Sucheta Dalal :When their faith came crumbling: A stock story (14 April 2003)
Sucheta Dalal

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When their faith came crumbling: A stock story (14 April 2003)  

Two days of turmoil in the Indian stock markets have left investors so jittery on the eve of a long bank holiday that they cannot seem to separate truth from fiction.

The shock and awe started on Thursday when Infosys, the darling stock of Indian investors crashed an unbelievable 26.78 per cent after it issued a profit warning for the coming year. The dumping of IT stock led by Infosys sent the bench mark BSE sensitive index tumbling over a 106 points while the trading volume rose by 60 per cent on the National Stock Exchange (NSE).

The extent of volatility was a massive four standard deviations (4 Sigma). Here is how a top stock exchange official explains it. He says that if a three Sigma risk containment system is expected to take care of 95 per cent of market volatility and three sigma accounts for 99 per cent, then the fact that the Indian capital market weathered the exceptionally high four-sigma volatility is tribute to our risk containment systems.

But the damage is to investor psyche has not been addressed. Investors hate surprises and the Infy collapse has left them so jittery that they cannot believe that Thursday’s upheaval and Friday’s continued fall (which saw the Sensex dip below 3,000 points) has not resulted in a payment crisis and large-scale broker defaults.

The run on ICICI Bank is a consequence of such nervousness triggered by malicious rumours. It apparently started with a few (Automated Teller Machines) ATM’s running out of cash following large withdrawals ahead of the series of bank holidays this week.

Although the rumours were false, nervous Gujarati depositors began to make frantic calls to friends and relatives in Mumbai late into Friday night to verify them. The panic continued on Saturday morning at some branches such as Borivili in Mumbai and the bank had to seek police security and bring in additional cash before depositors were convinced and walked away.

The absurdity of a run on India’s second largest bank with total assets of about Rs 1 trillion and a network of about 540 branches ought to cause government and the policy makers to pause and worry. It reflects a dangerous lack of credibility in our financial system resulting from years of decline, inefficiency, corruption and losses. Lets look at it from the investors’ point of view. Over the last few years, a series of big and small institutions have declined and turned sick, but nobody was ever punished for corruption or mismanagement.

The loss of credibility started with UTI, which managed funds of over Rs 80,000 crore and investors considered it safer than the SBI. Suddenly in 1998, years of neglect took their toll and revealed a massive hole in its books. It was bailed out at taxpayers expense and handed into the care of another political appointee whose close connections with speculators was common bazaar gossip.

Even after a second debacle at UTI and a report by a Joint Parliamentary Committee (JPC), there has been no action against UTI’s top management. The smart guys turned out to be those banks and financial institutions whose inside information allowed them to liquidate units at the peak rate of Rs 14.75 before the freeze on sale and purchase.

That is why Gujarati depositors who have already been battered by the cooperative bank scandals, rushed to secure their money before worrying about whether ICICI Bank’s problems were true or false. At around the same time, there have been reports about the huge bad loan portfolio of IFCI and the Industrial Development Bank of India (IDBI) and how both institutions need a government bailout. Why then should rumours about problems at ICICI Bank surprise the man on the street?

ICICI Bank is partly to blame for the perception problem. Its executives have loads of attitude and in its pursuit of aggressive growth; it hasn’t worried about riding roughshod over borrowers and competitors. In fact, news about the run on ICICI Bank caused so much merriment along competitors, they needed reminding that they could just as easily be the victims of a similar slander campaign with far more disastrous results.

The panic over bank’s liquidity is loosely connected with Thursday’s blood bath on the stock exchanges. It is about the unanticipated and precipitous drop in the price of another blue chip leading to loss of faith among investors. Why should Infosys’ negative profit guidance have been such a shocker? Why did savvy and highly paid analysts fail to anticipate a profit warning from Infosys, given the global business turmoil caused by the war?

It is all very well to talk about re-rating of the IT sector after a steep collapse in the biggest scrip in the sector, but the manner in which Infosys was liquidated by institutional investors on Thursday raised the spectre of programme trading.

A clue to how little the market has anticipated Thursday’s mayhem is in that day’s morning newspaper. P.N.Vijay, a market expert and portfolio manager had written that he thought the time was right for a bull run.

In an interview to The Economic Times on the same day, Gul Tekchandani, chief investment officer of Sun F&C Mutual Fund had predicted that ‘after the resolution of the war, the markets are expected to revive’ and that the ‘sensex will range around 3,600-3,800 levels’. He also expected a 30 per cent growth from the IT sector leaders. As it happened, the Sensex dipped below 3,000 on Friday and Infosys’ has forecast for itself less than half the growth anticipated by Tekchandani. May other institutional investors who sold heavily over the weekend were similarly wrong.

The market could easily see a strong revival over the next couple of weeks and it is fairly obvious that many retail and institutional investors had over-reacted last week. But it does demonstrate that investors’ are far too nervous for comfort.

After Thursday’s fall, a fund manager was reported to have said, ‘Narayana Murthy has done in one day what Saddam Hussein could not achieve in three months’.

Well, Infosys and ICICI Bank have demonstrated that the financial system has become so fragile and brittle that it takes very little to crack it. Maybe its time the government launches a massive clean up and confidence building exercise to restore investor/depositor confidence in the Indian financial system. But to achiever this it would have to ensure that systems work, rules are obeyed and wrongdoers are punished swiftly and stringently.

-- Sucheta Dalal