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| September 26, 2005 | Monday | Sha'aban 21, 1426 |
Watchdogs monitoring stock market: Mumbai Letter
WORRIED over the ‘irrational exuberance’ of the stock markets and the bizarre manner in which many scrips have been rising over the past few weeks, the federal government last week despatched a crack team of intelligence bureau sleuths and income-tax and finance ministry officials to keep a close watch on developments.
They are being helped by officials from the Reserve Bank of India, the country’s central bank, and the Securities and Exchange Board of India (SEBI), the market watchdog, to ensure that the on-going bull-run doesn’t end up as a bubble. Raids were also conducted on a few brokers here and in Ahmedabad in recent days.
The Sensex, the benchmark index on the Bombay Stock Exchange (BSE), last week broke through the 8500-barrier, and was showing all signs of heading to the 10,000-mark, before some sense appeared to have dawned on the market players. The Sensex underwent some corrections, but bulls continue to have a stranglehold on the market. The key index has shot up from 7000 in June to 8500 last week, the fastest rise in history.
All the major indices on the BSE and the National Stock Exchange – the two largest marts in India – have been soaring on the back of a ceaseless inflow of funds from foreign institutional investors (FIIs). FIIs have so far pumped in a record $8 billion into the Indian capital markets (as against $8.5 billion in the whole of 2004).
The new entrants include FIIs from South Korea and Japan, and US-based institutions have also been injecting huge amounts of funds. Much of the foreign inflow is based on sound reasoning: the Indian economy, despite record-high oil prices, is expected to grow at seven per cent this year, and a bountiful monsoon is expected to boost the agricultural sector as well.
Foreign exchange reserves have shot up to $145 billion, and inflation is well under control. Industrial production has also perked up, and so too have exports.
But the federal authorities are worried that some of the money, entering the markets through Mauritius-based companies, could be tainted, basically signifying laundering of funds maintained abroad by resident Indians. Some big time operators are known to divert such funds through the Mauritius route to the stock markets.
RBI governor YV Reddy has also warned banks – commercial, co-operative and non-banking finance companies – to be careful about their lending policies. Some scam-tainted brokers in the past have misused funds from co-operative banks and siphoned it off to the stock markets.
What is even more worrying, thousands of small time retail investors are entering the markets recklessly, paying scarce attention to the quality of scrips or to their long-term prospects.
SEBI chairman M. Damodaran has cautioned such investors, urging them not to be taken in by the hype churned out in newspapers and web sites, and market advise and tips doled out by so-called experts. Shockingly, many of the low-priced scrips (or penny stocks) have seen a phenomenal rise in recent weeks.
Retail investors have been floored as prices of these scrips – ranging from less than a rupee to around rupees five or six – have skyrocketed, giving returns of a thousand per cent or even more (in one case, a whopping 5000 per cent).
SEBI has now introduced caps on many such scrips. Earlier, low-priced stocks could see a variation of 20 per cent during trading hours, but now the market regulator has brought it down to five per cent, to curb volatility.
These measures should hopefully cool down the over-heated markets and bring some sense to the operators. Unbridled speculation in the past has resulted in major scams, leading to meltdowns in the market.
PUNTING is big business in Mumbai, India’s financial and commercial capital, and millions of people are addicted to it. Punters play the stock markets, and before the entry of foreign institutional investors, were among the biggest movers of scrips.
Betting on the racetracks is also a major activity, and on weekends thousands head for the Mahalakshmi racecourse, or to the one in Pune, about 180 km from here. The stakes involved are huge, and the government earns handsomely by way of tax revenues thanks to the gambling instincts of citizens.
Lotteries offer another avenue for gamblers, and thanks to the low stakes, millions buy tickets, now churned out by electronic gizmos installed in every neighbourhood restaurant and ‘paan’ shop. And for thousands of commuters travelling on Mumbai’s suburban trains, cards provide entertainment and an easy way of earning (but more likely, losing) money.
