All of last week, market circles attributed the sharp stock market volatility to a display of financial muscle by a large, market-savvy corporate group. While several factors, such as unwinding of leveraged positions by lenders had indeed exacerbated the selling, there were too many ominous signs of huge market manipulation. Last Thursday, when the BSE Sensex registered a sharp intra-day fall of 285 points, a worried Securities and Exchange Board of India (Sebi) called stock exchange officials at 8 p.m. to discuss the situation. The meeting seems to have discussed suspicious manipulation and the general apprehension about the industry house blighting the ‘feel-good’ factor. Sources say that Sebi chairman G. N.Bajpai was perturbed enough to call the industrialists to convey his apprehensions. The regulators’ subtle warning seems to have led to some whip cracking in the organisation; in particular, an aggressive and increasingly notorious fund manager from the group has apparently been asked to cool down. Some believe, that the sharp recovery on Friday may have a lot to do with the regulators’ talking-to, but nobody is quite sure that the group can be easily disciplined or that it will heed a warning, which is obviously not backed with any precise or substantive proof.
Meanwhile, Sebi has zeroed in on some brokerage houses that may have reaped a big ‘bonanza’ during last week’s market manipulation. A round of inspections are likely to be ordered to follow the money-trail in the hope that it leads to the source of market manipulation. Especially under scrutiny is one brokerage firm, which has offices across the country, and has allegedly received massive new investments (politician’s money) through its Vile Parle branch in Mumbai. Also under scrutiny are the large transactions of an arbitrageur whose operations came in for detailed scrutiny even after the Scam of 2000. Three other firms are on Sebi’s list including some firms close to the industry house, which is under scrutiny.
Rebates & freebies
The Mutual Fund industry is certainly competing hard to attract investors’ attention and getting their money. But many of their lures seem to fall into the domain of ‘rebates and freebies’ that the capital market regulator normally frowns upon. For instance, JM Mutual Fund offered free life insurance from Life Insurance Corporation (LIC) with its Monthly Income Plan. ING Vysya Mutual Fund’s MIP which closes on February 6, has a host of freebies structured along with its parent bank ING Vysya and which are contingent on investors staying with the Fund. For instance, eligible investors get to open savings bank accounts without the Rs 5,000 minimum balance condition as long as they remain with the Fund and provided they apply in the IPO. Investors are warned that they will get a savings bank account, only if there is an ING Vysya Bank in their locality, and it deigns to accept their business. Yet, the offer document narrates a long list of other goodies that come with a savings account. For instance: a personal accident insurance cover (Rs 3 lakh for three years), a free annual accident hospitalisation cover of Rs 35,000 for three years, an international debit card, a demat account, zero commission demand draft, free bill payments facility for utilities etc, etc. Tempted? Obviously, selling a MF these days doesn’t work without a freebie. Sometimes even the AMC (Asset Management Company) is giving up its own income to ‘reward’ senior citizens who stay in the fund beyond December 31,2004 provided they have invested in its Initial Public Offering (IPO). But is this healthy for the industry? Mutual Funds have to attract investors by managing their funds well and giving them the highest possible returns. Luring them or tying them up through freebies and goodies linked to group entities is neither in the interest of investors nor the development of a healthy industry.
It is a problem that afflicts every large Indian institution: the urge to float new entities with no unique profile or functionality. Sebi has suggested to the finance ministry that there is a need for an independent research organisation whose capital would come from a 1,000 select companies and from market intermediaries. The proposed research body would function under an eminent advisory board. Sebi thinks that if proper research is done on approximately 7,500 companies which are listed on bourses but never traded, then it would generate investor interest leading to liquidity and trading. What is not clear is why Sebi or the Investor Education and Protection Fund (IEPF) cannot fulfil this objective by merely offering a grant to existing and reputed institutions such as the Centre for Monitoring Indian Economy (CMIE) or even some rating agencies. This would mean putting out credible information without building new infrastructure for the purpose. -- Sucheta Dalal