Bearing The Hawala Cross

Says Kamal Kabra, BSE president:"The uncertainty of the elections’ outcome pushes the bulls intohibernation all over the world. But this time, uncertainty in India reignssupreme." With the hawala scandal increasing the confusion on the politicalfront, the market was quick to react and stock values plummeted. Rumours aboutthe hawala happenings spread wildly and fast, and the bears were quick tocapitalise on the uncertainty. In a sentiment-driven BSE, the stock values tookan ominously grave beating.

Terming the mood at the country’spremier bourse as "very bad", Kabra adds: "It is not my businessto comment on the politics of the country, but with this hawala scandal, no oneknows which way the tide will turn."

Such a phenomenon has been witnessed consistentlyespecially in the Reliance scrip Having spread the news of Dhirubhai Ambani’sarrest by the CBI, the Reliance scrip fell by Rs 5.50 to touch Rs 167.50 at theBSE and a four-year low of Rs 157 at the NSE. A few months earlier, the RILscrip was similarly hammered down by rumours of Dhirubhai’s demise. In fact,bears had also made hay spreading rumours about Man-mohan Singh’s resignationa couple of times in the past.

Besides, the liquidity crunch has beendoing its bit to keep the markets depressed. "Most of the market’s woesare due to the Government’s insistence on keeping inflation low by tighteningthe money flow," says Sanjay Jha, vice president, Alliance Capital. Withforeign portfolio investment put off till after the elections, the stockmarketsare starved for funds. Added to this is the banks’ scramble to raise over Rs1,000 crore before March 1996 in order to meet their capital adequacy ratio.With liquidity lacking, interest rates too are going up.

Foreign remittances have dwindled aswell. Combined with the Government’s tight monetary policy, these factors haveshut off all avenues for funds to the market.

The market is hoping that whichevercoalition of parties form the government after elections, the new governmentwill at least relax the tight monetary policy that is being vigorously pursuedby the present Government. Says Govind Bhandari, director, Securex FinancialServices: "Despite the single point agenda to control inflation, theGovernment has been unable to control its own expenditure. Besides, theGovernment refuses to monetise the deficit, and instead is raising money bybonds, thereby garnering whatever liquidity may be left in the market. We areback to the high-cost economy of 1991, but that time at least the markets werebooming, thanks to Harshad Mehta."

To make things worse, even the remodified badla—in which transactions can becarried forward for 90 days within which deliveries have to be made and paymentssquared up—reintroduced last week failed to boost the morale of the marketpunters. In the present uncertain political scenario, leading speculators wereafraid to enlarge their commitments.

The feeling that the country is headedtowards a hung Parliament is almost unanimous among the market operators. SaysAlok Vajpeyi, country head of BZW India: "Who comes to power is not theworry today. But let this uncertainty which is resulting in the cheapening ofIndian stocks get over."

And the cheapening of their stocks hasIndian corporates worried. The apprehension over the cheapening of stocks isbecause of the risk of hostile takeovers. Stock prices are perfect forrelatively cash-rich corporates and transnationals to make a grab for companiesthey have been eyeing. Says Bhandari: "I won’t be surprised if financialcompanies—for lack of any worthwhile business at present—start preparing ahit-list of Indian companies that may be offered to the transna-tionals forgrabs. There is going to be a bloodbath in the Indian corporate arena."

For instance, if Colgate had to take overthe toothbrush business of Hindustan Ciba-Geigy today, it would have to payaround Rs 5 crore less than the Rs 131 crore it paid for acquiring the same inDecember 1994. And according to Vajpeyi, such mergers and acquisitions maybecome the order after a couple of years.

But hope isn’t dead and not all are pessimistic about the capital markets.Says Vajpeyi: "I think the markets will pick up after the elections.Whichever new government comes to power, it will have to relax the tightmonetary policy, political equations notwithstanding. Despite the gloom in themarket, I feel that around $2 billion will flow into the country during 1996-97.The rupee too will stabilise at around 5-7 per cent lower than today."

Some foreign institutional investors (FIIs) are also trying to keep a bravefront by planning offshore Indian funds. In fact, some FIIs feel that thepresent depressed stockmarket in India provides a judicious entry point forinvestments in a long-term perspective. With several blue chips andfundamentally strong companies hovering at extremely low price-earning ratios offour to five, FIIs consider them a bargain price. "More importantly, itwould be easier for them to sell these stocks abroad than in India," says alocal broker. Alliance Capital India is also planning a debt fund for thecountry. Says Ajay Kaul, country manager, Alliance Capital: "In view of therising interest rates in India, a debt fund would be very attractive for an FII.The political uncertainty and the general elections are the only major factorskeeping away the FIIs at present. "

And market operators are praying thatelections take place as soon as possible. Says Bhandari: "Most of usinvolved with the capital markets are of the view that let the elections be overand done with. At least we’ll then be able to sense which way the wind isblowing, which is a far better situation than not knowing anything at all. Thecurrent crisis is just about breaking our backs."