April 23, 2000

When the Sensex says goodbye to Nasdaq

What is probably worrying the regulator is the dip in mutual fund NAVs. Having rushed, lemming like to launch IT-specific schemes even though their valuations were ridiculously high some fund managers are now losing their nerve. Smart investors who had invested in growth and IT funds are rushing to encash the abnormally high returns of the past and funds are forced to sell in order to meet redemption demands

Last Thursday, regulators at the Securities and Exchange Board of India (SEBI) were furiously working their telephones as the top brass struggled to find ways to prevent a further crash in stock prices. The panic increased when trading opened for the day to a 200-point drop in the Bombay Stock Exchange sensitive index (Sensex). The Sensex had refused to recover along with the Nasdaq and fund managers and punters were at a loss to explain why it had developed a mind of its own.

Given the Finance Minister’s reaction to the Mauritius tax business, it was to be expected that SEBI would be in a flap. But its method of handling the perceived crisis is what is objectionable. SEBI simply resorted to the decades old formula of calling up government-owned financial institutions and funds and ‘persuading’ them to buy stock. Unit Trust of India and the insurance companies were SEBI’s targets and expected to provide an exit route to greedy punters.

This has to stop. SEBI loses no opportunity in crowing about its role in bringing about automation or trading systems, improved regulation of the capital market, dematerialisation of shares and the big increase in turnover, yet, at the first sign of trouble it looks to government-owned institutions to provide a safety net.

When the Sensex soared under the influence of irrational valuations of IT, Communications and Entertainment (ICE) scrips, SEBI chose to remain a mere spectator, except for the occasional warning. It made no attempt to investigate runaway price increases and was happy to blame it on what someone called “the globalisation of madness”. Even when newspapers openly discussed the dealings of a particular operator and his nexus with fund managers, SEBI refused to respond.

On the other hand, it was happy to relax several safety mechanisms. When investment bankers got together to persuade it to dilute Initial Public Offering (IPO) norms for ICE sectors or to exploit book building in order to extract the best price, SEBI was happy to cooperative. Every such concession was wrangled on the basis of the sneering refrain that investors are greedy and should learn to invest sensibly.

Should that not hold true when the Sensex crashes? Why is the regulator so jittery when ICE values begin to approach sensible levels? After all, investors have been adequately warned this time and every punter knows that there will be no sympathisers this time.

What is probably worrying the regulator is the dip in mutual fund net asset values (NAVs). Having rushed, lemming like to launch IT-specific schemes even though their valuations were ridiculously high some fund managers are now losing their nerve. The Tatas, Alliance, Birla, SEBI and IL&FS schemes have all seen substantial damage to their NAVs... Corporate houses and smart investors who had invested in growth and IT funds are rushing to encash the abnormally high returns of the past and funds are forced to sell in order to meet redemption demands. Naturally the Sensex parted ways with the Nasdaq.

Fund managers who became media darlings because of their colourful and on-the-record decimation of Indian corporate performances had also joined the speculators game. With exit routes blocked and NAVs dwindling they are now having to explain their investment in scrips such as Global Telesystems and Himachal Futuristic.

If the Sensex does not keep step with the Nasdaq, the punters lose their big justification for rigging up shady IT scrips. They can no longer argue that irrational valuations are the international norm and that India as a future IT superpower is no exception. It may also be that Indian investors have less of a capacity and willingness to lose money than US investors. They may keep away from the volatile market, unless FIIs who remain bullish on India bring in foreign funds. For instance, in the last few days, the Reliance group circles have been exulting the massive purchase of the scrip by the Janus Fund.

Its purchases along with those of financial institutions steadied the index towards end of trading last Thursday; but it remains to be seen if the party continues when Reliance gets out of its ‘no delivery’ period on Monday.

Curiously enough, SEBI as the market regulator chooses to remain oblivious to trading manipulations. It is even unaware of the systematic operation of a certain group. A nervous market is always the happy hunting ground for this group; its bag of tricks includes, strategic funding of operators and the withdrawal of these funds, buying or short selling select stock and, most deadly of all, playing on the nervousness of punters by spreading well timed rumors.

This time the target is clearly the ICE sector and specifically the K-10 scrips. These stocks have regularly hit the lower circuit barriers over the last few days and barring a couple of scrips, and a short recovery, are expected to continue their downward spiral. There is a bull-bear struggle out there no matter how much the leading players may deny its existence and at this time it seems that the bears have an upper hand.

The Indian capital market, despite the combined turnover of Rs 10,000 crore on the two Mumbai exchanges alone continues to be most susceptible to manipulation. For one, the sentiment continues to be heavily influenced by the 30-scrip sensitive index which exaggerates price movements both ways.

Automation has increased volumes but the hedging mechanism is still inadequate. Also, the bears, who are able to collect badla charges without having to borrow scrips are always at an advantage. To them, volatility provides a big punting opportunity. Finally, there are uncontrolled kerb trading, off-market speculation and illegal badla in the smaller exchanges and those movements definitely influence stock prices in the official trading session.

What the market needs is change. This is the time to introduce Derivative products and to move over to rolling settlements instead of permitting the rollover of market positions. SEBI should be working overtime to implement these instead of asking institutions to prop up scrips.

The regulator should show more savvy about market manipulation. It needs to inquire into irrational price movements and create audit trails. Even the mere launching of an inquiry is often a good deterrent, but so far, timely investigation and stringent punishment has been Sebi’s Achilles heel.

Updated weekly.

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

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