February 27, 2000

Regulators continue to miss the signals

A couple of weeks ago, the High Level Committee comprising the Finance Secretary, the SEBI Chairman and the RBI Governor set up a joint committee of the RBI and SEBI to check if bank funds are being misused to fuel the equity boom. Within days after it was formed, business newspapers began to carry carefully planted reports to suggest that both regulators had fulfilled their end of the regulatory responsibility. The reports were followed up with more meetings by the RBI top brass with bankers and another round of confirmations that banks had not over-extended themselves in lending to market operators and that there was no misuse of funds. Yet, price fluctuations of the last three days suggest that there is so much money borrowed against shares or through overdraft facilities, that the slightest prospect of a reduction in the funding can lead to a mindless crash in prices. Brokers are usually the first to spot trouble and to crowd the exits leaving retail investors holding worthless paper. The Sensex reportedly dropped 187 points on Friday because even the badla financiers of Calcutta’s unofficial market had refused to fund software stocks. Yet, the regulators continue to be in denial mode and hesitate to start investigation of specific stock movements.

What are the chances that a meeting with bank chairmen will allow the RBI to figure out what is happening? A leading business paper had recently referred to a journalist’s recollections of 1992 as ‘institutional memory’. Accessing such ‘institutional’ memory may be as useful for the regulators as it is for us old-time hacks. In the first few days of the Securities Scam of 1992, bank chairmen were not only clueless about what was going on, but foreign bank heads such as Pesi Nat of Standard Chartered had actually lectured the then Governor on bank supervision. Stanchart not only was the biggest loser but had virtually handed over its treasury to broker Hiten Dalal for a guaranteed return. Even today bank chairmen are hardly in a position to know what is happening unless they investigate exposures at various important branches.

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. 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 cover 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 FII route.

Another area that SEBI has steadfastly refused to touch is the media. Advise, tips and baseless corporate reports are recklessly aired in the print and visual media. In Mumbai suburbs, there are weekend classes which teach housewives and others the elements of stockmarket 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 knowledgeable 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 a 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 1,400 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 crores of bank NPAs? 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.

Updated weekly.

The author's e-mail address is: suchetadalal@yahoo.com

Other columnists: