The regulators continue to miss the signals

As for the flow of funds into the market, there are several pointers that blue-chip finance companies such as GE Capital and others have found ways to fund promoters against the pledge of their equity. The funding is structured into attractive instruments which are offloaded to other banks and institutions. As against the one specific example of GE Capital funding promoters that I know about, there may be scores of others which are unquantified. National Stock Exchange Managing Director R H Patil has also talked about the diversion of corporate sector money to the stock market. This probably calls for an investigation by the Department of Company Affairs into high-profile companies whose stocks are unjustifiably high. Can a middle-level committee with ill-defined powers be able to trace the shenanigans of brokers and fund managers acting in tandem?

SEBI’s supervision is focussed on margins and these too do not have any say over FIIs and institutions. At the same time, SEBI has opened the doors for speculative money to enter the market by allowing individuals to come in through the Foreign Institutional Investor (FII) route. In fact, a market insider says that mutual funds have been flouting the 10 per cent exposure norm for individual scrips with impunity without attracting SEBI’s attention or punishment.

Another area that SEBI has steadfastly refused to touch is the media. Advice, tips and baseless corporate reports are recklessly aired in the print and visual media. And investors lap it up.

In the Mumbai suburbs, there are weekend classes which teach housewives and others the elements of stock market investment, day-trading and rolling over positions from one exchange to another. These freshly graduated experts are plonking down their own savings in dubious companies and are also offering hot tips to less knowledge colleagues.

As for the companies themselves, here are some snapshots. A reader has written about this Chandigarh-based company whose Managing Director’s Mercedes was picked up by his banker because he couldn’t pay his instalments. The stock is shooting up and shows a 52 week movement from Rs 28 to Rs 773.

A whole bunch of telecom companies discredited for their Sukh Ram connections are booming again. A reader writes in about a software company’s innovative way of silver-lining performance. The company has a Rs 20 crore deposit with Bank `O’, the bank in turn has lent an equal amount in another company close to the group and those funds are routed to show a higher turnover in the software company and also to play the market. At the same time it has borrowed Rs 10 crore from Bank `C’. Nobody checks or questions how a company which has funds for a Rs 20 crore fixed deposit is borrowing Rs 10 crore from another bank. Its share price is over Rs 1400 and it is also planning an ADR issue. Aren’t both banks guilty of helping fuel funds into the stock market? Will the RBI be able to conduct such micro investigations, or will the inevitable losses add to the already huge pool of over Rs 65,000 crore of bank NPAs?

Strangely enough, the frenzy this time is not restricted to India. It is exactly the same in the US. In a book titled The Internet Bubble

, the authors Anthony B Perkins and Michael C Perkins, write about how the US rally is fuelled by individual investors, or what they call dumb money. They warn against the tricks of cynical venture capitalists, investment bankers and institutions who have been whipping up the frenzy for internet stocks. They say that these institutional investors get out on listing and leave what they call `dumb’ money holding the shares. They also speak of `bubble’ portfolios which are stashed with IT companies. The Indian stock market situation almost exactly replicates that in the US, except for the ability of our retail investors to withstand the impact of a big meltdown. An additional dimension is the number of political heavy-weights who are completely involved in aiding market manipulation by fund managers and big brokers.

Some savvy investors and fund managers, certain that the current boom will end in a crash, are quietly transferring their investments to foreign mutual funds. Their logic: if the market crashes three days in a row they will quickly fill up redemption slips. The funds may not have exit routes, but individual investors who act quickly enough can make a getaway.

— Author’s email: suchetadalal@yahoo.com