rampant. And virtually impossible to pin down. So legalise it, keep
tabs on it, and let everybody enjoy the spoils-not just promoters,
fund managers and operators, but minority shareholders too.
If this sounds suspiciously like a legalise
cannabis/prostitution/prohibition/etc, argument, well it isn't that
different: Rather than forcing ''insiders'' to break the law-and
thereby equating them with thieves, murderers, and rapists-allowing
them to profit from material information not disclosed to the outside
world can actually work to the benefit of the external universe
of shareholders. Making insider trading a crime, however, doesn't
translate into healthier returns for the small investor, although
the insider on most occasions laughs his way to the bank. (Quick,
can you remember the last time somebody got indicted for insider
Insider trading, in case you're still wondering,
is the practice by which a company insider uses material information
not yet disclosed to other shareholders to profit by trading in
that stock. This is considered unfair because investors without
that information can't benefit. But does that really hold water?
Consider the case of Alliance Capital's former star fund manager,
Samir Arora, who earned SEBI's wrath for allegedly disposing of
Digital shares on the basis of unpublished price-sensitive information
he had about the Digital's merger ratio with hp. Now fact is that
if Arora did indeed do such a thing, shareholders should actually
be garlanding him. Because the moment Arora sold Digital, he would
have brought down the share price to reflect more accurately the
company's value. Public shareholders may not have had access to
the info that triggered that sale, but they would have seen the
price fall, which would have been a good-enough-and very quick-
alert that something was happening at Digital that could impact
future earnings. That's one of the biggest benefits of insider trading:
The share price (falling prices in this case) can be the fastest
way to disclose information about a particular stock.
Now let's assume that there was some insider
trading in Enron a year-or-so before it fell from grace. Unfortunately,
there didn't seem to be much of insider activity-for even if a handful
of Enron insiders privy to the accounting fraud going on in the
company had begun selling stock, that would have been a clear signal
for the external shareholders that something wasn't right at the
former energy Goliath. And the entire world would have known about
the goings-on at Enron much before they eventually came to light.
Anybody for insider trading?
BT 50 INDEX
Will we see 200 in 2003? Maybe, just maybe.
this magazine did a story about how the Sensex could cross 4,000
this year, people scoffed. Now, the market is nudging 5,000 and
will probably soon cross the mark. If things hold on, the Sensex,
reckon some bulls, could even cross 6,000 sometime in 2004. That's
a big if, and contingent on no new stockmarket scams coming to light.
Even a whiff of a scam could, in a market where most investors have
borne the brunt of such happenings, dampen sentiment. Do we think
BT50, India's first free float index can cross 200 this year? Maybe.
As far as the Sensex is concerned, another major resistance-zone
lies just ahead, between 5,059 and 5,222. Still, given the way in
which the markets have moved this time around-a gain, some consolidation,
a minor dip, then a gain again- we believe 200 is a possibility
A Season For Change
First, and this was on september 1, Bombay
Stock Exchange's (BSE) Sensex became a free float index, much like
BT 50, India's first float index. Now comes news of a major reconstitution
of the index, this one scheduled for November 10. On that day, five
companies will become part of Sensex, replacing a similar number
which, the thinking goes, are no longer representative of the market.
The companies being inducted are Bharti Televentures, India's largest
cellular telephony company, HDFC Bank, ONGC, Tata Power, and Wipro.
The ones exiting Sensex are Castrol India, Colgate-Palmolive (India),
GlaxoSmithKline Beecham Pharma, HCL Technologies, and Nestle. BSE
had kept ONGC and Wipro out of its index out of fears that the high
promoter stake in these companies (84 per cent in both cases), would
distort the index. Now, thanks to the free float methodology, such
companies can be included without any such fear. As for some of
the companies exiting the index, they'd long since ceased to represent
Is My Consumer?
HLL looks beyond the SEC.
marketers have known all along that the widely accepted socio-economic
classification (sec, for short), based on the education and occupation
of a household's chief wage earner, has its limitations. Its very
definition makes sec an inferred taxonomy. "There are some
limitations with sec and we do make mental adjustments while using
it," admits Hoshedar Press, Executive Director, Godrej Consumer
Products. "Consumer behaviour is governed by income, exposure
to media, population of the town or city," adds Harsh Mariwala,
Chairman, Marico. "While we use sec, we also factor in these
variables." Trust India's largest fast-moving consumer goods
company to do one better.
As part of a Unilever initiative being implemented
in Africa, West Asia, East Asia, and China, Hindustan Lever Limited
(HLL) is moving to a proprietary classification, the Living Standards
Measure (LSM), which segments consumers into 18 clusters on the
basis of 25 parameters such as ownership of durables, income, consumption
of media, size of household, and shopping habits. "This is
a surrogate measure of the consumer's capacity to pay and buy,"
says B.V. Pradeep, Head (Consumer and Market Insight), HLL. "It
is more robust than the two-variable sec." An LSM 1 family,
for instance, will live in a one-room tenement and own a cycle,
a B&W television set, or a pressure cooker, and boast an income
of Rs 3,000 a month, while an LSM 8 one will own a car, a mobile
phone, eight other durables, and boast an income of Rs 10,000 a
month. Almost 95 per cent of Indian households belong to the first
eight LSM categories. The classification can also help marketers
match products to consumer segments. For instance, HLL is targeting
all Lakme offerings at LSM 8. And it is eyeing a couple of Unilever
brands that just might fit into the corresponding LSM categories.
Now, that, sec couldn't do.
India is definitely on the FII radar now.
FII money driving
the market is old news. After all, of the Rs 82,160.5 crore foreign
institutional investors (FIIs) have pumped into the Indian market
since 1992, Rs 23,211.2 crore has come in the first ten months (till
October 17) of this year. What isn't is the entry of some big, but
equally low-profile, FIIs this year, further evidence of the fact
that circa 2003, India is the place to be for investors in equity.
At last count (and this article is being written in mid-October),
27 FIIs had entered the Indian market since May 2003, when the current
bull run began. Among the entrants is Charles Schwab Investment
Management, which manages around $879.5 billion (Rs 39,57,750 crore)
worth of assets; it added $ 7 billion (Rs 31,500 crore) of these
in the second quarter (April-June) of this year. Indeed, even investors
who have been around for some time are finding it difficult to resist
the lure of the Indian bourses. Warburg Pincus, which has invested
over $700 million through its private equity arm, registered an
FII in October. Fidelity Investments, which manages $1,534.5 billion
(Rs 69,05,250 crore) of assets, has introduced more India-focussed
funds. And a clutch of pension funds-these normally manage more
assets than equity funds-have entered the market. Andrew Holland,
Vice President (Research), DSP Merrill Lynch, cautions that the
FII inflow may slow as valuations increase. Right now, however,
there's no sign of that.