Stock market scams: A wake up call for big bulls

As the Securities Exchange Board of India cracked the whip on big players in the stock market after a detailed investigation of wrongdoing and barred 24 institutions as well as two top broking firms, there was a bloodbath and the Bombay Sensex and Nifty hit new lows. But the Finance Minister, campaigning for the Congress and its ally, the DMK, in Tamil Nadu, is reported to have intervened to save one of the most important indicators of economic growth and economic health. He is believed to have ordered or persuaded Sebi to stay its hand and modify its orders on the ground that its directives could not stand the scrutiny in the courts on appeal. But is that the whole truth?
But the Sebi chief Damodaran has claimed that he had not spoken to the Finance Minister for three weeks, implying that there had been no orders to him from Delhi. What he might be hinting at is that three weeks earlier when Sebi started drafting its 250 page order, his proposed action may have been cleared by the Finance Ministry, which may not have believed that there could be turbulence and turmoil on the stock markets by the drastic action announced by Sebi. But it might have also been prepared for some kind of reaction, perhaps not as severe as happened. Apparently the order was timed during the three-week recess of Parliament to escape noisy scenes in the two Houses. But when the stock markets started tumbling and there appeared to be a crash in the works, the authorities had second thoughts and wanted fire fighting as well as damage control.

It is entirely possible that the Finance Minister, away in Chennai, did not personally speak to Mr. Damodaran late at night on Thursday after gloom and doom. After all, it was a quasi-judicial action. The Minister might have asked the Finance Secretary to get the Additional Secretary in charge of the stock markets to do the talking not to Mr. Damodaran, but his chief investigator, Mr. Ravindran, to stem the rot as big guns in the financial world, including banks, had raised a hue and cry.

It is in this light that Mr. Damodaran's denials have to be seen. He is no doubt defending his action and its modification to give breathing space to the big players in the bourses. He is entitled to insist that he is not fully reconciled and assert that the investigations are continuing and the guilty will not escape punishment for trying to corner shares in initial public offerings by allowing benami accounts for dematerialized shares to be opened. The alleged racket happened almost three years ago when the Maruti Udyog came out with an initial offering, followed by several others where an attempt to corner shares at a relatively low price was made, only to make a fast buck by unloading them soon after they were listed.

Just now there is a breather of sorts and stock markets have bounced back to the over 12,000 market at Dalal Street and over 3,500 in the case of the Nifty. But it can be reasonably surmised that some muted action will be taken later in the summer either after the Budget Session or Monsoon Session of Parliament as Mr. Damodaran or even the Finance Ministry cannot whitewash and forget about wrongdoing that is apparent. It is being claimed that even India bulls have welcomed the Sebi action, the watered down one. It is also being claimed that genuine small investors have been protected by Sebi and the Government, but they have taken three long years to do so, if indeed they have done something right. Just now, the Sebi orders are being described as interim, although a 250 page order, which took weeks or perhaps months to draft, would not appear to be so.

Yet the new episodes are fresh reminders of the era of Harshad Mehta and Ketan Parekh, two names that rankle the stock markets, investors and the government. They were an unusual breed of spin doctors of dubious sorts. Harshad Mehta took the Bombay Sensex to a great high of 7,000 in the early 1990s and Ketan Parekh had a network bigger than Harshad Mehta's and created a new frenzy less than a decade later. Both came to grief in spite of their great connections in high places. Their excesses proved to be their doom.

On both occasions their macabre and underhand manipulations brought about stock market crashes and tens of thousands of crores were lost by investors, many of whom had put in their lives' savings in mutual funds, whose documents were nearly dud. That was followed by the Unit Trust of India scam where the retired people faced even a worse fate. However when Harshad Mehta's and Ketan Parekh's dealings had proved to be a damp squib as they could not settle their accounts. Even a cooperative bank was roped in and the authorities had to take steps to protect depositors whose money had been whisked away, but the bank had to be wound up ultimately.

The government had then woken up with a shock of sorts, even though the Finance Minister at one point of time said he could not lose his sleep if the stock markets rose one day and dropped dead the next day. It was not to be so for long as it dawned on the government that regulatory authorities had to be put in place to curb future scams and save India's name and its investors even as overseas financiers were beginning to take an interest in the rapidly growing Indian economy.

The regulatory authority created was called the Securities and Exchange Board of India or Sebi for short. It took quite some time to evolve as a credible institution even as manipulators were able at times to pull wool over its eyes and ears. New and stern norms in accord with similar authorities in New York and elsewhere in the First World were laid down to ensure that fly by night operators did not find it easy to manipulate the market and take certain shares to new high levels and curb what is called insider trading.

Just now Sebi has cracked the whip and in one fell blow it has barred 24 key operators, including India bulls and Karvy Stock Broking, though the last two have earned a reprieve of sorts for the time being. One of the top registrars of shares for several big corporates is known somewhat for its arrogance and harassing investors when they try to demateralize their shares by repeatedly questioning investor signatures and requiring excessive and repeated banker verification and even verification of bank codes and signing bank officials who attest depositor signatures. The poor investors are trying to comply with the new requirements of stock market dealings, but they find the going tough even as dubious characters manage to sail through scrutiny because of their alleged connivance with certain moneybags. But why does this outsourcing franchisee of big corporate accounts, play havoc with ordinary retail investors, who are innocent and deserve a better deal? Perhaps the game is to corner shares for interested parties and take genuine investors for granted as well as for a ride. This aspect of share registrars' also calls for an investigation as it appears to have escaped the attention of the Sebi and other authorities.

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