THE INDEX / Invisible hand

Insider Trading: Is the political element here too?

SUCH are the quirks of the law of the land that most often those who indulge in insider trading go scot-free. Clinching evidence is hard to find and the guilty are rarely punished.

The prime suspect for insider trading is always the corporate management, which is privy to information not simultaneously available in the public domain. Fingers have also been pointed against stock exchange authorities for indulging in insider trading.

The ‘invisible hand’ of politicians and their associates, rarely gets exposed in murky deals. Yet sometimes, circumstantial evidence can point to their indirect involvement in such acts.

The reason for such suspicion is simple. They are the ones who frame policies regulating the business environment and are, thus privy to vital information, which may have a significant bearing on the share price of a particular company or a sector in general.

The recent upsurge in the share prices of IT stocks, particularly telecom stocks raises eyebrows over some informed buying that has been taking place in the market. What is surprising is that the price of stocks such as HFCL and Global TeleSystems has shot up by more than 200 per cent without any correction. However, the share price of other top rung IT companies like Infosys and Wipro has gone up by only around 50 per cent!
Is it sheer coincidence that the telecom sector gets sops in the recent amendment to the Finance Bill? The benefits relate to a reduction in customs duty on telecom components and decrease in the tax on export profits. What is important is that telecom scrips began to look up much before the sops were announced or did someone know something? The sharp upward movement in HFCL and Global TeleSystems started from April 12 when both these stocks were hovering at Rs 70 and Rs 100 respectively. Within eight trading sessions from that day the stock price of both these companies had almost trebled to Rs 196 and Rs 267 on April 25.

Any sops given in the budget normally has the effect of shooting the price of the companies affected favourably. However, in the present case both HFCL and Global TeleSystems hit the lower circuit of 16 per cent on April 26, the day next after the amendments were announced. This indicates some profit booking by those who had taken long position a few days ago.

The chain of events raises doubts over some informed buying taking place. It is time the market regulator, Sebi spots something fishy and starts an enquiry in this regard.

Bata India
Once a symbol of quality, Bata India (BIL) appears to have lost a significant ground to the fiercely competitive unorganised players. Moreover, the company has been lax in responding to the fast changing trendy market for footwear. These could be the reasons behind the bottomline turning red during the quarter to March 2001.
Sales (net of excise) has almost remained stagnant at Rs 159 crore. Labour problems and a saturated shoe sector have accentuated the company’s woes. A premium brand name and a dominant position are not enough to beat the cost advantages of the unorganised sector. Flat turnover is accompanied by a 5.6 per cent rise in total expenditure.

Labour, of course, is a major component, that accounts for nearly 25 per cent of the total expenditure. Frequent labour problems at the Batanagar plant that resulted into huge upward revision in wages continue to haunt the company for a while.

Operating profit witnessed a drastic fall to Rs 1.7 crore (Rs 11.1 crore). Other income, though higher at Rs 0.96 crore (Rs 0.26 crore), has not made much of an impact. With depreciation remaining constant, interest which went up by 44.7 per cent to Rs 2.3 crore was the major culprit for turning the bottomline red. Net loss of Rs 3 crore is a big setback from comfy bottomline of Rs 6.4 crore.

BIL’s problems also spring from the demand side. Its target segment is highly price-sensitive. At times when the economy is witnessing a slight contraction, price-sensitive goods are affected the most. The company’s competitors, such as Liberty Shoes, are also witnessing a fall in OPM. However, only BIL seems to be affected by the fall in sales volumes and hence, it may be attributed to its supply-side problems.

On the whole, from a long-term perspective, the footwear industry appears to be slowing down. All the listed companies from the industry such as Mirza Tanners, Liberty shoes have been quoting at P/Es of three to five, reflecting lack of investors’ interest in these scrips. Considering the scenario, BIL has held on well at Rs 40 level.

Prashant Kothari & Manish Joshi