Share Market Shenanigans by amar b shrestha

Many people compare the stock market with gambling. Of course it is advised that you study companies’ balance sheets and annual reports before investing, but most people find it difficult to understand figures. And even those who do, they have to be wary of ‘cooked books’ (more on this below). Share traders, brokers and dealers obviously spend all their time going through such things, it’s their livelihood, but can one trust their judgment fully? The worldwide stock market fiasco leaves little doubt that even these pundits can go grievously wrong. For the general public, here at least, it’s a case of herd mentality which is actually based on media hype and custom. For example, custom dictates that bank IPOs (Initial Public Offerings) are sure bets and so you see record oversubscriptions every time a new entrant enters the field.
In truth, there are many who have no clear idea about the what’s and how’s of the share market. This, despite the dutiful media coverage which is actually nothing more than filling up space because they are so limited in scope, both analytically and critically. Then there is the hard truth that media does not want to antagonize bankers – a prime advertisement revenue source. A case in point – a much talked about banker who received the manager of the year award last year left his old abode for greener pastures recently. At the time he resigned, his bank’s value as derived from market capitalization was half of what it had been a year earlier. So, did anybody have the guts to talk about why such a manager, under whose management the bank had lost half its worth, and because of which thousands of investors had become as poorer, should have been hailed as the messiah?
NEPSE Records Dead Cat Bounce – Ha!
So, what we see is that most of the efforts go towards creating hyped up headlines. Even these, because of over coverage, and because there is really nothing new to report, are becoming stale. ‘NEPSE keeps falling’; ‘NEPSE maintains recovery trend’; ‘NEPSE Rebounds’; ‘NEPSE continues to climb up’; and so on are the most common headlines used, with occasionally, ‘NEPSE in See Saw Mode’ and the best one in recent times, ‘NEPSE Records Dead Cat Bounce’. The one who wrote this last one deserves something that’s for sure.
To recapitulate, NEPSE is the acronym for the Nepal Stock Exchange Index. Established on 13th January 1994, it cites that its basic objective is ‘to impart free marketability and liquidity to the government and corporate securities by facilitating transactions in its trading floor through members, market intermediaries, such as brokers, market makers etc’. Banks and financial sectors are the major players with 128 out of 159 listed companies being from this sector alone. In the Sensitive Index too, except for one hydropower (Chilime) and one manufacturing (Unilever), the rest of the 78 ‘blue chip’ companies are banks, finance and insurance companies.
Today, the market capitalization of all the blue chip companies is worth half of what they were in 2007/2008. The NEPSE has crashed to below 500 points from a high of 963.4 points a year ago. However, the total market capitalization has risen to Rs. 512.94 billion from Rs. 366.3 billion. Credit this paradox to many more companies raising easy money from a trusting public by getting listed and winning the game even before the first round has begun through the customary and time tested bet of IPOs.
NEPSE’s market capitalization contributes more than 50% to the country’s Gross Domestic Product (GDP), up dramatically from just 7.2 percent in 2002/2003. In essence, this means that the fate of more than half of the country’s GPD rests on progress and prosperity at the exchange. Going deeper, it means that since almost 80% of this is from banks and financial sectors, the country’s economic fate depends on banks doing well. Well, they are not doing well now, that’s for sure, so where does that leave the GDP? Add to this the fact that even in this sector, it is only a dozen banks at the most that make up 50% of the financial sector, and you will understand why a relatively more knowledgeable person like this writer is worried.
What if Nabil were to fail? What if Standard Chartered were to close its doors? How far in the mud are they involved with the real estate bubble? What if comparatively safe and regular sources of liquidity like the US Visa fees and the airport tax business, for example in the case of Nabil, were to stop flowing? Its share prices are already barely Rs. 2000 today compared to Rs. 5000 a year ago. About Standard Chartered, whose share value has crashed to Rs.3000 from more than Rs.7000 in 2009, we can only guess at the hit it must have taken due to the carpet export downfall.
Shenanigans in the Stock Market
Nepal Development Bank’s CEO was in the news recently as perhaps the first CEO of a bank to be arrested from his office. His bank is accused of committing five counts of fraud. The bank, even when it was for all practical purposes bankrupt, managed to hoodwink quite a few of the lay public into buying their rights shares. It collected Rs. 80 million which although a substantial amount, was well below their target of pinching Rs.320 million from the always gullible public. Well, now the public’s Rs.80 million is well and truly in a ‘see saw mode’! Nepal Bangladesh Bank is in the ‘troubled bank’ category having had a historic run on its establishment a year or so ago. Under Nepal Rastra Bank’s direct control now, the original promoters NB Group (guilty of using the deposits for their own needs) are shedding control by offloading lakhs of promoter shares in the market. Who’s buying? Does anybody know? Another shenanigan in the making? Maybe.
