Indian Stock Market Woes Show Risks in Emerging Asia (Update2)
By Cherian Thomas
Mumbai, March 23 (Bloomberg) -- Money manager Deepak Malhotra drove to his east New Delhi office on March 2, expecting India's stocks to extend gains spurred by a market-friendly budget unveiled two days earlier.
Instead, the key Sensitive Index, or Sensex, plunged and went into freefall, losing 17 percent in seven days. It left Malhotra, who helps manage 4 billion rupees ($88 million) for Max India Ltd. from his third-floor Max House office, searching for answers.
``Nobody had a clue,'' he says.
It became clearer the following week when the Securities and Exchange Board of India suspended all six brokers on the board of the Mumbai stock exchange and its president, Anand Rathi, quit.
Amid charges of insider trading and whispers of bitter rivalry between two trading groups, SEBI, as the regulator is called, launched an investigation, which may result in the suspension of as many as 20 top broking firms. Among those being investigated are Credit Suisse First Boston Inc. and First Global Stockbroking Ltd., both of which have denied involvement. SEBI expects to complete its investigations by mid-April.
Welcome to investing in India. Nudges, nods, winks, personal contacts and personalities still dominate trading in Asia's oldest stock market -- red flags for foreigners who invested about $1.6 billion this year. The rigged nature of the market may keep funds out for now, investors said. While SEBI has unveiled rules to restore credibility, investors want to see them enforced before putting in more money.
``We will wait and see what happens,'' said Sam Mahtani, who helps manage $4.3 billion in stocks at Foreign & Colonial Emerging Markets Investment in London. ``We would require substantive evidence to invest.''
Scam History
It isn't the first time India's markets, like those in the Philippines, Malaysia, and elsewhere in Asia, have been roiled by securities scams. In 1992, a Mumbai broker named Harshad Mehta was charged with wrongfully using funds from banks to boost stocks, assuring them of a fixed return.
Banks in India are prohibited from lending money to brokers for stock purchases. With money from the banks flooding the markets, the key stock index more than doubled in the four months between January and April of 1992. The index then lost almost all the gains in the next seven months as news of the scandal spread.
Although barred from trading, Mehta's name popped up again in allegations of rigged share prices in 1998. Investigations into that scam have just been completed by SEBI.
Still, the current turmoil is the worst the market has been through, investors said.
``It's one of the darkest phases for the stock market,'' said Ved Prakash Chaturvedi, chief executive at Cholamandalam Cazenove AMC Ltd., which manages 6 billion rupees in India.
Trader Rivalry
At the center of the troubles, India Today and other media reports say, is the rivalry between two groups of traders. The first, they say, is led by Rathi, who in addition to then being the president of the Mumbai stock exchange, manages a brokerage. Ketan Parekh of NH Securities Ltd. led the other.
Parekh is Australian media mogul Kerry Packer's main business partner in India. The two are also partners of Vinay Maloo of Himachal Futuristic Communications Ltd., an investment company spearheading Packer's investments in India.
``Ketan Parekh was at his peak in February -- an indication of his interest in a stock was enough for people to buy,'' said Madhukar Sheth, director of Sheth Securities Pvt. in Mumbai.
Media reports speculate that Rathi, as president of the exchange, knew of Parekh's holdings in stocks such as Himachal Futuristic. They allege that brokers in Rathi's group may have sold the stock short, or sold shares they didn't own to capitalize on an expected decline in the stock.
Himachal Futuristic, which rose to as high as 1,400 rupees at the beginning of the year, has plunged 85 percent, closing at 203.45 rupees on Thursday. The Sensex has lost 6.10 percent this year.
Rathi has denied any wrongdoing and says SEBI is not investigating his firm. Parekh and SEBI officials declined to comment.
Staying Away
The Mumbai exchange's problems have spread to other bourses in the country. About 100 brokers on the Calcutta Stock Exchange failed to meet their payment obligations, the Business Standard reported in its online edition today.
India's Finance Minister Yashwant Sinha stepped in to reassure investors soon after the scandal broke. Rules would be changed, he said, to ensure that companies recommending stocks disclose their holdings in those shares. He also wants the 22 exchanges in the country run by self-governing trusts to become companies to make them more transparent.
Still, ``the Indian market lacks depth, there's a lot of collusion between brokers running the exchange and office bearers,'' said Sanjay Sachdev, managing director at IDBI Principal Asset Management Ltd., which manages 14.5 billion rupees. ``It's a homemade recipe for insider trading. This has got to stop.''
Big money isn't going to make it back into the Indian stock market until that happens.
``We won't buy as long as this problem is not solved,'' said K.S. Pai, who manages about $200 million in Indian stocks for Aquarius Investor Advisors Ltd. in Singapore.
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