Sucheta Dalal :As bulls party one question: how long will good times last?
Sucheta Dalal

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As bulls party, one question: how long will good times last?  

June 24, 2005

MUMBAI, JUNE 22: Instead of the expected correction after the benchmark Sensex hit 7,000, the stock market has continued its upward surge for the second day running. But uppermost in everybody’s mind is the nervous question: how long will the good times last?


There is a good reason to be nervous. On the one hand, a bull run that ignores the impact of high petroleum prices and an uncertain monsoon to the Indian economy suggests a high degree of overconfidence. Add to that, the Congress party’s own uncertainty about disinvestment (we are not talking of privatisation) of profitable (read saleable) Public Sector Units (PSUs) and the turgid decision-making with regard to big ticket infrastructure projects, and it’s clear that it is time to take off those rose-tinted glasses for a while.


But investors seem unprepared to take their foot off the price accelerator. The entire buying frenzy is based on a single factor—anecdotal reports about foreign investors insatiable appetite for Indian shares. The biggest of these stories is that the Japanese are finally getting ready to invest in India after watching the market for nearly a year. Market reports say that $1.4 billion should enter the market in the coming weeks.


Every fund manager has stories about hedge funds being able to raise upward of $500 million in no time for investment in India. Nobody knows if all or any of these reports are true. Moreover, the investment tap can be turned off anytime that prices begin to look unrealistic—as they are in the mid-cap segment. And clearly, the large number of bulk deals happening in the market suggest a big churn in institutional portfolios. Smart money is using irrational exuberance to book profits.


And although TV experts keep beaming the good news about healthy corporate results and the arrival of monsoon, there is a good chance that they are booking profits. Incidentally, the large number of block deals in known and unknown companies suggest that it is high time that the regulator takes a stand on these trades.


While a surging market is indeed an important feel-good factor, it is time the regulator focussed increased attention on certain issues. For instance, lack of transparency about the beneficial ownership in FII investment accounts remains a big worry.


Anecdotal evidence tells us that most of the scamsters involved in manipulating prices in the market have been trading through FII fronts. Most of them have been barred from the market following the scam investigation. Yet, their trades and their favourite stocks are an open secret in the market. In fact, FII sub-accounts and hedge funds provide a perfect cover for price ramping, stock accumulation and profit booking through ‘block deals’.


It is also time the capital market regulator took a stand on ‘bulk deals’, because they are officially disallowed. Block deals cannot be struck without a highly dubious synchronisation of trades between the buyer and seller. Yet, scores of block deals being openly reported everyday and stock exchanges even provide a separate reporting window for such trades.

Clean, single-shot deals are clearly beneficial to new FIIs trying to build a portfolio. In theory, they also check excess volatility in the secondary market prices. But without enough clarity about buyers and sellers, these deals leave the market clueless and could send false price signals.


It is time the regulator stops turning a blind eye to these deals and takes a stand—one way or the other. It should either legitimise the deal or enforce the ban rigorously. Meanwhile, the ordinary investor can only be advised to show extreme caution and stay away from rash investment at high levels or rush to equity mutual funds in the expectation of miracle returns.

 Sucheta Dalal






-- Sucheta Dalal