JANUARY 20, 2002
 The Stockmarkets
 Banking & Finance
 Economic Revolutions
 Business Families
 The Consumer
No Revival Yet
The CII-Ascon Survey of 110 manufacturing and 12 services sectors reconfirms what many were fearing: that an economic revival isn't around the corner yet. The culprit is the basic goods sector, which is given a 45 per cent weightage by the survey in the manufacturing sector..

Show Me The Money
It seems the Finance Minister Yashwant Sinha is going to have a tough time balancing the government's books this fiscal end. Estimates of gross tax collections for the period April-December 2001, point to a shortfall. Unless the kitty makes up in the last quarter, the fiscal situation will turn precarious.
More Net Specials
A Chronology of Major Stock Scams

It was the media that first hinted there might be a scam involving the sale of shares to LIC. Feroz Gandhi sourced the confidential correspondence between the then Finance Minister T.T. Krishnamachari and his principal finance secretary, and raised a question in Parliament on the sale of 'fraudulent' shares to LIC by a Calcutta-based Marwari businessman named Haridas Mundhra. The then Prime Minister, Jawaharlal Nehru, set up a one-man commission headed by Justice M.C. Chagla to investigate the matter when it became evident that there was a prima facie case. Chagla concluded that Mundhra had sold fictitious shares to LIC, thereby defrauding the insurance behemoth to the tune of Rs 1.25 crore. Mundhra was sentenced to 22 years in prison. The scam also forced the resignation of T.T. Krishnamachari.

The man who seemed to own the sobriquet Big Bull, and whose Toyota Lexus became the subject of reams of column-CMS in the media, leveraged a loophole in the country's banking system to siphon funds from banks (using banker's receipts) and used the money to ramp up the prices of shares. The scam was uncovered in April 1992 and the Sensex came crashing down from a peak of 4,467.32 on April 22 of that year to 3,896.90 on April 28. It caused ripples in Parliament, and the quantum of money involved was placed in excess of Rs 3,000 crore, but unlike the Mundhra scam where justice was swift, the judicial processes related to the Mehta scam continue to drag on to this day although the man's sudden demise on December 31, 2001 (he was 47) could change that. In a bizarre twist, a few months before Mehta's death, the CBI filed a case against him and his brother Ashwin Mehta for allegedly selling the shares of their clients in their possession and later claiming that these very shares were stolen from their offices when their properties were in the court's possession. Harshad Mehta also had another brush, albeit a minor one, with stockmarket infamy, in 1998, but that's another story. At the time of his death, ascribed to a cardiac arrest, Mehta had been in jail for over 50 days over the missing-shares issue. Intriguingly, one of the other people involved in the scam, UTI's M.J. Pherwani, also died abruptly due to a heart attack in 1992.

Anyone who was old enough in 1994 to read will remember the advertisements-tens of them intriguingly headlined: 'Who is Pawan Sachdeva?' For the record, it was the peak of the public issue-led advertising boom and the ads were created by the Delhi branch of Rediffusion. Sachdeva, the promoter of ms Shoes, allegedly used company funds to buy shares (of his own company) and rig prices, prior to a public issue. He is alleged to have colluded with officials in the the Securities Exchange Board of India (SEBI) and SBI Caps, which lead-managed the issue, to dupe the public into investing in his Rs 699-crore public-cum-rights issue. Sachdeva was later acquitted.

CRB SCAM: 1997
Another scam forged by greed and discovered through accident. Chain Roop Bhansali, a smart-talking entrepreneur, created a pyramid financial empire based on high-cost financing. At its peak, his Rs 1,000-crore financial conglomerate had in its ranks a mutual fund, a financial services company into fixed deposits, and a merchant bank. That Bhansali knew how to work the system became evident when he also managed to secure a provisional banking licence. Then his luck ran out. An executive in the State Bank of India inadvertently discovered that some interest warrants issued by Bhansali were not backed by cash. The bubble finally burst in May 1997, but by that time investors had lost over Rs 1,000 crore. This was among the first retail scams in India and it was played out, in smaller avatars, across the country-especially in the South where financial services companies promised returns in excess of 20 per cent and decamped with the principal. Bhansali was arrested for a few weeks and released later on bail.

The Big Bull returned to the bourses. This time, he allegedly colluded with the promoters of BPL, Videocon International, and Sterlite Industries to rig the share prices of these companies. The inevitable collapse happened sooner than planned, Mehta orchestrated a cover-up operation that included a high-jinks effort by officials of Bombay Stock Exchange to (illegally) open the trading system in the middle of the night to set things right, but the damage had been done. SEBI finally passed its ruling on the scam in 2001, banning the three companies concerned from tapping the market-BPL for four years, Videocon for three, and Sterlite for two years. Mehta was debarred for life from dealing in securities. SEBI's order against Sterlite was later set aside by the Securities Appellate Tribunal (sat) in October 2001.

