May 07, 2000

We don't investigate anything out here

The country should be relieved at Yashwant Sinha’s declaration that he is not the “Finance Minister for the stock markets”, because it certainly looked like he was. No other FM has been so openly obsessed with market movements, so publicly irritated that trading is based on baseless rumors or shown such alacrity in squashing the first hint of “investigation” in market excesses.

Given the choice between an FM who refuses to lose sleep over market movements and one who stays awake worrying about the Sensex, the latter is still a better option, but not if his concern takes the form of celebrating irrational price increases and squelching investigation. But let us give Sinha the benefit of doubt. Getting the Finance Bill cleared without rolling back subsidies is a big achievement and a clear priority. He has also rectified omissions of his budget such as taxation of ESOPs and Venture Capital Funds as well as the tax holiday for pharmaceutical research. These were pragmatic and welcome and the two-day market rally at the end of the week reflects increased market confidence.

Now that the budget is through, Sinha better start looking at market discipline and fundamentals. His message so far has been: hey, don’t worry, we do not investigate anything out here. Why is the FM only irritated by panic sales based on irrational rumors? Why is he not equally worried when specious valuation theories are used to ramp up prices?

Every business newspaper has reported the power of a market operator in ramping up a dozen stocks; major market operators have precise details of the open nexus between company promoters and the operator and how scrips are put into play. How come an FM worried about fundamentals has not ordered an inquiry into price rigging? This writer has often informed the regulator about specific instances of foreign finance companies/banks structuring “trusts” and other instruments to fund the market operations of promoters (against the pledge of their shares). In many cases it is also possible to establish insider trading, but SEBI, which is so hostile to criticism, has rarely acted on the leads. After all, why risk a public denial of investigation by the FM himself?

In June, it will be two years since Harshad Mehta, resurfaced in the market to rig up share prices and created the infamously hushed up crash of June 1998. SEBI has still to complete disciplinary action against BPL, Videocon and Sterlite as well as Harshad Mehta and former BSE Vice President Rajendra Bhantia. The FM is silent. If Sinha ignores these glaring examples, can one expect him to study the subtler process of diluting protective regulation every time the primary or secondary market begins to boom? Let us look at just two examples. A few weeks ago, SEBI diluted Initial Public Offering (IPO) norms for media, entertainment and infotech companies allowing them to offer a mere 10 per cent of their shares to the public. The Wipro share crash is a clear example of the problems with low floating stock, but the government policy cannot be based on one example. Instead, it could study the 66 odd IPO prospectuses posted on SEBI’s website, the majority of which are for IT and dotcom businesses. It should compare the quality of projects, promoters, their background, investment bankers and banks which fund/appraise these issues with those that looted investors in the eighties and again in the IPO boom of 1993-96.

All these companies - Vitro Pharma, Dynamatic Forgings, Samrat Bicycles etc and others of the eighties and hundreds of vanishing companies of the 1990s - are available as a ready database in the bank defaulters list recently published by the All India Bank Employees Association. Now examine the dilution of rules. First, ICE companies need offer only 10 per cent equity to the public making price manipulation easier. Secondly, they can skip the three-year track-record requirement, by getting a bank appraisal combined with a 10 per cent investment by the appraising institution. A cursory look at the SEBI site raises suspicion of bank irresponsibility. Wonderfully for banks, they are accountable to SEBI and it is difficult to establish malafides. When the company siphon off money and turn into NPAs, they simply become a statistic compiled by the RBI. An academic study will help draw inferences and make reasonable assumptions for improved policy-making.

Finally, the Skumar.com issue shows that going through a smaller bourse can dilute listing requirement for major stock exchanges. The combination leaves the investors at the mercy of manipulators. Whenever investors whine about market safety, they are told to invest through Mutual Funds. Even though they have been traumatised by public sector funds’ attempts to renege on assured returns in the past, the dream run of the last year coupled with generous tax concessions have brought them flocking back. Nobody asked any questions until last week, when the ICE started to melt, and portfolios began to be analysed. So-called balanced funds were found to have invested over 60 per cent of their portfolio in IT stocks. The holdings of some shady IT scrips often accounted for over 10 (often 20 per cent) of the portfolio of balanced funds. And though Mutual Funds were supposed to be safer because of the distribution of risk, their NAV’s were falling faster than the Sensex. Unit Trust of India and SBI Magnum’s portfolios were causing serious worry but Alliance, Birla and others were not too far behind. Even after an Rs 4800 crore bail-out, Unit 64’s NAV remains a secret and open to rumours and speculation. The FM may also want to note that the attempts by UTI’s top brass to talk up the market do not build confidence but fuels nervousness.

Now look at the rule changes. In 1993, the Mutual Fund rules required that they could not hold more than five per cent of a company’s equity or have an exposure of over 10 per cent to an industry. These may have been restrictive but have been scrapped altogether. Instead Schedule VII of the Mutual Fund regulations only says that “No mutual fund scheme shall invest more than 10 per cent of its NAV in the equity shares or equity related instruments of any company”. The restriction applies only at the time of investment and not when the value zooms up. Naturally many funds are choked up with IT stocks at amazingly high prices.

SEBI has also scrapped the need for postal ballots when Mutual Funds chose to change the fundamental attributes of a scheme. Changes can now be made through a mere public notice and an exit option to investors. In other words, if you don’t like it, beat it. Only when the market is dead will investors be wooed with three-day turnaround promises and no-load Funds. As usual, investors are unaware of their implication of the sum total of little changes and there are hardly any investment advisors to caution them in time. Naturally they panic when markets fall and the warts in the system become so visible. But forget it, there will be no investigation.

Updated weekly.

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

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