'Insider trading is rampant in India'

Mar 11, 2013

In this issue:
» India's rating saved but India Inc pays the price
» Will RBI cut rates further?
» FIIs are exiting these stocks
» Fed's QE responsible for Dow hitting new highs
» and more....

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Insider trading is a phrase that has landed many global fund managers into trouble. It is defined by Investopedia as the buying and selling of stocks by someone who has access to material non public information. Naturally such trades are unethical and potentially damaging to the integrity of capital markets. This is because someone has an advantageous position because of the information. And this someone misuses his position to exploit the markets for his or her personal interest. Therefore regulators around the world pay a lot of attention to this aspect. To the extent it is possible; insider trading is controlled and punished.

But as Mr Narain, the current Managing Director of National Stock Exchange (NSE) opines, insider trading is rampant in India. And this is in the smaller companies at what he calls 'chillar level'. The insider trading is fuelled by the Indian investors' interest in 'tip based' investing. Naturally to generate tips, brokers can and do resort to insider trading. In many cases, the managements of the companies are party to such tips. The idea is to try and boost prices of these stocks. And in many cases this is done through tips based on insider information.

It is not that India does not have adequate controls and mechanisms to detect and prevent insider trading. Unfortunately most of these systems are in place to capture the larger fish in the market. Therefore if there are instances of insider trading in the case of larger companies, these events are cracked down and individuals are taken to task. But at the grass root levels the systems fall short.

As Mr Narain points out the insider trading can be controlled in two ways. First is the use of technology to tap into the networks. This would throw up all cases with ease and minimal cost implications. The second and more important is to change the attitude of the regulators. Currently the attitude is to chase the big guys and ignore the smaller stuff. Unfortunately it is this attitude that fuels the idea that the perpetrators can always get away with their crimes. Once the attitude is changed or forced to change, all instances of insider trading can and will be controlled.

For investors there is a huge takeaway in what Mr Narain has said. Investors need to keep in mind that the 'tips' they receive could just be an offshoot of insider trading. Such tips usually jack up the prices in the short term. But unless fundamentals follow, such momentary price spikes will correct just as quickly as they came about. And when this happens investors will lose their hard earned money. This is why it is always better to do your own homework when buying stocks rather than relying on a 'reliable' tip.

Do you agree with Mr Narain that insider trading is rampant in Indian share markets? Please share your comments or post them on our Facebook page / Google+ page

 Chart of the day
The engineering sector in India has taken a hard hit with the slowdown. Persistently high inflation rates combined with the hawkish stance of the Reserve Bank of India (RBI) has hurt capex plans of most companies. This in turn has led to a slowdown in demand for engineering sector. As shown in the graph, things are not too good on the export front either. There has been a decline in demand in nearly every export market in the period April 2012 to January 2013 as compared to the year before numbers. The reason for this is the recession brought about by the crisis that has gripped the global economy since 2008. Unless the global climate turns favorable demand from export markets is unlikely to revive. Therefore the only hope for the sector is the domestic market. For this there is a need for policy reforms that will boost the investment climate. Unless that happens, the woes of the engineering sector will not end.

Data Source: Financial Express

India's slowing growth and rising fiscal deficit has been a matter of great worry. It has been a big headache for the Finance Minister. Rating agencies have been threatening of downgrading India's rating to junk status if the financial condition deteriorated further. If this happens, attracting foreign capital would become even more difficult and expensive. Keeping these risks in mind, the FM has launched an austerity drive. But this is taking a toll on highly indebted corporates. Tight liquidity has resulted in a torrent of corporate rating downgrades. During the first half of FY13, rating agency CRISIL downgraded 484 companies. This went up to 530 downgrades during the October-February period. This means over 1,000 downgrades this fiscal. It must be noted that there were just 492 downgrades during the whole of FY12. Banks have been facing the risk of rising bad loans. As such, they have shut the doors on small and medium enterprises. This has been the worst affected segment. It will take a while before these companies escape from the debt trap.

The RBI had its job cut out over last few Monetary Policy reviews. To turn down the government's appeal for aggressive rate cut. After all, it saw little sense in cutting rates when inflation was nowhere near its comfort zone. More so because the government did little to assuage its fiscal deficit and inflation worries. Hence review after review the RBI stuck to its dovish stance. Rate cuts though few and far between, hardly offered enough growth stimulation to the economy. However, the Union Budget and several other economic indicators seem to suggest that the RBI might have to explain itself more. Especially if it chooses to stick to the current interest rate levels much longer. For one, the government reiterated its commitment to fiscal consolidation. The FM is targeting fiscal deficit below 5.2% for FY13. FIIs and foreign investors will continue to be welcomed. The risks of government's massive borrowing programme may also be mitigated if the proposed inflation linked bonds find wide acceptance. Fall in oil prices could be lower inflation in the days to come. Rise in Chinese exports gives cues of global economic recovery. Thus the RBI will have to articulate the next Monetary Policy review carefully to justify its stance. Having said that, we believe, as in the past, Dr Subbarao and his colleagues should not give in to undue pressure.

One would not be entirely wrong in saying that retail investors tend to have a love-hate relationship with foreign institutional investors (FIIs) . They love it when FIIs buy into stocks that are owned by them. And would of course dislike it when FIIs exit such stocks! After seeing an outflow of Rs 27 bn in CY11, FIIs' inflow into equities stood at whopping Rs 1.3 trillion during CY12. According to the Economic Times, FIIs have significantly reduced stakes in companies whose financial performance has not been up to the mark. Instead, they seem to have favored large caps. Given the overall uncertainty that has been surrounding the economy and broader markets over the past year, this seems like a good strategy. However, we believe that one must also keep a close eye on the broader valuations. Currently, good quality stocks are not cheap. And they haven't been for a while now! With FIIs favoring such stocks, the overall expectations also would have risen. This could possibly make large caps volatile especially in cases of the financial performances failing to meet expectations.

