The Hindu : Banking on flimsy evidence

Online edition of India's National Newspaper
Saturday, Jun 14, 2003

Business

Business

Banking on flimsy evidence

By C. R. L. Narasimhan

With the Union Finance Minister asking the capital market regulator, the Securities and Exchange Board of India, to probe the recent volatility in the prices of bank shares, the stage is set for an indefinite continuation of the controversy. Previous investigations into similar alleged shenanigans by the regulator or for that matter even by bodies more suitably empowered and equipped have gone nowhere. The SEBI's previous record in this critical area has not been inspiring. Even when the findings are announced after a delay, the follow-up action has been such that neither the guilty is punished nor the recurrence of similar malfeasant acts prevented. In areas connected with the stock exchanges, it has been easier to cry foul every time there is a suspicion than it has been to define the problem.

A basic trait of public policy towards the capital market has been to swing from one extreme to another. In more optimistic times the stock market is considered to be not only the ideal intermediary for capital formation but also a vindicator of "sound'' economic policies. However, a falling or a stagnant market lends itself to numerous accusations of malfeasant acts, usually, by the market intermediaries in collusion with others. No one denies that a few market intermediaries including brokers have been guilty in a most spectacular fashion. Yet to condemn them as a class is unwarranted and injurious to the further orderly development of the stock markets.

Those general observations are relevant to the ongoing controversy involving public sector bank shares. For, it is alleged that some brokers speculated on these shares by trading on some contradictory reports connected with what essentially is a policy decision to get back the capital invested in a majority of banks. As widely reported, the raging debate has been over whether the Government should get a premium on its investments in the banks' share capital. Speculators' action has allegedly endangered market safety and caused a sizable loss to the investors. (Estimates, however, vary wildly). These financially weak banks had required the Government's support and in turn were compelled to invest matching amounts in a special series of recapitalisation bonds. With an improvement in the financial performance, the time for returning the Government's stake has probably come but even this basic issue cannot be decided unilaterally by any of the interested parties. Among other reasons, the ongoing needs of these banks to shore up their competitiveness if not their solvency have to be addressed. As speculators are supposed to have benefited by the tendentious reports, it is further alleged that the Finance Ministry's spokespersons are also responsible.

Hence an important link in the alleged fraud is sought to be established a broker-government official nexus. A further invidious link with bankers cannot be far off. The scrips that were allegedly speculated upon are of government-owned banks. No one has yet alleged this but it will not be long before some one makes a vague reference to the top management of these banks leaking out "price-sensitive'' information or engaged in insider trading. The analogy of bankers in the government owned institutions, behaving like some unscrupulous private sector promoters, is absurd but the possibility of a nexus however remote between a broker, banker and a civil servant is too sensational to be ignored, which brings into focus the pitfalls of applying market yardsticks to government owned institutions. Till the other day none of them admitted any outsider shareholding. When their shares began to be quoted on the exchanges (after their public offerings) everyone realised that there was no way the stock markets would discover their value. Trading with pathetic valuations, the PSB stocks were an acute embarrassment, as the markets seemed to have thoroughly discounted government ownership. Never mind that it is the public ownership that finally saved the day. The upsurge in share prices took everyone by surprise. The explanations given — solid improvement in their financials, abnormal growth in treasury income, the success of VRS and many others — are valid. Yet none of the strengths of the PSBs including their ownership by the Government has ever been either projected or appreciated in the market place. In fact some of the initial offer prices of these banks were so low in terms of conventional parameters such as price to earnings that one wondered why the Government was hell bent on allowing the banks to make a bargain basement sale. It was at that time rather than in the more recent context that a scam if any existed. True the SEBI will give its reports on volatility, the Government may conveniently file it until the next time when some other set of stocks — may be the to-be-divested petroleum stocks — behave "abnormally.''

Two further points are worth noting. For the public sector banks it may well be the right time to adjust to the new reality — of the stock market paying heed to their stocks. That in turn has other implications. The top managements of these banks will have to devise a new communication strategy that is more in tune with the needs of their newer stakeholders, the non-government outside shareholders. Hitherto, despite having already accommodated outside, minority shareholders, the Government owned banks seem more attuned to the goals set in an earlier era. It is not merely the question of extolling the virtues of the continuing government ownership but being able to project them as being investor and consumer friendly. Government ownership of them is likely to continue in the foreseeable future. Logically therefore one cannot expect any spectacular jump in their share prices. It is therefore not only surprising but also ironical than that the raging controversy is over a spurt in their share-prices.

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