Sucheta Dalal :Encashing From Shining India (12 Jan 2003)
Sucheta Dalal

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Encashing From Shining India (12 Jan 2003)  

Last week, finance minister Jaswant Singh literally put his money where his mouth is. He displayed his confidence in a ‘shining’ India by announcing tax and duty cuts across diverse sectors, and betting on increased volumes making up for the give-aways. His gamble would certainly have been more credible if the goodies hadn’t been distributed with an eye on the elections. But let’s not quibble, and instead, give him full marks for carrying off a mini-budget with the appropriate royal gravitas. However, if Jaswant Singh wants to maintain the ‘shining’ effect all the way to the elections, he’d better take a long and hard look at the goings-on in the Indian capital market.

The close of trading last week, destroyed some of the credibility of this bull run. Until recently, it had been pronounced scam-free and based mainly on cash-down purchases by foreign institutional investors; but the volatility on Friday cannot be explained as anything but intense manipulation of market sentiment to induce panic selling.

Look at how stocks moved on Thursday, January 8. The Sensex opened at 5992.1, which was the day’s low and moved steadily up. It touched a high of 6118.62 and closed a shade lower at 6108.54.

But January 9 was different. The finance minister had announced his mini budget and stocks were expected to open significantly higher, with a large gap. It was also an important day in the investors’ calendar, because Infosys was to announce its third-quarter results (which were expected to beat market estimates).

Trading started on the expected high note. The BSE Sensex opened at 6211.06 and quickly rose to the day’s high of 6249.6 by noon. This was 103 points above the previous day’s close of 6108.54. The Sensex then began to sink rapidly on sudden and massive profit booking, dropping a steep 150 points to 6096.68 by 1.30 pm. In just half a day of trading, the feel good factor arising out of the finance ministry’s sops had evaporated. The Sensex then rose approximately 75 points again, before another bout of concerted selling saw it end the day at 6119.59 — a mere 11 points above the previous close.

What explained the massive unloading of stocks at noon and again later in the day? Exchange officials were clueless about the reason for such extreme volatility. Market circles offered two explanations. One was the feeble claim that operators panicked at raids on a Kolkata-based broker in connection with the 1992 scam. The second, and more plausible explanation was that a large corporate group, which has enormous financial clout and has always been a huge player in the capital market, through various investment companies and FIIs, had temporarily unloaded a big basket of stocks. Apparently, it had done the exact same thing on Tuesday, January 6, when the Sensex plunged 200 points from the day’s high.

This group’s market manipulations are known and have been investigated by the regulator and the political establishment several times over the last couple of decades. But it has never been punished. By forcing panic selling in the market, the group created an opportunity to book profits in a surging bull market. It also demonstrated its control over price movements to speculators and punters. Other big bulls have deployed this trick in the past to book profits with a savage bout of selling and replenish their holdings at lower prices.

With elections round the corner, the group has turned bolder in its manipulation — as a show of its strength and possibly out of confidence that no political party would dare question its activities when they all need funding.

Officially, there is very little trace of the group on the bourses, except through a couple of investment vehicles. Market insiders insist that they operate through FII sub-accounts, but that trading too is carefully dispersed leaving no identifiable trail. Its trades are unlikely to be through Participatory Notes and in any case, FII sub-accounts are not being adequately probed by the regulator by peeling off several layers of dummy companies to track true ownership.

What did the extreme zigs and zags of prices achieve? And what was the message from a Sensex that closed almost at the same level as the previous day? First, it signalled that neither the results of a smallish infotech company, no matter how high its reputation, can set trends for the capital market. Only a big player can do that. Second, it signalled that the finance ministry’s basket of goodies also pales before the machinations of a powerful group. It alone can move prices. Third, it indicates that the capital market is shallow, illiquid, easy to manipulate and not yet ready for easier leverage.

Stock exchange sources are extremely worried about the volatile price swings, but find it extremely difficult to nail the problem. These sources insist that they have sliced and diced trading data to detect concerted action and manipulation, but find it difficult to establish manipulation. The regulator on the other hand, having cautioned investors to be careful, seems confident that there is no scam this time. Its reports to the finance ministry explain the relentless rise in stock indices by favourably comparing India’s price-earnings ratios with those of other South-East Asian economies.

This may have led to a sense of hubris. What else would explain the regulator’s decision to permit increased leverage through margin trading at a time when prices are already so high and the relentless vertical movement was causing nervousness?

The decision to reduce the size of derivatives contracts is part of the same complacency. It was certainly unnecessary at this stage. SEBI’s advisory committee on derivatives and market risk management has recommended: a reduction in the derivatives contract size from Rs 2 lakh to Rs one lakh, introduction of physical settlements and a change in the eligibility criteria for stocks open for derivatives trading. The SEBI secondary market advisory committee advocated caution in introducing these changes. And the SEBI board left it to the regulator to choose the timing of implementation. But the peak of a bull market seems to be the wrong time to permit more leverage in the market, especially in the face of such dangerous volatility.

-- Sucheta Dalal