Sucheta Dalal :More to rally than meets the eye?
Sucheta Dalal

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More to rally than meets the eye?  

Aug 1, 2005


The benchmark Sensex shimmied up 91 points in the first 30 minutes of trading last Friday when Indian stockmarkets re-opened for trading after the biggest deluge in history crippled India’s commercial capital and its largest listed company suffered extensive damage due to a massive fire at Bombay High.


Is this a sign of bullishness, irrational exuberance, or worse, the sign of sinister manipulation of stock prices to ensure that the National Stock Exchange’s (NSE) Nifty remains at a high on Friday, which was expiry day for Futures & Options contracts.


Sources in the know say a massive bull-bear tussle has developed between two sets of hedge funds, all hiding behind sub-accounts of Foreign Institutional Investors (FIIs) and operating under the cover of highly respectable dollar investment.


This tussle is responsible for the price spiral and steep fall in the last half hour of trading. Friday finally ended with the Sensex up a mere 30 point and Nifty down six points. The bull-bear fight is set against a fragile market; this is evident in the way prices are gyrating to widespread rumour mongering and false information.


Almost like the Tsunami and cyclone rumours that killed a score of people in Mumbai on Thursday, Friday’s 60-point drop in the Sensex towards the close of trading is being attributed to disinformation that a big bull operator was in trouble and that the NSE had compulsorily squared up his position. Proof of the problem, said the rumours, was the half-hour delay in the NSE pay-in.


In fact, the NSE says there was no problem at all. The half-hour delay only pertained to pay-in of securities and not cash; also, it was at the request of the depositories not the brokers. The exchange also says no broker’s position was squared-up.


On the contrary, almost all the top players seem to have plenty of liquidity are generous with margin payments and are all well within their risk limits. Also, there is undoubtedly a regular inflow of foreign investment coming in everyday, seemingly from large and respectable institutional sources.


Consequently, our regulators insist that things are under control and there is nothing to worry about. But the truth is that they know little about the real players in the market and the investment outfits that they are trading through. Anecdotal reports say that all the scamsters who operated in 2000 and earlier have banded together. These players had gathered for a strategy meeting at a resort near Mumbai a couple of weeks ago. They are aggressively active in the market, along with a well-known industrialist and a top market operator who has been encashing on his trading ability as well as his newly-acquired reputation as an ace stock picker.


Of this motley gang, the scamsters operate through FIIs and hedge funds as fronts. In the last couple of months many of these big operators have booked enough of profits to pay back old debts (some of these were the subject of police investigation and involved dubious, unaccounted money), or acquire new businesses. Yet, neither the regulators nor the income tax authorities seem inclined to investigate the source of their money, because of the perceived political clout of these dubious characters and their alleged linkages with the Congress top brass.


The contrast is evident in the fact that the same Income Tax department showed great alacrity in chasing after Ramdeo Agarwal of Motilal Oswal Securities to check the source of the Rs 3-crore ransom payment that he made to rescue his son.


In fact, some market insiders, using fictitious email addresses have also been informing the regulator and the media about their trading mischief, which includes high IPO allotments to certain scamster-connected hedge funds. Some of these emails name the hedge funds that are fronts for specific scamsters.


Stunningly, this information is meaningless to anybody but the Securties and Exchange Board of India (Sebi), because they alone have data on FII sub-accounts. In fact, even the stock exchanges have no way of knowing or investigating investment patterns of these sub-accounts, because they do not have the information.


Isn’t it ironical that Sebi has stringent Know Your Client (KYC) rules for brokers, but stock exchanges have no access to detailed information about their biggest traders? The UBS Securities case revealed that even Sebi has sketchy information on the ultimate client operating under the FII umbrella. This is alarming since FIIs are, by far, the most dominant investors in the Indian market today.


As a recent HSBC report says that foreign investors own a ‘‘staggering 74 per cent of free float’’ in the market. And their stake in the Sensex has risen over 40 per cent in the last 12 months. Are these investors really foreigners? Or are they Indian scamsters and tax evaders who are laundering their money through foreign accounts?


Market sources say if the bull gang is a bunch of Indian scamsters, masquerading as foreign investors then the bear cartel is an equally dubious bunch of foreign investors. Various investigations into American scandals, such as the IT stock bubble of 2000, the corporate scandals of 2002 and the mutual fund late trading scandal suggest that the anonymity of FII sub-accounts would provide a wonderful cover for unscrupulous foreign traders.


The anonymity of investment through Participatory Notes (PNs) worries regulators. But foreign investors are powerful and influential. Witness how Sebi continues to drag its feet over scrapping the much-abused discretionary IPO allotment to institutional investors?


Strange things also happen at appellate hearings of their cases. A recent example is the UBS Securities appeal where the Presiding Officer of the Securities Appellate Tribunal (SAT) first suggested a strange, Rs.50 crore ‘plea bargain’ deal, then rescued himself on rather flimsy grounds and eventually resigned.


The problem is that the government is happy to believe that the Bull Run only reflects great corporate earnings and future potential. Corporate results have indeed been dazzling, but they still do not explain the giddy rise in index stocks in the face of calamity.


-- Sucheta Dalal