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The art of manipulating stock pricesnews
10 October 2005

Market rumours and motivated announcements by companies are used to manipulate the prices of small-cap stocks, says Rex Mathew, pointing out how the media unwittingly spreads them.

Ever since the prices of small-cap stocks started appreciating rapidly, market observers and the more responsible sections of the media have been urging SEBI and the stock exchanges to tighten controls and disclosure standards. Most of these stocks, which have seen considerable appreciation over the last six months, are listed only on the BSE. Most of these companies have no business worth mentioning and their financial condition is pathetic.

There are many stocks in the BSE small-cap universe which have appreciated rapidly, some by more than 10 times this year, only on the basis of announcements by the management or on market rumours. After remaining oblivious to this rampant manipulation for months, SEBI finally went into overdrive in September. That resulted in the sharp decline in small-cap stocks we saw during the last two weeks of September.

The market regulator passed orders against the promoters of a few companies, restraining them from trading in the stocks of their own companies. The regulator also restrained some prominent broking firms from dealing in these stocks on behalf of the promoters or their associates.

The announcements made by the managements of these companies over the last one year, and their stock price movements, are quite interesting.

From finance to generating power from municipal waste
One of the companies against which SEBI took action is IFSL Limited, listed only on the BSE. Earlier known as Interlink Financial Services Limited, the company was categorised as a finance company by the BSE. It did not have much business till the third quarter of FY 2004-05.

Its results were nothing much to write about and the BSE website does not even list the annual audited results of the company for the years before 2004-05. It is not even clear if the company actually filed audited annual results with the exchange, which it is required to do under the listing agreement.

In the fourth quarter of 2004-05, the company got into the business of power generation from waste. It acquired a private company that, it claimed, was engaged in this line of business, though not many details about the acquired company were given. The results for the fourth quarter of 2004-05 were the best ever in the company's history, and audited results for the full year were promptly filed with the exchange.

The company changed its name to IFSL Limited and, over the next few months, made a number of announcements about technical collaborations and new orders. The announcements included a preferential allotment of equity shares and an overseas order from Indonesia. It also announced a tie-up with a German company for getting some Canadian orders. Rumours were floated about the company being eligible for carbon credits, the latest buzzword in the markets, since it is in the business of non-conventional energy.

Its stock price, which was quoting below Rs20 till the third quarter of 2004-05, multiplied more than 13 times to touch a high of Rs275. Then the company decided to split the Rs10 face value shares into 10 shares of Re1 each. The markets love stock splits these days and, adjusted for the split, the stock went up by another 20 per cent to Rs33. Even FII's, including Goldman Sachs, were traders in the stock.

The more interesting fact is that the promoters held only a 17-per cent stake in the company as of June 30, 2005. A clutch of stock broking companies held between one and two per cent each and more than a dozen individuals held over one per cent each.

It turns out that the promoters were heavy traders in the stock during the period January '05 to September '05, mostly through off-market deals. According to data on the BSE website, the promoters' holding was 37 per cent in December 2004 which dropped subsequently to 17 per cent as the stock price jumped.

The shareholders are now languishing with the stock, which was locked in the lower price circuit after the SEBI order and closed on the BSE at Rs21.95 on September 30, 2005. On October 7 it had dropped to Rs13.10.

The real estate gold rush
The rapid appreciation in real estate prices across the country led to significant gains in the stock prices of many companies. Many new stocks were suddenly 'discovered' by the market as having significant land holdings. After the record prices seen during the auction of old mill land in Mumbai this year, this frenzy reached new heights. Statements from the government on allowing FDI in real estate development helped stocks of property development companies to rise to new heights.

One such stock, which saw an unbelievable 20-fold jump in price over a six- month period between March 2005 and September 2005 is Prime Property. The stock, which had a recent low of under Rs15 in March 2005, touched a high of Rs308 in September. During this period, the company released a few announcements to the BSE regarding completion of some projects and acquisition of new properties in and around Mumbai. This stock is also listed only on the BSE.

The company had total revenues of Rs16.30 crore for the year 2004-05, of which more than Rs8 crore came in the fourth quarter, and profits of Rs1.4 crore. The results for the latest quarter ended June 2005 were impressive in percentage terms. Total revenues at Rs8.5 crore were 350 per cent higher than in the same quarter of the previous year, and profits for the quarter doubled to Rs2 crore.

