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First strike on May 17 monsters

Mumbai, May 17: The market cop, on the prowl for butchers of the May 17 stock slaughter last year, drew its first blood today, banishing a UBS arm from derivatives for a year.

UBS Securities Asia has been punished for engineering deals that sparked off “selling pressure for no reason” on this day last year, when a 564-point sensex crash flattened shareholder wealth worth Rs 1,24,005 crore.

M. Damodaran, the chairman of the Securities and Exchange Board of India (Sebi), which has been on the trail of the market monsters for over a year, said the order on UBS was the first in a series of decrees to follow. In all, 12 brokerages have been under the scanner.

For UBS, an investment bank of global repute and one of the top five funds that shovel cash into Indian shares, the ban could besmirch its image at home and abroad. The firm has vowed to go into appeal against the bar.

Sebi said the company had failed to lay bare the identity of clients and “stonewalled” attempts to find those who were responsible in not one but “a slew of cases”.

UBS allowed its clients to invest in Indian markets through participatory notes ' instruments that enable foreign investors not registered with Sebi to buy shares here.

Brokerages, UBS in this case, send back dividends and capital gains to these investors, most of whom funnel their money through tax havens such as Mauritius.

At times, the anonymous investor even names the stocks he would like. The brokerage buying the shares acts like an exchange, using internal accounts to settle the deal. Sebi is wary of this instrument because it throws a cloak of secrecy on the identity of those behind it.

UBS said it was consulting its lawyers on how best to appeal. It will have 45 days to move the Securities Appellate Tribunal (SAT), the body that checks the fairness of Sebi orders. “UBS does not believe that the description of its conduct or intent in the Sebi order is fair,” UBS spokesman Mark Pandey said from Hong Kong.

“It was suspected that the steep fall on May 17, 2004, could have been triggered as a result of UBS playing ducks and drakes with the market, accentuating the selling for no reason linked to the fundamentals of shares or their performance,” Sebi said in its 60-page order.

Damodaran hinted at curbs on 11 more entities being probed for their role in the mayhem. “Other investigations have not reached the final stage,” he added.

“The findings in this case have highlighted serious concerns over participatory notes. Foreign funds should maintain high standards of regulatory compliance, exercise high due diligence and independent professional judgement,” the regulator said.

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