Now, cut to year 2000. Another bull, Ketan Parekh, and a similar scenario. Parekhs personal wealth was counted in thousands of crores and he was seen on the society pages flanked by industrialists, media barons and deep-pocket foreign investors. When the crash happened, it became clear he was not playing with the profits he had encashed by spotting IT stocks very early. His money came from Global Trust Bank (which funded a variety of scamsters and Ketans industrialist friends), from Bank of India, and from the pockets of lakhs of small depositors whose savings were in Madhavpura Mercantile Cooperative Bank.
At the end of five years, the banks have collapsed, but Parekh is not doing badly at all.
Now 2005, and another big bull run. This time, no identifiable Big Bull. Instead, an amorphous mass of foreign institutional investors (FIIs) who are apparently pumping $100 million every day into Indian stocks, even after the Sensex has crossed 8,000. At the same time, we have a bunch of experts telling us that price-earnings multiples (P/E) of leading indices are so safely at 14 and 15, that current market practices pose no risk to the market.
Are FIIs alone driving the Sensex up by an unsustainable 100 points every day No. Domestic mutual funds have suddenly turned aggressive net buyers after the Sensex approached 8,000. More important, will the safe P/Es in the top 500 stocks cushion the impact of a crash or deep correction when it happens Or, are we again missing the main source of mischief, because we have identified some big sources of funds
The market knows many FIIs are fronts for shady Indian investors
Banks and brokers are fuelling retail investors in an unsustainable spiral
The answer is banks and their stockbrokers. Every foreign bank has been offering personal finance at anywhere between 15-16.5%, with no questions asked. Most of this has gone into penny stocks and makes great business, so long as stock prices rise at 30% and more.
A second source of the funds luring retail punters to over-speculate are brokerage firms. Banks fund most brokerage firms, with very few queries. Competition between banks is so intense, they no longer fund specific projects or activities; they fund the balance sheet. According to market reports, a leading private bank has a Rs 200 crore unsecured exposure to a brokerage firm whose soaring share price is making global headlines. The brokers, in turn, are funding retail investors and encouraging them to punt on penny stocks.
The music is going to stop some day. Chances are that the government will figure what fuelled the penny-stock mania only when recovery officers start driving some investors to suicide.