The Hindu : Ups and downs

Online edition of India's National Newspaper
Sunday, Feb 08, 2004

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Ups and downs

The stock market has been buoyant but there has been volatility too. Oommen A. Ninan takes a look.

A LITTLE over six months ago, the Indian stock market was still in a long lull. Then, suddenly, it spurted, touching new highs. The reason for this was simple: a renewal of investor interest, especially of Foreign Institutional Investors (FIIs).

What was the stimulant? Among the possible factors are the revival of the economy spread across virtually all sectors; the effects of a good monsoon, which spurred demand; falling interest rate levels, the likes of which India had never seen; and the cost-cutting measures that most Indian corporates adopted, which enhanced their efficiency even as they faced international competition.

The market began to show signs of upward movement in July 2003. It positively galloped during October-November 2003. However, the rise of stock market indices came to a sudden halt around mid-January 2004. Then began the period of volatility, and fear gripped the stock market.

A fall from the peak would upset the apple cart for everybody, and certainly for the regulatory authorities. Early this January, the benchmark Bombay Stock Exchange 30-Share Sensitive Index (Sensex) peaked at 6200 levels (January 9). The "mini budget" of January 8 — which introduced sweeping changes in customs and excise duties on a range of products — boosted sentiment on the bourses. When market indices reach peak levels, the regulatory authorities and the Government usually become uncomfortable, and the Chairman of the Securities and Exchange Board of India (SEBI) repeatedly advised caution.

The volatility of intermittent rise and fall began on January 12, with the fall intensifying on January 15.

The volatile movement of the market has continued unabated. The issue began with the Reserve Bank of India informing SEBI that there was a possible outflow of illegal money from the country, which was being pumped back into the stock market through Participatory Notes. The PN is a derivative instrument issued by FIIs to market participants who do not wish to reveal their identities, or are not registered with the Indian regulator and are therefore barred from participating in the Indian market.

The regulatory authorities found, after preliminary investigations, that a whopping Rs. 24,000 crores had entered the market through the PN route. This accounts for 25 per cent of the total FII investment (Rs. 90,000 crores). This is alleged to have come through the Mauritius route, which is known to have been used for money laundering. A similar phenomenon was noted during the stock market boom of 2000.

The investigation into the Ketan Parekh-led stock-market scam uncovered the fact that around $2 billion had been brought in or taken out of the country through Overseas Corporate Bodies (OCBs) registered in Mauritius. It also came to light that the ultimate beneficiaries of these capital flows were resident Indians.

The recent revelation that Rs. 24,000 crores had infiltrated the market via the PN route, jolted SEBI. The capital market regulator responded, at first, by saying that it would ban all investments through the PN route. Following the announcement, the market began to fall. But the pattern was unpredictable: fall was followed by rise, and another precipitous fall.

This unnerved both SEBI and the Government. Not surprisingly, in the circumstances, SEBI performed a volte face and legitimised investments by the PN route, provided they had been made before February 3, 2004.

When slush money makes its advent, there is a possibility that markets may behave unnaturally and create losses for investors. In the aftermath of the 2001 scam, led by Ketan Parekh, the RBI banned OCBs from investing in the stock market. In the present case, that of the PN route, the capital market regulator has preferred to allow the money to flow into the country. Market buoyancy helps in the run-up to an election.

When bourses behave in a dull and lacklustre fashion, no one bothers to find out why. But when they move up sharply, everyone wants to know what is happening.

When the going is good, there are many who claim credit for the buoyancy in the market, the first among them being the Government. Apparently, not even the most cautious Finance Minister can resist the temptation of projecting an upbeat momentum in the market as one of his achievements.

It is true that there is a consensus among market observers that the present correction could stretch itself out for at least one or two months more. It is also true that the present boom has borne fruit across a wide range of sectors and cannot be reduced to the machinations of a single entity — like Harshad Mehta in 1992 and Ketan Parekh in 2000.

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