Bull Run :: does History has some clues for this BULL RUN

Vertigo On Dalal Street

It’s high blitz one day, bloodbath another. Is a sinister hand shaking up the stock market? Is there cause for alarm? SHANTANU GUHA RAY and VIVEK SINHA report

Sudeep Chaudhari

ON JULY 25, 1990, the Indian stock market hit the 1,000 mark. It took two slow years to climb to 2,000 on January 15, 1992. For three months then, it rocketed dizzily — to 3,000 on February 29 and 4,000 on March 30. Then it stopped. It took seven full years to reach the 5,000 mark on October 8, 1999. Another year to touch 6,000. And then five long years before it climbed to 7,000 on June 20, 2005.

Compare that to 17,000 last month; 18,000 a few days later; 19,000 even as this goes to press. You don’t need to track the history of the Indian stock exchange to know the graph has never run crazier. But it’s not vertigo anyone’s complaining of in the market. The tensions are about other things. How much higher is this run going? How far should one ride it? Are corrections called for?

Real-estate tycoon KP Singh reaped an astounding Rs 19,500 crore on a single day early this October and DLF’s turnover touched the Rs 1,30,000 crore surpassing its employees and stakeholders’ wildest dreams. The company had listed itself barely four months earlier; its value has almost doubled since then. If this streak continues, Mukesh D. Ambani, Chairman of the Reliance Industries conglomerate could well jump ahead of Bill Gates, Warren Buffet, Carlos Slim and Laxmi Mittal to the coveted number one slot as the richest man in the world. Market pundits have already started making mega announcements to this effect in the dailies.

These are the conjectures on the market today. Excitement. Rumours. Dizzy calculation. That’s the mood. In barely 21 days, the Sensex has soared 2,154 points (14 percent) and then it grew further to touch the magical figure of 19,000. The Finance Ministry issued an instant note, so did the Securities and Exchange Board of India (SEBI).

What’s driving this? FIIs have been pumping in loads of money in the Indian market. Consider this one: the FIIs pumped in an unprecedented $ 4.2 billion in a nine-day stretch. This is not all. Global financial consultancies like Credit Lyonnais feel the Sensex could actually touch a whopping 40,000 mark in just three years time. Others, like the London- based brokerage Astaire and Partners, are more conservative: the 30,000 mark in the next four years is what they predict.

But amidst all this euphoric hysteria, perhaps it would do well to go back to the history of the stock market. When was the last time the graph escalated so crazily? What are the lessons of 1992? Shouldn’t some alarm bells be going off? Is the bull-run of the stock market so heady for everyone — investors, corporates, brokers, government, media — that no one is willing to pause and ask uncomfortable questions?HOW IRRATIONAL is this exuberance? How justified is this optimism? What’s driving the boom? Is there cause for caution? For those who are willing to disengage from the euphoria and probe the truth, the first few cautionary voices are starting to
come through.

“This tsunami in the Indian market has followed after the US federal interest rate cut on September 18 this year. But there is an element of a bubble that’s built up because of this surge and it needs to be observed closely,” says Abheek Barua, chief economist, HDFC Bank. Nimesh Shah, director of Mumbai-based brokerage firm, VFC Securities agrees whole heartedly: “I would say the sudden rise is definitely dangerous and though the Sensex might hit new heights by the end of the year, it’s important for investors to wait and watch.” And he is not alone is issuing the warning signals.

Last week, Finance Minister P. Chidambaram himself finally began to caution retail investors. Speaking at a conference in New Delhi, he said unprecedented foreign
investment flows into the rapidly growing economy had pushed the rupee higher and New Delhi was having trouble handling the rush of funds. “The rupee is an uncomfortable zone and we must find ways to manage a competitive exchange rate without hurting investments.

We cannot let the rupee suffer under pressure,” he warned. But are FIIs the only trigger for this unprecedented bull-run? Or is there something more shadowy, and, consequently, more unpredictable and sinister working behind the scenes? How would a sudden crash impact the mad rush of investors? What would be the magnitude of the damage? For those who have their ear to the ground, the market is agog with dangerous rumours. We have been here before. The hushed talk — in confidence, offthe- record — is that the Indian stock markets’ current ultra-run is uncomfortably similar to earlier bull-runs that ended in disaster.

Take 1992. The market had climbed 3,000 points in just three months. Investors were euphoric. Then came the slump. Big Bull Harshad Mehta’s securities scam triggered a crash that destroyed investor confidence for nearly six years. Rs 5,000 crore worth of market capitalisation was eroded in a few days. No one today remembers what happened to thousands of retail investors who suffered because they did not have the luxury of employing stock market advisors. As a result when the slump happened and Mehta went behind bars, they lost it all.

