Sucheta Dalal :Stock behaviour this week was a warning
Sucheta Dalal

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Stock behaviour this week was a warning  

Apr 10, 2006

Is there a scam this time? Is this another stock bubble? Ever since the Sensex crossed 8,000, retail investors have been asking this question. Expert opinion was always divided on the subject. On the one hand, the economic and corporate growth numbers were terrific, so there was strong support for the view that portfolio funds will continue to propel stock indices upwards. At the same time, some of the brightest market minds have been predicting a major correction that has never happened.


The spiralling Sensex seemed to have gathered further momentum over the past two weeks, with a daily increase of 100 points (on an average), but the regulator has remained complacent about market fundamentals. Although market intelligence suggested that several top investors were dangerously over-leveraged, the regulator made no move to increase margins (at least until Saturday morning) and force investors to sell and unwind some trades.


On Friday, the inevitable happened. The sharp volatility in prices, the intraday zig-zag of nearly 400 points and the speed with which prices rose and fell are all signals of price manipulation. Hopefully, this is a wake-up call to the regulator and a signal that we are now in dangerous territory.


Friday began like any other trading day in the past couple of weeks. The Sensex opened with an upward gap and zipped up 100 points, to 11,930. But as the media was getting ready to hype the 12,000-point milestone, prices began to nose-dive by around 12.45 pm; at one point, the Sensex had dropped 365 points from its intra-day peak. As panic gripped the petty speculator and day trader segments, they were served up a plausible rumour. It was that the Securities and Exchange Board of India (Sebi) had suddenly barred 12 foreign institutional investors (FIIs) from the market. Prices stabilised a little when it became clear that the rumour was false, but the volatility continued and the session finally closed with a 157-point fall in the benchmark index.


Sebi has asked stock exchanges to conduct a quick inquiry in order to track the source of the panic creation that triggered the sharp fall in stock prices. Going by past experience, as well as the May 17, 2004, investigation (when the Sensex crashed over 800 points in the first half hour), neither Sebi nor the bourses are likely to discover this particular needle in the massive turnover haystack. At best, they will come up with another list of big sellers lead-ing to nowhere. Sources say that FIIs had sold a hefty Rs 700 crore on Friday and fingers are also pointing to heavy unloading by a builder-turned-stock broker.


The difference between May 17, 2004, and today is that Sebi now has in place an Integrated Market Surveillance System (IMSS). According to the service provider’s website, this system integrates data from “stock exchanges (cash and derivatives), clearing corporations and depositories” into a single system to “generate alerts that will help Sebi to identify serious market violations such as market manipulations, insider trading and other types of frauds that undermine market integrity.”


• Friday’s rumour-triggered panic are a test for the new IMSS tracker

• Sebi needs to dissect a few issues in the primary market as a sample check

• The quality of disclosures is another issue that Sebi should not ignore


I am told that the system is in place and has already started functioning. Well, here is the IMSS’ first live test—will it be able to provide better information to hunt down manipulators? Will Friday’s big sellers only turn out to be over-leveraged speculators who rushed to safer territory on hearing of plans to increase margins? Or will the trail come to a dead-end when it reaches a clutch of domestic institutional investors and FIIs who are fronts for large Indian money? Higher margins could surely have forced some unwi-nding of leveraged positions without the need for panic.


And what about the primary market, which is now in the bubble stage? Will Friday’s secondary market alarm resonate there as well? A rash of dubious companies have filed offer documents with the regulator and even the better ones are pricing their Initial Public Offerings (IPOs) at a steep and unreasonable premia. Large Indian companies are also hatching plans to split themselves and raise easy IPO funds in each residual entity. Airlines with blotches of red, retailers, brokers and builders all want a share of easily available public money. Interestingly, several recent IPOs have seen hefty over-subscription in the high net worth individual category. Are wealthy investors really throwing away their money on expensively priced issues or is this segment being manipulated? Sebi needs to dissect a few issues to check if everything is above board.


Quality of disclosures is another issue. An angry investor from Rajkot called to ask if Sebi will follow the Income Tax department’s lead and go through Suzlon Energy’s prospectus claims with a fine-tooth comb. Within months after the issue catapulted this unknown promoter to the list of India’s richest men, the I-T department has unearthed a nationwide scam of fake depreciation, billing and tax rebate claims. Interest-ingly, several senior finance professionals knew about this mischief and probably tipped the authorities. It may also be pertinent to find if Bollywood beauty Aishwarya Rai has really invested Rs 20 crore of her tax-paid money in this project or if that was a publicity gimmick.


This story is going to be repeated several times over in the coming months. It is no longer about foreign portfolio investment and economic growth; the quality and pricing of issues are themselves an indicator of things to come.


-- Sucheta Dalal