Ups and downs

While regulators and politicians do not like to be seen doing nothing, over-reactions can be damaging. Responsible media does not like to be missing out scams, but creating a psychology of paranoia can be irresponsible, too. The sharp fall in stock markets yesterday was the result of an unfortunate combination of both.

To put things in perspective, let us remember that the rise in Indian stock prices has been in the context of a rise in global markets. Of 41 big countries over the last year, 36 have witnessed returns of more than 10 per cent. The BSE Sensex and Nifty score at rank 13, with roughly 50 per cent returns. Moreover, profits of Indian companies have been rising. The price earnings ratio of Nifty is less than 16. This does not suggest manipulation of the market index. The allegations of manipulation have appeared for small stocks of unknown companies that hardly trade. They account for just 3.8 per cent of market capitalisation. And this is where the problem lies.

It is not as if the problem should not be addressed. We need to strengthen the surveillance process when it comes to obscure stocks as well. However, this must be done quietly and calmly at all times, not with the entire government machinery going public in the face of grave danger. We must remember that these are just a tiny part of the stock market and not overreact. Unfortunately, the hard-earned money of small investors who were investing in companies hoping to earn a 100 per cent rate of profit, will get lost when defunct companies whose shares they bought go bust. SEBI must improve regulation and company disclosure so that investors can be better informed and avoid such companies. It must monitor market power in such stocks and not turn the difficulties in them into difficulties for the market as a whole. The government must not start interfering in the ups or downs of the stock market. These must be left to the economy.