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COVER STORY: THE STOCK SCAM; SMALL INVESTORS
What Was SEBI Doing?
Most of the dozen-odd
technology mutual funds launched with much fanfare in 1999 and 2000 are
quoting at 30 to 40 per cent of their face value today. That's a remarkable
reflection of the error in judgement by most fund managers who have been
the custodians of an increasingly large share of public money. In the
past few years investments in mutual funds have soared. Between April
2000 and February 2001, private-sector mutual funds alone managed to collect
Rs 17,000 crore. But the scam will most definitely affect that tide.
More than the analysts or the media or even
the brokers, it is the regulator that investors are most disappointed
with. Despite alarm bells being rung almost every year in the 1990s as
one scam or the other surfaced with unfailing regularity, SEBI waited
till now to enforce the system of a rolling settlement. Till March 7,
SEBI allowed the practice of what is called "naked short-selling"
of shares. Speculators would sell huge quantities of shares without actually
owning them. The oversupply in the market would bring down the price and
they would then buy the same shares at lower prices and book a handsome
profit in the bargain. This is how the bear cartel rigged the market for
months, eventually leading to the crash. Of course, there was also the
all-pervasive insider trading in the stock markets that SEBI was blissfully
unaware of for long. Even the Bombay Stock Exchange's (BSE) surveillance
system failed to report to the SEBI the instances of BSE's board members
making enquiries about the sales and purchases of foreign institutional
investors.
MUTUAL
FUNDS:
DOWN IN THE DUMPS
Current value of a Rs 10 unit of technology funds |
NET ASSET
VALUE
|
| Chola Freedom Technology |
9.47
|
| Alliance New Millennium |
4.95
|
| Kothari Pioneer Infotech |
14.93
|
| Magnum Infotech |
7.66
|
| UTI Software |
8.30
|
| Kotak Mahindra K-Tech |
3.35
|
| Pru ICICI Technology Fund |
3.18
|
| IL&FS eCOM Fund |
3.09
|
| KP Internet Opportunities Fund |
4.82
|
| Sun F& C Emerging Technology Fund |
4.02
|
Aware of rampant cheating on the stock markets,
but unable to find a recourse, Delhi-based public-sector executive Rajeev
Maheshwari has filed cases against promoters of companies, the SEBI and
even the Government of India. "Nothing will come out of it, but I
will get some mental peace," admits Maheshwari.
The mushrooming of software and technology companies
in the past two years is one instance of the failure of the Department
of Company Affairs. The absconding promoter of the Lucknow-based Century
Consultants, A.K. Jauhri had raised Rs 250 crore by simply changing the
company's name to Cyberspace Ltd to lure the greedy and the naive into
the trap. The share price of Cyberspace flared up to Rs 1,900, before
plummeting to Rs 18.45 in March.
Beyond the angers and frustration, the crash
has also made small investors see some sense. Nobody now believes that
stock price don't matter when you are buying shares in a technology company.
Anyone who's paying attention can see how dangerous it is to buy the stock
of even very good companies if you pay an extraordinarily high price for
them. Not to mention how dangerous it can be to pay a high price for shares
of companies with big claims and but little else. Rues Nagpal, whose holdings
of Infosys and HFCL shares are now about a fifth of their purchase value:
"I shouldn't have frittered away my hard-earned money like that."
That such devastation happened in the markets
despite several measures to improve efficiency and transparency is ominous.
In the past when shares used to be delivered physically, there were problems
of forged certificates. That was eliminated with the advent of DEMAT (paperless)
trading. But since opening a DEMAT account requires disclosing one's permanent
account number and bank account number, many investors prefer to park
their shares in their broker's account. That allows brokers to start trading
in those shares without the knowledge of the investor who owns them.
Online broking, though still in a very nascent
stage, holds promise of faster information to the investor. That could
reduce the chances of rigging and manipulation by middlemen to some extent.
Says Gagan Banga, chief marketing officer, India Bulls: "Today real-time
market information is available on TV and the Internet, allowing investors
to respond faster and better." But for that to work, the market has
to be cleansed of insider trading and company-bank-broker nexus. That
is solely the job of the regulator.
The evaporation of the savings of thousands
of small investors is bound to have some impact on consumer demand. The
perception of having lost wealth on the market will hold back some purchase
decisions, especially of consumer durable products. The virtuous cycle
of rising stock prices, which made things look better than they were,
will turn into the vicious cycle of the lower stock price and make things
look worse than they are. But if the Government moves quickly and decisively
to cleanse the regulatory system, and through that the entire capital
market, investor confidence could be restored before long.
But the yet-to-end nightmare on the market has
proved to the small investors how fragile share prices are. And how silly
it is to assume that the market will always go up. As the saying goes,
don't fall in love with your stocks. Because you can be sure that your
stocks aren't in love with you. If investors have learnt this lesson,
March's mayhem on the markets will not be repeated soon.
-with Malini Goyal, Shailesh Raval and Stephen David
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METRO TODAY
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