Letter to the Sebi chairman

Dear Mr Damodaran:

I am a pensioner residing in Kolkata. I have never invested in the stock market, preferring instead to keep my money in bank deposits. However, now I realise it is becoming increasingly difficult for me to depend on the interest income from such deposits. Many of my friends and my family have also been advising me to invest in equities, now that the market is booming and the BSE Sensex is over 7300. Hence, my letter to you.

Of late, after being advised from several quarters that equities are a good avenue for me, I have been tracking the developments in the stock markets, before I finally take a decision either way. I must, however, tell you that some of the things I noticed have left me more than a little confused. As the person in charge of the country?s stock markets, I think, therefore, that you are the best person I should turn to for advice at this stage.

I never understood or tracked the stock markets in my working years. But having worked in the heart of Kolkata?s business district for years and known Lyons Range, where the stock exchange is headquartered, I remember often seeing crowds milling around that street and investors queuing outside the Calcutta Stock Exchange building. These days, however, when I pass the street occasionally, I cannot help notice that the place looks rather forlorn. I am also told that the local exchange hardly has any business and that most of the top brokers of Kolkata prefer to deal on the National Stock Exchange. What, then, is the option? In case I do opt for equities, do I go to the Kolkata exchange, or do I have to get a broker who is an NSE member?

The other day, I also decided to do some calculations on my own, and stumbled upon some interesting facts. While examining the equity market, I found quite a few stocks which have really given huge returns in a span of just three months.

I have compiled a long list of these, but won?t bore you by mentioning all of them. I?ll just mention some. Akhileshwar Texports has given a 562% return between April 15 and July 15, Interface Financial a 505% return, Twinstar Software 435%, Kotawala (India) 334%, Landmarc Leisure 293%, while others like Monotona Exports, Chandni Engineering etc have also given well over 170%. My problem is, I haven?t heard of most of these companies, though they have given returns which are so high. Have I missed something here?

The other option some friends have advised me on is to go for mutual funds, rather than invest directly in equities, since I don?t have the expertise. So I did a quick survey of the mutual funds sector as well. There, too, I have been left a little confused. My study of the recent mutual fund launches has left me wondering whether it?s such a good option after all. I obtained some figures from my nephew, taking some of the schemes which have been launched between December 2004 and June 2005.

I found, to my horror, that most of the schemes which have been launched since December have suffered steep declines in their corpus. Compared to the amounts mobilised, they are now left with far less assets under management. In fact, in some cases, the fall in corpus ranges from anywhere between 27% to as much as 76%. Does this mean investors are dissatisfied with mutual funds? Why are they, then, quitting these funds so quickly? I was, sir, told by many that mutual funds are the small investor?s best investment vehicle. But the figures seem to suggest that investors are opting out in big numbers. What could be happening?

Sir, there is a group of my friends who come for morning walks with me, who keep telling me horror stories of the stock markets. Stories about how a handful of people used to monopolise information and move the markets and how, even now, whenever a company is planning a merger or a takeover, some people in the market ramp up those stocks well in advance. But I thought it was best I should seek your valuable guidance, rather than give credence to such talk.

As I see that investor protection is one of the top priorities of your organisation, I am sure I will benefit from your wise counsel. I know you are a very busy man, sir, but I look forward to an early response to my queries from you.

Thanking you,

Yours sincerely