Sucheta Dalal :Trace the money to nail the price manipulators (9 June 2003)
Sucheta Dalal

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Trace the money to nail the price manipulators (9 June 2003)  

The good news is that after many years the Indian stock market is looking up even without the help of software stocks, the steady rally being based on a genuine improvement in performance by manufacturing sector, banks, public sector undertakings (PSUs) and especially companies in the oil industry, auto and auto ancillaries and power equipment. It is also interesting that the rally so far is reflected not only in the rise of the 30 share BSE Sensex, but also in the broader stock indices. For instance, while the Sensex rose over 400 points from 2,904 on April 28 to a high as 3,314 on June 6, the Nifty Mid Cap index rose from 716 to 896 in the same period. The BSE-PSU stock index rose steeply from 1,624 on April 28, all the way to 2,207 on June 6 having touched a high of 2,259 on June 5. This suggests that investors have good reason to expect the bullishness to continue — unless the assorted mischief makers, speculators, punters and scamsters who have already turned active are allowed to destroy a good bull run by their speculative excesses and manipulation. The warning signals are already there.

Brazen and rampant insider trading is clearly visible in several scrips, with the huge spurt in trading volumes acting as the first telltale indicator. In fact, the ramping operations are so brazen that the regulator does not need its (mostly unused) on-line surveillance system to detect the extent of manipulation. Yet, the regulator does not seem to have started any probing at all.

Clearly, the investigation department is the Securities and Exchange Board of India’s (Sebi) weakest link and the fact that it failed to nail the broker-promoter nexus despite the massive scam of 2001 has obviously emboldened operators. Take a look at some examples. Several bank stocks have been openly manipulated by operators, who may have been in cahoots with officials in the finance ministry. That saga has already been extensively documented by the media, but nobody is conducting any investigation.

Then there is Indian Oil Corporation (IOC). The IOC scrip has traded in the Rs 200-240 range all through the last two years. All of a sudden, the stock was electrified on May 12. Trading volumes, which used to average between 10,000 to 20,000 shares a day suddenly soared to two lakh shares on May 12 and the price rose from its previous close of Rs 248.94 to Rs 264.90 during the day’s trading. From then on, both price and volumes shot up dramatically. On June 6, a whopping 31-lakh shares were traded on the NSE and the price touched Rs 405 before closing at 384. The company then announced a 1:2 bonus, which was clearly known to certain insiders.

Even a kid would have realised that the situation required an insider trading investigation, even without the benefit of a sophisticated on-line surveillance mechanism. But it hasn’t happened. The Reliance stock scripted a similar magic. The scrip traded at Rs 258 on May 8, and has been rising steadily since then on daily average volumes of 25 lakh. From May 23, the volume of transactions gathered momentum and touched 56 lakh shares on June 6 when the price was Rs 316.85, its 52 week high. Just a day earlier, a phenomenal one crore shares were traded — a level of volume rarely seen in this scrip. Even as day traders and punters scurried around trying to find out why the scrip had begun to attract what was clearly informed buying, one business daily reported a gas find at Shahdol in Madhya Pradesh.

Interestingly, even government sources denied any knowledge of the gas find to a television channel. The same newspaper had another screaming headline last week about the government rejecting Unit Trust of India’s plea to sell its substantial holding in ITC to BAT Industries. How true was this news? ‘Mischievous, malicious and motivated’ was how the UTI chairman himself labelled it. Was it innocent? Market sources believe that it served some speculators’ purpose. The BPL stock is another that has risen over 53 per cent in a fortnight. From just around Rs 22.05 on May 13, the first sign of the manipulators ‘move’ was the spurt in volume from an average of 34,000 a day to 84,000. On June 5, when the price touched Rs 33.05 the volume was an amazing three lakh shares.

Similarly, punters predict that unless the regulator intervenes, another Ketan Parekh favourite —Himachal Futuristic Communications (HFCL) would touch Rs 1,000. So far, the stock price has risen from a paltry Rs 11.20 in early April to Rs 33.25 — a 300 per cent rise. But those who were part of the 1999-00 run are unperturbed at how far this is from the punters’ target. Other scrips showing strange upward movement are SSI, which shot up from Rs 70 to Rs 84.70 in a single day on June 6. The volume was up from under one-lakh shares a day to 2,59,000 shares.

Digital Equipment is another scrip whose price rise was accompanied by rumours that a foreign fund had dumped a large quantity of stock on to an Indian mutual fund ahead of the company’s marathon board meeting on Friday June 6. That day the stock fell from Rs 535 to 497 on a volume of 48 lakh shares, which was double the daily average. Several other IT scrips and stocks such as TIPS Industries, Spic Industries, Mid-day Multimedia, Mukta Arts and Balaji Telefilms, which used to be part of the speculators club are showing early signs of manipulation through a huge spurt in volumes. Every passing day will bring new information about such reckless manipulation; and unless checked, it will quickly grow into a speculative bubble. But that would require two actions.

First, for Sebi to investigate the phenomena of large trading volumes (which it has not been able to investigate or explain despite a major scam in 2000-01) and secondly for Sebi to work with the Reserve Bank of India to track the movement of money that pays for these huge volumes of stock transactions in order to identity the manipulators.

Regulators all over the world, simply ‘follow the money’ in all investigations, whether it is a murder or a murky financial deal. But despite two major scams, two Parliamentary investigations and several lesser scams through the decade, money is the one thing that is neither followed nor traced in India.

Had the RBI collaborated with Sebi in 2000, Ketan Parekh’s money trail would have led to Global Trust Bank and Madhavpura Mercantile Cooperative Bank, much before the bubble burst. This time too, it will have to meticulously follow the money to nail the price manipulators and to prevent a real rally from degenerating into a sordid swindle

-- Sucheta Dalal