Indian Share Market All Said And Done Has Always Been A Quasi-Gamblers’ Den

There are many economists and finance gurus who bristle with indignation at the description of the bourses or stock markets as gamblers’ dens. Gambling or wagering is a scheme, game or avenue whose ultimate outcome or result, loss or gain, cannot be predicted. In a way the apologists of stock markets are right; for a section of the players in the market, namely insiders, the results are predictable as the market dances and gyrates to their tunes during normal times. Of course, during abnormal times, such as the one being witnessed when POTUS Trump’s eccentricities are wreaking havoc across the globe, even the insiders are not spared of the downsides of the excessive dalliance with the market.

The malaise begins with the primary market, i.e., the market for Initial Pubic Offers or IPO. In the good old days when the Controller of Capital Issues (CCI), the bean counter operating under the Ministry of Finance, ruled the roost and called the shots, there was no free pricing, instead the issuers had to be content with whatever little, niggardly premium the Controller deigned to allow on public issue. Colgate-Palmolive, once the darling of the investors and operators alike that had to make a public issue of as much as 40% of its equity shares in 1978 under the diktat of the then industries minister George Fernandes lest the foreign company had to pack up and go, had to content itself with a measly premium of Rs 15 on its Rs 10 shares. Contrast this with the laissez-faire regime obtaining in India since 1991, orchestrated by the market regulator SEBI, which stepped into the breach left by the CCI when liberalisation and globalisation were the buzzwords. Paytm in 2021 made its IPO at a mindboggling price of Rs 2150 for its shares of the face value of Re 1, thus translating into a whopping 2,14,900% premium, the kind of financial reward no other market can dream of offering, not even beachcombing or gold hunting. Vijay Shekhar Sharma, the promoter of Paytm, laughed all the way to the bank, and how!

The saga of the get-rich-quick scheme that the IPO is would remain incomplete and one-sided unless its adjunct, the OFS or Offer For Sale, is tagged or interwoven into the discussion. It is invariably IPO cum OFS. Promoters, who invariably subscribe to the bulk of the shares on incorporation, do so at their face value. They wait for the IPO with bated breaths, and when the denouement dawns, they ride piggyback on it through the OFS of their own investments in the equity of the company, engendering the worst conflict of interest scenario. The aggressive pricing of the IPOs has its genesis in this unholy hyphenation, IPO-OFS. The promoters pay a hefty fee to the merchant bankers in return for an exaggerated valuation, often for a loss-making company with the glib assertion that the company has a bright future. Touché! Predictably, listing losses instead of the keenly looked-forward listing gains stare at the small investors. Paytm, when last heard, was quoting at Rs 683. Paytm and its promoter, Vijay Shekar Sharma, have been used in the metaphorical sense. Much the same obtains in the vast majority of the IPOs.

The secondary market or the stock exchanges to which the shares on IPO onboard are no better with front running and insider trading marring its fairness. Front running is mutual fund officials putting their self-interests ahead of those of the investors whose funds they are handling. Ditto for insider trading, in which promoters, bankers, brokers and others take advantage of the price-sensitive information coming into their possession to be one up on the outsiders. Add to this the havoc wreaked by the unbridled FPIs or Foreign Portfolio Investors, who enter and exit India at will, driving valuations to the craziest levels due to their famed deep pockets. Of late, though, the domestic portfolio investors have had a sobering effect on the FPI. In fact, one of the failings of Manmohan Singh as finance minister under PV Narasimha Rao was that the duo opened the sluice gates of the Indian bourses to the FPI. They have made the market hot with the too-much-money-chasing-too-few-goods factor ramping up quotations to stratospheric levels when they enter the market and falling with a thud when they exit, as they have been doing lately in order to shift their investments from India to China.

There was a time when the primary or IPO market was recommended for small investors as the right entry point to the equity cult, with the CCI maintaining the vaulting ambitions of promoters on a tight leash, enabling listing gains. But no longer. Now the secondary market seems to be the good entry point because, over a sufficiently long period of time, the excessive valuations on the IPO sober down, and the true value is discovered by the much larger number of players in the bourses. But then the menace of insider trading and front running is too real and insurmountable for small investors. Thus, the only relatively safe route for small investors is mutual funds, whose twin USPs are diversification and expert full-time fund managers.

In the US, there are many Dow Jones watchers; just as in India, there are a large number of Sensex agonisers, as it were. Many youngsters, idlers, quick-buck dreamers, and starry-eyed investors are inveigled into the day-trading menace in the hope of striking it rich on the back of selling in the afternoon what they have bought in the morning and vice versa. They often lose their shirts once again due to the fact the secondary market is in the vice-like grip of the insiders. The pink papers are fond of romanticising the market, encouraging staying invested for a long time in the hope of making capital gains in the end. But that is easier said than done. What will they do for a living and capital expenditure in those 10 to 15 years when their capital is blocked? The government should walk the talk and put in place a vibrant bond market so that small investors are weaned away from the innately risky equity to debts. Meanwhile, the bourses remain quasi-gamblers’ den – a haven for the insiders and hell for the outsiders.

S Murlidharan is a freelance columnist and writes on economics, business, legal and taxation issues.