Sucheta Dalal :How bullish can we be on the present bull run? (13 Oct 2003)
Sucheta Dalal

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How bullish can we be on the present bull run? (13 Oct 2003)  

After several years, the bull market has made it to the covers of general interest news magazines. But for the first time in decades, there is no Big Bull playing Pied Piper and leading a herd of investors all the way up to a huge crash. Instead, we have Foreign Institutional Investors (FIIs) who are so bullish about the Indian economy that they are pumping in a net investment of Rs 300 crore a day into the market in the last two weeks. The exceptionally good monsoon and a broad-based industrial recovery are indeed bullish factors, and they have led to an official revision on growth estimates for the economy.

The conservative Centre for Monitoring Indian Economy (CMIE) has just revised its growth forecast for the economy from 6.4 per cent to 7.4 per cent for 2003-04. Credit rating agencies such as Crisil are also reporting more upgrades and almost no downgrades. More positively, the government is showing great restraint in not talking up the market. One reason could be that Finance Minister Jaswant Singh is too careful a person to put out self-congratulatory statements about the bull run. But another reason is probably genuine worry. The absence of faces associated with the sharp rise in prices can be unnerving rather than reassuring.

Foreign Institutional Investors (FIIs) are clearly the Big Bulls of 2003, having dragged the benchmark Sensex up 60 per cent from May this year. But they are faceless. Except for some consolidated numbers put out by the regulator, nobody knows who is doing all the buying. Approximately half the foreign investment in India is believed to have come from hedge funds, whose exit may be as dramatic forceful as their entry. At the same time, FIIs may also be a front for Indian money being coming back into the market. The point is, nobody knows.

Perhaps that’s why, even a BJP MP, Kirit Somaiya is saying that there is a ‘‘need to study the present bull run’’. Somaiya, a qualified Chartered Accountant, who also runs an investors’ association, has been calling on stock exchanges to discuss his worries. And the issues raised by him probably merit a discussion. Somaiya, and his Investor Grievances Forum (IGF) believe that the 1500-point rise in the BSE Sensex over the last 16 weeks ought to be analysed so that the ‘feel good factor’ does not end up in a new scandal. He says that the re-entry of Shankar Sharma of First Global and the ‘tainted’ companies involved in the ‘Ketan Parekh Scandal’ are cause for concern. And if Overseas Corporate Bodies (OCBs) played a big role in the last scam, then FII arbitrage transactions between the cash and derivatives market need scrutiny this time. IGF quotes FII investment figures of Rs 17,390 crore for 2003 till September 18 and suspects that much of this may be short-term arbitrage money. It says that when this money tries to find an exit, no Indian institution is large enough to counter-balance the situation and the market could go into a free fall. IGF has also flagged the absence of a physical settlement in the derivatives market as source of worry. For various reasons, India chose to introduce only cash-settled derivatives and has yet to launch physical settlement of derivatives trades.

The question however is, are cash-settled derivatives as dangerous as the carry-forward market of the past? Somaiya certainly thinks so. However, the stock exchanges, which meet the regulator on a weekly basis to examine surveillance measures, insist that there are adequate checks and balances to avoid speculation from spinning out of control.

Curiously enough, while Somaiya expresses concern about FII investment in the derivatives market, the size of their exposure at Rs 2,389 crore is hardly worrying when the daily derivatives turnover is over Rs 10,000 crore. His own note also says that the cumulative FII position in the derivatives market as a percentage of total gross market position on September 26, 2003, was 21.05 per cent. Again, not high enough to cause any panic. Somaiya also makes other allegations that are refuted by the broker community itself. He says that even small and defunct brokers are allowed a Rs 50 crore derivatives trading limit. He also worries about the consequences of a reduction in FII bullishness about the country. Somaiya’s long bearish note raises some pertinent issues and other fanciful ones. But why is the Bharatiya Janata Party MP raining on what could be the government’s economic parade? That too with the country fast getting into election mode?

It is not that Somaiya is not a disciplined party soldier. Remember how he did not allow his genuine concern for investors, to stop him compromising on some key issues in the Joint Parliamentary Committee (JPC) where he was a member? Participatory Notes (PNs) and Overseas Corporate Bodies (OCBs) played a role in the Scam of 2000 too, but the JPC did not suggest a ban of OCBs. Sebi banned them from the secondary market and the Reserve Bank of India (RBI) stirred itself to ban their primary market participation only last month. Also, the JPC carefully avoided examining the role of industrialists and listed companies who brazenly colluded with Ketan Parekh and diverted several hundred crores of bank funds to him. Industry houses, whose involvement with carry-forward financing took up a lot of the JPC’s time and attention, are again extremely active in the market, but Somaiya’s note makes no mention of it. In fact, it is Sebi’s decision to transfer speculative scrips to the Trade-for-Trade segment when it noticed concentrated trading by a few brokers that significantly deterred businessmen from colluding with brokers to manipulate the market. Similarly, Sebi has received no support from the BJP-led government in going beyond FII submissions on beneficial ownership of PNs to track the real source of foreign inflows. Also, neither the government nor its investigative agencies have made any attempt to prevent brokerage firms banned in the Indian market from being active on the London Stock Exchange and the NASD of the US despite serious charges of destabilising the market.

What conclusions are we to draw from a bull market and a booming economy if a ruling party MP who is most knowledgeable about the market is so worried about the relentless rise in prices? Is the government doing enough to get all the information and giving the regulator a free hand?

-- Sucheta Dalal