banks and IPO's

The Reserve bank of India has fined seven banks for their role in the allotment of shares in the initial public offerings by firms. While the move is belated, it needs to be welcomed for taking note of investor concerns and norms already in the books of these banks. It is a good move for ensuring long term stability of the stock markets.
In a recent case, just a handful of individuals managed to open 14000 demeterialsed accounts and route them to corner a large share of the offering of a public issue from the Infrastructure development finance corporation. There was a lot of concern expressed at the fact that the regulator did not act in time to avoid such manipulation.
While the fine in itself is not a very big amount, ranging from Rs five to twenty lakhs, it does harm a banks reputation and sends a strong message. Banking norms will ensure that the banks that have been fined will have to mention the penalty in their annual report thus denting their credibility.
The action also brings into focus the myth of the small investor. It appears that a large part of the small investors are in fact punters shopping to get shares at a discount price just too offload it at the earliest opportunity for a profit. While there is nothing intrinsically wrong with such a move, it is important to underline that these are not hapless small individuals that they are often made out to be but speculators.
Speculators do not deserve special treatment.
The Indian markets need a vigilant regulator and restoring the confidence in the purchasing of shares in initial public offerings is a critical step if the dream run of the Sensex is to be sustained and taken forward. Unlike many foreign markets, the Indian bourses have been so far powered by domestic and foreign institutional investors. If the faith of the domestic investor is restored in the stock markets the Sensex can easily go to greater heights. The penalty will go a long way in curbing the speculative instincts of a section of the players in the bull market who try to coroner a large share of the initial public offerings. The fine on the banks is an important though symbolic step in ensuring that banking norms are followed and market speculation curbed.

Banking oversight alarming

There are frauds and then there are frauds, however for sheer audacity the loss heaped on Société Générale by Jérôme Kervie through trader has few equals in corporate history. That a 31-year-old junior trader can cost a conservative French bank $7 billion in looses before he is discovered show astounding lack of corporate accountability and auditing oversight.
It appears that the trader consistently placed wrong bets on the derivative markets through investments that reduced stock futures. What is mysterious in this whole affair is the amount of money that was hedged. It is difficult to believe for an outsider that a 31-year-old junior executive can have access to funding on that scale in a multi national bank.
It appears that nothing as been learned by international banking system from the collapse of Bearings another bank that had its impressive legacy junked by a relatively junior trader Nick Lesson in 1995. If anything the money involved in that disaster $1.38 billion appears small in comparison to the latest loss faced by the French banking giant. That is if a billion dollars can be termed as small beers in the first place.
The Indian banking industry will do well to learn lessons from this collapse. At the center of the fraud is the working of derivative products that shift risk from one owner to another. In times of economic dynamism, banks and investment firms put premium on risk taking; the juicy yearly bonuses are determined by profit from trading in complex derivatives, which shift risks almost as soon as an instrument is closed to another more intricate mechanism.
While there is a clear economic advantage in allowing risk to be diversified if the process of this risk diversification is not in the ambit of either internal audit or external regulations the result can be a catastrophic.In India the derivative market is in its infancy. It would be prudent to act quickly and put in place regulations especially regarding positions that an individual or an entity can take vis a vis actual underlying value of its assets. Not regulating the derivative markets could well lead to a banking collapse in India in the near future. Regulators need to keep up with the mathematical models that rule today’s stock markets.