Does the free stock market always work?

Share Shah

Under our free market system, a group of a few wealthy individuals can acting as a fund or a syndicate, "manipulate" a stock, causing unaware investors to buy the stocks at inflated prices, where then wealthy individuals would dump the stocks, causing prices to collapse? Would this count as fraud even though it is technically not illegal under our present system? If government or the Securities Exchange Commission had to step in to regulate things, would not it violate the system? Indeed it did in the past and in manner still does by validating queer interpretation of the regulations.
   People do indeed occasionally try this strategy, particularly in regards to small, illiquid stocks, often in small markets of developing countries. The situation described did not constitute fraud as per our existing securities law. If a few people aggressively bought stock to drive up the price, there can be no certainty that others will follow them and buy enough to drive the price high enough for the original buyers to sell profitably. Such a strategy sounds risky, and would likely be a losing strategy by itself.
   There is no such thing as an "inflated price". Fundamental analyst may disagree but then prices are only determined by those willing to buy and sell. I am yet to find government controlled ICB ever selling shares at fundamental prices. They did not do ten years ago and they still do not do so. If a person believes the price that others pay is higher than what he believes it should be, he can sell that "inflated" stock. A person who buys a stock merely because it has gone up is pretty foolish and has little basis to complain about the actions of others.
   If enough people have enough money, they can increase a stock price by buying heavily, faster than sellers are easily willing to accommodate. But remember, unless fools rush in afterwards with even more zeal than the original group, the original group will be the ones to lose money, as the stock would tend to settle back down afterwards, all other things remaining same.
   The situation which happens more often, and is more serious, is for people to buy up a stock, and then make false statements or spread rumours about the prospects of the company or stock, soliciting others to buy it. While this is immoral, it would probably not be illegal if these people were just mom and pop investors exaggerating the quality of a stock. That is why one should take free investment advice with a grain of salt, and carefully judge its source and quality. If on the other hand, such false statements were intentionally made by a stockbroker to clients, then this would simply be fraud, and would be punishable as such.
   However the danger lies with small stock exchanges particularly if there is dual listing as we have in Bangladesh. The risk is the damage external funds can do to the market in the short term. If one reviews the investment pattern of foreign institutional investors the weaknesses in the policy of the Securities & Exchange Commission would be easily perceived. It is a veritable fact that foreign investors infusion of funds during 1993-95 led to higher price levels of listed shares. The problem the foreign investors faced was the sudden spurts in the price level in the traded shares. This price increase was not good business for foreign investors; they along with issuers 'convinced' SEC through a furtive deal that they should indeed be given privileges.
   These privileges came in the form of special quota and later as huge pre IPO placements to foreign investors. Soon enough the foreign investors were sitting on stock which because of their interest had inspired the mom pop investors to take share prices to higher plane. In other word they had the largest pool of stock and great profits to reap. While the small investors thought more foreign investors would come, the foreign investors dumped their shares.
   If the matter had been contained within the floors of the stock exchange the rise in the prices would never have been so rapid and eventual fall so drastic. The stock market was fired by illegal trading on the streets generally known as the kerb market. The fact is the kerb market exists even today and deals are made through surrogate beneficial owner accounts. The other factor was the dual pricing which edged over the principal of price discovery and lead to unfair price escalation.
   Once again the IPO market has been distorted by recent SEC's preferential treatment of quota for fund managers. Needless to mention that any special benefit to a few would be at a great deal of cost to many - this is hardly a fair public policy decision. While we can see great public enthusiasm in IPO, one cannot see why SEC is cutting a deal with mutual funds. Then again do we really need mutual funds when shares and stock are in short supply?

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New water trade route beckons
India, Bangladesh

The Brahmaputra river is expected to once again come alive with vessels carrying fuel sailing to Bangladesh, reports IANS from Guwahati.
   India's decision to export 120,000 tonnes of diesel to Bangladesh annually using the waterways could be the beginning of a new trade route for greater economic ties between the two neighbours.
   "The deal would also boost economic activities and help in generating employment to locals of the two countries," Bhupati Das, Chairman and Managing Director of Numaligarh Refinery Limited said.
   The Bangladesh Petroleum Corporation Limited (BPC) and the Bharat Petroleum Corporation Ltd, the marketing arm of the Numaligarh Refinery Ltd (NRL) of Assam in Northeast India, have signed an export-import agreement to meet Bangladesh's vehicular fuel demand.
   "The business deal is definitely a win-win situation for both the countries. Apart from earning revenue, the most important aspect of this agreement is that the waterways could be a new trade route for the two countries," Bhupati Das, told IANS.
   The first lot would be on its way to Bangladesh next month with diesel loaded into barges from the Silghat port in Assam and delivered at Bagabari in northern Bangladesh. It would take about seven days to complete the journey.
   Bangladesh's total demand for petroleum products is 2.2 million tonnes per annum.
   The 2,906-km Brahmaputra river, one of the longest in Asia, traverses Tibet (China), India and Bangladesh before emptying into the Bay of Bengal. The 1,530 km long Brahmaputra waterways connecting Assam to Kolkata via Bangladesh - about 600 km passes through Bangladesh - has remained literally idle despite the two countries having a protocol agreement to allow using the river system for cargo movement.
   "The volume of traffic at present is almost negligible and it would be ideal to transport items like bitumen, coal, LPG and kerosene between Assam and Kolkata using the waterways," said M.K. Saha, director of the Inland Water Authority of India.
   "The deal for export of diesel to Bangladesh could go a long way in proper utilisation of the vast river system we have."
   "The development of infrastructure linkages is very important for improving economic ties and the decision to export diesel to Bangladesh using the waterways could be a boon for many people residing on the riverbanks," said Montu Doley, a water tourism entrepreneur in Guwahati.
   With the waterways until recently not fully developed, nearly 70 to 80 per cent of India's total exports to Bangladesh was transported through land routes.
   "If the volume of traffic in the waterways increases then there would be several anchoring points that would come up in the route and that way the local economy is bound to grow," Doley said.
   "It is much cheaper for both countries to use the waterways for transportation of cargo instead of using the land routes. It also saves a lot of time."

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