In March 2001, that happened again. Stockbroker Ketan Parekh, working through a network of brokers, ramped up the shares of select companies in collusion with their promoters, driving up the stock market index to dizzy heights. When his scam was busted, panic sales wiped out an estimated Rs 1,25,000 crore of investor wealth in a month. Thousands of small players who had invested in good faith suffered severe losses. Remember statements by Ramesh Gelli, the then chairman of Global Trust Bank which bore the brunt of Parekh’s madness? Gelli told investors that the bank had not sanctioned more than Rs 100 crore to Parekh despite issuing Rs 250 crore.

Big Bull 1 died in custody in 2001. Big Bull 2 — Ketan Parekh — was also arrested and debarred from the market. But he is now out of jail and pursuing a bewilderingly lavish lifestyle. He is known to park himself in suites of exorbitant super-deluxe hotels — out of bounds for even top corporate honchos. The Finance Ministry and investigating agencies like the Enforcement Directorate have reports of him travelling business class and even hiring private jets for travels. On ground, his preference is Merc-taxis. His parties are always thrown at the most expensive pubs in five-star hotels. All this when he is banned from the stock market, his bank accounts and assets remain seized by Income Tax authorities, and he needs to clear debts touching a whopping Rs 250 crores. Much of the market’s current buoyancy is probably legitimate. A majority of listed companies, touching the high water mark, may well be the beneficiaries of a genuine and congratulatory growth spurt. The trouble is, when the panic comes, everybody suffers. Distinctions between genuine and artificial are drowned in the chaos.

But that the big boys are at play again is evident on the Bombay Stock Exchange, the NCDEX and the MCX. Those who care to listen are again whispering about a dangerous shadow falling across the market operations on Dalal Street. The man is old and familiar, but he now has a new sobriquet: brokers are calling it the new proxy game of “Mr India”.

Bull in net Ketan Parekh's arrest in 2002 caused the last big crash

LIKE BEFORE, “Mr India’s” modus operandi seems to be the use of a host of front companies and a cartel of brokers from outside Mumbai. Speaking of him, a top finance ministry source says, “He has been aggressive in commodities for the last three years through a clutch of brokers on both NCDEX and MCX. In fact, the sharp rise in prices of menthol in the commodities exchanges was attributed to a bull-run triggered by him. He is high on commodities such as sugar and crude. But since he is currently operating through a band of brothers who act as his front, no one can touch him.” The gameplan is simple: do things without proof, do not keep even a shred of paper with you.

“He remains completely in the background, does not trust anyone and keeps changing his mobile numbers every three weeks. The numbers are given to a very selected clientele,” says the source, adding: “A number of medium level companies have already started queuing up to him to pick his razor-sharp brain.”

The Bull Effect If the bull rise continues, Reliance chairman Mukesh D. Ambani, currently placed behind Carlos Slim, Bill Gates, Warren Buffett, and Laxmi N. Mittal, could take the No 1 slot Real estate tycoon KP Singh reaped $5 billion on a single day of stock fury and touched the $33 billion mark An estimated $4.2 billion was pumped in by FIIs in just nine days Finance Minister Palaniappan Chidambaram wants markets to find a competitive exchange rate for the rupee and is worried about such unprecedented FII inflow London-based brokerage firm Astaire and Partners predicts the Sensex touching 30,000 by 2011

The unprecedented, almost astronomical, market spiral has raised the antenna of several regulatory agencies, but the trail is impossible to pin down. “We have reacted to a number of government and intelligence reports that some of these banned players are playing the market again. And they are not playing small or medium level, they are playing big and that is a matter of concern because of steady rise of the commodities market. Secondly, barring us, not many agencies are focused on the commodities market,” says Kewal Ram of the Forward Market Commission (FMC), a regulator for the commodities market. “We’ve tried to put up lots of fencing so that these players cannot take huge positions and we are ultra careful now. But on record, we have no names to offer. And unless that happens, no one is going behind the bars.” Does that put the ball back into the ministry’s net? Perhaps yes.

The SEBI, on the other hand, is confronted by exactly the same problem. “We are tracking a lot of movements because there’s definite information that a number of banned players are back in the market. We have reports on a whole range of players who are active through fronts. It seems to be the latest trend,” says G. Anant Raman, wholetime member, SEBI. “But please remember we work with certain restrictions. It’s a Herculean task to crack down on those who are banned but
still operating. Just because a banned broker is having a party or travelling in private airplanes, we cannot touch him. It’s for the investigating agencies to look into his source of income. We are not here to find out who’s travelling business class and hiring Mercs and entertaining friends in plush hotels. We can only ban people and recommend to the ministry that their accounts are frozen,” adds Raman, in an obvious clue.

