in cricket (an entertainment activity) is a criminal offence. Fixing cricket matches for the purposes of gambling is illegal and criminal.
    But somehow, fixing the markets to deprive the hard earned money of the investors is not a criminal offense.

    • piyush modi says:

      Totally agree. Make this a criminal offence, put these people behind bars and suddenly all this rampant manipulation will stop. This is just one example, it happens every day, every single day. I see it in so many midcap stocks, especially the FnO ones. Its become a serious problem.

      • arp says:

        In the US buying (or selling) stocks based on insider information, or even providing non-public information is a criminal offence. Raj Rajaratanam and Rajat Gupta are in the jail for these offenses. They did not even manipulate the stocks, simply traded in them based on the information.
        In the case of Ruchi Soya we are talking of outright manipulation, and still no criminal charges.

        • piyush modi says:

          In fact, we should create a separate division in CBI for this and take this aspect of market surveillance away from SEBI.

  • Paul says:

    For me this doesn’t seems “criminal”. They knew a loop hole and they exploited it. If we call all these “criminal” then our technical analysis is also criminal.
    For me this is failure/loop hole of the market structure.

    • Paul, price manipulation of this sort qualifies as fraud in multiple ways, including circular trading. It’s not a “loop hole” – it’s criminal fraud, by manipulating prices to benefit from the futures price change (since obviously this impacts the seller of the futures, by their circular trading) The focus should be on having enough proof to nail these guys, and put them in jail.

  • arp says:

    Yesterday was another of the manipulation days. Margin shares of a group of operators (rumours say it was Sanjay Dangi group) were liquidated, in some cases nearly 60% below the previous closing price.
    Gambling on horse races seems to be a better option these days. There seems to be lesser volatility and lesser number of high sigma outlier events happening in horse races these days.
    Last year, the RGESS – Rajiv Gandhi Equity Savings Scheme was introduced for first-time investors.
    Perhaps our honorable Finance Minister can introduce RGEGS – Rajiv Gandhi Equestrian Gambling Scheme in this budget as an incentive for first-time horse racing gamblers … oops investors.