When the bears chased Harshad8217;s bulls

It8217;s perhaps the country8217;s most well known historical fact that he was theman responsible for the unprecedented boom early this year. Equally wellknown is the fact that his involvement in the securities scam led to thestunning crash in share prices.

Just a fortnight ago, investors had heaved a sign of relief when the indicesstarted appreciating despite Harshad8217;s arrest and other steps which hadearlier been anticipated as dampeners for the market. However, share pricesmoved up positively with the impression that perhaps the Harshad Mehtafactor had ceased to affect the stock markets.

But that happiness has remained shortlived. The market slumped this week asa result of the impasse over the transfer of disputed shares belonging toHarshad Mehta.

The trouble was triggered off when the Unit Trust of India refused to takedelivery of the shares sold by Harshad Mehta. The value of these sharesbeing a whopping Rs 500 crore, the issue placed the market on the verge of afinancial crisis. Things got complicated further when brokers in Delhirefused to take delivery of Bhupen Dalal8217;s shares.

The panic reflected in the investors8217; mood as the DSE index closed the weekover 50 points lower than the last week8217;s close, showing a net fall of 12per cent8230;
8212; An Indian Express8217; report by Vishal BakshiThe decline and fall of share prices in the last of April, after their rise,rise and rise in the first three months of 1992, could send the stockmarkets into a tailspin. The unnerving prospect has led the Bombay StockExchange BSE authorities to reduce daily margins on purchases, and hikethose on sales, in a bid to smoothen the down-slide, in vain though. Shareprices on Dalal Street, as measures by the BSE Sensex, slipped by 222 pointson Wednesday on top of Tuesday8217;s record 570 points drop. The absence ofbuyers after such cut-back suggests that the market expects a steepercorrection. One reason could be the belief that private placements were madeby the leading bull in distress at 30 to 40 per cent below top prices duringthe period of the stock exchange strike. The best that the authorities can,therefore, do is to allow the markets to ride out such expectations and letprices find their level. That will bring in buyers, who have turnedover-cautious, notably the institutional investors flush with funds.

Arguably, the best is not good enough but little can be done about this. Therunaway boom, reflected in the Sensex8217;s leap into the stratosphere, wasfuelled by adulterated liquidity. Money was created8217; by the financialsystem with massive issues of Banker8217;s Receipts BRs in support offictitious transactions in government securities. The surfeit of createdmoney was used to absorb profit-taking and push up share prices, thusshort-circuiting the market8217;s normal corrective process of steadying theirrise.

Following the exposure of the scam, good money cannot but keep out of theshare markets till the speculative positions built with bad money areliquidated. Aberration can be made to make way for normalcy only if themarkets are allowed to float freely. An interventionist strategy can hardlydecide on the Sensex level at which normal buy-sell activity will beresumed. Besides, there is too much fizz in the share markets, in the faceof the decline in the growth of industrial production in 1991-92 and thecontinuing uncertainties associated with the foreign exchange crunch, theexit policy, etc. The markets must be left free to settle down.

This may, appear a drastic prescription, but the market failure whichprodded judgments to flout fundamentals, is a serious disease which has allbut destroyed investor confidence. The stock exchange authorities were heldprisoners by speculators8230;.
8212; Excerpted from an Indian Express8217; editorial dated May 1,1992