The state government earns millions of rupees by way of taxes levied on gains earned in the stock markets, at the racecourse and also in lotteries. Yet, authorities here have a prudish attitude when it comes to gambling on cricket matches, and the police frequently target bookies and bettors.
Betting on cricket is widespread and a hugely popular pastime, but thanks to the lack of an imprimatur, indulging in it is considered to be an offence. Since billions of rupees are bet on cricket matches, and bookies rake in millions, it attracts the undue attention of rent-seekers in government.
And unfortunately, when the state wishes to fix up an inconvenient individual, it grabs at any links that he or she might have to bookies and cricket betting. The fate of Tarannum Khan, a dancer (who thanks to years of hard work and also her artistic skills, earned several million rupees, but has now ended up in a police lock-up), is a glaring example of how vengeful authorities can conveniently raise the bogey of betting.
Tarannum was a dancer at a prominent bar in a Mumbai suburb, and had attracted a huge fan following. Many of the customers showered thousands of rupees on her, and over the years she saved substantial amounts and built a bungalow.
The Maharashtra government last month imposed a widely criticised ban on dance bars (a move that has been challenged in court), at the behest of a small-town politician who has suddenly found himself catapulted to a position of prominence, as the deputy chief minister. The move rendered about a hundred thousand women dancers jobless, and attracted a lot of flak for the ruling combine.
So an income-tax raid was ordered, and Tarannum’s house was searched, resulting in the recovery of a couple of million rupees in cash and jewellery. It was no big deal, and the dancer pleaded that she was clueless about filing of returns and was willing to pay the penalty.
But further investigations revealed that she used to frequently bet on cricket matches, and so the police decided to fix her on that count. Selective leaks in the media dubbed her as a bookie, the names of Bollywood stars and international cricketers began floating around, with suggestions that they used to frequently visit the bar.
The names of actor Aditya Pancholi and Sri Lankan spinner Muthiah Muralitharan cropped up, linking them to Tarannum. Both fortunately came out openly, denying that they knew her personally, while admitting that they had visited the bar once.
But the damage was done, and Tarannum was last week whisked away to police custody, on vague charges of indulging in gambling. Big-time bookies in Mumbai earn millions of rupees (all tax-free), and as long as the business remains unregulated and opaque, the government will continue losing revenues, while unscrupulous rent-seekers will exploit the situation.
EUROPE’S leading automaker, Fiat, has finally decided to join hands with India’s premier industrial house, the Tatas. The two groups have decided to consider the possibility of jointly taking up development and manufacturing of automobiles.
According to Ratan Tata, chairman of the Mumbai-based group, both companies would benefit from the new alliance. Tata Motors produces the popular Indica (besides the Indigo and the Marina), while Fiat manufactures the Palio at its Mumbai plant. Though Fiat had acquired a sprawling site near Pune to produce vehicles in India, it is now likely to manufacture the Palio at the Pune plant of the Tatas.
Earlier, the Hindujas, the London-based overseas Indian business family, were toying the possibility of acquiring the Fiat India plant. The Italian auto giant has had a long association with the Walchand Hirachand group of Mumbai, which used to run Premier Automobiles. However, after the opening up of the automobile sector in India, and the entry of virtually all the global manufacturers, who have set up plants in the country, the traditional producers (including Premier Automobiles, and the Birla-owned Hindustan Automobiles) have seen a sharp decline in their fortunes.
For Fiat, the tie-up with the Tatas forms part of what Sergio Marchionne, the CEO, says is “our clearly defined strategy that calls for targeted alliances across the automobile value chain.” The auto major has similar associations with PSA Peugeot Citroen, Suzuki and Ford Motors.
The Tatas are eyeing the global markets, and have successfully exported their cars to Europe, Africa, the Middle East and even South East Asia. Other Indian auto giants, including the Mahindras, are also on aggressive over-drive in the foreign markets.
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