A passing remark heard by then finance minister Palaniappan Chidambaram resulted in a furore over what was a badly-kept secret on Dalal Street. Chidambaram was told that hundreds of companies had disappeared after raising monies from the public. An informal scrutiny revealed that perhaps over 600 companies were missing. Chidambaram ordered a probe by SEBI. The SEBI probe conducted in May 1998 revealed that while many companies are not traded on the bourses at least 80 companies that had raised Rs 330.78 crore were simply missing. Later that year, the Department of Company Affairs (DCA) was asked to probe and penalise these companies. DCA still investigating. Investigations continue to this day.

It was as innovative a swindle as any effected in the world. Savvy entrepreneurs convinced gullible investors that given the right irrigation and fertiliser inputs, teak, strawberries, and anything else that could be grown, would grow anywhere in the country. The promoters could afford to collect money from investors and not worry about retribution (or returns, for that matter). For, plantation companies fell under the purview of neither SEBI nor Reserve Bank of India. Indeed, they didn't even come under the scope of the Department of Company Affairs (DCA). By the time the government decided to change things in 1999, enough investors had been gulled: 653 companies, between them, had raised Rs 2,563 crore from investors. To date, not many investors have got their principals back, just another affirmation of the old saying about money not growing on trees.

Ketan Parekh's modus operandi wasn't very different from Harshad Mehta's. If Mehta used banker's receipts, then Parekh used pay orders to ramp up the prices of his favourite scrips (the K-10). Apart from money from the banking system Parekh also re-routed money from corporates like HFCL (Rs 425 crore), and Zee (Rs 340 crore) to good effect. He was caught when pay-orders issued by Madhavpura Mercantile Cooperative Bank bounced. Although the total amount involved in the scam was just Rs 137 crore, the impact was far greater.

Apparently, when a bear cartel sensed Parekh was in trouble, it stepped in and leveraged a dip in the Nasdaq to beat down stock prices. The resultant slump in the markets happened soon after Finance Minister Yashwant Sinha presented what he considered his best budget ever. Under pressure from the government, SEBI investigated the scam and heads began to roll. Among them: the entire management team of BSE, including its President Anand Rathi, CSFB, First Global, and, in an indirect connection, P.S. Subramanyam, the Chairman of UTI. Evidently, for the 18 months that PSS was Chairman of UTI, the Trust had mirrored the actions of the bull cartel. The result? When the market tanked, so did the NAV of its holy cow, the US-64.

The Mutual Funds Boom

The history of mutual funds in India begins in 1964; that was the year the Unit Trust of India launched US 64. It was only in 1987 that banks and insurance companies got into the act, with the State Bank of India taking the initiative. Forty per cent of the funds promoted by banks and insurance companies were launched in the go-go years between 1987 and 1993.

The first private fund, Kothari Pioneer (now ITI Pioneer) was launched in 1993. More funds joined the party and the total assets under management grew to Rs 61,301 crore in March 1994. But as the Sensex dropped, investor preference shifted to fixed-income instruments in 1996. Here, most new entrants found it difficult to compete with UTI, which had assured-return debt products. The period 1996-98 was the worst in the history of mutual funds. But several asset management companies used the opportunity to restructure their portfolios, and were ready for the 1999 boom in equities. In 1999-2000, the value of assets under management swelled to Rs 1,07,946 crore. Then the great equity meltdown happened. Today, there are 34 mutual fund houses managing 614 schemes and Rs 94,571 crore in assets. Not all of them will survive, but performance and transparency will tell in the long run.

The Sensex

The New York Stock Exchange has its Dow Jones Industrial; BSE has the Sensex. Given the nature of the Indian stockmarket, one may be tempted to pass this off as a portmanteau word, but the origin of the name is from a rather staid 'sensitivity index'. The index first made its appearance in 1986. Today, only 11 of the original club of 30 remain; the others have been supplanted by companies whose scrips are far more indicative of the happenings in the market. In these 15 years, BSE has launched 13 more indices, and some of these have taken some shine off the Sensex. But the index retains its gold-standard reputation. The highest it has ever seen: 6,150.69 (in intra-day trading) on February 14, 2000. The lowest? 956.11 on January 25, 1991, but we'd rather not dwell on that.

