Tuesday, December 7, 2010

The 'Lower Freeze'

The Nifty and Sensex have been flirting - with the 6,000 and 20,000 levels respectively.

Over the last 3 sessions, they have gradually melted away from these benchmark numbers; at these levels, Indian stocks are close to their all-time levels, so reluctance to scale new heights is understandable. The more note-worthy dynamic is the schism between leading stocks which make up the Index, and the broader universe: on the Bombay Stock Exchange yesterday, declines beat advances 2037 to 881, a factor of more than 2 is to 1. And, if my early-morning count is right, the number of stocks hitting the lower circuit-breaker was 256. This is an extremely large number.

When a stock hits a lower circuit, it makes for an interesting statistic; more importantly, it signals a certain desperation for the seller, one which gets frustrated by the unwillingness of any buyer to pick up the stock at that price. When the stock goes into lower freeze for several days, investors are unable to find an exit for several days at an end.

A recent exhibit in this category is Money Matters, the 'consultancy' firm, for want of a better word, which was at the heart of the bribes-for-loans scam. Since the scam burst on Nov 22nd, the share has hit lower freeze every single trading day, taking the price from Rs. 694 to Rs. 241 yesterday. The number of shares being traded has been negligible: yesterday, for example, only 227 shares were transacted. Compare this to the 242 thousand shares transacted when interest in the share had peaked.

A share which joined the 'lower freeze' club yesterday was U-Flex, the packaging giant promoted by Ashok Chaturvedi, who has often been in the news, not always for the most edifying reasons. From July through November, shares of U-flex and other manufacturers of polyester (PET) packaging film had surged impressively as international shortages of PET had allowed prices to rise in a fashion that was punishing to end-users. This was clearly a phenomenon that had to end, and share prices peaked on October 25. Yesterday's 20% drop for U-Flex, however, came on the news that Ashok Chaturvedi has been sentenced to 4 years in jail, along with the IAS officer Neera Yadav, who had headed NOIDA at a time when initial land allotments were being made there; allegedly, Ashok Chaturvedi had a good side business going, helping Ms. Yadav fiddle these allotments for some pocket money. Allegations had been wide-spread at the time, yet they didn't prevent Ms. Yadav becoming Chief Secretary of U.P. Now she seems headed for the lock-up, too.

These are only 2 case studies, out of 250 + stocks, but I wonder whether there is a broader pattern here and investors are sniffing out companies where things are not quite above-board. If markets can punish fraudulent promoters, justice (though partial) will be a lot more rapid than through our creaking legal system.

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