There has been a steep 700-point rally since mid-May, but ask any investor and he will tell you that the teji has just begun. In a market starved of good news, the rally is like the first showers of a long awaited monsoon. Brokers who were toying with the possibility of selling their trading membership are back in business; and nobody wants the good times to end.
At the same time, there are niggling doubts. The finance ministry is not alone in worrying about the sharp rise in stock prices. If the ministry wants the Securities and Exchange Board of India (Sebi) to ‘look into the rally’, so do most investors. They are tired of market operators destroying every serious rally based on fundamental factors through rapacious greed and uncontrolled ramping of prices. What worries people most is two factors—the lop-sided purchases by foreigners and reports that a bull operator of the 2000 scam in back on the bourses, making deals with many of the same shady industrialists who supported him during the bull-run that he engineered three years ago.
That the operator is back is no secret; after all, it is part of his ramping strategy to broadcast his interest in certain stocks to help propel their prices upwards. What is unknown is the various fronts through which he is operating. In fact, between the then Finance Minister and members of the Joint Parliamentary Committee (JPC), they made sure that the Mauritius route and the money being the Overseas Corporate Bodies (OCBs) was never properly probed. So when the Finance Secretary asks Sebi to ‘look into the rally’, he may want to start by probing OCBs and the so-called Hedge funds, who are pumping several hundred crores of rupees into our market everyday.
Maybe the FS can ask what makes these foreign funds more bullish than our own mutual funds. Look at the numbers. All foreign funds, individuals, OCBs etc are banded together under the generic head of Foreign Institutional Investors (FIIs). Last week, these FIIs made a net investment of Rs 500 crore in the first three days of July. The invested a net of Rs 293 crore on July 3, Rs 68 crore on July 2, Rs 149 crore on July 1, Rs 153 crore on June 30, and Rs 119 crore June 27. Now, compare this with the net investment of Indian mutual funds on the same days. It was minus Rs 20 crore on July 3, Rs 30 crore on July 2 and minus Rs 8 crore on July 1. That is a net investment of Rs 2 crore in the first three days of July. It again begs the same question—What is it that the foreigners see that Indian mutual funds don’t to have pumped Rs 7,100 crore into our market in two months. Conventional wisdom is that large funds, especially foreigners, look for the exit route, before putting down their money. If Indian mutual funds are not so excited about this rally, then who will provide an exit to the foreign hot money and the speculators? After all, every major scam—1992 or 2000—has depended on large government institutions such as Unit Trust of India (UTI) for providing the exit and liquidity to operators. With most government institutions in the dumps and UTI turning over a new leaf, who will absorb the ramped up stocks?
A leading newspaper would have us believe that State Bank of India (SBI), the big daddy of all institutions is looking to enter the equity market. If SBI starts building an equity portfolio in this over-heated and over-bought market, it will indeed provide and exit for speculators and the hedge-funds’ hot money.
Maybe the FS and the Reserve Bank should pay some early attention to big daddy’s plans. Newspaper reports also say that Finance Secretary D.C. Gupta wants Sebi to check if the fundamentals of companies justify the sharp rise in prices. Well Mr Gupta, how’s this? Even the shadiest companies have grabbed the opportunity to clock large percentage gains and also record significant volumes in this rally. Remember DSQ Software, whose notorious promoter and speculator Dinesh Dalmia has a dozen-odd warrants for his arrest? On July 3, DSQ Software shares recorded a volume of 1,07,202 shares, which soared to 9,73,856 on American Independence Day (probably because Dalmia is in the US).The price crept above par to Rs 11.15 with a 15 per cent gain. Another forgotten company, Lan Esada is crawling up from near zero. It price doubled in a week from Rs 0.85 to Rs 1.55—what makes it significant is that a hefty 4 lakh shares suddenly changed hands. Why would anyone touch these shares unless they are part of a larger future plan?
Mr Gupta could also look at the rumour trick employed by agile speculators. It is simple; spread a rumour and make a fast buck. A few weeks ago, it was the conflicting policy pronouncements on bank equity that provided quick opportunities. While HDFC may eventually merge with HDFC Bank sometime in the future, a revival of that old story provide a quick money-making opportunity for some operators. HDFC Bank shot up from Rs 263 on July 2, to an intra-day high of Rs 302 on July 3 and closed at Rs 290. On July 4, it tumbled 4.5 per cent to close at Rs 276. HDFC went the same way. From Rs 385 on July 2, to Rs 435 (intra-day) on July 3, closing at Rs 418 and down 3.7 per cent on July 4 to Rs 402.
In the absence of any clear indication, nobody is quite sure whether Warren Buffet is really interested in our oil PSU’s, whose divestment plans are the subject of litigation that will be heard by the Supreme Court next week. But such destabilising rumours are part of every big rally and there will be many more in the coming days.
How can the FS prevent the rally from turning into another scam? By some quick proactive action by Sebi in co-ordination with the Reserve Bank. The JPC has already pulled up the RBI for sleeping on its supervision duties in 1992 and again in 2000. But this time, there is woman on top (Deputy Governor K.J. Udeshi); and we expect a lot more from her. If the RBI works with the capital market regulators and the stock exchanges, to track the source of the money that is pouring into the market, it could keep help keep the market safe for investors.