Based on these findings, SEBI, earlier this month, had served a show cause notice on BSE executive director R C Mathur, president J C Parekh and the then vice-president Rajendra Bhantia as well as the National Stock Exchange.

Though SEBI continues to keep a tight lid on the report, it submitted a summary of its findings to the finance ministry which is now available with The Indian Express.

The highly damaging revelations in the SEBI document, provide a graphic account of how BSE's top office-bearers, tampered with the system and colluded with brokers close to Harshad Mehta to hush up the payment problem. As reported by this paper earlier, SEBI investigations revealed that the BSE opened its trading system not once but four times in orderto permit affected brokers to insert trades late into the night and hush up the crisis.

The report says that during the settlement of June 8-12, 1998, several brokers operating for a common set of financially unsound and not genuine clients (allegedly Harshad Mehta) were unable to discharge their pay-in liabilities. The president and vice president of the exchange then approached Sevantilal Kantilal Securities Pvt. Ltd. (SSKI) and Khandwala Securities (for BPL); Madhukar Seth & Co., Jaysukhlal Jagjivan and Ventura Securities (for Videocon) and M/s Eldorado Guarantee Ltd. (for Sterlite) to buy up the ``receivable positions'' of brokers who faced payment difficulties.

The SEBI report quotes officials of CMC, which maintains the BSE trading system, that these set of brokers were allowed to enter trades through the ``contingency pool'' by synchronizing the timing of logging-in of trades by buyers and sellers in order to effect the bail out.

The system was opened on June 17 and June 19 as late as 9 pm toenter `bulk deals' for BPL and again on June 12 and June 13 at midnight to enter `all or none' deals. Not only did the BSE tamper with the trading system but it did not even follow procedures laid down for bulk deals.

The ``all or none'' trading facility was cancelled by SEBI a few weeks ago due to its gross misuse. The use of the contingency pool to tamper with trades is another issue before SEBI.

Significantly, while the BSE officials had emphatically stated that the payment crisis was handled without resort to the trade guarantee funds, the SEBI report says the bourse did help itself to another general pool of brokers' funds. It said that since some members could not clear their liabilities even after the bail-out package, the settlement was completed using the ``Common Pool Fund'' comprising margins collected from other members. This pool was replenished only later, after the sale of security deposited by the potential defaulters.

SEBI alleges that the governing board was not given full details ofthe manner in which the crisis was handled. Pertinently, the deals inserted for Shrikant Mantri (with respect to Eldorado Guarantee for trades in Sterlite shares), a broker associate of BSE's ex-vice president Rajendra Bhantia, were never disclosed. Bhantia and president J C Parekh were at the forefront of negotiating the murky bail-out.

According to SEBI, keeping information away from the governing board at a meeting specifically called to discuss the bail-out indicates ``serious lapses and throws adverse light on the conduct of high office bearers''. It further says that the active involvement of the BSE functionaries has ``put serious questions on the transparency and integrity of the system'', and also created an adverse public perception which is harmful for the confidence of the investors in the system.

Another significant finding is the fact that the BSE office bearers knew the identity of those building up positions in BPL, Videocon and Sterlite way back in February 1998 and had enough clues toindicate that companies such as Damayanti Finvest and Mazda Industries were probably linked to Harshad Mehta.

There were more indications of common clients and concentrated trades in April 1998 but the exchange failed to act or impose special margins. On the contrary, SEBI says, BSE reduced margins and took no effective steps to reduce trading exposures which were violative of prescribed limits. SEBI says that there were indications that these decisions were influenced by some broker directors and ``this is detrimental to the integrity of the system''.

Amazingly, SEBI investigations show that BSE allowed members to trade as much as 120 per cent above the prescribed limits and failed to deactivate trading terminals even when exposures went well beyond even this level. It was lax in collecting margins and allowed these to be deposited in the form of securities rather than in cash. The result was that as much as 70 per cent of carry forward trades in BPL, 47 per cent in Videocon and 53 per cent inSterlite were through the common set of clients and allowed manipulation of prices.

Among the most damaging findings is the BSE's decision to reduce the daily and carry forward margins even though trading activity in these scrips was ``high and abnormal''. The exchange has provided various justifications for this, but important among these is the argument by broker directors that high margins was drawing business away from the exchange and ``had caused avoidable stress to the brokers and loss of business to them''.

It remains to be seen what SEBI will do now because for far less damaging findings it superseded the governing board of the Pune Stock Exchange in 1996-97.

You were in it, too, says BSE

The BSE's reply to SEBI's show cause notice has added an interesting twist epidose. In its indignant reply to the notice, BSE has reportedly insisted that it had kept informed senior officers of SEBI about its efforts to deal with the crisis. In effect saying that SEBI was fully aware of the break-ininto the systems. The BSE's reply was sent to SEBI on February 23.