“Hello everyone, it is sad to say that the NEPSE is manipulated by big players in the market by doing pooling, warehousing and similar other crimes as stated by SEBON (Security Board of Nepal). I am so sorry to say that I am also one of the players in the market who is active in manipulation; I have five team members to do so. Not only me but there are lots of teams that I know of who just play foul in the market. I suggest that it’s better not to follow the herd in the market……study, research and analyze before any investment.” So states a discussion thread on the Investor Venture Forum web site http://www.nepalsharemarket.com/JambForum/Defau.... It’s a very pertinent statement if you ask me. Who can forget the likes of Enron, Harshad Mehta, and most recently, Satyam?
From 1996 to 2001, Enron Corporation (a blue chip energy company), was declared “America’s Most Innovative Company” by Fortune magazine. Its healthy stock price ($90 per share in August 2000) made it a tremendously wealthy organization. With ample help from its auditor, Arthur Anderson, Enron ‘cooked its books’ to keep prices high committing unforgivable accounting fraud in the process. Well warned with inside information on the real hidden losses, Enron’s executives began offloading shares even as they encouraged the general public and other investors to buy, assuring that prices would possibly reach as high as $130 to $140. Of course, the company’s assets and profits were highly inflated and even, fictional. In due time, Enron’s shares dropped to below a dollar and the company went bankrupt on December 2, 2001.
In 1992, the ‘Big Bull’ Harshad Mehta illegally siphoned off funds from inter-bank transactions using it to buy shares heavily at a premium across many sectors at the Mumbai Stock Exchange. Share prices naturally went through the roof. By then selling off his artificially high priced shares, the ‘Big Bull’ made his billions (he didn’t have to spend a paisa, as it were). Within two months of the scam’s discovery, share prices dropped by over 40% and cleaned the slate of market value worth Rs. 100 billion. The index shed 2000 points (!) from 4500 to 2500. Loss to investors? Rs 80 billion.

In September 2008, it was awarded the Golden Peacock Global Award for Excellence in Corporate Governance. On January 7, 2009, its chairman confessed that he had committed grave accounting fraud. He was consequently imprisoned. India’s fourth-largest IT Company, Satyam Computers, had overstated its September 2008 quarterly earnings and profits by 76 and 97% respectively and inflated its cash balance by about one billion dollars. Instantaneously, the Sensex dropped 7.3% points. On January 10, 2009, Satyam shares were trading at Rs.11.50 compared to Rs. 544 earlier. In March 2009, its shares at the New York Stock Exchange were worth only $1.80 compared to $ 29.10 in 2008. And yes, another high profile auditor, Price Waterhouse, was implicated deeply as well. Just goes to prove, you can’t trust anybody these days! No matter how much of a powerhouse!
Another big fish in the net in recent times has been the American financier, Bernard Lawrence “Bernie” Madoff, who was once the non-executive chairman of the NASDAQ stock exchange. As chairman of Bernard L. Madoff Investment Securities LLC, a top market maker business on Wall Street, he was convicted on June 29, 2009 for operating an investor fraud scheme that resulted in client losses of almost $65 billion. His modus operandi was simple – don’t invest the client’s money, just deposit it into your own account! The judge’s order was also simple – don’t care if he’s old, just put him in jail for the next 150 years.
A bit of luck never hurt anybody
Well, such are the stuff that Stock Exchange legends are made of. Undoubtedly, those who have benefitted hugely, and still continue to do so, are more than those who have lost but the above examples do reveal that the stock exchange can be a fertile ground for those who wish to play less than clean games with it. Manipulation of prices is a real danger as is the danger of ordinary investors being laid astray by even reputed companies who do not hesitate to ‘cook their books’ and by ‘respected’ firms who get into the habit of duping the layperson. How easily this can be done is demonstrated by the fact that Satyam (with an internationally accredited auditor like Price Waterhouse Coopers) was able to falsify its accounts and inflate its share value for years and years without anyone suspecting that anything was amiss. Similarly, others too have managed to conduct such affairs at the cost of the ordinary investor for long periods of time without anybody becoming the wiser.
Perhaps the share market should be trodden carefully and after some preparation on the part of the investor. It is true that one can make a nice eggs’ nest for one’s retirement or even quick fortunes via good investment in shares, but it also true that even the best calculations can be undone and an investor could lose his life’s savings at the stock exchange. And no matter how many people say that luck has little to do with how one fares here, I for one believe that a bit of luck never hurt anybody, not least in the complicated world of the stock market.