IN THE wake of all this, the finance ministry has reportedly been furnished a detailed note on old operators like Nirmal Kotecha, Manish Marwah and Ketan Parekh. In fact, both Marwah and Kotecha have already beenindicted by SEBI for manipulating the shares of Atlanta, a real estate firm. A top SEBI official admits tracking the surge in stocks like IFCI and a few other index heavyweights that have contributed to the bourse’s on-going bull-run.

What raises all this beyond the realm of idle conjecture is the fact that the finance ministry itself is keeping tabs on “Mr India” and a list of his suspected operatives. Among them are:
• A prominent financial sector company with a large investment portfolio in real estate which has had its price skyrocketing over the last two years.

• A Mumbai-based real estate company whose share price has increased three times in the last two months.

• A Mumbai-based infrastructure companywhose share has increased ten times after its listing in the last 14 months.

• A Mumbai-based IT company whose fluctuating share has increased five times in less than six months.

Yet, the ministry’s hands are tied. Referring to the masterful, almost intangible, operations of Mr India, the official says on condition of anonymity, “It’s hard for SEBI, the ministry and security agencies to establish a direct link between the banned player (Mr India) and price manipulation because tracking surrogate ownership, benami transaction and financial layering in the market is always tough.”

So how exactly does “Mr India” manipulate the market and create his bull-runs? It seems he meets promoters of companies across India. Several promoters still have faith in his capabilities and his web of front entities. They give him the mandate to rig their share prices. “Mr India’s” front entities then start buying the shares of these specific companies. The buying is funded, partially or largely (depending upon the deal with him) by the promoters of the companies themselves. This is very hard to track as the payments to these brokers are normally made in hard cash. Payments are made all over the country, at all strange places. Interestingly, this is a trend which was synonymous with the two crashes that happened with Mehta and Parekh.

Simultaneously, the company makes positive announcements to fuel a bull-run in its share price through various newspapers and magazines. After the stock price is rigged up to a desired level, mutual funds, foreign institutional investors and hedge funds are roped in to buy large quantities from the market. The shares that these funds buy from the market are the very shares that have been cornered by “Mr India’s” front entities at much lower prices.

“The huge illegitimate profits made in the entire exercise are shared between ‘Mr India’, his front men and the promoters of the companies,” says a prominent Mumbai broker.

High rise Brokers and stock analysts will be reined in by SEBI

“The media’s role in the stock market movement is a matter of intense debate. We have already asked for certain regulations that needs to be imposed instantly. Once it comes into force, we will — hopefully — have more serious reporting,” adds Anant Raman. There are chances that even stock market advisories would come under the SEBI dragnet because of countless complaints received by the market regulator on their illegal movements, especially those relating to their connivance with promoters and regulating shares in a specified period so as to push the price of the stock. This increased transaction shows that the scrip is in demand, as a result of which a gullible investor moves in and purchases the stock. Once the price goes up, the promoter-broker duo quickly takes the escape route. This, in turn, leaves the small time, retail investor in complete mess. And it happens only because the small investor continues to remain at the mercy of the promoter-broker cartel.

The unethical connivance does not just stop there. Nor is this the only money the conspirators make. Many of the companies collaborating with Mr India are able to raise fresh capital at high premium, justified by the artificially raised high price of their shares. This fund raising is often done through another round of public offer, a foreign currency convertible bond (FCCB) issue, a preferential allotment of shares or any other convertible instruments to foreign or domestic institutional investors. Sources say many of Mr India’s present associates are those who were involved with him in the past. The regrouping of old associates has been a win-win situation for all, ostensibly because Mr India owed them crores of rupees from his earlier game.

There are two alleged front entities that are particularly in the eye of investigating agencies. These are headed by brokers who were small-time fringe players in “Mr India’s” earlier game. One of them, a 40-something Punjabi stock market operator, shifted his base from New Delhi to Mumbai a few years ago. He has been involved in the IPOs and subsequent price rigging of at least a dozen companies, including a pharma company from the north and a Mumbai based infrastructure company.

The SEBI has already nailed him for rigging the price of this infrastructure company and has come out with highly adverse interim orders against both him and the promoters of the company. No one, of course, knows how he is back in the market and active as ever.

The second person, say ministry sources, is from Gujarat and has a short Gujarati surname. He and his Punjabi cohort used to work together till they parted ways around four years back. This Gujarati has been in the news recently for successfully manipulating the price of a diamond jewellery company. SEBI had information of the same but before it could move it, the deal was struck and the money made.

These are the fronts. “Mr India” himself remains tantalisingly elusive. The only trail he leaves are unexplained binges in posh hotels, a battery of 13 cell phones he changes every month, and a surging stock market index reminiscent of the dangerously galloping bull.