Sensex and Politics

Ravishankar Panda

Investors flee Gandhi's India

Mumbai, May 17, 2004, Investors in India are dumping shares on fears the country's
new Congress-led government will slow or halt the economic reforms that have
delivered 8 per cent growth to the world's biggest democracy. (CNN)

Historical Background

Stock market essentially means a place where buyers and sellers trade or exchange small
ownership portions of companies in the form of stocks or shares. Stock market provides the space
for both the money seekers and providers through an auction mechanism in which value or price is
decided for investment. It also brings the financial institutions together to make money. The history
of Indian stock market is about 200 years old. Prior to this, the hundis and bills of exchange were
in use, especially in the medieval period, which can be taken as a form of virtual stock trading but
it was certainly not an organised trading.

During 1830's the banks and cotton pressing business flourished and stocks and shares of these
two trades came into the light and here one can see the start of actual brokering business in the
market. By 1850 there were only 6-7 brokers recognised by the banks and businessmen. Then
came the 'Cotton Boom' which was a result of American Civil War (1860-61) when the demand of
Indian cotton soared to unprecedented high and the number of brokers crossed 250 mark. After
the end of American
Civil War, there came a period of slump following the law of average.

But, it took almost 10 years for brokers to realise that they should do the business in an organised
manner in order to protect their own interests and earn respect in public as well. Setting up of
Stock Exchange followed this realisation. They named it "The Native Share and Stockbroker
Association" in 1873 and it was intended to be a voluntary and non-profit institution. The
association started with 318 members. The credit for the formation of rules and regulations went to
Premchand. Since then the business in stock exchange never looked back.

Current Scenario
Presently there are 22 virtual stock exchanges apart from National Stock Exchange (NSE) and
Over The Counter Exchange of India (OTCEI). Securities and Exchange Board of India (SEBI,
established in 1988) does the supervisory work. It was constituted to put a check on various
malpractices prevailed in the existing stock markets like benami possessions, outdated trading,
settlement mechanism, lack of transparency in transactions, time gap between actual purchasing
and physical delivery, improper disclosure, price manipulation, inside trading, lack of liquidity, etc.,
and bring more transparency in the stock exchange practices. National Stock Exchange came into
existence in 1994 despite strong protests by Bombay Stock Exchange. Since the inception
Bombay Stock Exchange remains the pioneer and premier stock exchange of India. The index of
Bombay Stock Exchange is known as Sensex (short form of sensitivity index) and that of National
Stock Exchange is known as Nifty. Sensex is nothing but an indicator of sensitivity of the amount
of on going trade and their trends. If there are more buyers in the market, then sensex zooms
(bull) but when more sellers come to market it goes down (bear).

Black Monday
Over the period Indian stock exchanges faced various bulls and bears. But, on 17th May 2004 the
first Monday after the election results came out sensex witnessed the second highest fall of its
history and the Monday was given a name of 'Black Monday'. The sensex dropped down by 800
points but then again made a recovery of 236 points only after newly elected Prime Minister
Manmohan Singh's announcement of tough action against market manipulators. On the Black
Monday the market closed at 4505 mark with a fall of 564 points. The market capitalisation eroded
by about Rs. 3,00,000 crores in just two days. In its history the stock exchange witnessed the
biggest fall of 570 points during the Harshad Mehta scam on 28th April 1992.

The Trigger Pullers

There was selling pressure built into the markets on Monday morning as many of the outstanding
positions were not squared off on Friday in the previous week.
The market opened on Monday morning and with the start of working day some brokers with large
outstanding positions, some banks and stock exchanges started to sell heavily. Within no matter of
time the market lost 500 points. The institutional brokers were considered to have been selling on
behalf of hedge funds, which changes the market trend rather quickly. The banks and finance
companies, indulged in margin lending, were the other set of sellers. While banks sell securities to
avoid taking on the market risk in the event clients are unable to bring in additional margins in the
prescribed time. According to market analysts most of the selling in the first few minutes of trading
on Monday were market orders, or orders to sell at best available market prices. In the absence of
many buyers, market orders brought down the sensex in no time. The imbalance in the market
was reflected in the futures prices of most prominent shares, which quoted at very steep discounts
to spot prices. According to experts the fall was result of market manipulation by a group of market
players. Market manipulation is neither illegal nor a fraud but it creates a false market, distorts
price set and leads to wrong resource allocation signals to the rest of the economy. The PSU
companies suffered most, which were in the disinvestments list.

Sensitivity of the Index

Black Monday was the result of a single comment made by Sitaram Yechury about the closure of
disinvestments department. The capital market panicked speculating the rolling back of the
economy because of left's presence in the government. Over the period of time the market trend is
becoming dangerously sensitive towards politics. Of course politics does play an important role to
give direction to the economy but excessive reactions is certainly a matter of concern. Even when
the exit poll after the second round of election came market slumped as it came to know that NDA
is not getting clear majority. What investors should look into is country's strength in infrastructure,
resources, growth rate, educational system, various company's future plans and performance etc.,
but they look into political comments, speculations over false or baseless rumours, whether
monsoon is good or not, etc., instead and react instantly. These all make the capital market rather
unbalanced and uncertain and investors go frenzy over completely unrelated matters.

According to some experts the market should be closed for one week when the results of election
are due to come. At least it would have given breathing space to the investors and they could have
a clear picture of the future path of economy before making next investment decision.