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And then you wonder?

Mar 31, 2001

Dear Members of the Finance Ministry, SEBI, the Finance Industry, and the press: In 1991 a few weeks after the announcement of the budget by the then Finance Minister, Dr. Manmohan Singh, the stock markets began a meteoric rise that took the BSE-30 Index from 1,275 on July 1, 1991 to a peak of 4,467 on April 22, 1992 – a gain of 250% in less than 10 months, with many individual stocks rising by over 500%. Rather than trying to analyse the reasons for this phenomenal increase in share prices, members of the then government pointed to this astronomical increase in share prices as a vindication of the reform process. India was on the verge of a new economic miracle and would claim its place as a global powerhouse in business.

A lack of investigation and a smug attitude during the euphoria period led to a situation where millions of small investors put their money into the stock market directly or via mutual funds, most of which were controlled by the government. When the stock market “scams” were revealed in a news article in The Times of India, the BSE-30 Index plummeted to the 2,000 levels resulting in losses of thousands of crores to the small investors who followed the pied piper to their doom. The “scam”, it should be noted, was the illegal use of bank money sloshing its way into the equity markets and supported by mutual funds, most of which were controlled by the government.

Move the date to the year 1999. The Indian stock markets again show their penchant for a meteoric rise and the BSE-30 Index gallops from 3,055 at the start of 1999 to 5,933 by February 11, 2000 – a gain of 94% in 13 months with many individual companies recording gains of 500% and more. This time the government in power says that India is at the leading edge of a technological revolution and the rise in share prices of the “TMT” companies is justified by the madness on the Nasdaq. Instead of learning from history and trying to evaluate where the money for this madness is coming from, the government and its various arms took pride in the buoyant capital markets. Again, many investors moved their savings into mutual funds (this time not all controlled by the government) only to find that they were buying into a bubble that has now gone bust. The participants and the mechanisms are identical – their names have changed.

There is a broker who inspires awe and confidence. There are banks that give their money to the brokers to fund their positions in the stock markets. There are some mutual funds that happily support the game as the people who manage the money get rewarded from how their funds perform. And when the markets are gaining ground and share prices appreciate, the brokers are happy because they make a profit that allows them to pay off the interest on the loan and still come out ahead. The banks are happy as they have made a nice profit from this share financing transaction. And the mutual funds are happy because their assets under management are growing.

But what happens when the music stops?

The brokers do not have a profit but, in fact, they have a loss. The banks do not get their interest and their loan principal is at risk since the shares against which the loans are given are collapsing in value. And the mutual funds see money flowing out and their assets shrinking. But for all the pain that these participants in the “scams” suffer, there is the pain of the investor who buys into these “new era” and “new beginning” stories that are tacitly endorsed by the governments in power.

Everyone loves a bull market. And everyone likes to believe that their new economic policies are creating wealth. The government, the central bank, the regulators, and the stock exchanges have, by their silence, endorsed the madness in 1991-92 and the mania in 1999-2000.

And then they have the gall to ask: “but where is the small investor?” and “why is the small investor not coming back to the stock market?” How many times can you slaughter a lamb? How many times can you sweep your mistakes under the piles of history and pretend it never happened or that is was not your fault? Take responsibility. Admit your mistakes. And set systems and structures in place that will never allow these “scams” to happen again.

If a bank has given loans improperly, kick out the management, confiscate their shares, and auction the bank to the highest bidder.

If a mutual fund has been seen to be investing money irrationally and against guidelines in its investment policies, ban it from raising any new assets for the next 3 years and suspend all those involved.

If a broker does something illegal, suspend them for a few years – if not forever. And the government must stop controlling or trying to influence SEBI, UTI, LIC – these institutions have not been set up to please the government but to protect the capital and the money of the small investors – that class of people whom every one pretends to exist for but, in fact, everyone only lives off. The phone lines between New Delhi and these institutions must be cut off!

So, when will the small investor return?

Until the government recognizes that its business is to set policy and not to applaud a bullish stock market.

Until the Unit Trust of India realizes that its bosses are not the people sitting in New Delhi, but the investors who pledge their savings with UTI.

Until the Reserve Bank of India acts decisively to swiftly punish errant bank management.

Until SEBI recognizes that its job is not to set guidelines and rules that police a financial intermediary based on size and money clout but on integrity and intent (why should there be a capital adequacy requirement for an AMC? AMCs manage other people’s money, not their own!).

Until the stock exchanges are devoid of any broker influence and have common settlement cycles and trading rules.

And until we have someone brave enough like Alan Greenspan was 3 years ago when he warned the US investors about “irrational exuberance” and the effects of getting too optimistic on technology; who did not mind looking stupid for a few years but spoke his mind to warn investors (that is why no one is blaming him for the Nasdaq’s rise and collapse).

After all these things are in place, then you can ask: “where is the small investor?”. Until then, the only experience the small investor can be sure of will not be a pleasant one.

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