Sucheta Dalal :Deja vu on Indian capital markets
Sucheta Dalal

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Deja vu on Indian capital markets  

March 12, 2001

When the Bombay Stock Exchange Sensitive Index crashed 175 points for the second successive Friday last week, newspapers dubbed it 'Black Friday-II' or 'Black Friday revisited'. In fact, everything about the present payment scandal on the Indian stock markets has a sense of deja vu to it. The cast of characters, the lack of regulatory supervision and investors trapped in the maelstrom of a bull-bear war. It is a story that has been repeated every three years in India.

Interestingly, one half of the Indian capital markets has continued to develop and change all through the succession of scams and debacles. In terms of automation and legislation, it is on par with the best in the world; it has also reduced problems related to paper-based trading and counter-party risk -- but when it comes to enforcement and supervision the rating is down to a near cipher.

Ironcially enough, the formula never changes. It is always a promoter-broker nexus, inside information, powerful political friends and lethargic regulators who act out the same hackneyed script. See how this works:

The players:

Ketan Parekh, the latest holder of the Big Bull title, was a close associate of Harshad Mehta -- the central figure in the multi-billion dollar securities scandal of 1992 and is implicated in one case related to those days.

Given this background, Parekh's growing influence over the market ought to have set the alarm bells ringing at the Securities and Exchange Board of India. Nothing happened.

Regulatory issues:

A chronology of events over the last decade would show the failure to respond to market intelligence and lax supervision as Sebi's biggest problems.

Sebi got its statutory teeth in the clean-up that followed the 1992 securities scam. Those days, the bourses used to be rocked with broker defaults every few months and innocent investors who were invariably caught in the crossfire lost heavily due to counter-party trade risks.

The professionally run and automated National Stock Exchange was set up as a counter to the BSE's recalcitrance and clubby functioning and refusal to change. When the NSE's turnover crossed the BSE, it actually kick-started the process of real change. The NSE relentlessly pushed for trade guarantees, on-line surveillance systems, elimination of paper-related fraud including fake and forged share certificates and finally dematerialisation of shares.

To its credit, Sebi used its statutory status to push the development process along by enabling changes in regulation and legislation required to modernise and transform markets. However, when it came to supervision and enforcement, Sebi was found weak and gullible. A series of scandals followed, and each of them hit the retail investor the hardest.

  • In 1994-95, the war between Reliance and a group of market operators, over what is famously known as the 'share switching scandal', led to rampant short-selling through inter-exchange deals on five bourses.

    Sebi identified the cabal of brokers involved at each exchange, but the report was buried after some tough measures against the Pune Stock Exchange whose board was superceded.

  • The scrapping of the Controller of Capital Issues led to a three year orgy in the Initial Public Offering market, where industrialists and businessmen with fictitious projects decamped with several thousand millions of investor money. This killed the IPO market for three years. Again, seven task forces investigated the fraud, but nobody has been punished and no money recovered.
  • A couple of years later, the Rs 10 billion CRB Group, a financial conglomerate which was built entirely on hype, high interest borrowing and the promoter's friendship with regulators, politicians and godmen, caved in.

    Started as a finance company, CRB had been allowed to set up a mutual fund and had even obtained 'in principle' approval to set up a private bank. CRB investors too have not recovered their money, and when last heard, its promoter C R Bhansali has diversified into the dot-com business.

  • The collapse of CRB and the IPO market triggered a run on finance companies. Several billions of rupees were withdrawn by investors and many companies never recovered from the blow. At about the same time, some enterprising industrialists had promoted plantation companies which had promised 100 per cent returns and more to rake in over Rs 20 billion from gullible investors.

    It was only when these began to fail, in the wake of the CRB scandal that investors realised that plantation companies were not subject to regulatory supervision. Again, investors lost all their money.

  • Next came the stunning re-emergence of Harshad Mehta in 1998. The Internet and the media was Mehta's vehicle. He launched a website, which dispensed tips and made friends with newspaper management to bag a dozen odd newspaper columns to spread his message. His formula was the same. He engineered a bull run in BPL, Videocon and Sterlite stocks through some arrangement with their promoters. However, his mega plans to expand his influence came a cropper because of excessive speculation. The bubble burst in June 1998 and scores of greedy brokers who were his fronts went bust.

    A shameful cover up, involving the insertion of fictitious, synchronised trades followed, which ultimately led to the sacking of the then BSE president and executive director. Many of Harshad's broker fronts were also punished, but the investigation against Harshad and his buddy Rajendra Bhantia -- a former director of the BSE board and vice-president -- continues to drag.

  • Circa 1999. Ketan Parekh began to make his presence felt by identifying information technology, communications and entertainment (ICE stocks) as his chosen areas; that this coincided with a runaway international boom in these sectors helped him immensely. Ketan's problem was that he either failed to spot the end and get out in time or was so badly trapped in the pyramid of speculative funding that he had created, that it was impossible for him to get out. Everybody credited Parekh with being far more sober than Harshad Mehta is, but the truth became chillingly clear only in February.

    On March 2, which was dubbed Black Friday, the bottom fell out as a set of bear operators, having realised Ketan's vulnerability hammered his favourite stocks; the Sensex tumbled a massive 177 points. It fell another 175 points on the following Friday when the Calcutta and Ahmedabad stock exchanges teetered on the brink of a default.

    Eventually, this crisis too will blow over -- few brokers will go belly-up and millions of investors will lose heavily. What is not clear is whether this crisis at least will force the government to end the 'clubby' supervision of the capital markets and a regime of 'market friendly' regulators.

-- Sucheta Dalal