The market's stock is low

Volatility is the outward manifestation of the several ills that plague the domestic stock market, writes C.R.L. NARASIMHAN.

ON TUESDAY, March 13, the Bombay Stock Exchange's (BSE) benchmark 30-share index crashed by an unprecedented 300 points within minutes of the start of trading. Thereafter, riding a roller- coaster, the market swung wildly throughout the day to close 227 points lower. Such swings can wreck whole fortunes and can send brokers into liquidation. Indeed, this recent phase of the market has again revived doubts as to the safety of the payments system.

For the record, the Government and SEBI say that there is no payments crisis for the system as a whole. Brokers might fail,individual investors might loose their shirt but there will be no system failure is the official view. In the coming days, there will be plenty more assurances backed hopefully by strong regulation as well as investor education.

If anyone doubted the nature of volatility and the havoc it can cause to the Indian bourses and their investors, March 13 was yet another - especially noticeable - day to be disabused of the notion that market behaviour can be understood and even anticipated. Volatility, at least an excess of it, is the outward manifestation of the several ills that continue to plague the domestic stock market. Perverse movements of share prices can neutralise some hard-won macro-policy gains.

For instance, this year's budget was acclaimed by many, including the stock market on budget day when the Sensex moved up 177 points. But for the next 10 days it was unmitigated disaster on the bourses and for those who believed that the share price movements correlate with the economic conditions.

The current season in the market though fitting into past patterns has been exceptional in one major sense. The big disappointment over the market's reaction to a generally acclaimed budget has had an unexpected consequence of opening the proverbial can of worms.

From now on it seems a resolution of these festering issues will be as important as furthering capital market reform, a fairly strong dose of which was announced by the Finance Minister in the Rajya Sabha on March 13.

How swiftly the disappointment over the share bazaar's reactions to the budget has grown into a dissertation of the stock market's ills. Not a day has passed since March 1 (the day after the budget) without an expose of an undesirable trait of the market or a development like the sacking of all the broker-directors of the country's premier stock exchange, the BSE. (The BSE's high- profile president, Mr. Anand Rathi, who is also a successful broker, was shown the door a few days earlier).

The fact is that none of today's headline-making stories whether it relates to an unholy nexus between bankers and brokers or the existence of a bear cartel that used price-sensitive confidential information to rig prices is either new or unbelievable. It is a measure of the cynicism that pervades the stock market culture that the worst shenanigans not only exist and are tolerated but have come to be desired in certain quarters.

Thus there are operators driving up stocks at their will (only to unload them to an unwary investor). The operators have their own preferences. The new economy stocks, being as a rule less transparent, currently figure in most operators' list but they need not always be the preferred ones. Today's big bull, Mr. Ketan Parekh, is supposedly very active in 12 stocks, some or a majority of which ought not to merit ordinary investors' interest.

Yet, a whole set of questionable market practices has been built around the operators. Chain transactions - concerted buying or selling of one scrip across the bourses - has been a well known rigging tool. Shorting - selling scrips which you do not have (to buy at advantageous prices later) - is traditionally a legitimate activity. But when resorted to by the operators and their followers it can do considerable damage. (SEBI recently banned `naked' short sales. Yet the fall in stock prices continued).

Other practices such as arbitrage - exploiting the price differentials between bourses - can be part of mainline activity but to the extent the information flow is skewed, some benefit at the expense of the majority. Information asymmetry is at the root of a few of the burning issues of the day: take the GTB/UTI Bank deal. Much of the post-mortem on the agreed swap price concerns the alleged price manipulation of GTB stocks on the eve of the merger. Even if proved, GTB's case will neither be the first nor the most original of those practices.

The difficulty has always been from the regulatory side: no matter how effectively SEBI has grown it still lacks the stature good enough to frown on sharp practices. In the event, official inaction seems to suggest a peaceful coexistence between the regulators/Government on the one hand and those who thrive on such practices. Only when extreme provocation occurs - as for instance when the Sensex brought down the budget hype - does the official policy wake up.

Although a bear cartel, comprising among others two influential foreign institutional investors, has been identified as the culprit few expect any meaningful regulatory action beyond the initial warnings.

Another area of peaceful co-existence has been in the management of the exchanges. It sounds preposterous but yet it is true that the country's leading exchanges (barring the NSE) have been run by brokers who are the most influential of the market intermediaries. The BSE and other broker-run exchanges no doubt have a non-broker Executive Director and other officials but in relation to the broker office-bearers most of them have been a colourless lot unable or unwilling to play their required role.

Mr. Yashwant Sinha has announced corporatisation of the exchanges. How this will translate into action that is beneficial for the entire investing community, not merely one class, is the billion dollar question.

Much has been said about regulators' limitations. Way back in the late 1980s, when SEBI was first set up as a toothless body, no one could visualise what regulation could do to develop the market. Even after SEBI was empowered in 1991-92, it still could not come to grips with the several problems that continued to dog the exchanges with monotonous regularity. Lack of adequate legal powers has been cited as one of the reasons and Mr. Sinha has promised to rectify it. But other problems will remain.

One major limitation has had to do with regulatory inexperience. The BSE is in its 126th year. The stock exchange tradition of more than ten decades cannot be easily captured in textbooks or manuals. SEBI, a new regulatory body, could not draw the best talent: most of its middle level staff are on deputation from one of the Central Services. Imposing the regulatory authority on a market dominated by brokers was never going to be easy for SEBI, some of whose key officers were both inexperienced and simply overawed by the glamour of the BSE.

The role of money or money power to put it more appropriately has always been an intriguing aspect of the share market operations. Bank finance, at least at the astronomical levels needed to finance the huge volumes, cannot be procured legitimately.

This is because despite recent liberalising of the bank rules not many banks are keen on financing shares. However, currently it is an issue. Note how GTB was allegedly helped by Mr. Ketan Parekh (he is also a shareholder) to drive up its shares. On its part, GTB appears to have provided ample funds to the broker for his activities.

There are other questionable practices - too numerous to report at one go. Hopefully it will be before the breaking out of another scam that they become public knowledge and corrective action initiated.

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