Supercilious as it may sound, it is probably time to either scrap or substantially modify the Bombay Stock Exchange (BSE) sensex. After all, what exactly is it that the sensex does? Essentially, it does two things. One, it is a barometer of the market sentiments or confidence levels. The second function is more of a derived one. Given the fact that it measures confidence levels in the secondary market, it gives some kind of indication as to whether it will be possible for companies to raise money from the primary capital market. Frankly, the sensex is not fulfilling any of its two functions at present. It's true that the composition of the sensex was revised last year to include more stocks of finance sector companies (banks and financial institutions) and make it more representative. It probably has got a lot more representative, but it still doesn't tell us what really is going on in the stock markets in the country. So when the sensex shot up the day that the budget was announced, it didn't mean that all, or anywhere near the majority, of the stocks had appreciated. Similarly, when it fell by over 300 points the day Sitaram Kesri withdrew support, it didn't mean that the values of most stocks plunged. It just meant that the values of the top-notch stocks rose and fell on those days. In April, for instance, 74 per cent of the trading on the BSE was accounted for by just three scripsSBI, Reliance and ITC. The others, in the B1 and B2 categories, continued to languish, neither rising nor falling dramatically. That, you will say, is obvious. Sure it is. Only point is that what happens to the sensex has little or no correlation with what happens with other stocks. That, you will agree, is serious. Let's figure out how serious the problem of lack of representativeness is. If you take the CMIE share price index which is weighted by the market capitalisation of the shares (such weighting, finally, is what the sensex really boils down to in a fundamental sense), you'll find that in April, the index went up by 11 per cent. Point is, where was this hike concentrated? While the top ten per cent of stocks saw their value rise by 12 per cent in that month, the next decile saw their values rise by a mere 2.5 per cent. The bottom ten per cent of stocks, in fact, saw values fall by over 5 per cent! For the year as a whole, the picture was similar. While the 12-months ending April saw the CMIE index fall by 14.2 per cent, the fall was really concentrated in the stocks at the lower end of the spectrum. The fall in value for those in the last decile was 41 per cent, 51 per cent for the decile just above this in fact for all companies barring those in the top ten per cent, the fall was in the range of 35 per cent to 55 per cent. What happens if you decide not to weight the index by the market capitalisation? Well, in April you get an increase in value of a mere 1.1 per centremember, when it was weighted by the market cap, the increase was a stupendous 11 per cent. The unrepresentative nature of the BSE sensex wouldn't really matter except for the fact that all of us have been conditioned to believe that the individual investor will come back to the primary market (and that's where companies raise money from) if the sensex crossed various "psychological" levels. So, one believed that once the sensex crossed the level of 3500, companies would find it easy to raise money. But when it did cross this level, the investor still didn't come back. We were then told that the investor would return once it touched 3700. That didn't happen either. Chances are that even if the sensex touches 4000, the investor isn't coming back to the primary markets either. Nor is there much reason for him to want to. Apart from the fact that he was badly hurt in the post Harshad Mehta depression, corporate performance continues to be poor and there is little reason to believe that it is going to improve dramatically in the near future. The recent problem of the CRB Group and how it went bustit is believed a host of other non-bank finance companies (NBFCs) are headed the same waypoints to how lax the system of monitoring still remains. Nor is the problem confined to just NBFCs like CRB. The fact that CRB has outstandings of close to Rs 100 crore from commercial banks like even the SBI shows that for all the talk, bank lending continues to be somewhat imprudent. It also remains true that several top corporates are in deep soup and are regular defaulters on loan repayments. Some indication of how serious the problem is can be gauged from the fact that the RBI has recently relaxed the provisioning norms for financial institutionsthis makes it easier for them to hide their bad debts. In a situation like this, it is clearly naive to expect the small investor to return to the market. What's worse, if the sensex continues to look healthyat levels of 3700/3800 it clearly is that it is unlikely that any serious action will be taken to remedy the problems.
