Indian Stock Market Manipulation -

The Indian stock markets crashed on Monday and Tuesday resulting in a blood bath of sorts on Dalal Street with investors losing crores of Rupees. The reasons for the crash can be attributed to global factors such as the sub-prime crisis, coupled with large offerings in the primary market and a feeling that a correction on the market was long overdue. However a less known and less spoken fact about the market is the rampant manipulation of stock prices.


Correction or Manipulation
What most stock analysts and media-people refer to as a free fall in the stock prices, can also be referred to as manipulation on the part of a consortium comprising of major stock brokers, operators, FII’s and other institutional investors. An interesting point to note is that when the markets reopened for trading after an hour’s halt on account of the indices hitting the lower circuit, most of the brokers terminals were frozen for buying.

What this meant was that investors – who had funds – were unable to buy shares at the lower levels. However, these same investors were allowed to sell, thus indicating that while the smaller investors were being allowed to sell off their stocks at lower prices, they were prevented from making taking advantage of the low prices. However, the stock prices began to rise from the day’s lows, thus indicating that ‘someone’ was definitely buying stocks at lower prices.

How come this discriminatory treatment towards the small investors? Why is he allowed to sell his stocks at lower prices, but not allowed to join the party by buying at lower levels. This clearly reflects that the markets were being manipulated by the cartels comprising of brokers, operators, et al.


Timing of the fall
Another factor that needs to be probed is that why did the markets fall only following the completion of the book-building process of the Anil Ambani promoted Reliance Power public offer? How is it that global factors and liquidity did not affect the markets earlier? If the gray market premium on the shares of Reliance Power is to be considered, it does seem a grim situation wherein certain sections are controlling the prices of shares.

Thus it is evident that to some extent there is a manipulation in the prices of shares by unscrupulous brokers and operators. However, the regulatory body, SEBI, is yet to take cognizance of it and conduct a full-fledged probe.

Now let us look into the reasons mentioned by most main-stream publications and business channels for the fall in the stock markets.

1) The sub-prime saga

The sub-prime mortgage financial crisis began with the bursting of the housing bubble as a large number of “high-risk” borrowers were unable to repay their loans. This factor which initially affected the US became a global factor – affecting world markets - over the course of time.

What this means is that the major financial institutions in the US have provided loans to borrowers who may not be able to repay them. Due to the current market situation, the worst nightmares of these institutions are coming true, with numerous borrowers unable to repay their debts. This has a spiral effect not just on the American economy but also the rest of the world as the economies of many other nations is linked to the American economy.

2) Initial Public Offerings

The hype surrounding the public offer of certain companies has resulted in massive over-subscription. This has resulted in a liquidity crunch, as a lot of money has been taken off from the secondary markets and invested in the primary market.

This means that the ordinary investor would be selling a part of his portfolio of stocks in order to re-invest the money in the public offers. As a result a lot of pressure would be placed on the secondary markets, resulting in a fall in the prices of shares.

3) Margin Pressures

A lot of traders use margins offered by brokers to take leveraged positions in the stock markets. When there is a fall in the stock prices, the investors have to cough up additional funds to make up for the shortfall as the value of their investments are reduced.

This means that traders are able to trade by paying just a fraction of the total value of the shares. Hence this puts them at a great risk when there is a fall in the prices as they need to provide additional funds to the broker or else their holdings would be sold off and they would have to bear the losses.

At times – as was evident on Monday – the investors are unable to provide the funds to the brokers within a short time span, leading to a sell-off of their holdings. This has a cascading effect on the markets as the stock prices plummet to lower levels. The result is an overall fall in the indices.


What about the common man?

How does the ordinary investor fit into the equation comprising of global factors coupled with manipulation in the stock markets? The common man is usually the sucker in the happenings on the street as he usually buys stocks when they are at their highest level and he is most likely to sell them at the lowest level, thus bearing the brunt of huge losses.

It is unlikely that regulatory institutions or the government will take up the cause of the common man. Thus it is essential for him to have a few essential ground rules to follow prior to investing in the stock market.


Rule No 1: Do not buy stocks on the basis of tips or recommendations.

Rule No 2: Invest for the long-term. If you have an investment horizon of 5-10 years and are invested in the right sectors, chances are that you will gain.

Rule No 3: Invest money that you can afford to lose. In other words, do not put your entire life savings in the markets.

Rule No 4: Study the market thoroughly before you invest.

Rule No 5: Avoid putting all your eggs in one basket. Hence, diversify your portfolio.