|»5 Minute Wrap Up by Equitymaster|
On This Day - 11 MARCH 2013
'Insider trading is rampant in India'
In this issue:
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.
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.
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