When promoters cry foul

June 2006: Real estate firm Unitech stock price rises from below Rs 1,000 in January to over Rs 12,000 by May end. Reason: rising real estate prices, a liberal 12:1 bonus and a 5:1 stock split. October 2008: Unitech’s stock falls nearly 60 per cent during the month in the wake of falling real estate prices and fear of a liquidity crunch being faced by the company.

The two scenarios depict the extreme manner in which stocks move in bull and bear markets. But these are also significant for the way in which company managements behave in such situations. In 2006, when Unitech stock was scaling jaw-dropping heights, the company’s management did not deem it fit to declare reasons for its dramatic surge. But, when in October 2008, its stock price fell more than 50 per cent in just a day, it promptly blamed a bear cartel for spreading rumours against the company and said it would lodge a complaint with the Securities and Exchange Board of India (SEBI).

Similarly, ICICI Bank and Educomp Solutions kept mum when their stock prices were soaring inordinately during the bull run but cried foul when they got hammered during the recent meltdown.

Why do companies behave so? The answers are simple: rising share prices help managements raise funds through equity. So, for instance, when a company’s stock price doubles in a month, it would have to sell only half the number of shares for the same amount of funds to be raised. High stock valuations also come in handy during merger and acquisitions. “Everyone in the stock market from the promoter down to the investor likes rising share prices. It helps in every way you can imagine. Nobody is dissatisfied then,” says Arun Kejriwal of KRIS Research.

But the fall in stock prices in most cases is not always the result of rumours or manipulation, as managements invariably allege. Market players point out that quite often stock prices fall due to some information available to investors—product rejection, financial problems and so on—that the companies willfully hide from the public. Traders cite the example of real estate firms. Since they were not able to sell the properties over the past year and a fall in their profits was inevitable, their shares have been hit the hardest. “In a bear market, nobody wants to hold on to falling stocks, and as there are no buyers at lower levels, it results in a sharp fall in the stock prices,” says an equity dealer.

Managements must learn to inform the market whenever their shares rise or fall inordinately. And unless this becomes a regular practice, the companies may not win the trust of the investment community, say analysts.