Cheques & Balances

Thursday, August 26: L K Advani is alive and well; a few casual inquiries reveal that there is no raid on Ketan Parekh nor would it have disastrous implications on trading; as for the non-appearance of the story in The Indian Express, that is easily fixed too. Another story is simply leaked tosay how the said journalist has been “fixed” to ensure that she does not write the story. Prices shoot up and the BSE sensex touches an all-time high, as operators as well as retail investors rush back into the market.

The result: In less than 24 hours, a well orchestrated operation by a powerful group of operators demonstrated their muscle by inducing panic and engineering the collapse of prices; they also made some quick money in the process.

That such an utterly simple manoeuvre, can shake up the capital market so dramatically only points to one fact – that market is overbought, prices of too many scrips are grossly rigged up and the situation is dangerously volatile. It also shows that the cosy arrangement between one large institution and a broker which provides him with an exit route is common enough knowledge to trigger off a panic if it is exposed.

Making money seems to have been a less important consideration in Wednesday’s drama. The collapse in prices was to send out certain signals and itdid. Market sources say that politicians who have been actively interested in the market and using their clout to force share purchases by institutions, were pressed into action to cool things off. The message, through fear or favour, was to ensure that nothing destabilised the market until elections are over. But the regulator cannot afford to relax; the easy manipulation of prices remains dangerous.

The Securities and Exchange Board of India (SEBI), however, is completely focussed on margin collection by the stock exchanges. Margins do not account for the large scale unofficial badla (carry-forward) financing and its impact on trading. Gross numbers also provide no indication about specific manipulation of shares, which can only revealed by simultaneous inspection of brokers and their large institutional clients.

This is why a dozen odd industrialists are big market operators having put their own holdings “into play” by borrowing against it in the unofficial market and using the money to pay marginsfor their punting on the official stock exchanges. The operations are carefully synchronised by a big market operator who keeps prices up.

The funding is not necessarily from private sources. A multinational finance company has provided a Rs 60 crore bridge loan to the family which controls a popular pharmaceutical company in order to restructure its stock holdings. The money has apparently been used to rig up the share price. Access to such funds has allowed even medium sized industrialists to build up market positions running into several hundred crores of rupees each. This creates a vested interest in keeping the prices high until exits can be found through institutional purchases.

For a long time now, brokers dealing with Unit Trust of India (UTI) talk of specific deals with a select few brokers as providing the exit route for such operations. This may or may not be true, but the stories gain currency because nobody is checking.

When questioned, top SEBI sources pleaded complete helplessness.Amazing as it may seem, the Deepak Parekh committee report and the Rs 4,800 crore bailout has not yet brought UTI under the supervision of the market regulator. Thus, even when the market was rife with speculation about political pressure to buy certain scrips and questionable deals, SEBI refused to conduct a quick inspection and clear the air.

However, the big manipulation last week did lead to two other initiatives by the regulator. Firstly, it forced the Bombay Stock Exchange (BSE) to throw out 10 scrips, which the exchange had been trying to induct into the specified list. Its investigation into the selection of scrips demonstrates that the so-called index committee had dispensed with several basic and well laid down rules for selection of specified scrips and the selection procedure.

While SEBI has done well to force the BSE to drop 10 scrips, it needs to do more to improve confidence in the exchange. Its action still does not answer why the so called “index committee” gave established rules a goby and it still does not explain why a brand new executive director rubber stamped decisions which were pushed by a broker President and sanctified by his chosen committee.

It is reliably learnt that SEBI’s investigation has opened quite a can of worms. For instance, between the G S Patel committee on badla and the Jayant Varma committee, several precautions suggested by Patel have been abandoned. One particular one pertains to the impounding of 25 per cent of the profits while fixing carry-over margins. It is now being argued that Varma’s recommendations override the Patel committee’s safety measures, when it was clear that the Varma committee only modified certain aspects of the Patel committee recommendations.

Instead of investigating why well laid down rules pertaining to specified scrips, carry-forward trading and the responsibility of stock exchanges not understood or followed by the exchange, SEBI is now helping the BSE gloss it over by ordering a “comprehensive review” of the criteria “in thelight of new developments”. It may be a better idea, from the capital market point of view if SEBI orders some introspection into why its disciplinary actions, its various committee and its frequent change in rules do not have a strong enough deterrent impact on market intermediaries. The answer probably lies in the seemingly reluctant little driblets of disciplinary action that it releases against those involved in the June payment crises.

This time too, the volatility in the market, led it to announce action against three inconsequential brokers allegedly connected to Harshad Mehta – the main action against companies who helped rig their shares and bail out brokers, continues to remain in limbo.

Author’s e-mail: suchetadalal@yahoo.com