Somewhere in April 2007, there was an interesting story doing the rounds. It had to do with the troubled economy of the nation of Zimbabwe. And how its stock market was up nearly 7 fold since the start of the year. Cleary, the news left anyone who had some idea of the state of Zimbabwean economy , in a state of shock. With the entire economic machinery on the verge of a collapse and with inflation running amok, how could Zimbabwe possibly have the best performing stock exchange in the world?

Well, the answer can be summed up in two words 'money printing'. You know, with the Government running huge deficits, it had no other option but to print money. And most of this money went straight to where people thought was the best destination to beat inflation. So, up went the country's stock markets, rising more than the jump in the country's consumer price inflation. But did this money lead to real wealth creation? Certainly not. There was no investment happening on the ground as entrepreneurs were scared to put their capital at risk. Thus, it was clear that no sooner would the money printing stop, stock prices could again collapse.

Now, are you finding any parallels to this story in the current environment? How about the US Dow Jones index? It made a new high recently despite the economy not being out of the woods yet. So, is the new found spring in Dow's step also a result of cheap money printing? Quite possible we believe. For had the US policymakers not spent close to some US$ 8 trillion between deficit spending and money printing, we wouldn't have seen the highs in the stock markets we are seeing right now. And just like the Zimbabwean stocks, a collapse if not in the short term can certainly not be ruled out over the course of the medium term we believe.

In the meanwhile after opening the day on a positive note, Indian equity markets have slipped into the negative territory albeit in a small way. At the time of writing, the Sensex was down by 3 points (0.02%). The other major Asian stock markets have closed the day on a mixed note with Japan and Taiwan closing in the green while China and Indonesia have closed the day in the red. Europe too has opened the day on a subdued note.

 Today's investing mantra
"The risk of an investment is described by both the probability and the potential amount of loss. The risk of an investment-the probability of an adverse outcome-is partly inherent in its very nature. A dollar spent on biotechnology research is a riskier investment than a dollar used to purchase utility equipment. The former has both a greater probability of loss and a greater percentage of the investment at stake." - Seth Klarman

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8 Responses to "'Insider trading is rampant in India'"

K Kandasamy

Mar 13, 2013

What is more widespread is manipulation of share prices by small companies.A careful study of mergers,demergers, remergers ,reverse mergers and name-changes will show the range of legal tricks used by these small companies. People do know but nobody is ready to fight.


Nikhil Shah

Mar 12, 2013

"Insider trading is rampant in India" - is it a news??

Everybody knows it. So what is new, Mr. Narain??



Mar 12, 2013

Insider trading, Corruption, etc.., everything can be controlled by the government, only if the politicians have the will to do it, but, when they themselves are the brain behind all these crimes then nobody can help the innocent victims, the common man or an investor, who will repeatedly fall prey to all such gossips and tips as the financial markets are well suited only for the rich and powerful who can afford to gamble a part of their wealth to win a lottery and build an empire of their own.

The theme of the financial market participants is `Fortune not only favours the brave but with an extra credential as a wealthy too' if you want to succeed.

Like (3)


Mar 12, 2013

I do agree that insider trading is rampant, but i wish to state that our regulators do not have the powers or the will or the inclination to CATCH THE BIG FISH.Can anybody touch Reliance for its insider trading. Existing case of RPL will be disposed off with minimum penalty. Similarly India bulls is one of the biggest insider trader. Does anyone have the guts to after that.

Like (3)


Mar 11, 2013

Dear Sir,

Please ask Mr. Narayan whether his own exchange NSE does the duties of being 'First Regulator' of Stock Market Trading? Whether employees of NSE/BSE do practice ethics in their job? If yes, why in your NSE & BSE prices get triggered causing "systemic failure" in certain scrips and Can they find out whether sensitive information in the stock exchanges has been passed on to the operators by the Top Employees of exchanges? Whether circuit filters, Trade to trade segments have been fixed based on bias or on genuine investor interest? First organise our own house in order and then come to public to advise others how the set up has to be.

Like (1)


Mar 11, 2013

Unintelligent analysis!

All the problems enumerated above have been caused by the RBI.

What was the rationale for raising interest rates when inflation was mainly on account of food these past 3 years?

DROP INTEREST RATES FAST before the Indian economy fully collapses.

Now we have a dead economy and stagflation.....where is your insightful analyis?

You need some real economists on your team....

Like (1)

MRK Gandhi

Mar 11, 2013

It is not just insider trading; they resort to many other questionable practices. After abolition of controller of capital issues who was regulating the price of shares, there is total rigging of price. Even investment magazines were publishing paid news which was not taken note by SEBI. Unfortunately in our country profssionals are corrupt. See the case of Rajat Gupta and manipulators of Bank rate who were punished by regulators and governments in US and Europe. Today our stock markets survivte on P notes who need not disclose their identity; our government approves flow of bad money.

Like (1)


Mar 11, 2013

As I do not belongs to any of registered national exchange partner to say it is rampant will be nothing but just an mental speculation but one can smell it easily and its really strong clue that if without any strong base if any tip is circulated by a broker or their employees it is nothing but outcome/cause of insider trading and as its an illegal attempt to wipe out innocent investor hard earned money it should be tackled quite effectively by regulatory bodies.

Like (1)
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