The Credibility of the Promoters in the Stock Market

The stock market is one of the most dynamic platforms to ever exist. From daily changes, the stock market witnesses a dip one day and an intense rise the other. It would not be wrong to say that to interpret the market is extremely tough, but to make it work according to your whims and fancies if you have the resources (majorly, money), is not as tough as it may seem.

This is one of the greatest reasons Indian Promoters majorly lack credibility.

One such example to back my opinion would be the recent Vedanta-LIC brawl. Vedanta had decided to delist itself, as it noticed a loss of 80% from its peak valuations in 2017. Its market cap shrunk from Rs. 1.7 lakh crore to only Rs. 33,000 crore. It was the interference of the government-run insurer, LIC, which upset the entire delisting procedure for Vedanta. They submitted its shares at Rs. 320/- piece (which a holding capacity of a whopping 6.37% in the company) over and way above the floor price of Rs. 87.25. Their average buying price for the shares was Rs. 225 per share and they said that the share price they submitted was anything but fair.

This scenario gave rise to the reverse book building system, as many others also bid their shares at Rs. 320, while some investors tendered the shares around Rs. 150.

Vedanta’s share prices ended up crashing by 23% as the delisting process was unsuccessful. As the company couldn’t afford the shareholder’s listed prices, they could only buy back 125.47 crore shares against the need of 134.1 crore shares.

This entire event depicted how big housing groups can control the market situation. Even though LIC is a non-promoter of Vedanta, it made sure to not let any market decision take place against their will, as they did not want to face any credit problem and wanted to be graciously compensated.

Another famous scam to back this article is the “Satyam Ghotala” – the corporate scandal of the then fourth-largest IT Company. This was a Rs. 7000 crore corporate scandal in which their chairperson, Mr Ramalinga Raju confessed that the company’s accounts were forged. He confessed via an email to SEBI and stock exchanges that he had inflated the cash and bank balances of the company. As the fictitious clients made up by the chairperson of the company to boost revenues couldn’t make the payment on time, the company inflated the money due from its clients to be in the good books of the market. This entire scandal ran on fake people paying fake money which generated fake revenues resulting in fake profits which were used by Mr Raju to buy 2 real real-estate assets.

This scenario also paved its way to prove that big companies/promoters are not very trust-worthy in playing with the stock market. As they are profit maximisers, they use their perfect information solely in their favour, making it tougher for the smaller investors in the market to survive.

These big investors always have the right amount of information and ideas, which help them distribute their funds in the best way that yields them money. However, that’s not the case with mid-cap or small investors. They rarely have excessive funds or even the perfect information to survive in the market, hence, situations like these forces them to liquidate their assets and sometimes even exit from the stock market. This is exactly how they lose their trust in the market, which leads to only a handful of people controlling the stock exchange mechanisms. And when only a few of people control a particular system, it is most likely to only benefit them, closing the door for other investors to even try the market out. This spreads a sense of outsider-ship in the investors who are forced to withdraw their funds when they see a sudden fall or rise in a particular stock price for no particular reason, and often end up losing a hefty amount of sums, as well. This is the credibility issue with promoters of the companies listed in the BSE or NSE, which almost every small investor suffers and is now slowly recognising, too. The market had to be democratic, which would be affected through the forces of demand and supply, majorly—that was how the concept of stock markets was introduced to everybody. But a few big players have changed the entire scenario by taking the market in their own hands and directing it the way they want, sometimes by increasing the money flow in the market and sometimes by absolutely squeezing the flow altogether.

In my opinion, if an equitable and unprejudiced method needs to prevail in the market, there has to be some clear credibility shown by the promoters of the companies. In the absence of which, the market shall only remain a market-place for a few big players along with the small investors as experimental hamsters, trying to chase their way in and out of the market every now and then, bearing losses along with the imperfect information that they don’t deserve.

DISCLAIMER: The opinion stated above is the author’s own and free from bias. The data has been researched and taken from various reliable sources on the internet. This article does not depict any personal sentiment against or in the favour of a particular person, group of persons, or organisations and is in the best knowledge of the author.