BSE adds to manipulation in software-led rally

MUMBAI, AUG 22: The Bombay Stock Exchange (BSE) is facing flak for including as many as 12 software scrips -- mostly illiquid with low pu...

MUMBAI, AUG 22: The Bombay Stock Exchange (BSE) is facing flak for including as many as 12 software scrips — mostly illiquid with low public holding and high promoter stake — in the fancied A group. Once carry-forward trading (badla) starts in these scrips, there is a big risk of rampant manipulation in the prices which can endanger the safety of the market.

Although badla trading in the 27 scrips upgraded by the BSE will start only on September 14, manipulators moved in the very next day of the BSE announcement last week and 18 of them hit the upper band of the circuit filter (trading was stopped after their prices exceeded the 8 per cent permissible limit). Before the reshuffle, there were only five software companies in the A group.

“The inclusion of several software scrips in the new list is questionable. The exchange seems to have considered only the market capitalisation. It has not bothered whether the scrips are easily available in the market. The poor liquidity in the such scrips will bemanipulated by speculators,” said a former chief of a leading financial institution. In fact, experts attributed such decisions for the recent bull run’ on the markets which took the Sensex above the 4,600 level once again.

The Wipro share witnesses hardly a business of 5,000 shares every day. In BFL Software, the public shareholding amounts to only 17.8 per cent of the total equity capital. “The exchange should consider various parameters like the floating stocks, size of the capital, turnover, profitability and market capitalisation and corporate governance while putting shares for badla trading,” said a fund manager with a leading foreign investment firm.

The decision of the BSE officials to include some scrips with low public holding and high promoter stake has raised several eyebrows. “It’s easy to rig up prices when floating stocks are less. The beneficiary will be the promoter… he can sell and buy depending on the situation and control the prices. Why is the BSE encouraging such practices?Excessive speculation will lead to high volatility and price rigging. This will destroy the market,” he said. This is at a time when investors are yet to regain the confidence in the market after the price rigging in Videocon, BPL and Sterlite last year.

Even as the BSE was putting more software scrips to the A group and adding to manipulation, the market regulator SEBI was sending out notices to the stock exchanges, cautioning them about the rally in software shares. “The regulator should look into the process of selection of shares for carry-forward business (A group). There should be transparency in such decisions with proper explanation. The selection of so many software shares and some other questionable scrips to the A group seems to be tailor-made to benefit speculators,” said an analyst.

The regulator has also contributed to the “software boom” by relaxing the mandatory public holding from 25 per cent to 10 per cent for initial public offers of software companies. Notwithstanding the threatof the Registrar of Companies (RoC) of not to allow companies to change their names to reflect the business of software until a substantial income is derived from software, many have already rechristened their companies to take advantage of the boom.

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Significantly, a large number of finance companies were in the forefront to change their names to reflect association with the software sector and mislead investors. While genuine companies which are in need of capital are scared to enter the new issue market, as many as 60 software issues are slated to hit the capital market in the current year.