There is a well-oiled market system that lures small speculators to invest in dubious shares that are favoured by market manipulators. However, the Securities and Exchange Board of India’s (Sebi) crackdown against 10 dubious companies, their promoters and traders last week led to turmoil in their sleazy operations. The regulator’s biggest tool this time has been its ability to use the depository system to target specific entities and freeze shares at all levels right from promoters to brokers and specific individuals.
This has panicked punters who run circular trading rackets and ensnare greedy speculators to join the ride to bumper profits. The regulatory freeze would saddle them with un-saleable shares and their paper profits would vanish forever. This fear saw over 2,121 shares decline on the Bombay Stock Exchange (BSE) last Friday while only 402 advanced. The mere 15-point decline in the benchmark Sensex does not truly reflect this flight to normalcy. The impact of Sebi’s action in just 10 companies underscores the point that both stock exchanges and the regulator could easily have prevented rampant manipulation in nearly 1,000 scrips that soared between 100 to 6,000 per cent if they had only acted faster.
Although penny stock operators and investors are ready to dump scrips that fetched them easy profits, there is still a powerful segment that is unwilling to get out of the dubious business. Last Friday morning, even as Sebi’s action and the nation-wide raids on crooked government officials had started to panic the market, their disinformation machine was working overtime. Investors received messages from a few top brokerage firms telling them not to worry and advising them to hold on to their investments because the market would go up sharply next week. Their story was that 200 companies listed on the BSE would be transferred back from the trade-to-trade segment (which is like a delivery v/s payment segment) to the regular B2 section. This was probably based on the fact that trading restrictions, which are reviewed every quarter, were due for a re-look in the first week of October. Top Sebi officials tell us that there will be no review next week. The regulator has told the BSE and the National Stock Exchange (NSE) to continue with existing trading restrictions in view of the steep rise in stock prices and allegations of rampant manipulation in hundreds of stocks. Those investors who believed the fake rumours and held on to their shares may be in for a surprise. Action at last after having ignored all negative reports for months or years, the BSE and the NSE have finally decided to suspend trading in two notorious stocks — SBI Home Finance (whose business license has been suspended months ago) and DSQ Software (whose promoter has a Red Corner Interpol alert issued against him, the Board of Directors has resigned and much of its business has been sold). Curiously, both stock exchanges write to companies everyday to check the veracity of media reports.
But they only seem to check on news about expansion, diversification, acquisitions and fund raising and ignore reports about dubious dealings and insider trading in their selective verification process. In fact, DSQ Software ought to have attracted greater attention as it was extensively exposed by the Joint Parliamentary Committee that investigated the Scam of 2000. Intriguingly, the NSE suddenly reports ‘‘non-compliance with various provisions of the listing agreement/secretarial audit report’’ and found the corporate response unsatisfactory. Sebi sources, however, say this belated action by exchanges has only been initiated at the regulator’s insistence.
These days brokers and investors track Rakesh Jhunjhunwala’s investments with as much enthusiasm as their own portfolio of investments. So when he chose to address a seminar on penny stocks last week, investors looked forward to some clues to how Jhunjhuwala made his investment decisions. The new guru, who is hugely bullish (‘‘we are going to see a bull market like we have never seen before’’) about the market didn’t disappoint. In a speech full of homilies and quotations, he told investors that ‘‘the worst of investments are made at the best of times’’ and that ‘‘bull markets are always the time for the worst excesses’’. Jhunjhunwala says, ‘‘You can’t make money on the market by being ordinary.’’ He asks investors to make a list of potential investments and investigate them ‘‘like a detective or a hound’’. But when someone asked him what how he chose his investments, the answer was a stunning contradiction. ‘‘I don’t do any deep research; I decide an investment in five minutes based on a business model.’’ Huh? But then, he also believes that ‘‘investment is more an act of wisdom than research’’. While talking about his Jhunjhunwala’s investments, one of his latest acquisitions, Vadilal Industries was to be suspended by the BSE from October 4 for non-compliance with the listing agreement. However, the company rushed to make amends and the suspension has been cancelled. [email protected]