Go Away, Paper Tiger!

If there were a Grammy for the ‘Worst Sound Quality’, DR  Mehta and

the Securities & Exchange Board of India would emerge runaway winners. After

all, under Mehta’s stewardship, Sebi has mated every thump of its watchdog

drum with every tortured pull of the policing string to give birth to today’s

cacophony in the stock market.

Twenty-four hours after Budget D-day, which saw the BSE Sensitive Index

welcome Yashwant Sinha’s proposals by spurting by over 100 points, a clueless

Sebi ordered a probe into the bear hammering, sending the Sensex into its

yet-to-be-explained tailspin. All right rudder and throttle, Sebi tried to prove

that it was entering a new mode–after all, it was the first instance that the

market watchdog had initiated an enquiry without pressure from any quarter. The

market was so impressed that the Sensex crashed by 176 points to close near the

4,000-mark.

A payment crisis began to emerge within two days, prompting another almighty

declaration from our toothless tiger. Big names might be forcing the market

movement southwards, it was announced, and the likes of Bigger Bull Ketan Parekh,

RS Damani, Ajay Karan, and institutions no less than Global Trust Bank, Credit

Suisse First Boston and JM Morgan Stanley named as being allegedly involved in

manipulating the market. Sebi proudly got the exchanges to hum and haw–there

was enough money to ward off any payment crisis, after all Rs 7,000 crore is

more than monkeys get for peeling peanuts.

As if to prove its insatiable lust for odd-numbered dates, Sebi sprung into

marshal action again on March 5, banning with immediate effect all short sales.

Everyone applauded the lower exposure risk in the market and Sebi bowed and took

the applause with due humility, but failed to explain that in the long run, this

would also result in reducing liquidity. The BSE Sensex thumbed its nose,

majestically slipping by another 100 points to dive below 4,000.

Someone somewhere decided, finally, to take a closer look at the K-10 stocks.

For those not in the know, we are talking them biggies–Wipro, Infosys

Technologies, Global Tele-Systems, MTNL, Satyam Computer, Zee Telefilms,

Himachal Futuristic Communications, Reliance Industries, Reliance Petroleum,

Hindustan Lever and State Bank of India. An even closer stare and someone woke

up and realized these were mostly IT stocks, and if the IT industry were ready

to do everything for Yashwant Sinha after his goodie-goodie Budget, why were

these scrips crashing? It was a pity for Narayan Murthy, Premji & Co, who

lost pride of positioning in the Forbes’ Richest list–their scrips had

crashed 40-70% in a week.

Another odd-numbered date prompted further action–additional margins on net

outstandings were hiked to 25% from 10% to curb volatility. Also, a cap of Rs 50

crore was slapped on to brokers’ daily outstandings to ensure that safety at

other exchanges was also bottled in. The market all but threw up in disgust–the

Sensex closed 110-plus points down. Then came the Sebi hoopla–all seven broker

members of the BSE governing board were suspended. Former president Rathi was

muzzled as a broker and significantly, all other directors of Sebi were also

banned from trading.

A closer look at the laxity of supervision and paucity of action against

errant parties by the market watchdog makes for interesting analysis. It was

after the securities scam came to light in 1992 that the Sebi got the teeth to

take tough decisions. The setting up of the automated National Stock Exchange

was also a wake-up call, coming at a time when the all-important BSE refused to

change. The NSE ushered in an era of on-line surveillance systems, trade

guarantees, elimination of paper-related fraud and in the long haul,

dematerialization of shares.

To give our tiger it’s due, Sebi did flex its regulatory muscle to

kickstart the development process along, propounding regulatory change to clamp

down on market irregularities. But it has always been a classic case of

too-little, too-late– when it came to stop gnashing and actually bite, Sebi

would just give a pathetic grin and blame either the tartar collected on its

teeth by years of not biting, or its bleeding gums, from having bitten into the

wrong meat many a time.

It was in this backdrop that a series of market scams erupted–the Reliance

‘share switching scandal’, scrapping of the Controller of Capital Issues

which led to a splurge of IPOs, most of which hit the common retail investor

hard, the CR Bhansali-masterminded Rs 1,000-crore CRB scam, the re-emergence of

Harshad Mehta as a media and Internet-pushed market guru, and finally Ketan

Parekh...all of them leading to Black Friday, when the the bottom fell out of

the stock market as operators poached in on Parekh’s K-10 bundle and smashed

the Sensex out of shape.

The latest victim, albeit of its own follies but a victim nevertheless, is

UTI. The ICE avalanche has shaved off Rs 1,300 crore, or a mind-boggling 52%,

from US-64’s investments in the technology sector. The exposure, at Rs 2,527

crore, has seen a steep fall to Rs 1,200 crore, given the smashing that

technology stocks have suffered across the country. US-64 had 13.5% of its

assets in technology stocks for December 2000, which is also the last available

portfolio for the balanced scheme. Consider UTI’s exposure to HFCL at an

unbelievable Rs 50 crore, and the mindless or motivated indiscretion of fund

deployment comes to the fore.

What prompted UTI to permit this kind of exposure to the volatile technology

sector? Obviously, no one has learnt from the Nasdaq lesson. Finally, the

paradox behind the tragedy: in order to prevent further erosion in NAV, UTI is

forced to prop up market price by continued buying in these scrips!

It is in situations like this that the government and its appointed bodies

have to take remedial steps to restore market confidence, especially keeping

US-64 in mind. Most of the smaller investors in the country have exposure to

US-64, and they will be the ones hurt most. Among the fund’s technology

holdings, only VSNL has been able to defy the market movement, with gains of

1.75%. The fund’s sizeable holding in RIL has also helped, as the scrip has

jumped quite radically since December, but in the face of monumental ICE losses,

these gains are equal to the proverbial drop in the ocean.

And UTI chief PS Subramanyam’s statement that heavy sales in January and

February reduced exposure to IT, telecom and media stocks to 19.6%, compared to

30% earlier, tells a truth–if not for this, UTI could have been flattened.

Clearly, all is not as it should be in our market system…unless the watchdog

begins to loom large over the heads of scamsters and errant parties, it will

remain that way. Paper tigers, no matter how vicious the snarl and the gnashing,

have nothing to bite with.

Rajeev Narayan in New Delhi