Running out of tricks to play the speculators game

The market gurus have now found various pegs to hang their predictions. First it was the Nasdaq. I remember a broker answering the mandatory television interviewer’s question of "so how do you see prices moving tomorrow?" with a snappy "ask me at 2.45 am when the Nasdaq closes and I will tell you".

On cue, the Sensex ditched the Nasdaq and began to chart its own course. When the equally temperamental Nasdaq soared, the Sensex crashed. The National Council for Applied Economic Research (NCAER) predicted an increase in business confidence during the last quarter, but it did nothing to improve investor confidence in stock prices. The experts all agreed that valuations in new economy stocks were out of line with intrinsic values but the market disagreed with the level at which they saw value in the stocks again. Finally, some experts were found blaming factors like "excessive media focus" on the drought for the continuous erosion in share values.

Then analysts began to clutch at remote straws to predict markets. The interest rate hike by the US Federal Reserve, the recomposition of the MSCI Index and so on. The Sensex was indifferent to both issues and only dropped 41 points after the MSCI index included the speculative favourites in the index composition.

Apparently, institutional buying alone does not move prices without the day traders. And they are badly hurt. They include housewives who learnt at Rs 10,000 weekend courses, students and traders who pulled out money from theirregular businesses to invest in the market. The latter group has lost twice over – in the stock market and their regular business.

Retail investment, though foolish was fairly large. Most investors had created neat pyramids through bank borrowings to maximise their funds. They would use their savings/real money to buy a bunch of `momentum’ scrips (usually in the volatile IT and entertainment sectors), take delivery of these, pledge them with banks borrow further to buy more scrips, pledge these again and borrow even more. Some investors avoided the upper ceiling imposed by the better banks on borrowing against shares by distributing their borrowing over several banks through shares held in the names of various family members.

When prices were moving up at a clip of eight per cent a day, there seemed no easier way of making vast sums of money. The Finance Minister told parliament last week that the amount borrowed against the pledge of shares is approximately Rs 5,611 crore. This is apparently based on a study in respect of 35 banks, which the Finance Minister says accounts for 70 per cent of total bank finance against shares. Market sources believe that the real number has to be at least twice as high. They point out that the bigger banks — foreign, nationalised and private — may have been more circumspect, but cooperative banks and smaller private banks have been used for the second round of borrowing and their numbers may not have been added up.

Also, banks were doing more than providing margin guarantee to brokers and lending against shares. Market operators tell me of specific `trusts’ and instruments which were created to fund market operations. None of these tricks have been disclosed to the RBI. I have some specific instances of such funding, but in the absence of documentary evidence they are difficult to prove. These trusts are usually structured for promoters to borrow against their shares at higher rates by repaying old borrowings. A big foreign finance company and at least two private banks have been doing 1992-style ready-forward deals with punters at fixed rates of return. The big drop in prices has caught them off guard; the second leg of the transaction has become complicated and there are fears of default because prices have fallen 50 per cent or more after the first leg. Chances are that these deals will be known only if there is a default.

A well-known gold expert says that his associates in the textile industry alone have lost Rs 40 crore of real money, pulled out of their regular businesses. In the biggest and probably fastest bull run ever, many individual speculators have ended up with real losses and no gains. Only a few ignored the experts and encashed early profits.

These individual investors who have been beaten by the ICE stocks are unlikely to come back for a few months. It now appears that neither the largeinstitutional players, nor individual market operators can move prices on their own without the retail players/speculators. Their frenzied buying gives currency to rumors and makes it easy to manipulate stocks to the upper or lower circuit filters.

Last week, the Finance Minister and SEBI finally announced a series of supervisory measures – but the horse, as usual, has already bolted. These decisions included:

* A technical committee of RBI and SEBI officials to study the role of banks in the capital market.

* Tightening of norms for Initial Public Offering norms by SEBI.

* SEBI’s promise to investigate price manipulation of circuit filter limits.

These measures are unlikely to bring back investors who have little confidence in the supervisory system. But greed always lures punters after they have had sufficient time to forget their losses, settle dues and lick their wounds. Until then, the regulators will tinker around trying to make markets safer for investors and lure them back.

Author’s email: suchetadalal@yahoo.com

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