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Tuesday, March 15, 2005

Over-hyped stocks: Too good to be true


COMPANIES extolling their achievements in print is not news. But prominent advertisements of lesser-known listed companies appearing repeatedly on the front pages of leading, nationally circulated business dailies? That does seem a bit of an overkill. What do they wish to highlight for the benefit of the readers? Typically, they claim that their turnover and profits have grown by 40-50 per cent.

One company claimed to be servicing an impressive list of clients. Another claimed that it has bagged large orders from the Gulf region. A third claimed what appeared to be a leading Indian telecom player picking up a strategic stake in the company. Only that the telecom company in question turns out to be an entity incorporated in Nigeria!

For added effect, many of them claim that they have planned huge investments and bonus shares. On the face of it, these advertisements appear to be the quarterly financial statements of smaller listed companies as per the guidelines of the Securities and Exchange Board of India (SEBI).

But somewhere in small print, there would be an innocuous line: Not a statutory release. That is because the "statutory" release carrying all the information as per the SEBI-prescribed format would have appeared in some small newspaper that nobody gets to read. Only the rosy figures would make it to the front pages of leading business dailies.

Incidentally, SEBI guidelines also mandate that the company has to publish its results within 48 hours. For such companies, the non-statutory advertisements appear several days after the board takes on record the quarterly results.

Statutory or not, these advertising claims have not hurt their stock prices. A study of the price movements of the scrips of half-a-dozen highly advertised companies reveals upward movement to the tune of a 400-600 per cent in the last one month when the ads started appearing.

In the case of one particular stock, the price had climbed to Rs 148 from a yearly low of Rs 1.46. It has since fallen to Rs 45. But quite a handsome gain in stock price, nevertheless. What explains this seeming extravagance? Market players that this correspondent spoke to claimed that there is a cartel of brokers with promoters staying in the background that is out to snare unsuspecting small investors.

The cartel first takes a position in these stocks. Then, as the scrip price rises, pushed by a relentless advertising and media campaign, the unscrupulous operators suddenly dump the stocks and get away with their booty. The small investor is left with worthless paper.

The booming stock market has only made the task of these operators easier. The recent rally in the Sensex has tempted even the fence-sitting investors to try their luck in the market. Lack of awareness about investing, coupled with the hesitation to invest high-value stocks attracts the small investors to such companies. Of course, the brokers who are part of the cartel are always around to pass on "hot tips" and highlight how both, the company in question and its scrip, have been doing exceedingly well.

The media is not complaining though. When asked, the advertising manager of a leading media house said that there was no way a newspaper could check such advertisements.

"They rarely ask for a discount. They are willing to pay us the rack rate and that too in advance. We cannot be held responsible for the advertisements appearing in our paper as they break no rules. It is for the investors to exercise caution," the marketing executive said.

So, if some broker passes a "real hot tip" to you and shows you a newspaper or television advertisement about a company you have not even heard of, don't fall for it !