Why do most companies want to be listed on Stock Exchanges?

Why do most companies want to be listed? Google says, “to raise funds,” and so would a regular retail investor. If only the poor investors knew what they do. 🤷‍♀️

Today, any VC can provide you with funds that you intend to raise from the public. Which is why, it would make  no sense to get under the scrutiny of SEBI and exchanges by going public. Moreover, the cost of getting listed in India is somewhere around ₹8-10 crore! Now, although some companies benefit from free PR and market visibility through IPO, the more dominant reason is something else. 

This might hit hard, but the Clever Corporates perceive Retail Investors as a huge, gullible mass of people and that it’s okay to rip them off of their own money in the name of investments. This is the single biggest driver for the emergence of most investment products like ULIPs, chit funds, cryptos, as well as some stocks and bonds. 

A classic case study of this was Surana Solar, which became talk of the town in 2015 when a news reported that Rakesh Jhunjhunwala had bought 2.5 lakh shares of the company. No, not ₹2.5 lakh worth of share, two-point-five-lakh shares! 🤯 

Now, as soon as the news was made public, there was a madness amongst investors to grab the stock. They had their fan-moment, sending the stock price to its all-time high after a whopping rise of 19% from the opening price. But guess the twist here! The excitement of Mr. Jhunjhunwala buying it, faded away within a couple of hours, when the market got to know that the buyer was not the ace investor Jhunjhunwala but a namesake investor based in Kolkata. Investors after this:

The result: a series of lower circuits which wiped out more than 40% capital in a few sessions.

The price action was on account of the unfair trade practice from the company's end, or  was it another ‘pump and dump’ scheme run by an operator that still remains a mystery. However, the incident proves how easy it is to dupe people when it comes to stock investments. 

Well, this is not the first case. The stock market has had an ill reputation since its inception. Here is how it all began. 

Not Demat, but just Mat(erialistic) certificates

You must be aware that before 1996, physical shares were issued for every stock purchased. And the grand plan to cheat you off your money started right here. 

Let’s take hypothetical situation to understand how it was done. 

A company, XYZ wants to raise capital and hence, is getting listed. Each share of the company costs ₹10, and SEBI has permitted me to raise ₹1 crore. So XYZ can issue 10 lakh share certificates for the general public to subscribe. 

But when XYZ’s IPO opened, the demand was very high, and this resulted in higher applications (more than 10 lakh shares) than the threshold set by the market regulator. Technically, XYZ has to refund the surplus amount for which applications cannot be accepted. But in this case, the company got a bit greedy and decided to scam the investors. The management instructs to give shares to all those 50 lakhs applications who have applied.

But how can they issue 50 lakh certificates when they are permitted to issue only 10 lakh? Well,  They make 4 copies of each certificate and send them to the people who bought shares of the company. By doing this, XYZ gets ₹5 crores instead of  ₹1 crore. 🤯

The obvious question from your end should be - what will happen when two people with the same share certificate number come to redeem it? How will they manage it, then? 

The whole base of this scam is built on the fundamental rule of the stock market, i.e., Demand & Supply forces. If everyone who has applied for the IPO gets the allotment, there will not be a further demand. The supply would still continue as some people might still be willing to sell their shares post listing. So, the prices will fall, and boy, oh boy, they fall harder than a moron falling in ‘love’.

So, as the share price of the company falls from ₹10 to ₹9 now, the company can buyback all the duplicate shares at the reduced price, which is going to cost ₹3.6 crore (40 lakh * 9). The initial sum received was ₹5 crore, minus the ₹1 crore capital, which was legal. Still left with  ₹40 lakhs, and that, my friend, is the profit of the promoters of XYZ, booked in one day, with one simple trick. If you’re feeling inspired, WE NEED TO TALK. 

A few reports say that Reliance, the darling stock of the market, has done this a few times too. 🤥

The Good news-Bad news game

Now that we are onto revealing the tricks promoters employ to earn unhealthy profits, let’s uncurtain one more tactic of theirs. 😈 

Whether a sensational controversy, an earnings forecast or any deal of such sorts, wins or losses, the news flow can make or break you. In both cases, promoters find ways to benefit by manipulating share prices. 

Negative news like a bad earnings report, management uncertainty or corporate governance failure can create selling pressure and result in a fall in share prices, which is an excellent time to take a position in the company. The next day, you just need to issue a clarification that so and so news was false, and has no bearing on the company's operations. 

The prices will be back on track, and you can cash out hefty profits by selling those shares. (Don’t let the bad thoughts win, reader! Talk to us.)

Sometimes this fake news flow is so dramatic that it would give you the feeling of a Hindi daily soap- a gambit play which mostly works by spreading the false news of clashes amongst top management, CEO Vs CFO, Chairman vs Board or CEO vs Chairman. These controversies are then fueled by deliberate media avoidance by the people involved so that it gives the impression of legitimacy to the investors. 
They be like:

The drama, coupled with the media's sensational headlines, is enough to influence the market's direction. Then you just have to take advantage of price volatility by acquiring shares at the right time. A more sophisticated way of playing it is announcing buybacks during the price crash, which helps you pocket a fat profit and win back the investors' confidence at the same time.

The modus operandi adopted by promoters here to manipulate the prices is much similar to that of an operator. But the irony is that sometimes, the company’s key managerial personnel, popular media houses, top journalists and sometimes even the regulatory body are not able to escaped the lure of these gains. 

Each party involved in the process of manipulation gets some kind of reward: a one time commission, stake or capital gain from trading, etc. But the whole blame goes to the media that they mislead readers by publishing fake news. The media be like:

But have you wondered what drives them to circulate this propaganda in exchange for their brand equity? The “big bucks”, and who pays for it, finally? YOU, the investor!

Horrifying Data

The evidence isn’t just anecdotal either. A report of business line shows that around 119 cases of insider trading have been reported in the year 2018-20. Can you imagine, this is one of the highest number cases detected by SEBI in any of the previous years since its inception! Furthermore, the absence of advanced surveillance systems and limited awareness amongst investors means low detection rate in both insider trading and market manipulation cases in India. Until a proper system is put in place, the least you can do people, is try to stay updated and not fall prey to just about any news. 

The fundamental reason for this is the structure of the Indian market which is said to be wide, not deep. Other than the top 200-250 stocks, most of the shares are traded sparingly, and thus are easy to manipulate. The question is, can we do anything to turn the tables in such scenarios? Well, it’s a “no” as certain as your parents’ rejection of your solo-trip plans! 

Manipulation in the financial market took birth with the markets and now, seems like the immortal villain in a sci-fi movie. It was prevalent decades ago; it exists today and doesn’t seem to have an end. To be mindful of attempts of market manipulation, pay close attention to prices when you see some unusual movements but don’t take any decision based on that. 

Let’s say a breaking news on a platform say, Poneycontrol reads- “Exclusive: CEO of X company may soon resign.” Do you really think you can take advantage of this news ahead of the market? If a platform with average monthly traffic of 85 million is releasing such a piece of news, by the time it reaches you all of the major players would have already executed their trades, and from here, things could only go south.

There is always a risk when investing in the stock market, but it is important to weigh it carefully in order to make the right decision. So the general principle of caveat emptor applies in investing as well!