Cheques and balances by Sucheta Dalal

Different Strokes by Sucheta Dalal

May 28, 2000

Stock brokers in an exit mood, seek more funds

The Bombay Stock Exchange Sensitive Index (Sensex) closed 85 points higher last Friday, but most market operators remain deeply worried about stock prices. Friday’s Sensex level was mainly because of renewed buoyancy in Hindustan Lever’s share price, but high-priced infotech communications and entertainment (ICE) stocks continue to fall. Market operators are not only worried about the implications of the huge exposures to these stocks of large mutual funds, but are particularly worried about the position of the big bull operators who have been credited with leading the ICE stock rally.

Of particular interest are a few exceptionally large deals struck over the last few days which have been reported in the depository segment. Among these is a Rs 90 crore deal (Rs 89.65 crore to be precise) deal in Himachal Futuristic for 11,00,001 shares at around Rs 800 per share. It is reliably learnt that the deal struck on Thursday was between a US-based foreign institutional investor (FII) as buyer and the shares were sold by a firm belonging to a big bull operator. Friday saw two more deals in the same genre being reported in the demat segment. The credit this time for striking it goes to another FII and again with firms belonging to the same broker. One deal was for the sale of 3.5 lakh shares of Zee at a price of around Rs 414; another was the sale of 4 lakh shares of HFCL at Rs 757 or so.

Why are these deals a source of worry? Mainly due to the suspicion that they are a ruse to provide funding to a distressed broker who holds large quantities of the stock. Though the deals are put through the depository segment, they are clearly direct transactions routed through the trading system. The give-away is that 11,001 shares were entered into the system instead of 11 lakhs. It is to ensure that though the deals are synchronised and placed on the trading system on an all-or-none basis, the odd number at the end is a safety check to ensure that there is no foul up with somebody else placing a better buy order.

Brokers in the know say that such deals are usually ready-forward transactions (or buy-back deals) and not real purchases. In the present bull market, foreign finance companies, FIIs and sometimes mutual funds have been doing these deals with brokers. When prices were moving up rapidly, they were often a risk free way of speculating since brokers never failed on the ‘forward’ leg of the transaction. These days it is reportedly used to fund brokers. Those in the know say that though such deals are struck at market prices, FIIs usually extract another hefty chunk of shares as a sort of safety margin. The additional shares, which are all in the demat mode, are placed with the FII along with a sale authorisation as a sort of margin payment. If the broker is unable to complete the forward leg of the transaction, the FII simply dumps all the shares. Brokers openly bandy phrases such as “custodial guarantees” in connection with these deals, but it is unclear how they work.

Another curious deal that is openly being discussed among the custodial staff of a certain bank is the acquisition of 2% of Zee shares by Goldman Sachs at Rs 1000. These circles say that while the FII on the one hand acquired the large chunk of shares, it has also been a steady seller of the scrip at as low as the Rs 400 plus range at which it is trading these days. The discussion and panic were triggered by recollections of the bank’s inglorious record during the securities scam of 1992 which led to the sacking of several employees. Another large US finance company is known among market circles for having helped operators speculate in a dozen schemes through ready-forward deals or specially structured instruments for promoters funding. The money found its way to the market, while the finance company denied knowledge of what it was used for. Yet another US bank’s private equity fund has not only been buying inflated software stock, but regularly leaks news reports to help push up prices. In that case, the fund manager of the bank as well as staff of the broker’s office have individually profited through insider dealings. The shares were ultimately placed with the fund at the end of the ramping operation and after several people had booked profits.

The big players in the stock market know about all these deals. They are also aware that ICE has run out of steam and the party is over. Even as they try to talk the market up by predicting a turnaround, they continue to find exits from the ICE scrips. Often the exit is provided by public sector mutual funds who have some amazingly bad scrips in their portfolios. At least funds like UTI have an excuse. If it is stuck again, it could easily blame the Deepak Parekh committee which had specifically and unnecessarily recommended that UTI ought to invest in pharma and software stocks.

Even as the regulator shows no inclination to investigate specific deals, the market will be hit by the repercussions of the news about Satyam Computers. The investment website, Indiainfoline has reported that the Satyam management allotted 800,000 shares at par to C Srinivasa Raju, a director and relative of the main promoter during a merger of three group companies two years ago. At a market price of Rs 1700 or so, this translates to a benefit of over Rs 500 crore to the director. The company has apparently issued a wishy-washy reaction saying that it may have overlooked certain “important legal requirements”, but investors on Friday were in no mood to forgive it and the price dropped 12 per cent to the lower circuit limit. Market sources expect worse to follow.

Sources in the computer business allege that it is time to investigate several computer companies to check the veracity of their export claims. Some of them are guilty of logging bogus contracts in order to help ramp up their share prices. The question is: who will conduct these investigations? What is needed in several of these cases is a joint investigation by the Securities and Exchange Board of India (SEBI) and the Department of Company Affairs (DCA). In practice though, each pins responsibility on the other, and no investigation really takes place. In the meanwhile, the market remains volatile and still in an “exit mood”.