Games on the market

THE BSE Sensitive Index, the most popular stock market index in the country, fell by 12 per cent over the previous month to end at 3,882 points on March 9.

In itself, that was nothing unusual. The Sensex has fallen by such magnitude in the past. But a series of incidental developments preceded and accompanied the latest fall. And it is not often that a Sensex crash is accompanied by the president of the Bom bay Stock Exchange (BSE) putting in his papers.

There seemed to be no reason for any such panic. The Union Budget, presented on Feburary 28, was well received by industry and the capital market and the market indices went up sharply that day. But the slide started soon after.

Rumours in the market about imminent payment default by some broker or other accompanied the latest crash. Confidence in the systems that have been built over the last few years to insulate the market from such defaults appears to be low.

Anand Rathi, the president of the BSE, quit office once it became known that he, a stock broker active in the equity market, had made a call to the BSE's executive arm during trading hours and obtained privileged information. The BSE's executive arm is s upposed to be separated from its stock broker directors on the governing board by a firewall in order to prevent any conflict of interest. But events over the last few years have shown that the firewall exists only on paper. Access to privileged informat ion - especially on the activites of other investors - gives the recipient an unfair advantage. Rathi, however, denies that the information he received was misused.

Speculation on the activities of select stock brokers and institutional investors seems to have played a significant role in determining share price behaviour over the last year. In recent times, rumours about select individuals and entities impacting on share prices goes back to 1999 when a bull run started in the stock market. The last bull run, between 1999 and 2000, was marked by a spectacular uptrend in the share price of companies in the information technology, electronic media and entertainment a nd telecommunications sectors. Along with this, the influence exercised by BSE brokers such as Ketan Parekh grew. A mere rumour that Parekh had picked up a particular in a stock was enough to send the shares of the company concerned to higher levels.

The biggest beneficiaries of the rumours were stocks in the technology and entertainment sectors. On the face of it, the popularity of these sectors with investors was well-founded, for growth in these sectors have far outstripped growth in other sectors . Moreover, with these sectors being relatively new, the potential for continued growth existed.

High-profile brokers and institutional investors played an important role in raising the profile of the technology and entertainment sectors. High levels of investor interest coupled with good prospects led to an unprecedented boom in these sectors.

During the bull run and after came rumours of collusive behaviour involving company promoters, institutional investors and select stock brokers. When the going was good none of it seemed to matter and the capital market regulator, the Securities and Exch ange Board of India (SEBI), did not show any visible sign of urgency in investigating the rumours.

An interesting aspect of the bull run and the higher profile acquired by technology companies is the rising interest in India in the development in the U.S stock market, especially Nasdaq. Nasdaq is where technology companies in the U.S. are listed and w here a few of Indian technology companies headed over the last couple of years. The high incidence of software exports, especially to the U.S., meant that events there did have a bearing on the new pivotals in the Indian stock market.

A few banks and finance companies appear to have resorted to lending against securities as collateral. Hard data on the activities of banks in the capital market is unavailable as yet, but there are credible reports that some of them may have over-reache d in lending ag against shares.

Once the bull run petered out last year, the fall in stock market prices in technology and entertainment stocks was fairly sharp. In fits and starts, the new pivotals drifted downwards.

Since the beginning of the year, foreign institutional investors (FIIs) have brought in over Rs.5,000 crores as portfolio investment. Traditionally, FIIs have driven market movement, but on this occasion their investment pattern did not leave a deep impa ct.

On March 2, Oracle, an information technology company in the U.S., announced that its financial results would be lower than expected. That day, the Sensex plunged 177 points. It was on that day that Rathi made a call to the Surveillance Department of the BSE and received privileged information.

In the subsequent week, the slide continued amidst rumours that stock brokers were likely to default, that banks that had lent against shares as collateral had begun to sell and that the slowdown in the U.S. was worse than was initially expected. SEBI re sponded by banning short sales for a fortnight. At the end of the week, all the leading stock exchanges had settled their accounts. But the sharp fall in share prices is expected to lead to defaults in the subsequent week.

The role of SEBI has come in for criticism. On the one hand, SEBI deserves praise, as do the stock exchanges, for having made a transition from an opaque and antiquated system to a transparent and fully automated trading system. But SEBI, and to an exten t the BSE, have not been able to convince the market players that they were able to enforce rules in an equitable manner.

There were reports in the mdeia about collusive behaviour involving stock brokers, institutional investors and a few promoters. The situation has the potential to create an upward spiral in share prices that may be transitory. If SEBI has tried to do any thing about it, it remains a well kept secret.

The old problem of stock brokers' tentacles reaching into the BSE administration has not been addressed convincingly. A sad aspect of the panic seems to be a pervasive belief that the stock market is still rotten. Contrary to popular perception, progress here in the last five years has been remarkable. But yet far too many people believe that the system still turns a blind eye to misdemeanours of the powerful. And therefore, the problem is greater than what is apparent.

The silver lining in the latest "crisis" has been that thus far the leading stock exchanges have been able to ensure that the stock market functions smoothly. But that has not translated into confidence.