Sensex surge an illusion

SMES, Realty Dip Market

By Shivaji Sarkar

The Sensex closing above 82,000 may grab headlines, but it doesn’t reflect the true market buoyancy. SEBI has raised alarms over unscrupulous practices in the SME and real estate investment trusts (REIT) sectors, underlining the need for tighter regulations.

While the index touched 82,135 and Nifty peaked at 25,152, this surge tells only part of the story. Despite these highs, most individual stocks remain stagnant, with demand concentrated only in select large-cap stocks. The recent rallies are largely driven by IT and FMCG sectors, influenced by cues from the U.S. market, rather than a broad-based market recovery.

Mid and smallcap stocks have been witnessing selling pressure. The REIT have many problems, including compliance of regulations, SEBI chairman Madhavi Puri Buch tells Global Fintech Fest in Mumbai. She hinted at considering the possibility of changing the complexion of indices for benefiting investors in their long-term interest. And added that compliance was a necessity for investor’s trust.

It is a revealing statement of the health of the market and warning to investors. She says that compliances should be like natural breathing. The SEBI would not tolerate any innovation for shortchanging investor interest. “That is opacity and lack of concern for investor money”. The SEBI would not accept it to attract investors and then exit.

The SEBI earlier specified that the SMEs after listing their companies, resort to illegal means to paint a rosy picture about their businesses, pump up stock prices and exit. This way they have amassed Rs 14,000 crore over a decade since SME stocks were launched in 2012. Of this, Rs 6,000 crore were raised in 2024 alone. These firms project unrealistic pictures. The announcements are followed up with various actions like bonus issues, stock splits and preferential allotment to create a positive sentiment to induce buyers purchase at elevated prices.

The SEBI mentioned about some companies listed at National Stock Exchange’s SME platform in 2022 wherein after listing, promoters resorted to rampant related transactions to show a sharp jump in business and revenues. Then it migrated to the main board, launched a preferential allotment to entities related to the promoters. Soon after the shares from this allotment were transferred to the promoters and sold in the market. The promoters made Rs 89.2 crore illegal gains while shareholders were left with worthless shares.

While financial sector risks in the larger and higher per capita countries are moderate, half of lower-income countries face significant risks, World Bank Financial and Prosperity Report 2024 denotes. Nearly 70 per cent of countries facing high financial sector risks are currently not adequately prepared to handle financial stress. The report also identifies a particular risk facing financial sectors in several countries: a large and growing exposure to sovereign debt. This exposure surged to its highest level in the past decade. It signifies that the regulators have tougher job to do than mere facilitating companies dishing out a glorious picture ignoring the risks for increasing profits.

Buch says that a consultation paper proposing changes to the rules for trading index-based derivatives received 6,000 comments. This is an indicator of the investors’ concern. The SEBI would use technology to scan the comments and may revise the index compositions and regulatory mechanism.

The Sensex, short for the Stock Exchange Sensitive Index, is India’s oldest index. It is an economy-weighted, free-float index with 30 financially sound, well-established companies listed on the BSE. These 30 firms, among the most successful and highest traded, represent various industries in India. The Indian stock market has been dominated for decades by narrow large-cap benchmarks. One of them is the S&P BSE Sensex, which has 30 constituents. The competing indices are similar in size and representation. These indices capture 40-60 per cent of the Indian market capitalisation.

Critics say that Indian market participants have narrow range of choices to make a true selection for benchmarks. It should capture 80-90 per cent of the market capitalisation to reflect the actual market movements. The S&P 500 is also designed for exposure of largecap stocks and represents about 70 per cent of the US equity market. The reason for this is historical. Benchmarks are useful when they can be largely investable. However, liquidity in the Indian stock market sits in the top 100 stocks and tapers off sharply at just the halfway point.

The performance of office-based real estate investment trusts (REITs) in India has not been great success and yields are below the benchmark 10-year government paper and little capital appreciation since their listing. 8 Jun 2024. In FY24, yields for most REIT shares had extremely low range of 5 to 8 percent in Mumbai stocks and have virtually no capital appreciation at Nifty Realty lndex. Investors do not have trust in these instruments. The REITs have been hurt by the recent stock market trends. Investors have been selling riskier assets.

The Foreign portfolio investors (FPI) are the major players in Indian equity market. Foreign investors have been net sellers since the Union Budget 2024. The FPIs have withdrawn Rs 16,305 crore from Indian equities in August, driven by a mix of global economic concerns, including the unwinding of the yen carry trade, recession fears in the US, and ongoing geopolitical conflicts in the Middle East. This pullout from equities highlights the cautious stance of overseas investors who are rebalancing their portfolios in favour of more stable and secure investment avenues.

The FPI preferences are making a shift to debt market amid global turbulence. According to data from the National Securities Depository Limited (NSDL), FPIs have poured Rs 1,02,354 crore into the Indian debt market so far in 2024. Stock operators say that that the FPI strategy is to sell India which is expensive and buy China which is inexpensive mainly through Hong Kong. The price to earnings or PE ratio in India is more than double the PE ratio in Hong Kong. This incongruity of the Indian scrip leads to ‘Sell India, Buy China’ trade by the FIIs.

The booming stock market may be a bubble. The Middle class transferred their savings to mutual funds and stock market creating problems for banks. The Reserve Bank of India has flagged it. Many also borrowed heavily. If the bubble bursts, it could become a major crisis hitting individuals and the economy. — INFA