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Suresh Krishnamurthy

The present situation in the stock market is a chance for SEBI to make its mark and correct the perception that the entire system is in favour of manipulative brokers and business-houses.

THE entry of Mr M. Damodaran, a key personality involved in the restructuring of the UTI, into the portals of SEBI had triggered expectations of a change in the way the market watchdog goes about its business. Even in his previous stint at UTI, Mr Damodaran did not restrict himself to the functioning of the mutual fund but had been vocal about the practices of certain other competitors.

His appointment as chairman of the Securities and Exchange Board of India had thus raised expectations that he could emerge as India's Eliot Spitzer, the New York Attorney-General who made it his mission to go after errant big businesses. With the indictment of UBS — the foreign institutional investor — the incumbent SEBI Chairman too has sent a strong message that he means business. He now has a chance to do more.

For instance, the trades in SPIcE, the exchange traded fund and SBI Home Finance, the almost defunct home finance company, are a clear sign that all is not well with India's stock exchanges.

The situation is crying for regulatory action to weed out errant stock market operators who thrive on some investors' gullibility. It is also a chance for SEBI to make its mark and correct the perception that the entire system is in favour of manipulative brokers and business-houses.

Case for action: The trends over the past year indicate a strong case for SEBI intervention into the market practices:

In a list of 140 stocks of companies with negative net worth, 105 recorded returns of more than 100 per cent in the past 12 months.

Negative net worth indicates that losses have eaten up the capital invested and the profits earned by the firm. Indian laws categorise such firms as `sick companies'.

These include ITI, Core Healthcare, IFCI, JCT Electronics and IFB Industries, which continue to record heavy losses. Some of these firms, such as Bihar Sponge, Tinplate, GTC, Ennore Foundries and Kirloskar Ferrous, may be on the road to recovery. Some firms might hold valuable assets.

Indeed, some textile mills do have valuable real-estate hidden in their balance-sheets. In addition, even if there is only a small probability that such firms will recover, these trades would be justified.

However, would the increase in trading volumes and the accompanying rise in stock value fall in this category? Highly unlikely.

Over the past 12 months, trading volumes in the T and Z Groups have gone through the roof.

The first includes stocks of companies that have not established connectivity with depositories or stocks that have come under surveillance, and the second companies that have consistently violated the Listing Agreement.

The explosion in trading volumes of this set of companies heightens the risk of retail investors being taken for a ride.

The increase in trading volumes in the Surveillance stocks in the T Group suggests that restricting operators to delivery based trades has not been sufficient to cool the ardour of stock market operators.

Irrational trades in, for instance, the exchange traded fund SPIcE only create an impression that there is a special place in the stock exchange for inveterate gamblers.

Caveat emptor: In any trade the rule of caveat emptor applies. The buyer has to be responsible for his actions. If he buys a stock looking for 100 per cent return within a month of purchase, there is nothing SEBI can do for him. There is a large section of retail investors that transacts such trades at the behest of brokers. That section does not deserve protection. It would be a waste of valuable regulatory resources if SEBI were to spend time protecting such investors.

At the same time, the exchanges cannot be run in a manner that allows patently illegal market operations. A market operator who now gets away with murder in the T and Z Groups today would only be emboldened to try the same ploy in the `A' Group or `B1' Group tomorrow.

In addition, it is also not becoming of a regulator to come down heavily when manipulators pull the market down, and adopt a `hands-off' approach when prices rise. It is thus imperative for SEBI to intervene.

Any intervention that leads to the quarantining of errant operators would go a long way in projecting India's stock market as among the best in the world.

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