Sucheta Dalal :Making Responsible Statements
Sucheta Dalal

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Making Responsible Statements  

May 17, 2004

Sucheta Dalal

The new government would do well to brief the entire cabinet on the rules and mechanics of capital markets

By late evening on Friday, the mayhem in the capital market seems to have had some sobering impact on those who triggered it off. Both Sitaram Yechury and AB Bardhan had toned down their rhetoric and indicated that the Left parties may not be rabidly against the disinvestment idea. What they now say is that they are against a separate ministry for disinvestment, but may be open to a select selling of loss-making enterprises.

Undoubtedly, the capital market’s reaction to the intemperate statements of comrade Yechury and comrade Bardhan was a little extreme; and there will be some correction in the days to come. However, it is equally strange when political writers berate investors for their ‘inability’ to understand the mathematics of coalition politics. An eight per cent fall in a leading, broad based capital market index (in this case the NSE’s Nifty) is not an event attributable to a few foolish punters. It was the sort of fall that made investors around the world sit up and take notice. Especially since India is among the fastest growing economies in the world today, with a 7-8 per cent GDP growth.

Sure, investors do tend to overreact, but they are investing real money based on doubtful information. Complacency or a wrong move sees their money literally vanish into thin air. Sometimes the selling is simply beyond their control. For instance, on Friday, a large chunk of selling was forced by margin calls from the stock exchanges. Trading terminals of scores of brokers were shut down on Friday until they brought in additional margins to make up for the drop in stock prices that day. Many of them were forced to liquidate their trading position or sell any stock that was saleable just to pay margins. It is such selling that led to an all round liquidation of stocks.

Now consider the quality of information on which an investor, or Fund Manager is expected to base his decision. As soon as the electorate throws up a fractured mandate, almost all political parties are ready to junk their manifestoes in the chase for power.

For instance, Sharad Pawar, who split from the Congress on account of Sonia Gandhi’s Italian origin formed a coalition with the Congress in Maharashtra almost immediately after. The Congress itself has a reformist manifesto; boasts several reformist finance ministers in its fold, and says it will continue with reforms. But will its views count in a regime when it has just 140-odd seats? Also remember that the first action of the new chief minister of Andhra Pradesh was to announce free power for farmers. This is such an anachronism in a modern economy that it worries investors especially when projects like Enron’s Dabhol Power Company are lying closed because of the tariff issue. To investors, Dr Manmohan Singh is the Congress’s welcome face while YSR Reddy’s action is a reminder that the opposite co-exists.

This applies to all political formations. The machinations by the Bharatiya Janata Party and the Congress over opening up the insurance sector, when they were respectively out of power, is a good example of how little one can depend on politicians’ statements.

To investors, the media is largely undependable as a source of policy information — they have been wrong far too often. And business leaders and industrialists are obliged to make welcoming statements, whatever their real sentiment.

So there are too many ifs and buts for investors to sort out right now. But if a Common Minimum Programme that is accepted by the Left parties is hammered out, it will go a long way towards restoring investor confidence; especially if they agree to be part of the government. The obvious question here is, why were the utterances of two Leftist leaders given so much credence by investors? Their views may be from the 19th century, but they speak their minds. Also, they are probably the only ones whose leaders do not dabble in the stock market and genuinely don’t care what Dalal Street thinks.

If the Left Front plans to be in government or even to support it from outside, then it owes it to the nation to attempt to understand this creature called the capital market, even if it abhors the very idea. As a group that is able to influence policy decisions, they will be in the unhappy position where investment managers and punters will analyse every statement for policy directions. And they will need to be far more careful about their comments.

A few rudimentary lessons on the concept of insider trading and speculation would not be amiss. Otherwise they would end up responding inadequately to loaded questions from the media at the behest of shady speculators. In fact, the new government would do well to brief the entire cabinet and top-level Secretaries on the rules and mechanics of capital markets. The Securities and Exchange Board of India has already urged that senior officials would have to “obey the rules” governing disclosure of price sensitive information pertaining to listed, government-owned companies. But the rule has been breached quite often.

For several weeks last year, banking stocks gyrated wildly based on contradictory utterances from finance ministry bureaucrats. The issue was whether banks would return capital invested in them by government at par or at a premium. The mischief was later traced to a broker-organised teleconference; an investigation was launched and then quietly buried.

Similarly, in July 2003, the chairman of National Fertilisers, talked down the shares of his company on television, saying that its market price was far higher than the government’s 51 per cent holding was worth. He also spoke about problems in its plants and the poor off-take of fertiliser. The scrip immediately tumbled 16 per cent. The chairman was clearly trying to avoid a strategic sale of the company.

When we wrote about this episode and brought it to SEBI’s attention, the matter was taken up by the finance ministry and later the Union cabinet. Ministers were instructed to ensure that such statements did not recur. Several BJP leaders, especially Union ministers continued to ignore these instructions. Maybe it is time to revisit these rules and take them more seriously to avoid needless turmoil in the fragile financial markets.

Writer’s e-mail: [email protected]

-- Sucheta Dalal