The Securities and Exchange Board of India, the stock market regulator, has found Hemant Ghai, an anchor with CNBC Awaaz, . Ghai was fired by his employer following the SEBI order.
Ghai, before he was fired, used to host a show called Stock 20-20 aired on the channel at 7.20 am, Monday to Friday. He also hosted other shows like Munafe Ki Taiyari Pehla Sauda and Kamai Ka Adda.
SEBI’s order deals with the show Stock 20-20. The show “features recommendations on certain stocks to be bought/sold during the day”. Basically, trading accounts of Ghai’s mother, Shyam Mohini, and his wife, Jaya, were used to buy stocks a day before he would recommend them on Stock 20-20. The stocks would then be sold on the day of recommendation.
This is how Ghai was front running. The SEBI order points out that Ghai made a profit of Rs 2.95 crore “just through the limited number of trades examined during the relevant period”. This means that front running was possibly Ghai’s main job, from which came a bulk of what he earned. Of course, being an anchor at CNBC Awaaz allowed him to do so.
Let’s take a look at this issue pointwise.
1) CNBC Awaaz has a massive reach among Indian stock market investors. When Ghai recommended a stock on his morning show, many investors and traders were bound to buy it once the stock market opened. The demand for the stock recommended pushed up its price.
Ghai was playing on this dynamic and once the stock price rose after his recommendation, his broker, MAS Consultancy in Mehsana, an authorised entity of Motilal Oswal Financial Services, sold the stock.
As the order points out: “Based on call data records, it is observed that Mr Hemant Ghai was in regular communication with Mr Parth Anilkumar Raval (equity research/equity analyst at MAS Consultancy...over the course of the relevant period.”
Also, a careful reading of the order suggests that the trading accounts of Ghai’s mother and wife were basically mule accounts. As the order points out: “It is prima facie observed that Mr Hemant Ghai was in effect in control of the trading accounts of Ms Jaya Hemant Ghai and Ms Shyam Mohini Ghai. Before proceeding to deal with the circumstances, it will be appropriate to elaborate on the concept of ‘Family and Friends’ mule account. These are trading accounts which are ‘lent’ by persons known to the person who is effectively controlling/placing the orders in the trading account.”
This was how it worked.
2) After the order came out, people were left wondering how someone who has been in this business for more than a decade and a half could be so stupid so as to front run through the broking accounts of his wife and mother.
Well, the answer lies in the fact, that he wasn’t being stupid, but he was just being blatant about the entire thing. He had probably been doing this for so long that he felt extremely confident about it until his luck ran out.
3) This isn’t something new that has happened. The business media has been dealing with this problem for a while now. When I first started working for a newspaper in October 2005, it was very common for reporters to write a piece on a particular company and inform a stockbroker about it. They knew that their story would move the price of the stock the next day, after the story had appeared in the newspaper and people had read it. The broker would take a position in the stock because he had advance information.
The next day, after the story appeared and the stock moved, thanks to the news item, a profit was made and was shared between the broker and the reporter. Sometimes, the reporters were so blatant that they would call brokers directly from their office phone numbers.
4) In fact, many years back at the Press Club in Mumbai, a reporter, a few drinks down, even confessed to me that sometimes he front ran using his own trading account. His justification was that he made small bets that wouldn’t attract any attention. He went on to justify what he did by saying that if he had insider information because of his skill, he should be able to profit from it.
This particular gentleman worked for one of the bigger pink papers (and still did, the last I checked), and primarily reported on stocks and mutual funds. Given this, he was constantly in touch with fund managers and hence had access to sensitive information that moved stocks.
5) Around a decade back, the business media started getting its act together and got into contracts with journalists which did not allow them to buy a stock today and sell it tomorrow. If a journalist bought a stock, he had to hold on to it for a while. This ensured that any front running moved on to accounts of mothers, wives and girlfriends. The smartest of the lot just took a cut for every piece of information they provided a stockbroker with, without getting involved in the buying and selling of the stocks. The payment to them was made in cash.
Of course, contracts have had some positive impact as well and journalists are not as blatant about front running as they used to be. There is this great story about one of the senior editors of a now defunct business channel calling up reporters to figure out which stocks were most likely to move after the finance minister had presented the budget.
6) In fact, the entire concept of news exclusives, even if done honestly, lends itself to front running. Most reporters get access to exclusives through leaks. Someone from the company leaks information. Some investment banker leaks information about a deal that is in the process of being negotiated. Some public relations official leaks information. While the reporter might just be breaking the news and not trading the stock on the information he or she has access to, there are no guarantees that the person leaking the information is not trading on it.
In this way, the media (both newspapers and TV channels) ensures that front running continues.
7) In fact, the rise of business TV only accentuates this problem. While newspapers only have so much space to fill with news on stocks, TV channels have five days a week to fill. The cheapest way to fill this time is to get journalists and analysts to make stock recommendations. There is so much information going around these days that something which sounds sensible but is completely useless can always be said.
Honestly, any company declares results four times a year. Over and above that, there are few other days when there is some news that impacts the stock price of a company. The rest of the days, the journalists and the analysts talk up many stocks. This creates opportunities for front running.
8) Investors fall for these recommendations primarily because the entire telecast of business news channels is built like a sporting event. I mean, why do you think a name like “20-20” is being used for a stock market show? Of course, it helps that the audience of the business news channels is primarily male. So, the link with sports works.
Given this, there are shows before the stock market opens (a pre-game show), a half-time show (somewhere around midday), and then there is a show around the time the market closes and after it closes (a post-game wrap up).
All these shows come with an adequate amount of mumbo jumbo (like the stock prices went up today because of “global cues”, whatever that means) and stock recommendations in between. An anchor, by the very chance of appearing on a show over and over again (as was the case with Ghai), builds confidence among the audience. In between all this, there is front running.
To conclude, it is great to see SEBI cracking down on this, even if Ghai is basically small fry. But at least the message has been sent across. Now, if only SEBI continued with this and exposed a few others as well. The rot can’t be limited just to Ghai.
Vivek Kaul is the author of Bad Money.