As the market went into a long overdue correction on Thursday and Friday, it exposed the lack of preparedness on the part of the government, its regulators and the media in dealing with a recently globalised capital market. It also exposed how easy it is to make the government panic and recoil from acting against market manipulators.
The India story still looks good, if one’s investment basket is limited to a select list of a few hundred stocks. But there are over 6,000 companies listed on Indian stock exchanges and brazen price manipulation is evident in thousands of scrips in the small- and medium-cap segments and what are known as penny stocks.
Even among the frontline stocks, the activities of several larger players, operating mainly in the derivatives segment through Foreign Institutional Investors (FIIs), is cause for worry.
Let us take a look at how the government and its regulators have dealt with the situation so far. The Securities and Exchange Board of India (Sebi) and the bourses are busy holding each other responsible for inadequate action.
Stock exchanges avoid responsibility by constantly bleating that they have no powers to question companies. But they have made little effort to seek better empowerment. Even in 1999-2000, they would crunch data, identify ‘suspicious’ companies and dump responsibility on the regulator.
Sebi, on the other hand, justifiably feels that the bourses are not fulfilling their role as the first line of regulation.
Stock exchanges sign Listing Agreements with companies and redress investor disputes. They don’t need specific powers to seek information and can escalate the investigation to Sebi if companies or investors refuse to respond to queries regarding suspected price manipulation. Quick action by the bourses could deter manipulators and hasten the regulatory effort.
The only proactive action by bourses is a mechanical verification of newspaper reports. This too is not comprehensive. That is why companies such as Lloyds Finance (which is doing almost no business), DSQ Software (whose promoter is absconding and there is no sign of any business) or SBI Home Finance (whose license and registration are cancelled and reported by the media but still attracts bulk buying by FIIs) continue to register trading volumes running into lakhs of shares everyday.
In all these cases, there is no regulatory action despite repeated media coverage. There are hundreds of such cases. This makes a mockery of rules that mandate quarterly disclosure of earnings, other filings and shareholder meetings. Does cross-verification require a special regulatory mandate?
Last Wednesday’s decision like shifting more scrips to the trade-to-trade segment, imposing 100 per cent margins on speculative scrips and disallowing bank guarantees backed by counter-guarantees could have been initiated before Sebi turned on the pressure as the penny stock bubble threatened to go out of hand.
The market regulator, the Reserve Bank of India (RBI) and the Finance Ministry cannot seem to make up their mind how to deal with the situation. Their insistence that ‘‘Indian markets are well-regulated’’ and there is ‘‘nothing to worry about’’ sounds like false bravado when thousands of stock with shaky fundamentals have been ramped up.
This time, even market players have openly provided details of illegal promoter funding and manipulation used to ramp up share prices. An industrialist told me about a ‘package deal’ offered by a top brokerage firm to ramp up his company’s stock. He was asked to fix a notional corpus for financing the ramping operation. He would have to pay a 20 per cent margin on that sum, while the broker would arrange the remaining funds at 18 per cent interest. He would also pay an 8 per cent ‘service charge’ to the broker for custody of shares.
The broker would be free to use these shares to raise more money and would sweeten the deal for itself through front running and luring retail clients to join the ride. Apart from access to generous funding from private and cooperative banks, this firm has a Congress MP and his father opening corporate doors to its manipulative deals.
Meanwhile, it is an open secret that scamsters involved in the 1999-2000 scam are back in action. A recent media report says the Central Bureau of Investigation (CBI) is probing how Ketan Parekh earned several crores of rupees to repay Madhavpura Mercantile Cooperative Bank (MCCB).
In a well-regulated market, the CBI and the Income Tax Department would have raised this obvious question long ago. The government would also have made some attempt seek the extradition of Dinesh Dalmia of DSQ Software (from his luxurious villa in New Jersey, US) and force him to stand trial for his market manipulation in 1999-2000. Instead, the government has issued a red-corner alert through the Interpol but ignores media reports about his attempts to acquire a Nasdaq-listed company in the US.
The regulators are also ignorant about the games that are played between bulls and bears in the derivatives market and the wars that are fought through FII fronts.
For example, there is this high-profile operator, who went short when the Sensex touched 6,500 is understood to have lost a hefty Rs 50 crore in the derivatives market when the Sensex climbed to 8,000. It is openly known to market insiders that all his trades were routed through hedge funds and Foreign Institutional Investors (FIIs). But the regulators are wary about probing too deeply because he is seen to have the support of the top brass of the Congress Party and a couple of senior Union Ministers.
Another big force in the market today is an industrialist who has recently come into a huge chunk of cash. He is one of the largest and most successful operators in the market today and large chunks of his investments are routed through dozens of FII sub-accounts. This too is unlikely to attract regulatory scrutiny, for fear of causing panic among investors.
In fact, if there is one lesson from last week’s media-induced panic, it is how easy it is to unnerve the government.
The government was just about getting ready to examine some pockets of mischief, when hysterical media reports caused stock prices to tumble, beating the Sensex down by a scary 300 points last Thursday. The government machinery immediately switched to reverse gear and was at pains to inform the world that no serious action is planned to clean up the markets and curb speculative excesses. Manipulators can continue in peace.