NSE: India's Premier Stock exchange

The late S.S. Nadkarni: catalyst

India's premier stock exchange today, National Stock Exchange (NSE), was born only as recently as November 1992. The cause of NSE was championed by Industrial Development Bank of India (IDBI), the country's largest financial institution, and its then chairman, S.S. Nadkarni. Other institutions didn't like the concept of NSE; nor did brokers on BSE who may have been averse to trading on a 'professional' exchange. But Nadkarni, and then SEBI chairman, G.V. Ramakrishna, who had the complete support of the finance ministry pushed it through as the panacea to all ills that ailed the country's exchanges. Now, a decade later, it is evident that NSE has revolutionised trading in India. Through its network of 3,075 VSAT exchanges across 379 cities, millions of Indians, who previously couldn't, can now trade in stocks. And competition from it has forced BSE to spruce up its act. In October 1995, NSE became the largest exchange in India in terms of volume of stocks transacted. In 2000-01, its total turnover of Rs 17,70,457 crore was higher than the BSE's Rs 10,00,054.62 crore.

The Great IPO Rush

Before 1977, the stockmarket was a place for the foolhardy or the intelligent as far as raising money was concerned. The number of initial public offerings (IPOs) made in these years rarely crossed 20. It was the FERA-induced dilution in the holdings of transnationals in their Indian subsidiaries that sparked of retail interest in 1977. The public issues of these companies were made at huge discounts as per guidelines laid down by the Controller of Capital issues (CCI). Reliance Industries with its 1977 IPO, subsequently expanded the market.

The next big boom in retail came in 1984-85, when more than 400 leasing companies entered the market. Most vanished a year later, leading to slump in the capital market. Things revived a bit with a couple of big branded issues like Apollo Tyre's Swarnaganga and Reliance's Khazana in 1989. But it was the abolition of the CCI in 1992 and the arrival of the free-pricing regime that set off a IPO boom (the number of merchant bankers registered with SEBI jumped to 1,163 in March 1997 before falling to 186 by March 2000).

Starting 1993, aquaculture, floriculture, granite companies, and NBFCs made a beeline for the markets. But in March 1995, the ms Shoes scam killed the IPO market for the rest of the decade for good, except for a short spark in 2000. Says Prithvi Haldea, CEO, Prime Database, ''The retail investor has lost money in the IPO market because of insufficient skills. Going ahead, we will see increasing number of institutions in the primary market.''

Doing It Online

Forget the hype, online trading in India is yet to take off. Despite a early-2000 launch, it accounts for just 1.5 per cent of the total daily turnover of NSE. A handful of brokerages account for the bulk of the trades: icicidirect executes an average of 1,600 trades a day. That puts it in the same league as the tenth-largest online brokerage in the US.

Derivatives: A New Way To Trade

Sebi approved derivatives trading in June 2000. The first instruments to be traded were index futures based on NSE's Nifty and BSE's Sensex. This was followed by options trading on the two indices in June 2001 and options in 30 individual securities in July 2001. Futures trading in individual stocks was permitted in November, 2001. Less than a month after the launch, National Stock Exchange (NSE) had achieved a record of sorts: the number of contracts (11,135 on December 14, 2001), is the second highest in the world after Spain's MEFF and ahead of London International Financial Futures Exchange (LIFFE).

The Story Of The Regulator

The Securities & Exchange Board of India (SEBI) was first set up as an administrative entity in 1988 under the stewardship of S.A. Dave. In January 1992, it was granted statutory powers. A decade later, though, the regulator still seems to lack the teeth to police the markets effectively.

D.R. Mehta: seen as reactive
G.V. Ramakrishna: strongman

That could well be a function of the present Chairman, the genial and media-savvy D.R. Mehta. Under earlier chairman G.V. Ramakrishna-the late S.S. Nadkarni, the man who held the post between GVR and DRM, did so for all of a year-the regulator was feared by brokers. Market buzz has it that Mehta prefers to react to crises rather than institute a system that can prevent them.

An oft-heard refrain concerns SEBI's alacrity in initiating 'action', and its inability to 'punish' offenders. It took two years for SEBI to complete its investigation of Harshad Mehta's 1998 rigging of share prices of Videocon, Sterlite, and BPL. Mehta says SEBI doesn't have enough powers. That's a fair comment: Justice Dhanuka report, which recommended strengthening SEBI, has been waiting to see the light of day at the Ministry of Finance since November 1998.

More powers apart, SEBI needs to fill its ranks with professionals, not bureaucrats, if it wants to become independent and market-savvy. And instead of its decisions being reviewed by appellate tribunals, they must directly go to the high courts. Nowhere in the world are quasi-judicial decisions by market regulators reviewed by an arm of the executive.