Revelations of fraud, evidence of insider trading and a consequent collapse of investor interest have led to an almost unstoppable downturn in India's stock markets since the presentation of the budget. This link with the presentation of the budget is not coincidental. Judging by the coverage of recent budgets in much of the print and electronic media, there is a widely prevalent belief that budgets are best assessed by financial market spokesmen and by their impact on financial markets. This premium on 'market responses' (meaning thereby purely financial market responses), even if overdone, is a fall-out of economic liberalization.
 
One of the much-emphasized benefits of liberalization was to be the positive impact it would have on financial inflows into the country. The reason why speculative financial investments, as opposed to greenfield foreign direct investment, should be inherently positive is of course unclear. But let us drop such skepticism for the moment. The point to note is that the concern with attracting foreign capital flow has been reflected in the government's fiscal, monetary and financial policies in recent years. Financial liberalization has not just permitted, but eased and rendered more attractive foreign financial investment in India. And budgets have been framed with the intent of not just satisfying financial investors from abroad but of attracting them by keeping financial markets buoyant. The spoken responses of financial agents and the activities as reflected by market indices were therefore seen even by the Finance Ministry, and not just by the media, as an indicator of success in budget formulation. This has meant that the pressure to please financial players has played a major role in shaping recent budgets though, given the whimsical demands of finance, success is never guaranteed.
 
Paradoxically, for the speculator in the stock market this has provided another counter to bet on. Would the budget trigger a sharp rise in financial markets, however short-lived or would it not? Differing answers to that question would elicit different speculative responses. This was the question which Ketan Parekh, the most recent incarnation of the perennial 'big bull' in India's stock markets, had set himself and answered in the positive in February this year. What ensued is now history.
 
Expecting to be able to offload stocks of a select set of companies at higher prices in the wake of the budget, Parekh built up large positions in these scrips. In normal circumstances, this very act of investment by a market-mover like Parekh should have provided a spur to the Sensex. It in fact did.  Both just before the budget was presented and immediately thereafter prices did rise. But that very signal, gave cause for a bear cartel to turn suspicious. Allegedly consisting of stock-market insiders, including the BSE chief himself, who in violation of SEBI norms checked out from the surveillance department who was making large purchases and of which stocks, this cartel discovered that the rise in the index was the result of speculative purchases of select shares. In a world where financial gain, however garnered, is the indicator of success, the cartel chose to offload large volumes of the very same stocks acquired at prices much lower than those prevailing in the market driving prices down.
 
There must have been a brief period when Parekh struggled to keep prices of his favourite stocks buoyant in the wake of the bear hammering. But if he did, his effort obviously failed, paving the way for the downward descent of all stock market indices. This simple tale of a speculative bout between bulls and bears in he market turns more complex and bizarre when a set of related questions begin to be asked and the consequences of the market collapse begin to be assessed.
 
Let's begin with the related questions. What explains the fact that a few operators, who in one way or another are market insiders, can make and break India's much celebrated financial markets? Analysts attribute this to the fact that markets in developing countries like India are thin or shallow in at least three senses. First, only stocks of a few companies are actively traded in the market. Second, of these stocks there is only a small proportion that is routinely available for trading, with the rest being held by promoters, the financial institutions and others interested in corporate control or influence. And, third the number of players trading these stocks are also few in number. According to to the Report of the SEBI's Committee on Market Making, “The number of shares listed on the BSE since 1994 has remained almost around 5800 taking into account delisting and new listing. While the number of listed shares remained constant, the aggregate trading volume on the exchange increased significantly. For example, the average daily turnover, which was around Rs.500 crore in January 1994 increased to Rs.1000 crores in August 1998. But, despite this increase in turnover, there has not been a commensurate increase in the number of actively traded shares. On the contrary, the number of shares not traded even once in a month on the BSE has increased from 2199 shares in January 1997 to 4311 shares in July 1998.” The net impact is that speculation and volatility are essential features of such markets. According to one analyst, the role of speculation is visible in the high ratio (3:1) of trading volumes to market capitalization in what is otherwise a shallow market.
 
These features of the market have a number of implications. To start with, Foreign Institutional Investors (FIIs), whose exposure in Indian markets is an extremely small share of their international potfolio, making India almost irrelevant to their international strategies, have an undue influence on the performance of markets in India. The sums they invest or withdraw can move markets in the upward and downward direction, as recent experience has amply demonstrated. This forces government's keen to have them constantly making net purchases and driving markets upwards to bend over backwards in appeasing them. A corollary of this influence of the FIIs is that any market player who is able to mobilize a significant sum of capital and is willing to risk it in investments in the market can be a major influence on market performance. This explains the importance of operators like Harshad Mehta and Ketan Parekh, the big bulls of the 1990s, who rose from being small traders to become crorepatis and were lionized for their resource mobilization and risk-taking abilities, which made them movers of markets. Ketan Parekh is reported to have risked his investments on a few sectors (the so-called technology stocks) and few firms, and till the recent debacle, always seemed to come out rights in terms of his judgements. He had, it now appears, a major role to play in rigging share prices, as he allegedly did in the case of Global Trust Bank shares prior to the aborted merger of UTI Bank and GTB.