Is there a mini-bubble in mid-cap and low price stocks that have rallied significantly over the last few weeks?
Nothing seems to keep stock prices down these days. Not the worry over international oil prices nor soaring inflation, or even the fact that the Chinese market (whose economy is often bracketed with ours these days) is at a five-year low.
Instead, foreign institutional investors (FIIs) have continued to generate large volumes and to bring in a steady inflow of dollars that is driving prices up. Meanwhile, Indian investors seem to be lapping up every corporate offering from shady scrips, to better quality mid-cap stocks and even high-risk initial public offerings (IPOs).
What is the reason for such bullishness? Is there a mini-bubble developing in some mid-cap and low priced stocks that have rallied significantly over the last few weeks? And what is behind the large block deals that are being reported on the Bombay Stock Exchange (BSE) everyday? For instance, on Friday (September 10) alone, the BSE reported big deals in KEC International, Bank of Rajasthan, Colgate, RK Forgings, Sterling Biotech, Jindal Stainless and Atul Ltd. The big question is what are the bourses doing when companies brazenly ramp up prices?
Only recently, the Kolar Biotech stock was astonishingly manipulated when its Re 1 face value scrip traded up from a low of Rs 0.37 paise to a high of over Rs 2. The company openly advertised its bonus (2:1) and claimed to be planning a global depository issue at a premium of three times the traded price. Significantly, it was untraceable at the address given in its advertisements and its telephones at another address at a Mumbai suburb went unanswered. Still, trading volumes had touched several lakh shares per day. The price collapsed when the stock exchange authorities finally pushed the scrip to the trade-for-trade segment, but it still gave operators enough time to manipulate prices and double or quadruple their money in just a couple of weeks.
Is it impossible for bourses to catch manipulation at the very beginning? Certainly not. But stock exchanges have to be willing to keep tabs on diverse sources of information to catch early signs of price manoeuvring. The newsletters and tips by some leading brokerage firms through SMS are an important trigger for day-traders to generate frothy volumes. These are difficult for a regulator to catch.
But much of the stock market action these days is also generated through Internet message boards. Message boards are a curious new phenomenon that needs to be tracked by regulators. Sources say that, on the one hand, they are a congregation of small but frequent traders, who usually trade through Internet trading platforms (and hence desperately need support and assurance about their stock picks from a host of unknown friends on message boards); on the other hand, they are a fertile ground for tipsters and price manipulators who working steadily at building confidence and to talk up scrips through multiple identities.
• FII inflows continue to generate large volumes driving up prices
• Indian investors too are lapping up everything from shady scrips to IPOs
• What are the bourses doing when companies brazenly ramp up prices?
If one were to track momentum stocks that are in the limelight, it is uncanny how many people on the Board seem to agree on a specific target price that the scrip will peak before a reaction.
Those who manipulate investor opinion usually back their tips with homilies against reckless trading and urge traders to set profit targets and stop-losses. They even offer free advice, analyse portfolios while ostensibly confessing their own trading positions to complete strangers. Here are some recent examples:
• A steel scrip has been steadily chatted up from Rs 135. Its price is pushed on the claim that foreign investors such as the Citigroup, Goldman Sachs and Merrill Lynch were buying the stock. Yet, it struggled to gain even 10 points. Were the boards providing a cover for exiting investors? If the price were to collapse, there would be a volley of abuse from losers and they would move on to the next scrip. Although investors on the message boards cannot always check the veracity of tips that are posted, regulators can certainly be alerted to mischief by cross-checking these postings.
• Essar Oil has remained firmly among the top three companies with the highest number of investor complaints for several years. Yet, the scrip gets steadily touted across boards as a winner and the scrip quotes at Rs 27.
• Alok Industries, a much discussed message board scrip, has been moving up steadily; but it is uncanny how many people are willing to bet on the scrip touching Rs 85. Will it? Only time will tell.
• Investors on CNBC’s message board tout Mercator Lines as grossly underpriced at Rs 399 and predict it will touch Rs 1,000 over a year. Investors are urged to keep loading up the stock if there is a downward reaction. Doesn’t that provide a great exit to those who want to dump the scrip?
• Modern Steel is another scrip that has been hitting the upper circuit on the Bombay Stock Exchange everyday almost since August. Much of the manipulation of low priced scrips occurs on the BSE, especially in those scrips that are also popular on regional stock exchanges.
• Morepen Laboratories is notorious for not paying fixed deposit holders, but the trading volume has been as high as 24 lakh shares and 26 lakh shares on September 8 and 9. The price is just Rs 7. IFB Industries, another low price stock has had only buyers in the last week. The price has doubled to over Rs 6. Core Healthcare, which has been in the dumps also shows astonishing volumes and has doubled.
What is astonishing about these low priced scrips is that trading volumes are often higher than frontline stocks. Clearly, they are the only playing field for gamblers and day traders and it may be easy to simply ignore the action and leave dabblers in such scrips to their fate. But unless checked, this Z-category manipulation that is mainly rampant on the BSE will slowly spread to other, better quality stocks. How long will it then take to create another crisis?