Symposium on

Soaring Share Prices in India:
Is there a Cause for Concern?

October 23, 2007

Introduction

Of late, the 30-share benchmark Sensex has been racing from one major psychological level to another effortlessly. From 13,989 on August 21, the Sensex crossed 19,000a gain of more than 5,000 points or a 35% increase in less than two months. The recent jumps have been even more spectacular. In just five trading sessions between October 8th and October 15th, the index gained 1,567 points. At one level, it looks as if the Sensex has been on a firm course and the intermediate setbacks like US sub-prime woes and the threat of mid-term polls have been taken in its stride. The dominant explanation is the huge buying of Indian stocks by FIIs following the rate cut in the US to extricate itself from the sub-prime mess. Expectations have built up for the index to reach 25,000-30,000 in a year's time.

The recent spurts are, however, causing major concern. Questions like how far and how long this rally could be sustained are agitating the minds of policy makers and investors. Even the Finance Minister has said:

Steep rise in Sensex sometimes surprises me, sometimes worries me. I don't think fundamentals of economy changes day-to-day. Sensex is driven by corpus inflow of funds, To an extent speculators are taking advantage of Sensex... I think things will cool down. Sensex is an index of 30 stocks (and) as such it is a number. We don't invest our future in Sensex.

On his part, the SEBI Chairman is reported to have taken a positive view of the developments when he responded to a question on the relationship between stock markets and politics:

Indian economy has generated certain pace, the growth story will continue no matter what happens on political scene, unlike in the past when there was co-relation, today economy is less susceptible to day-to-day changes.

While these two views do not contradict each other entirely, they do differ on the emphasis. The former implies the run away nature of the share prices and implies the need for caution and probably some action. The latter suggests that the increase is based on expectations and also exhibits a sense of improvement in the functioning of the market and self-satisfaction.

Finally, however, the authorities seem to have decided to take some action on participatory notes which form a significant part of the FII flows and about whose role there has been simmering discontent for a long sometime. The results are immediately visible. Sensex fell by more than 1700 points in the initial trading and the trading was suspended. Even in early 2004 one has witnessed a similar reaction from the market. Whether some action would be taken finally or the government would backout as it did in early 2004 is something that needs to be seen.

In any case the time is ripe for a discussion on the recent developments in general and the role of foreign funds in particular. While doing so it does appear relevant to look at the following questions in some detail.

  • First and foremost, is India 's recent experience country-specific? If some other countries are also passing through a similar phase, are there any common features among them?
  • Is the Indian stock market so closely intertwined with the international developments that it is only weakly related to India 's fundamentals? If that is so, will it be able to value Indian companies properly and reward or punish them on merits?
  • How widespread is the increase in share prices in India ? Is it confined to a few companies and sectors? Or, is the increase so widespread that the prices bear no relationship with even company fundamentals?
  • Are FII investments focusing on a few companies or are they entering into newer ones?
  • Can the market be left to itself? If not, what is the possibility of domestic financial institutions acting/emerging as balancing forces about which the government had hinted sometime back?
  • Even at this stage, would it be desirable to place some checks on FII inflows to contain run away prices and burgeoning foreign exchange reserves? Why should the authorities feel shy of finding out more on FII sub accounts and making the same public particularly because of their ramifications for insider trading on one hand and criminal and unwanted elements taking advantage of the FII route on the other?
  • Are some undesirable elements (money-launderers, terrorists and unscrupulous promoters and politicians) taking advantage of the general trend and manipulating certain shares to benefit unduly?
  • About 100 IPOs are reported to be in the offing during the remaining part of the year probably to take advantage of the current boom. They will invariably charge high premium. What would be the overall impact of a sudden down turn? Who could be trapped most likely?
  • Is the Indian financial sector well regulated and the corporate governance systems put in place are good enough that there is no major danger of domestic upheavals?
  • The increase has been accompanied by high volatility. Where does this leave domestic small investors?
  • Finally, are the woes of American market over? Or something worse is in store?

In the background of the Institute's ongoing interest in the study of the Indian corporate sector and the stock market, it is proposed to provide a forum for an in-depth discussion on the above questions which may offer some clues to the unfolding scenario. As a background for the discussion, a number of relevant facts and figures, including a preliminary analysis of the following, shall be put forward by the Institute's faculty.

Comparison with other markets: price increase, volatility and P/E Ratios

to reflect whether the phenomenon is India-specific or not

Behaviour of various sectoral and size indices

to indicate the possible generalized nature of the price increase

Changes in the holdings of different types of investors during this year

to bring out the changing relative positions, especially of institutional and individual investors

Overall trends in FII/MF investments

to assess their respective strategies

Value and volume changes and share of deliveries in total trades

to indicate the speculative nature

Trends in the latest quarterly results

to analyse the relationship between the latest spurt and company performance

Any individual stocks in Sensex/Nifty which gained disproportionately

to reflect possible manipulation

P/E Ratios international comparisons

to indicate whether the limits for increase in Indian share prices have already been reached

It is envisaged that policy makers, administrators, academics, investment analysts and representatives of fund houses would participate in the Symposium and enrich its deliberations.

 

P R O G R A M M E

11:00 AM to 11:10 AM

Chair's Opening Remarks
Professor S.K. Goyal
Vice-Chairman ISID

11:10 AM to 11:25 AM

Introduction of the Theme
Shri Sanjay Kapoor
Editor Hardnews

11:25 AM to 11:45 AM

Background Facts & Figures
Shri K.S. Chalapati Rao
Professor ISID

TEA
11:45 AM to 1:45 PM
Open Discussion
1:45 PM to 2:00 PM

Summing Up and
Vote of Thanks

LUNCH
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