Thursday, October 29, 2009

Indian Stock Market - Unreal Returns

. Thursday, October 29, 2009

By stockOzone team

It’s an occurrence that has even the best brains in the Ministry of Finance at a loss. For the last three months, a strange trading of a single or three to four shares has been driving the prices of Dalal Street Investments to a whopping Rs 13,000 plus — from a modest Rs 3,000. The Securities and Exchange Board of India (SEBI) has not made any official statement, but ministry sources say the market regulator is likely to investigate the case.

The ministry has asked SEBI to monitor companies that have attracted major investments from across the country by promising high returns. “A number of companies are under our scanner,” SEBI Chairman CB Bhave recently told reporters n Mumbai. While company officials refused comment, brokers remain tight-lipped on the movement of the Dalal Street Investments share, saying the matter falls outside their jurisdiction. “It’s for the SEBI to look into such cases,” Hemen Kapadia, a broker, told.

SEBI insiders say in one surprising development last week, the regulator was informed that some of the country’s biggest real estate companies — that had picked up more than Rs 11,000 crore from qualified institutional placements (QIPs) since March this year — have used up the money collected from home buyers to repay debts rather than to build houses. “Many of those hoping to get their homes in the next two to three years could actually be disappointed,” says a SEBI official, requesting anonymity.

Ministry officials say equally disturbing was the fact that the market — more than 12 years after the Reserve Bank of India (RBI) tightened norms for nonbanking financial companies (NBFCs) in the wake of the scam involving the highprofile CRB group — is actually seeing a re-run of the get-rich-quick schemes promising fantastic returns.

The RBI, on its part, has stepped up vigilance against firms offering unrealistically high returns. Some of the companies named include Alaska India, Trident Advertising and Superlite Linked Distributors. In Mumbai alone, there are over 50 such dubious companies.

And since these companies do not technically collect deposits, the RBI cannot regulate them. For instance, Shree Om Sainath is accepting orders for a brand new Tata Indica for just Rs 1.25 lakh and the car will be delivered only after five years. However, the company — until then — will pay the investor Rs 3,435 per month. Hence, the amount is not a deposit, but an investment and that puts such a company out of the RBI’s purview. Such frims can easily raise between Rs 15 crore and Rs 20 crore every month and the size of the actual racket runs into several thousand crore in Mumbai alone. The city’s Economic Offences Wing (EOW) is looking into a number of such cases. “We are scanning a lot of companies,” Sanjay Saxena, ACP, EOW, told.

Saxena says the EOW recently unearthed a ‘pay-per-click’ scam, where investors pay around Rs 1,500-2,500 for enrolling with an online firm. Thereafter, links of around 10 advertisements are sent daily to the investors, promising Rs 5-7 for clicking on each of those links. “The trouble starts when investors want to redeem their deposits,” says Saxena.

It’s a clever strategy, designed to lure investors with promises of high returns. But while the government certainly needs to track down such smooth operators of the markets, investors too need to realise that fantastic returns are indeed just that — a fantasy.

Disclosure: Author does not own any of the stocks discussed here.

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buzzing said...

Dear Visitor,
Thanks for visiting this nice and useful blog. As many events are about to happen soon. So we just want to share few things with all visitors as it might be helpful for everyone.

NSE and BSE are trading in range and we are expecting breakout in the market after budget. One should buy quality stocks at every decline and should exit long positions at every rise.


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