Rally a trap to lure retail investors? (2 September 2002)
On Friday the stock markets closed the week with a spectacular two per cent gain and a smart rise in scrips that have the biggest weightage in popular stock indices. The rally defied the continuous fall in major world markets; it also ignored the depressed global economic scenario and the continued slowdown in Indian business. But knowledgeable investors are surprised and even worried about the rally instead of being enthused. Friday’s 67-point rise in the sensex is a signal that large speculators led by a discredited bull operator have become bolder.
For the last two weeks, these operators have been pushing up and down B-grade software scrips, allegedly bank-rolled by off-market funding from Kolkata financiers who are willing to try anything to recover their earlier losses. The price ramping is accompanied by carefully orchestrated news reports about expansion plans, exaggerated profit numbers and fake speculation about possible takeovers.
On Friday, the operators made their big move. They pushed up blue chip stocks, which influence stock indices to create a decisive upward momentum. Since the sensex and NSE’s nifty are markers that determine market sentiment, their rise helps lure retail investors into the market. Retail investors and day traders are key to a successful ramping operation. They help obfuscate the trail to large speculators and are invariably left holding stocks when prices fall. The irony is that even before the Joint Parliamentary Committee (JPC) completes its report on the Scam 2000, the market has come a full circle.
This time the players allegedly are: the same big market operator, a large corporate house, a foreign mutual fund which thinks aggressively bullish, sundry IT companies and one television outfit acquired by a Ketan Parekh crony. Others in the speculator loop are said to include a discredited foreign banker who is holed up in Singapore for the last decade. The modus operandi is identical to 2000. Brokers who are not part of this cabal confirm there is no sudden burst of investor enthusiasm — their own business volumes and the trading operations of their clients have remained the same. Clearly, most of the operation is being put through a small group of obscure brokers across several cities.
The cabal is also taking advantage of a unique opportunity. Most fund managers in the US markets are on a summer holiday; this means that there is no major selling from overseas. The UTI bailout is another factor as it allows the cabal to claim that UTI’s continuous selling may come to an end and provide a boost to prices. But these logical explanations for the bullishness are not very relevant. Anecdotal evidence indicates a clear ramping operation and the high trading volumes warrant a detailed examination. This brings us to role of the regulator. As usual, discerning investors blame the regulator.
This time however, I am not quite as ready to blame SEBI right away. The ramping has started just a couple of weeks ago and if investors are genuinely worried, they must make the effort to inform SEBI about specific details. SEBI too needs to start an immediate combing operation to find out how the unusually high volumes are generated. For instance on Friday, a website had worked out that 40 out of the 67 points rally was accounted for by the movement in just three stocks — Reliance, Infosys and HLL. It would be possible to deconstruct the entire trading operation and if the trail again leads to foreign institutional investors and Overseas Corporate Bodies (OCBs) it need to trace beneficial ownership. The names would probably lead to the cabal that is ramping up half a dozen IT companies. Any regular investor would be able to identify these companies for SEBI officials.
But what happens after that? When the late Harshad Mehta made a failed attempt to resurrect himself as a big operator in 1998, SEBI officials used their limited powers to meticulously reconstruct his linkages with a group of front companies (the Damayanti group) he had floated to route his price ramping operations. His collusion with three corporate groups was also elaborately documented. However, the entire effort was thrown out of the window by the Securities Appellate Tribunal (SAT), mainly because it short-sightedly refused to accept SEBI’s use of the omnibus powers under Sec 11B of the SEBI Act to punish the accused companies. Since then, it has been decided to amend the SEBI Act and give it more powers. But the Department of Company Affairs (DCA) continues to stall the move by raising mindless objections.Finally, our politicians, whose high decibel agitation and demonstrations led to the formation of a JPC have either gone to sleep or joined the speculator cabal. The JPC itself got its kicks by humiliating government officials, focussing its attention on the lending and borrowing mechanism and shooting off hundreds of inconsequential questions. But a year-and-a-half later it has not interrogated industrialists who colluded with scamsters, nor questioned the former Finance Minister. Its report is nowhere close to completion. The UTI Act has not been repealed and the guilty officials not punished, but the government is ready with a massive bailout package. Clearly, there are a lot of people who will simply stand by and watch until there is another crash—why blame the regulator alone -- Sucheta Dalal