The lingering stock market crisis

Even nine months after its crash, the stock market is troubling the government, which apparently, is groping in darkness to find appropriate remedial measures. The collapse, no doubt, has left visible, invisible, short and long-term negative impacts on a number of sectors of the economy. It would take quite a long time to repair a few dents caused by the collapse, allegedly, masterminded by a handful of powerful people in the corporate world and beyond it. But what is troubling the government most is the frequent street agitations by a section of retail investors who claim to have lost most part of their investments. The repeated demonstrations by investors on the streets -- of late, their programme of hunger strike -- remind the cross-section of the people, again and again, of the sad saga of stock market collapse, a very sore point for the incumbent government. There is no denying that the investors themselves are largely responsible for the financial losses they have suffered due to the market crash. The greed of becoming rich overnight had gripped them, because of some wrong signals that were purportedly given to them. However, despite retail investors' misjudgment and adventurism, the people are sympathetic to their cause because of their severe losses. None would expect the government to be harsh while dealing with the poor small investors, though their blocking of the normal traffic movement during last Sunday's programme caused quite a good deal of problems for the people in general. On its part, the government had earlier formed a committee to probe into irregularities and manipulation that had led to stock market boom and subsequent crash. But, rightly or wrongly, there prevails a widespread notion that it has not done enough as follow-up actions to punish the individuals whom the probe body found to be directly or indirectly responsible for the market crash. Meanwhile, some securities-related rules and regulations have been reformed by the SEC in line with the recommendations made by the probe body. And also in a reactive move in response to the latest round of action programmes by the small investors, the National Board of Revenue (NBR) announced Monday through a statutory regulatory order (SRO) some fiscal measures, essentially restoring the status quo ante, in its bid to win investors' confidence. Furthermore, a high-powered body with none other than the Finance Minister as its chief has been constituted to help stabilise the market. It is too early to make any objective assessment at this stage about the likely impact of such measures on the stock market in its present volatile situation. For the market to pick up, the lead role of institutional investors is critically important. Unless and until institutional investors decide to make fresh investments, the market would continue to behave dull and drab. On their part, most institutional investors have, however, some strong reasons to be cautious about making investment of fresh funds in the secondary market now. But most banks and non-banking financial institutions have a huge amount of funds, already locked up in the stock market either in the form of their own portfolio investment or as loans provided to the clients through their subsidiary merchant banks. Such institutions have witnessed a marked dip in their profits so far this year because of several adverse factors. If there is no turnaround of this situation by the time they close their books of accounts on December 31, 2011, the banks and non-banking financial institutions will find it difficult to post reasonable profits and declare dividends to their share-holders as well. In that event, the stock market itself will be adversely impacted again, because most such banking and non-banking institutions are listed on the exchanges and transactions in their shares account for a substantial level trade turnover, in terms of both value and volume. It will, therefore, be too much to expect from banks and non-banking financial institutions to extend much of any liquidity support under the circumstances now prevailing in the stock market, without impairing their normal operations for keeping the wheels of the real sectors of the economy moving.