Sucheta Dalal :Lies damned lies and market rigging
Sucheta Dalal

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Lies, damned lies and market rigging  

Mar 28, 2005


Rumour mongering, media speculation and greed fuelled by a bull market dupe investors

It happened again last week with the Reliance shares. There was a rumour that a settlement between the warring Ambani brothers was on the cards and the media went into an overdrive, claiming that Reliance Infocomm would go to Anil Ambani. Immediately, all Reliance group shares flared and closed higher on a day when the Sensex had dropped a chilling 80 points. As the reports about a possible settlement were clearly emanating from circles close to the Ambani family, the subsequent denials by all group companies raise several issues.

First, what was the source of the rumours? Was there any truth to these, or was it just a gimmick to create price volatility? How much of a role did the media play in encouraging speculation based on the so-called settlement? Shouldn’t the media be asking tougher questions, when the Ambanis themselves have lodged repeated complaints with stock exchanges and the regulator about how the shares of their companies are manipulated through motivated speculation?

At least three instances come to mind about such complaints. First, Anil Ambani’s famous pre-board meeting statement, when he alleged “there is more to it (the movement in Reliance group shares) than meets the eye.” This was promptly followed by a counter- complaint by the Mukesh camp, to investigate the sharp spike in Reliance’s share prices. One doesn’t know if the regulator has made any progress with its investigation. A couple of weeks before, Reliance Industries reacted to a television report speculating about Indian Petrochemical Corporation’s (IPCL) future with a strong denial and a request to the Securities and Exchange Board of India (Sebi) to investigate the source of the report. Last Thursday’s media speculation was the third instance when Reliance share prices were probably manipulated by deliberate rumour mongering.

Such mischief has been fairly typical of the last two big bull runs and is just one of the many ways in which investors are duped by fake reports and elusive dreams. Such games are not limited to large companies. It gets worse when it comes to penny stocks and ‘Z’ category shares, be-cause it is difficult to check the veracity of every media report or message board posting. We have recently seen companies like Somani Cement talking about a lucrative contract in Iraq and new capacity acquisitions, even while its factory lay locked in Gujarat and it doesn’t seem to have a fixed registered office. Another company, Vijay Textiles, issued a series of forward-looking statements signalling major growth plans, while its promoters were busy dumping 40% of their own holding. Investors have no clue whether this stock has any future.

These are instances where the practice of bourses seeking clarifications on news reports from companies hasn’t worked for investors. In the Somani Cement case, the promoter has been quoted by one newspaper about his growth plans. Both cases need to be investigated by Sebi. Now consider another worrying trend. Several companies wanting to make an issue these days think the formula for success is the presence of a high-profile investor, like Rakesh Jhunjhunwala. As it happens, Jhunjhunwala calls himself a fully leveraged, but long-term investor, who is vastly different from the likes of Ketan Parekh and Harshad Mehta, in the sense that he has never overtly driven up specific stocks. However, in a market starved of icons and leaders, many retail investors and promoters are grasping at Jhun- jhunwala’s acumen and want to piggyback on his success. Con-sequently, companies are turning him into a brand ambassador of sorts for their public issues, by giving him a large chunk of shares on a preferential basis, prior to the issue.

• Deliberate rumour mongering seems typical of the last two big bull runs

• It’s worse with small firms, as it is tough to check the veracity of reports

• IPO plans reported in the press suggest a lack of learning from the ’90s slump

A recent television interview with the promoter of Bhushan Steel, where Jhunjhunwala has recently acquired a 3.5% preferential allotment, was an eye-opener. He could find little to say in favour of his public offering and future prospects, other than the fact that Jhunjhunwala considered his company worthy of a big investment. The justification was probably necessary, because the company had hit the headlines just a few months before, when live ammunition found in its imported steel scrap caused an explosion killing several workers. The subsequent investigation seems to have died a quiet death and the promoter, elusive then, is now ready to put the past behind and raise public money.

Another trick to lure investors is the growing number of private companies offering their shares to investors, on the promise of an imminent public issue and listing. Last week, a private airport company was offering its shares for Rs 70 each. A little earlier, a Kasargod- based investor wrote in to say that a coconut oil and chips company was flashing advertisements on a regional television channel, seeking applications on “a plain piece of paper” for its proposed public issue. The company claims a turnover of Rs 1 crore and promises a ten-fold rise. Clearly, it is confident that there are enough ignorant investors, who would be persuaded to send cheques to the company.

Such scams saw thousands of investors losing money in the IPO mania of 1993-96. The greed fuelled by a furious bull market seems set to take a few thousands more on a royal ride. Nobody can prevent a foolish investor from parting with his or her money. But at the peak of a bull run, those investing in IPOs must remember that companies who are claiming capacity expansion (even the genuine ones) are probably investing near the peak of the commodity cycle. The viability of these projects, based on the current high prices, may turn out to be badly flawed. But the IPO plans reported in the press suggest nobody has learnt any lessons from the slump of the 1990s, especially steel companies.

-- Sucheta Dalal