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COVER STORY: THE STOCK SCAM; MODUS OPERANDI
Villains Of The Scam
Regulators, fund managers, bankers and brokers collude-either
by default or by design-leaving unsuspecting investors shaken and the
stock markets in mayhem.
By V. Shankar Aiyar
Greed is good. Greed
is right. Greed works. That's what Gordon Gekko said. The script didn't
quite pan out that way for Michael Douglas in the 1987 Oliver Stone film,
Wall Street. Greed didn't work. It could have if the setting had been
Dalal Street.
Between 1992 and 2001, Indian investors have
been scammed nearly a dozen times. Be it M.S. Shoes, C.R.B. Capital, plantation
frauds, the vanishing companies or the BPL-Sterlite-Videocon rigging case,
each time Gekko's Indian cousins have got away doing everything that he
dreamt of.
The rot is so deep that Madan Gopal Damani,
former BSE president and broker who fought SEBI for several years, feels
the brokers "have lost the right to regulate themselves. It was long
awaited. I do not believe that just one call was made. I am inclined to
think that the system was being fully used regularly in league with exchange
officials for personal profits."
Obviously, in Gekko's words, "greed worked"
and with an impunity that underlines the complete inefficacy of SEBI and
to some extent the RBI. How else does one explain a rigged market followed
by a crash twice in three years? And it isn't just the bear operators
who seem to be the focus of attention. Two weeks before the budget, everybody
in the market knew big bull Ketan Parekh was facing a payment crunch as
his stocks slid precipitously. His bellwether K-10 index was plummeting
and his favourite stock HFCL had dipped to Rs 400 from a high of Rs 2,079.
He needed funds badly for pay-in and he got them. So who was the "loan
shark"? It isn't clear.
Kirit Somaiya, BJP MP and chief of the Investor
Grievance Forum, has an idea. "On March 1, the Unit Trust of India
bought Rs 50 crore worth non-convertible debentures of HFCL. Why did UTI
buy NCDs of a company clearly in peril? For whose benefit?" he asks.
Sadly, Somaiya is the only one asking questions. Just as he was the rare
skeptic questioning the boom on January 25, 2000 in a letter to the finance
minister. He also petitioned the minister to stop the merger of the Global
Trust Bank with UTI Bank on
March 8.
Significantly through 1999-2000, corporates,
bankers and brokers knew the market was rigged. The simple formula adopted
by Parekh and other bulls: pick up tech stocks with low floating stocks-some
with just a few thousand shareholders, ramp up the shares and place them
with institutions. As the bubble expanded, mutual funds-ever hungry for
easy profits-joined the fray and even launched new schemes worth Rs 2,011
crore to cash in on the mania. The Sensex in a rush of adrenaline crossed
6100.
Analysts and researchers got carried away. Sure,
there was a tech wave across the world and both Dow Jones and Nasdaq touched
historic highs. But what about fundamentals? Unknown scrips like Visualsoft
rose from Rs 625 to Rs 8,448 and Sonata Software from Rs 90 to Rs 2,150.
Such was the frenzy that 189 companies changed their names to cash in
on the rage. 170 companies raised Rs 2,111 crore through public issues.
Ironically, SEBI chief D.R. Mehta warned, "The investor should be
guided by fundamentals and not greed." Fine, but what did SEBI do?
Mehta reveals that SEBI initiated 13 measures
from the time the Sensex was at 3,336 when the market was in an upward
spiral and eight measures when it slid. These include: tightening of new
issue norms, better dissemination of information and quashing of rumours,
monitoring of individual broker and scrip positions and imposition of
higher margins-which on March 9, 2000 amounted to Rs 7,737 crore. Perhaps,
the measures injected some skepticism but they didn't stop punters from
rigging the market.
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