A couple of days back, market regulator Securities and Exchange Board of India (SEBI) reached the conclusion of an investigation into a brazen scandal that had happened back in January.
In its order, SEBI banned a huge number-230-individuals from participating in the security markets. I don't have any data on the history of SEBI's bans, but this could be the largest such action to arise from a case involving just one company. The company is a small one, a Chennai-based film exhibitor called Pyramid Saimira, and the case involved the floating of a rumour that led to a temporary jump in its stock price, which was used by an operator to offload his holdings.
The rumour was supported by an expertly-forged letter from SEBI and a fake company secretary who was giving statements to the press. According to the conclusions reached by SEBI, the conspirators included a senior journalist of a leading business daily and a PR person from a well-known financial PR agency.
Off course, such rumour-mongering is routine in the stock markets and the only thing that makes this case unusual is the forgery of an order from SEBI. Basically, the conspirators seemed to have been completely oblivious to the fact that the forgery of a letter from a government department would be taken seriously by the authorities. They seem to have thought that this was a great trick to play. I can only put this curious blindness resulting from living in an atmosphere where rumours and manipulation are all in a day's work.
A good proportion of Indian market participants exist in such a mental frame of reference. In this world, stocks move only when someone is driving them and when that driving ceases, then the stock stops moving. When someone tells you that a stock is going to go up, then the most important piece of knowledge is not anything about the stock or the company, but who's behind the move, how far do they plan to take it and whether there is someone else who's likely to oppose the move.
Does this world exist? It most certainly does, at least outside the 100 or so widely traded liquid stocks that are difficult to manipulate. That means that a vast majority of the stocks listed on our stock markets fall in this zone. If you are not stupid enough to forge a sarkari order and distribute the forgery to all and sundry then the chances of actually getting caught are negligible. The basic problem is that our markets are wide without being deep. The number of stocks is huge and no one in particular is interested in tracking and monitoring most of these. The bulk of these are thinly traded and therefore it's trivially easy to manipulate them.
In a strange way, the ease with which information flows today actually makes it easier to spread made-up stories. You can observe this all around you. On the internet and in the media, people either believe in stories or they move on-no one seems interested in refuting anything.
So, does all this means that it is useless to try and make an honest, well-thought-out investment in anything but the largest companies? To some extent, the answer is yes. However, in most cases, the impact of the stories is short-lived and they eventually turn out to be nothing more than noise that gets smoothed out in one way or the other. The thing to do is to either ignore the rumours, or float them yourself-there can't be much percentage in believing other people's rumours.