As Dalal Street’s punters play their game of spreading rumours and profiting from it, Indian companies are having tough times. There were about 12 clarifications made by companies to the exchanges over the last one month regarding news, speculations and rumours floated in the markets.
This came at a time when market conditions were weak wherein volumes were subdued making it easy to manipulate prices. "This (weak market conditions) is the best time for the operators and promoters to play stocks at a time when the market is lacking depth. It is easy for them to manage share prices as the volume and participation is low," says Ambareesh Baliga, a market analyst.
However, the reversal in sentiments hasn't changed the equation for the punters. Even in a rising market when volumes increase, it helps punters in playing with larger quantities.
Experts see increasing operator activity in the markets. "My sense is that over the last three months lot of operator-based activities is happening and this has increased. Lot of front-running is happening where the operators corner the shares and float the news to benefit out of it," says Kishor Ostwal, chairman and managing director of CNI Research.
Since the markets were fragile in terms of volumes, sentiments and prevailing risk averseness, it is easy to influence share prices. Recently, the share price of companies like Opto Circuit, Divi's Lab, Nava Bharat Ventures, S Kumar Nationwide and Reliance Media, among others, saw severe beating as a result of news/rumours, whereas those of others like Gujarat Apollo, HCL Infosystems and West Coast Paper surged on rumours, but later corrected after companies clarified.
Playing on weak sentiments
When market conditions are weak, information, which is price-sensitive, especially any kind of negative news, has a more damaging impact. To give an example, recently, Opto Circuit's management had to put strong comment about the company’s financial heath, coupled with a banker’s note, about the regularity of its accounts after the company's share prices were hammered by about 25-30 per cent.
The share price came under stress after concerns were raised over the liquidity issue and possible default of debt. The share price of Nava Bharat Ventures and Surya Roshni took a hit recently after the speculative news cropped up regarding their involvement in the coal scam. Nothing was proved. In fact, Surya Roshni's CMD replied to exchanges, saying he had nothing to do with the allocation of coal mines to Prakash Industries, which is run by his brother Prakash Agarwal. Share prices in both the cases recovered after the management clarified to the exchanges.
|West Coast||International Paper to buy out promoters||Denial|
|Piramal Healthcare||Strategic initiatives||Preliminary, no comment|
|United Sprits||Stake sell in Whyte & Mackay||Speculative info|
|HCL Infosystems||Lenovo to buy stake in HCL||Not aware|
|Gujarat Apollo Ind||Delisting||Incorrect, baseless|
|Divi's Lab||Accounting irregularity||Denial|
|Nava Bharat Ven||Investigation of coal block||No role of company|
|Opto Circuit||Liquidity issue||Strong financial health|
|S Kumar Nat||Corporate governance violation||Baseless|
|IRB Infra||Warrants against officials||No such communication|
|Reliance Media||Bankruptcy of its client||Marginal exposure compared to|
|Surya Roshni||Promoter's name in coal scam||No relation|
Recently, the share price of Reliance Media saw increased volatility after the news did rounds that one of its customers, Digital Domain Media, had filed for bankruptcy. Later, the share price stabilised after the company clarified to the exchanges that it had only Rs 30 crore exposure to the client against the speculated figure of Rs 140 crore.
"The whole game is to catch (trap) the retail investors. We have been telling our members to stay away from such news. But, there is still a large section of the investors who fall prey to hot tips," says Ostwal.
Tapping the greed factor
Meanwhile, many companies have also come out with clarifications after their shares hit the upper circuit. For example, the share prices of engineering company Gujarat Apollo were up almost 25 per cent in just two days after the market buzz of its delisting, which the company later denied. Recently, International Paper bought stake in Andhra Pradesh Paper Mills, which led to a change in sentiments for other paper stocks as well. West Coast Paper hit the upper circuit of 20 per cent. While there wasn't any announcement, rumours about a possible stake sale by the promoters did the rounds (the stock gained by about 34 per cent in three days).
However, the same was strongly denied by the company and the share price corrected significantly. Another recent instance is that of HCL Infosystems, which saw rumours of its parent HCL Corp planning to divest its holding. This saw the stock jump 20 per cent in a day. The following day (August 29), the company made a clarification, saying: "HCL Corp, which owns 42.85 per cent in HCL Infosystems out of the total promoters’ shareholding of 50.77 per cent, wishes to categorically state it has no plan of divesting any part or all of its shareholding in HCL Infosystems in the foreseeable future. We do not wish to respond to any further market speculation on this issue."
The clarifications and the price appreciation (which was due to speculation) provide reasonable clue of operators at play in some of these stocks. In most cases, the price has moved significantly and if one was not right in the timing he or she would have made losses. What's do experts advice in such cases? "First of all, the retail investors should not participate. If they are speculating, then probably they should be quick to exit because reversals could be even bigger than the original price at which it started. Retail investors should also book loss or profit, if any, rather than getting stuck in the game," says Baliga.
The market participants also explain sometimes the investors think the share prices are going up and they start participating but in actuality it could be trap where the operators might be distributing the shares of company they want to exit.
Market participants also do not deny the management's involvement in some cases. In such cases, in a bid to increase volumes, the stock comes into the limelight with the help of operators who float the news in the markets before it actually becomes an announcement. Till the stock remains in news (or rumours), it usually helps increase participation which helps create liquidity or market making for the stock.
The benefits of higher liquidity is that the promoters/company can place shares, institutions can buy and sell large quantities and operators/promoters who want to sell/buy large quantities can do so.
The advise to investors is that they should do their due diligence before reacting to such news.
An email questionnaire to the market regulator Securities and Exchange Board of India and exchanged BSE and National stock Exchange on the steps they are taking to tackle such events and penalise the guilty did not elicit any response.