Understanding the crash

Understanding the crash

Every fall in the stock market usually leads to a hunt for scapegoats. Witch-hunts are common. It is very important in such times of widespread mistrust and a rash of conspiracy theories, for the authorities to move quickly to clear the air.

The signs are good this time. The finance ministry put out some data earlier this month to show that overseas short-sellers who borrow Indian shares from registered foreign institutional investors were not responsible for the sharp fall in stock prices in September. And the Securities and Exchange Board of India (Sebi) said on Thursday that no one particular group of traders is to blame for the precipitous drop in ICICI Bank share prices.

There are two lessons here. One, the Indian share market is now not that small and shallow to be dominated by a bear cartel. For example, the 192 million shares lent abroad to short-sellers till 8 October dwarf the 100 billion shares in the capital of 224 listed companies studied by the finance ministry. That does not mean stock prices will not leap and swoon. They will. But these swings will be because of underlying shifts in economic circumstances and investor psychology rather than the doings of shadowy cartels or trapped bull operators (as Harshad Mehta was in 1992 and Ketan Parekh was in 2001).

Two, the government and Sebi have done well to move fast and give us a clear picture of what has happened over the past few weeks. That is not how it used to be. Previous stock market crashes would usually lead to questions in Parliament, setting up of parliamentary committees filled with legislators who do not understand markets and occasional arrest or two.

Short-sellers get targeted in most countries in such times. Even the US is no exception. But they are not the villainous creatures that many believe them to be. Short-sellers are healthy counterweights to irrational optimism. They also provide liquidity to financial markets.

It is possible that the stock market crash as well as a few cases of investor suicide could lead to a witch-hunt in the election season. There could be calls for a parliamentary commission. Let’s not go down that path.

Are short-sellers to blame for the precipitous drop in share prices? Tell us at views@livemint.com