Sucheta Dalal :India deflated
Sucheta Dalal

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India deflated  

Feb 19, 2007

With inflation climbing to 6.73 per cent the government is ready to hit the panic button and all of a sudden India is not looking so poised anymore despite a large media group choosing to play cheerleader. While the Indian industry is ready to conquer the world with major acquisitions, India’s commercial capital is reeling from power cuts and forcing industry to cut back production for two days a week. The government has cut petrol and diesel cost, but it seems a little too late to cool the debilitating increase in food, vegetable and commodity prices or public anger over soaring electricity charges and pathetic infrastructure coupled with ever rising tolls, tariffs, fines and charges for almost every conceivable public utility and facility.

Revival plan

On the weekend of January 10 around 25 of the Bombay Stock Exchange’s (BSE) biggest brokers were invited to the luxurious holiday home of Rakesh Jhunjhunwala — one of the biggest traders on the capital market today, whose personal networth is apparently counted in thousands of crore rupees. The location: Lonavala, a tiny hill station close to Mumbai. The meeting may or may not have had an agenda, but the discussion that seems to have excited his guests is a plan to revive the BSE to its old glory. After all, most of the invitees were stalwarts of the BSE in its golden days, dominating the ring in the open outcry system. Jhunjhunwala apparently suggested the brokers must switch their trades to the BSE, especially for derivatives where BSE has almost no trading volumes. Once trading volumes increase, the valuation of the bourse would also increase and along with it the value of each broker’s shareholding. One suggestion that emanated from the meeting was that each of these big brokers should plan to increase their personal holding to the permissible upper limit of 5 per cent by buying out shares of smaller brokers in order to maximise their profit possibilities after listing. However, this self-enriching loyalty will have to wait until Sebi (Securities and Exchange Board of India) clarifies several aspects of the demutualisation rules.

The other view

The flip side to brokers’ plan of increasing shareholding to 5 per cent is one that should worry the regulator. It means six or seven large brokers could easily control a block of 30 per cent and act together to dictate BSE policy. Or that one large operator can finance the purchase of additional shares and have a ‘side’ agreement giving himself the proxy on the bourse’s decisions. This is a big possibility, as public holding may be spread out and fragmented and so less likely to act in concert on various decisions. The chances of brokers clubbing their voting rights to ‘control’ the exchange would not have happened if Sebi had a better understanding of ground realities and had allowed BSE to bring in a strategic partner with a 26 per cent holding. As things stand, the BSE has managed to rope in the Deutsche bourse with a 5 per cent stake, but it will need at least one strategic investor with 26 per cent to remain independent of a block vote by broker-shareholders. But that will require Sebi to reconsider its rules, at least with regard to a large strategic investment by a global bourse, or by ordering that the listing of the BSE would be through an offer of sale, where existing broker-shareholders have to offer 51 per cent of the shares to the public. Since control flows from shareholding, the strategy would be to disperse it and prevent block votes.

Dejà vu

After Nissan Copper and Ashtavinayak Cine Vision, shares of AI Champdany Industries are setting records in terms of price rigging. Its shares were listed on the two national bourses on February 14, when the indices were volatile and largely in the red. The scrip opened around Rs 80 and soared to a high of Rs 306, before closing at Rs 234. So brazen was the manipulation that at one stage the scrip quoted at Rs 300 plus when the Sensex was down 200 points. On February 15, the price hit the upper circuit filter with a 20 per cent jump to 281 and closed at Rs 267.8. Interestingly, the very day of listing saw many bulk deals, with some entities like Neptune Fincot, Opg Securities and Ketan Bhailal Shah, trading the same number of shares. Sebi officials say the Integrated Market Surveillance System flagged the price movement and launched an investigation. But so far, the manipulators seem unconcerned about the consequences of their actions.

-- Sucheta Dalal