The Vanishing Fortune

How can a staggering Rs 40,000 crore vanish into thin air? It was not as if dacoits had descended on Dalal Street and decamped with Rs 40,000 crore in gunny bags! Shares of companies are bought and sold on the bourses. Their prices rise and fall depending on the market sentiment, company performance and speculative pressures. Invariably in a share transaction one party gains and another loses.

Theoretically, the stock market should be a 8220;zero sum game8221;. The stockmarket as a whole should neither be a gainer nor a loser at the end of the day. The gains made by some participants in transactions should offset the losses of others. How can the bourse as a whole lose a whopping Rs 40,000 crore in a day?

What happened was this. There is a certain price at which transactions take place on a company8217;s share in the stock market each day. Take the quoted price at which each company8217;s share changed hands in the stock market on that fateful day. Reckon the total volume of shares traded at that quoted price. Repeat the process for every share listed and traded. Compare the total market valuation of all the shares on that day with that of the previous day. You will see a precipitous fall of Rs 40,000 crore. The perception of the market value of all shares listed in the stock exchanges crashed by that figure. It was a demonstration of investor psychology.A fundamental change has taken place in our stock markets over the last eight years. Over 40 foreign institutional investorsFIIs have set up shop in India. Each FII is playing around in the Indian stock market with a corpus fund ranging between 50-100 million. The FIIs together are operating the Indian stock markets with a total fund of over Rs 10,000 crore. When the President dissolved Lok Sabha, the markets again fell. FIIs took advantage of the bearish sentiment and mopped up shares worth close to Rs 1,000 crore.

The relative worth of the money that FIIs are playing around with, as compared to the total worth of transactions in the Indian stock market, is not critical. What is important is that here is a body of investors with ready access to global databases and who are not inspired by a patriotic sentiment. They have the option to invest their money in Mumbai or Manila. The consideration governing them is the prospect of future earnings.

What is necessary to inspire their confidence is the perceived soundness of systems of financial management, reinforced by the transparency of corporate functioning and data. Theywant to know how reliable available financial data about a company are. They would like to be reassured about the accounting principles used by a company whose shares seem attractive.Clearly, perceived adherence to the norms of corporate governance is of the essence for FIIs.

On FDI, clarity about the direction of government policy over the next five to ten years is sorely needed. Every foreign direct investor works on the basis of meticulously worked out plans. He will need to know his prospective returns both in the worst and best cases. The best- and worst-case scenarios can be mapped only if the broad parameters of government policy are clear for the next decade. MNCs cannot take violent policy swings in their stride.

The author is a freelance writer