Bubble Bursting - Capital Markets

Interestingly, the Thursday evening i.e. 27^th April 2006, When S.EB.I. Announced the I.P.O. scam it was like hearing another new scam in the offing. This has been the trend of the Indian capital markets since we have decided to liberalize the economy. The Very next day Sensex nose dived 400 points within opening minutes of the trading session, but interestingly again on this fall of sensex S.E.B.I. announced yet another investigation. Is regulator the culprit for bringing the sensex fall or it’s the driving force acting on somebody’s behalf? In fact, everything about the present scandal on the Indian stock markets has a sense of Déjà vu to it. In the cast of characters, the lack of regulatory supervision and investors trapped in the maelstrom of a bull – bear war. It is a story that has been repeated every three years in India. One half of the Indian capital markets have continued to develop and change all through the succession of scams and debacles. In terms of automation and legislation, it is on par with the best in the world; it has also reduced problems related to paper-based trading and counter-party risk -- but when it comes to enforcement and supervision the rating is down to a near cipher. Ironically enough, the formula never changes. It is always a promoter-broker nexus, inside information, powerful political friends and lethargic regulators who act out the same hackneyed script.

India is already the most expensive capital market in the world. But typically, expert opinion about the future is sharply divided. Foreign institutional investors (FIIs) are showing signs of withdrawal, especially as US interest rates firm up. When prices beginning to look unrealistic, one would actually do well to install a rear-view mirror and remember that the 1992 collapse led by Harshad Mehta , the 1996 boom was followed by the C.R. Bhansali Scam and the 2000 one led by Ketan Parekh took down two banks each and the savings of several lakh investors. In between these two scams, the IPO (Initial Public Offerings) mania of 1993-94 killed the primary market for a decade, after hundreds of companies vanished with investors’ money.

Circa 1999. Ketan Parekh began to make his presence felt by identifying information technology, communications and entertainment (ICE stocks) as his chosen areas; that this coincided with a runaway international boom in these sectors helped him immensely. Ketan's problem was that he either failed to spot the end and get out in time or was so badly trapped in the pyramid of speculative funding that he had created, that it was impossible for him to get out. Everybody credited Parekh with being far more sober than Harshad Mehta is, but the truth became chillingly clear only in February.

The only thing to differentiate the Indian market at the current level from a bubble is the future growth. The market is willing to pay an expensive looking price on historical basis for the prospect of future growth. The Indian growth rate is likely to accelerate from the current level on back of few fundamentals. Any global event will also have its repercussions in the Indian market. Indian markets also will not be able to maintain the spectacular returns of the past. Though the current valuations of India look little higher on a historical perspective, it is not a bubble. It is based on future growth.

But, there is also the other side of the story about the Indian Capital markets. The sensex has delivered a return of more than 53% in the last 12 months, compared to Nikkei’s 45%; Seoul stock exchange in South Korea delivered 38%, Hang Seng 11% and The NYSE just 10%. This is not because of India being hot and happening, it’s also because of the consistent good performance of the Indian companies delivering consistent results and expansion plans which has boosted the Investors confidence to Invest in the Capital markets. The country has attracted more overseas investors, who poured $10.7 billion into Indian equities in 2005, and $4.13 billion in just the first quarter of this year.