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BUSINESS: STOCKMARKETS
Revenge Of the Bears
The sudden fall in share
prices points to yet another rigging controversy and raises questions
on the efficacy and credibility of SEBI as a regulator
By V. Shankar Aiyar
The party was nice the party was pumping
Ah Yepee Ah Yo
And everybody having a ball
Yepee Ah Yo
... I hear a woman shout out ...
Who let the dogs out?
Those familiar with
this year's Grammy award nominee Baha Men will find the song's sentiments
echoing on the stock markets. Except in this case they are likely to ask:
Who let the bears out?
After Finance Minister Yashwant Sinha unveiled
a market-friendly budget on February 28, the Sensex shot up 177 points
from 4069 to 4247. The next day it rose by another 24 points. Buoyed by
the cut in dividend tax, withdrawal of surcharge in corporate tax and
potential for revival of the primary market, corporates dusted their IPO
and GDR plans and began calling up merchant bankers. Investors locked
in a comatose market for months looked forward to happier times.
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Out: Rathi's offer to quit reflects the rot at BSE
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But they had not contended with party poopers.
Suddenly, on March 2 the Sensex plummeted by 176 points. The ostensible
reason was the bloodbath on the Nasdaq. But not many were buying the thesis.
They would rather believe the rumours-ranging from defaults to big bull
Ketan Parekh's arrest. The ripples didn't take long to touch North Block.
Perturbed by the tremors rocking the market, the Finance Ministry cracked
its whip.
By evening, SEBI had despatched 40 investigators
to probe contracts of FIIs like Morgan Stanley, Credit Suisse First Boston,
First Global and brokers Nirmal Bhang, Ajay Kayan of C Mackertich and
Radhakrishna Damani. Even as they sniffed around, the Sensex plunged by
a further 96 points to 3998 on March 5. It was clear that the 250-plus
crash had very little to do with the slump on the Nasdaq.
For well over a year, the bulls had used the
tech boom to keep the bears at bay. Over the past three months, the bear
operators had been looking for an opportunity to snarl the herd of bulls
led by Ketan Parekh. Every trick from persistent rumours about his arrest
to defaults with supporting banks were tried out. The timing didn't seem
to work. The slide in the Nasdaq gave the bear cabal an opportunity to
prompt investors and FIIs to dump tech stocks and bring down the markets.
The idea was simple. The bears knew that Parekh
and the other bulls were being funded by a clutch of banks. The bear plan
was to hammer stocks and force bulls to fork out money to keep prices
afloat. In the bargain, at every fall, the bears earned a bonus out of
short sales.
Adding to the pressure was a note from the RBI
to banks asking them to pare down their exposure (estimated to be around
Rs 5,000 crore) to the players in the capital market. The rumours too
helped the bears, hammering down the benchmark and adding to the pressure.
Their goal: to snap Parekh's credit lines. By March 2, there was so much
pressure on the bulls that they began unloading wildly when markets reopened
on March 5. This was just what the bears were waiting for. But they got
the timing wrong again. It was too close after the budget and stirred
a reaction they had not bargained for.
SEBI's investigation reveals a trail of skulduggery
that is shocking. Nine years after the 1992 scam, three years after the
BPL-Sterlite-Videocon ramping case, a group of operators could yet again
get together and take the market where they pleased. Even as SEBI wrestled
with the web of transactions, an unidentified caller reached SEBI Chairman
D.R. Mehta at home on Tuesday, a holiday, and "tipped him off".
The allegation: BSE president Anand Rathi had entered the out-of-bounds
surveillance room at BSE and sought to get critical information about
Parekh's positions. The conversation was recorded by the in-built security
system of the surveillance section. By Wednesday evening SEBI served Rathi
the ultimatum: resign or be sacked. Rathi chose to resign and declared
his "intention to fight for justice". SEBI also defanged the
bear operators by ordering a ban on all forward sales unless backed by
delivery.
It now transpires the bear operators got information
not just from the BSE's surveillance section but used Rathi and even illegal
means to access information about the bulls. This included information
from depositories, trading rooms of FIs, SEBI and friendly bankers. Despite
the secrecy maintained by institutions and regulatory guidelines, the
bear operators managed to glean every little detail that mattered in their
push to batter the bulls.
Of course it isn't that the bulls were totally
innocent. A senior banker reveals the methodology used by bull operators
over a year to ramp up technology stocks. "Operators are required
to produce bank guarantees to the stock exchanges before they begin punting
and are required to pay margins. Many bull operators simply tapped profit-crazy
bankers to write out cheques and guarantees." Although guidelines
require banks to take adequate collateral, it seems that many banks-struck
by the euphoria of the rising technology index-parted with money for little
more than 40 per cent security.
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