February 13, 2000

It’s party time, till ICE breaks the sensex

The sensex has crossed the 6000 mark in under four months and the markets seem to have hit the danger zone. The 620-point surge in a mere five trading sessions is dangerous because it is restricted to a small number of scrips which are being ruthlessly rigged up by operators. On Friday (February 11) it was Infosys which again made the sensex dance on rumors that it was on the verge of acquiring Cambridge Technologies of the US. In fact, the Cambridge Technologies rumor has been in the market for the last few days, but on Friday operators had gone a step further and were saying that Infosys is set to gobble up not one, but three US companies at one go. Punters simply ignored Chairman N.R.Narayana Murthy’s statement that ‘there are no new corporate developments outside the company’s normal business activities that may impact trading’, as mere wordplay and the scrip surged at the NASDAQ as well.

The danger is that Infosys and Wipro are being ramped up by operators only to justify the ramping of other not-so-blue-chip IT companies or downright shady scrips. In the meanwhile, all the signs of a disaster phase are evident. There are stories of small time punters liquidating their entire portfolio to invest in Infosys and software stocks.

Large mutual funds which are dumping commodity scrips to pick up the ICE (IT, Communications and Entertainment) shares. Similarly investors are pouring their savings in Mutual Funds as though fund managers have the magic formula to protect them in the event of a collapse. The Funds are pouring money into high priced high-risk scrips in IT stock. One Fund with a 100 per cent return, has nine out of its top ten investments in IT stock. There are other danger signals flashing from the news pages everyday. For instance, when the Sensex zoomed 144 points on Friday, the market overall was in the decline mode. On the NSE, only 315 shares moved up, while a hefty 625 declined and 50 remained unchanged. On the BSE, 843 shares moved up while a bigger 1163 declined and the bulk of 4208 shares remained unchanged. In the A group only 32 moved up while a hefty 103 declined.

Significantly, the specified segment (54 up and 95 down) and the B1 group (322 up and 471 down) had more declines than advances, but the picture was the reversed in the not so good or less liquid scrips of the B2 segment. Here there were more upward movements (612) than declines (528). An indicator perhaps, that several shady scrips which had found few takers in the last four years were back in play.

At least 12 truly shady scrips ramped up during the pre-1992 run and the 1993-96 madness figured in this list on Friday, a clear indicator that floating stock of these companies is being mopped up at low levels by operators in the process of working at a big price ramping operation. Such is the euphoria that nobody wants to analyse danger signals. A popular television programme had a rare investment expert saying that the ‘so called fund manager-broker-politician’ nexus is getting out of hand. Amazingly instead of drawing the analyst into a discussion on the issue, the anchor smoothly cut him off with a sweet thank you.

Let’s go on to what SEBI is doing in these euphoric times. Is it probing stock trends for danger signals and cautioning investors? It is; but its actions continue to look superficial and totally inadequate. SEBI has simply asked stock exchanges to impose cash margins on the top 25 brokers and reduce exposures. It has also written to stock exchanges asking them to be vigilant. None of this is of any use given that SEBI continues to fight shy of stringent and deterrent punishment. It is not enough for SEBI to impose margins, it should conduct a sample check among some of the notorious brokers to check if margins are actually being collected. The outstanding position on four major exchanges is at a dangerous Rs 19,000 crores and we know of at least one large broker with nation-wide operations who rarely troubles his clients to pay margins. Shouldn’t SEBI be sending out its own teams to check facts? One also expects SEBI to immediately call for details of who is buying large volumes of low priced stocks in the most disreputable companies.

Why should one suspect the veracity of stock exchanges’ margin collections? Because I discovered only this week that even the simple information mandated in Client Registration Forms is not filled up accurately and comprehensively. My broker friend says ‘nobody fills in details such as their Income Tax PAN numbers or banks accounts’. Typical of the Indian regulatory environment, the incomplete forms are simply winked at rather than corrected. Why should one believe that margin money which pinches brokers is being properly calculated and collected? We also need SEBI to go behind FII statistics to check whether the so-called FII investment is genuine institutional investment or hot money coming into the Indian markets. These actions may not prevent a fall or even a big correction, but they would make people vigilant and cool the insane rally.

 

Updated weekly.

The author's e-mail address is: suchetadalal@yahoo.com

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