Stock market crisis: just perceptions?

By C. R. L. Narasimhan

The recent stock market crisis has been defined by two specific but unrelated events. One, when the markets did not respond positively to an acclaimed budget there was a rude awakening that all was not well with the market mechanism. With the Government and the regulators going on an ``investigative mode'' thereafter, the proverbial can of worms was opened. Practices widely acclaimed and emulated until then suddenly fell into disrepute. Out of the sudden realisation have arisen several ``scandals'', share price rigging, the Global Trust Bank-UTI Bank merger fiasco, insider trading charges, promoter-broker collusions and last but not the least a banker-broker nexus.

The second occurrence reinforcing the crisis was more specific. The default by an obscure Ahmedabad-based co-operative bank on its pay orders issued to Mr. Ketan Parekh is big news. He in turn encashed it at a Bank of India branch in Mumbai and has already invited a criminal investigation.

Co-existence of good and bad

Those who now perceive another scam - and they are the vocal majority - forget that all the undesirable practices on the stock markets had existed all these years. More correctly, they co- existed with much better and acceptable practices. It is also important not to downplay the significant achievements by the regulators since 1992-93. The reform measures introduced on a war footing by the stock exchanges could not have been possible but for the active support of the regulators and the Government. For instance, demat (paperless) trading that has vastly changed the character of the exchanges for the better was pushed through by the Government and the Securities and Exchange Board of India with the Reserve Bank of India facilitating the process.

These have been big achievements especially because they are technology and capital intensive. The National Stock Exchange itself is a notable achievement and has brought stock trading to all parts of the country. The BSE too has invested heavily in technology and through its BOLT system it is accessible from most parts of the country. Most significantly, even on vastly increased volumes, the market mechanism has withstood the stresses and strains. It has been a much safer place than before although that assumption was sorely tested recently.

So what has gone wrong? Peaceful co-existence of good and bad practices cannot contribute to harmonious working. Sooner rather than later, lack of ethics will overwhelm the market edifice. That is precisely what has been happening at regular intervals throughout the 1990s in the BSE. All the charges one makes against the stock market and its regulator today could well have been made earlier, say in 1998, when shares of three or four bluechip companies were rigged by their managements in collusion with brokers. Earlier, there was the phenomenon of vanishing companies. They robbed primary market investors of their savings besides exposing the hollowness of regulation across several government departments. And then, though in a different league, there were the plantation schemes and the spectacular failures in the non-banking sector. It is true SEBI, the capital market regulator, was not directly involved with the last two, but shenanigans in any financial sector area have a dangerous impact across the spectrum.

Ignoring warning bells

More so, if the starting point of trouble lies in such a sensation prone area as the stock market. How quickly do people forget that the outward manifestations of the undesirable practices were not only not condemned but even gloated over? Was not Mr. Ketan Parekh idolised by most financial media for his sharp practices? When, for instance, he bought most of ICICI's recently vacated head office building at the Backbay Reclamation in Mumbai, did not a bell ring in someone's mind as to the similarity with the last days of Mr. Harshad Mehta (who was on a real estate buying binge)? Or the two tax raids at different points in time on the two brokers? In any system which attaches importance to values an IT raid would have served as a warning. Besides, no market intelligence can ignore such news. Yet once in early 1992 and again recently, an IT investigation on two principal market players neither sent out warning signals nor lowered their images.

It is, of course, totally incorrect to say that the current problems are more imagined than real. However perceptions play a big, even decisive role. For Mr. Mehta then and Mr. Parekh now the border between media-inspired aggrandisement and a fall into criminality has been wafer thin. Perceptions, again, have idolised Mr. Anand Rathi and his dual role of being an ace broker and president of the BSE. To say that nobody was aware of the potential conflict of interest in such an institutionalised arrangement is the height of naivete. Like many other arrangements this one too was tolerated, even welcomed. Mr. Rathi was perhaps too effective in projecting himself and his dual role. The BSE hosted two high profile visitors during his tenure - India's Prime Minister and the former U.S. President, Mr. Bill Clinton. He had also traded large volumes, almost Rs. 24,000 crores in just four months, according to a recent IT investigation. The danger for all colourful stock market players is that perceptions can and have changed quickly.

So is it a scam all over again? There have to be some more quantifiable yardsticks before pronouncing a value judgment. Loss to small investors on account of the shenanigans can be one. But no tears need be shed for losses to the big operators, the badla financiers and so on. After all, they ought to have been aware of the risks inherent in the environment. The need of the hour is to inculcate a value system. Regulation can help but it too must imbibe better values. At this stage there is no need to panic and be rail-roaded into setting up another joint parliamentary committee. After all the last one has not done anything to alter the perceptions-based evaluation of the markets.

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