Sucheta Dalal :Behind the market madness and RPL issue
Sucheta Dalal

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Behind the market madness and RPL issue  

Apr 24, 2006

Are we in the middle of a stock bubble?


Gushing editorials and cheering anchors are telling us that the Sensex at 12000 is a justified benchmark because it is a mistake to judge the future by looking through the rear-view mirror. Sound advice indeed. The booming economy warrants that we look strictly through the windshield, so long as we make sure that it is clear and transparent without any fake rosy tint.


Let’s start from the point, less than a fortnight ago, when the Sensex went into a savage correction of over 650 points to touch a low of 11,034. It was then yanked up a couple of hundred points in a single trading session on Thursday, April 13. This high volatility signals sheer money power and market manipulation rather than fundamental economic strength.


Interestingly, Foreign Institutional Investors (FIIs) who are credited with fuelling this monster Bull Run seem to be standing on the sidelines and were net sellers during much of last fortnight’s bull-party. This would suggest that smart money is staying out of the secondary market, whether it is genuine foreign money or Indian money round-tripping its way back to the market. Of course, Indian Mutual Funds were aggressive buyers last week, but we will come to that later.


The sharp fall in stock prices before the Easter weekend was triggered by a false rumour that the Securities and Exchange Board of India (Sebi) had suspended the operations of 12 FIIs. Over two decades of covering the capital market, I notice that fake rumours move stock prices only when they come from a seemingly credible source and are backed by actual action in terms of sale or purchase orders.


To an extent, the pre-Easter fall was aided by the increase in exposure margins. However, it ought to be easy for the regulator to use its automated market surveillance systems to get a fair idea of who triggered the sell-off on April 12. When the market opened for trading on Monday, it was in a different world. Both volatility and uncertainty had vanished and the Sensex scored a triple ton after the 1:1 bonus, hefty dividend and positive guidance by Infosys and equally good results by TCS.


The feel-good factor generated by these pivotal scrips however faded into insignificance compared to the euphoria generated by the barrage of good news around Reliance group companies that are under the control of Mukesh Ambani. Significantly, all the hoopla coincided with Reliance Petroleum’s 135 crore shares Initial Public Offering (IPO).


Also, don’t miss the point prominently front-paged by a pink paper that the Anil Dhirubhai Ambani Group (ADAG) shares did not perform as well in the last 1,000 point sprint that confirmed India as the most expensive market in the world. Are we expected to read between the lines here?


The question then is who were the big bulls last week? Media reports suggest that domestic mutual funds pumped in over Rs 2,000 crore, making up for the $61 million withdrawn by FIIs since April 19. Domestic mutual funds are indeed flush with funds and need to invest. But do the current crop of corporate results, growth indicators and interest rate trends warrant the level of bullishness witnessed last fortnight?


At one level, it is comforting that Indian mutual funds have not rushed to follow FIIs to the exit doors precipitating an exaggerated downward spiral, but one hopes that domestic funds are able to keep their heads when the factors that ‘drove’ prices last week are no longer valid. We will probably have our answer in the coming days.


Now let’s look at the spate of good news emanating from the Reliance group that thrust the Reliance Industries’ scrip to Rs 1,000 and ensured a thumping, record-breaking success of Reliance Petroleum’s (RPL) IPO. Just before the RPL issue opened for subscription, we learnt about Californian oil major Chevron’s 5% investment in RPL. The story actually broke with a misleading report that Chevron was acquiring a 29% stake (instead of the option of going up to 29%) in the company.


The second positive report was that of an oil find in the Godavari basin. This fact too had been kept carefully under wraps for over two months. Is it not a wonderful coincidence that the ‘good news’ hit the market just before the issue? It led to an incredible 70-point spike in Reliance shares taking the scrip up to Rs 1,000. It is another matter that the stock was down 2.07% last Friday.


Third, it was reported that Sebi has allowed Chevron to become a co-promoter of Reliance Petroleum. We learn that this was no dramatic permission but a procedural clearance, where Chevron was allowed to be included in the ‘promoter’ category after Sebi had turned down Reliance’s request to dilute promoter holding norms.


The net result: The RPL IPO received a record-breaking subscription of Rs 147,000 crore. The issue was subscribed 51.32 times and apparently received a frenzied response from every segment - retail, high networth and institutional investors.


The incredible investor response makes it impossible to suggest that the spate of positive announcements alone ensured a mind-boggling investor response. But this is still an unhealthy trend that can be grossly exploited by companies in future.


I learn that Sebi has no specific rules today that mandate a quiet period and specifically bar companies from making forward-looking announcements when a public offer is open for subscription. This is clearly a gaping loophole that needs to be fixed. Otherwise, investors will be routinely bombarded with glowing media reports that have no place in IPO documents after an issue is open for subscription.


Even with a quiet period, the regulator will have a tough time tracking a media leak back to the company, but unless it mandates such a quiet period, it does not even have a handle to ask tough questions.


-- Sucheta Dalal