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S. Vaidya Nathan

STOCK prices may well be weaving patterns, not generally seen in the past. The absence of sharp bullish phases cutting across sectors and stock categories may increasingly become the rule as has been the case for much of the last two years. What this has meant is that the overall market indices have remained locked in a narrow range for much of the last 30 months.

From a long-term point of view, the continuation of this trend may be good for the market. This would place the market on a more stable platform and help in the formation of realistic expectations of returns from equity. Let us take a look at the key events which have distorted stock prices and expectations and more importantly, shut out a sizeable set of investors each time.

Upping the ante: The first of the unsustainable liquidity-driven bull phases was in 1985-86. Those were times when the market was unregulated. Investors — though small in number then than in the 1990s and beyond — were pretty much at the mercy of brokers and promoters. The series of NCD conversions by Reliance and rights priced at attractive levels also drove the market. This bull phase lasted a short while, after which stock prices declined sharply.

Big Bull's market: A recovery from this episode was effectively ruled out by the Harshad Mehta scam in 1991-92. A burst of liquidity channelled through irregular means from the banking system came in handy to propel a boom of an unprecedented nature. Widespread buying in ACC in the run-up to Mr Harshad Mehta's birthday on the expectation that he would pick up sizeable quantities of his favourite play on D-day, sums up the mood then. Incidentally, Mr Mehta ended up buying one share of ACC at Rs 10,000.

What this boom did was to capture the attention of a mass of retail investors who had till then steered clear of equities. The unfortunate part was that these investors came into the market with expectations of returns that was simply not attainable or sustainable.

When the crash compressed in a three-month time-frame in mid-1992, it took out a fairly large number of disenchanted investors out of the equity circuit.

IPO-led boom: After about three-and-a-half years came the next boom without any basis in fundamentals and resting on liquidity of a different kind. Promoters and operators made quick a money buck by coming up with equity offers to the public. The era of free pricing of equity offers was put to as much misuse as possible with rigged-up stock prices as the bedrock. Close to Rs 60,000 crore was mobilised but a very small proportion went into value-creating investments. Only a few of the companies are around today. This IPO-led boom and bust eventually took out yet again a set of investors out of equities.

A mini scam: About 24 months later came a mini-scam of sorts with promoters and operators acting in concert to ramp-up prices in a small set of stocks. Prominent were the likes of BPL, Videocon and Sterlite Industries. The scam reached such proportions that the BSE had to down shutters for a few days and go out of the accepted ways of settlement to temper the payment crisis. Once again, the credibility of the market took a beating and contributed further to the weakening the feeble retail interest in equities.

IT/tlecom/media boom: The Ketan Parekh-centred boom in 1999 and 2000 with funds siphoned out from the banking system lured a mass of investors yet again into equities. The collapse in stock prices subsequently and its adverse impact on investors is too recent to have been forgotten.

These five abnormal phases, together with the still pervasive stock price manipulation ahead of corporate actions, insider trading and lack of effective regulatory action, continue to keep retail investors largely away from equities. Only five to 10 years with stock prices driven by fundamentals, liquidity from FIIs/mutual funds and other genuine sources such as pension/insurance companies seeking equity investments (and not of the 1992 or 2000 kind), and without any abnormal influences of the kind seen every third or fourth year as seen between 1985 and 2000, are crucial to restoring sanity to equities.

More realistic expectations of returns — backed by actual stock price performance — have to emerge to broadbase investor interest.

In this process, SEBI, the NSE and the BSE have a key role to play in keeping a close tab on fancy trends of the day. They especially have to look into sources of liquidity in tandem with the RBI to ensure that 1992 or 2000 are not repeated. Making disclosures more effective has to be at the centre of any such effort.

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