ECONOMY-INDIA: Small Investors Need More Protection

By Ranjit Devraj Reprint | | Print |

Ranjit Devraj

NEW DELHI, Apr 11 2001 (IPS) - A stock market crash triggered by a rogue trader, which ruined tends of thousands of small investors, has revived demands for tighter controls on India’s stock exchanges.

India’s aggressively pro-reform Finance Minister Yashwant Sinha says that the country’s stock exchanges are the new engines of economic growth.

But critics say the money markets are poorly regulated and prone to manipulation.

This was evident early March when share prices in the country’s premier Bombay Stock Exchange plunged to their lowest in the 125 years of the bourse’s existence.

The crash caused an estimated loss of 36 billion U.S. dollars, wiping off investments by tens of thousands of Indians.

Till the opening up of the national economy a decade ago, India’s stock exchanges worked sluggishly, with Indians preferring to put their money and faith in small savings.

In the past decade, however, Indians have become more adventurous with their savings.

Many were encouraged by stories of ‘killings’ made in the stock markets by following the advice of the big stock buyers, known as bull operators.

The stock market boom, which followed, however, soon exposed the serious flaws in the system.

This led to the nabbing in early 1992 of bull operator Harshad Mehta, who used public sector funds to push up prices of selected stocks, cheered on by grateful investors.

Mehta was never punished even though he claimed publicly that he had bribed then prime minister P.V. Narasimha Rao, who ushered in India’s economic liberalisation.

At the centre of the current crisis is bull operator Ketan Parekh, who used some 200 million dollars of public funds, allegedly siphoned out of colluding cooperative banks.

But Parekh soon ran up against an international ‘bear’ cartel. These are stock market operators, who profit by engineering share price falls by selling and even spreading rumours that erode investor confidence.

According to an analysis of the Bombay stock market crash, the bear cartel included some leading foreign institutional investors.

The demand for tightening of stock market regulations is being led by member of Indian Parliament Kirit Somaiya, who belongs to Prime Minister Atal Bihari Vajpayee’s Bharatiya Janata Party (BJP).

Somaiya says the March crash is proof that the India’s stock exchanges are being manipulated by an “operator, promoter, financier nexus.”

The lawmaker accuses government regulators like the Reserve Bank of India and the Securities and Exchanges Board of India of not doing their duty.

Somaiya hopes the financial market crisis will speed up the enactment of a law to protect ordinary investors, a large number of whom are pensioners, seeking a better return for their meagre savings.

It was Somaiya who steered the Investment Protection Bill in parliament last year.

Ironically, the crash came two days after the Feb. 28 announcement of the government’s annual budget, said to be one of the most business-friendly in the past decade.

The budget cut bank interest rates by 1.5 percent to encourage people to put their savings into market investments.

Over the past two years, the BJP-led government has progressively slashed bank savings interest rates from 12 to 9.5 percent, as part of financial sector reforms prescribed by the International Monetary Fund and the World Bank.

According to Kavaljit Singh of the independent, New Delhi- based, Public Interest Research Group, the move to encourage Indians to put their savings in the markets instead of banks, is not a wise one.

“Efforts to promote financial markets at the cost of banks would prove counterproductive to the entire financial sector as well as the real economy in the long run,” says Singh.

The stock market crash has ruined tens of thousands of Indians who put their money into hundreds of cooperative banks, which offer higher interest because the funds are used to play the stock market.

According to lawmaker Somaiya, small investors have little knowledge of what is really happening behind the scenes.

The government has now announced that it is setting up a 175 million- dollar fund that will be use for “informing, educating and enlightening” investors.

Officials say that while it is not the government’s job to influence investor behaviour, circumstances demand that more information be provided to the investor.

The new Investor Protection and Education Fund will be handled by banking professionals, financial institutions, the central bank, chambers of commerce and even non-governmental organisations.