Finance Friday: Why Should The Investor Suffer From Scams Like Pyramid Saimira

It is said that Bad News spreads like wild fire. Throw Stock Markets in the mix and the fire turns into forest fire burning down tons of cash. The Indian Stock Markets have been doing rather well hovering around 16k levels for some time now with short-lived bear/bull rallies.

So, when you see the usual “Sensex shoots up 500 points” kind of title , there is a little joy of seeing the portfolio seeing some green. For a medium to long term investor, the headline does not mean too much and things go on. But, what if every newspaper / finance website reads:

SEBI slaps a 7 year ban on Pyramid Saimira from accessing the Capital Markets

It attracts immediate attention and in some cases and immediate call of action.What the indictment means is that SEBI has banned the company from dealing in stock markets for seven years after it found that the company colluded with seven persons to corner the portion reserved for employees in its initial public offer in 2006.

SEBI has been rather active in trying to unearth the dirt in the Indian Equity Markets and the SATYAM debacle surely ensured the need to nab on the illegal stock market manipulations – that too before heavy damage is caused to retail Investors.

In the case of Pyramid Saimira like many others, the chairman strongly denies the allegation. Now, I am no judge of whether a manipulation actually took place or not. SEBI will hopefully drill it down to details in due course of time.

What affects me is the fact that announcements like this wreck havoc for the retail investors who are invested in the companies. To get an idea of the potential damage these announcements can do to your portfolio, figure this

Pyramid Saimira Theatre on Wednesday nosedived nearly ten per cent to hit the lower circuit on the Bombay Stock Exchange

Now, if you were an innocent investor in the aforesaid stock and you came back to your portfolio , you wouldn’t know what hit you. The scale of the loss is huge and there is nothing you can do about it.

There are two possible implications of a news like this:

If the allegations are valid, then at least there is some consolation that SEBI warned you about the worthlessness of the stock. A stock market manipulation reeks of shabby management and a mis-managed company is not to be touched.

But, a sudden news like this and the stock hitting lower circuit does not allow me to cut my losses and run too.

If the allegations come out as falsified even though unlikely, that’s when I think the retail investor becomes the scapegoat of such announcements.

A 10% single day loss can kill all the growth momentum of the stock even if the company never did anything wrong. Who do you blame for your bleeding portfolio.

I am not sure if there is any justification / solution to the problem – The frauds definitely need to be exposed but is there a better way to do it. But, can a way be devised so that the retail investor has time to think and act.

This kind of news based panic selling for sure does not fare well with the retail investor like you and me.

Do you think SEBI can devise a way to bring out the news in a fashion that it does not cause panic selling or rather it is better to have the news exposed as early as possible and at the time when the markets are functioning

How would you as an investor in Pyramid Saimira react to news like this?

[This Finance Friday post is written by our regular contributor Ankit Agarwal, an ERP Consultant by profession, a wannabe entrepreneur and stock market stalker by passion]