Prime Properties has a capital base of Rs10 crore, on which the annualised EPS, based on first quarter results, works out to Rs8 per share. At Rs308, the stock was trading at a forward earnings multiple of more than 38, and its peak market capitalisation of over Rs300 crore was 20 times the annual revenues of the previous year! All this was achieved by announcing the purchase of two properties in Mumbai with a combined area of 7,000 square yards… The cost of the properties was not disclosed, but the company did mention that planned development on them could fetch up to Rs110 crore in revenues over the next two years.

SEBI has barred the promoters of Prime Property and some individual investors from trading in the stock. Some prominent broking outfits, including IndiaBulls, have also been asked not to deal in this stock on behalf of the promoters till SEBI completes a formal investigation. The stock was locked in the lower price circuit on the BSE after the SEBI pronouncement and closed at Rs190 on September 30, sliding further to Rs147.50 on October 7.

From engineering services to diamond jewellery
The story of Minal Engineering is even more intriguing. The company had reported revenues of Rs41 lakh, Rs35 lakh and Rs21 lakh during the financial years 2001-02, 2002-03 and 2003-04 respectively. The company did manage to report profits for all the three years, though they were almost negligible.

During 2004-05, the company management was attracted to the jewellery business and joined a partnership for manufacturing diamond-studded jewellery. The results were spectacular. Revenues jumped more than 20 times to Rs4.37 crore for the full year, of which Rs4.18 crore came from the jewellery business.

Surprisingly, the company did not have to put in much effort or incur much cost in the new business and most of the revenues flowed straight to the bottom line. Profits for the full year were, believe it or not, Rs4.19 crore – a net profit margin of 97 per cent!

The annualised EPS of the company, which ranged between 3 paise to 33 paise during the previous three years, shot up to Rs31.50 during 2004-05. The share price made a gravity-defying quantum jump from Rs4.33 in Feb 2005 to a high of Rs452 in September 2005, a more than 100-fold rise in under eight months! Interestingly, the promoters hold over 90 per cent of the share capital and, therefore, the volumes are very low.

The good show continued during the first quarter of the current financial year as well. The company reported quarterly profits of Rs53 lakh on revenues of Rs61 lakh! Since the company was doing so well, the management decided to reward the shareholders by announcing a liberal bonus issue in July.

Not content with the bonus announcement, the management decided to hold a board meeting to consider a stock split and preferential issue of equity in September. The board changed its mind at the last moment and called for an extraordinary general meeting of shareholders later in the month. At the EGM, the name was changed to Minal Jewels Limited. The bonus issue proposed earlier was sweetened by increasing the number of bonus shares to 19, from the earlier 7, for every 5 shares held.

Uunfortunately for the company, by then SEBI moved in to play spoilsport and came out with a temporary order restraining the promoters from trading in the stock. The stock price has been locked in the lower circuit after the SEBI order and closed at Rs245 on September 30, dropping to Rs233.05 today.

Big names offer no comfort
Even stocks of companies promoted by the best known names in the country end up being manipulated by unscrupulous market operators. Take the case of SBI Home Finance, promoted by the State Bank of India.

The company has not had any business operations for almost two years now and its license as a home finance company has been cancelled by the National Housing Bank. Despite this, the stock price saw a three-fold rise between March 2004 and February 2005, before giving up part of the gains. Several rumours were floating around, including a restructuring package and a merger with parent SBI.

These rumours were enough to encourage even an FII to invest in the stock. A Mauritius-based FII bought more than four lakh shares for over Rs1 crore earlier this year. One can hardly blame the small investors for being suckered into buying the stock after FIIs had bought it, specially a stock from the SBI group. Finally, the exchanges have decided to suspend trading in the stock from October.

Why did SBI Home Finance fail to come out with a clear advisory to investors and allow the manipulators to have a field day? The list of announcements made by the company to the National Stock Exchange does not have anything related to the revival or re-starting of the company's operations.

Neither has the company denied any of the rumours through a formal statement to the exchanges. The management has repeatedly denied these rumours in the media, then why not a formal advisory to investors through the exchanges?

also see : Investors and misleading media reports
Cleaning up the small-stocks stable

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The art of manipulating stock prices