The most recent and spectacular example of insider trading in Nepal is the case of the Corporate Development Bank (CORBL). The stock saw an increase from Rs 210 to Rs 498, an increase of 135% in a matter of 10 business days.
The apparent reason for this sudden increase was the fact that the company had submitted an application with SEBON to issue a 1:1.5 rights issue. Right share issues are attractive to investors for the same reason IPOs are attractive in Nepal that is because they are always issued at a par value of Rs 100.
The only problem was the fact that this information was not available to the general public. In fact, SEBON had not yet published its right share pipeline status on its website till January 20.
Insiders at the company, perhaps the merchant banker, and maybe even SEBON insiders bought the shares at cheap prices before the market knew what was going on. That is the very definition of insider trading.
When the news was finally announced, this previous sleepy, lagging and middling performer among its peers in the capital market went even higher still and reached its peak of Rs 798 on February 21. Led by frenzied buying by people who’ve come late to the party. And who’s selling them these shares?
If I’m to hazard a guess, insiders have already sold their shares bought at cheap prices at recent all-time highs. Insider bulk selling has driven the prices down somewhat to Rs 670. The smart money has already booked their profits. Why wait for the rights issue process to finish which can be many months or a year down the line or worst yet it might not even materialise.
The curious case of Shree Ram Sugar Mills (SRS)
Our readers should keep in mind that not too long ago, Shree Ram Sugar Mills (SRS) had submitted an application for a 300% rights issue (1:3) with SEBON. The rights issue not only never materialised the company went into liquidation. Interestingly, the company traded at its all-time high of 338 on the day the company announced its liquidation. Who was left hanging the bag? The unsuspecting investor, of course.
You didn’t have to be an expert or an insider to see the deteriorating fundamentals which at this point had reached an insurmountable level. Yet, there was nonetheless buying of the stock at higher prices till the day of its imminent liquidation announcement.
Why Insiders Have All The Advantages?
The following is an excerpt (abridged and edited) from trading legend Jesse Livermore’s biographical book: Reminiscences Of A Stock Operator.
“Imagine a company that has gone through a period of depression in its particular line of business. The stock is inactive. The market price represents the general and presumably accurate belief of its actual value. If the stock were too cheap at that level somebody would know it and buy it and it would advance. If too dear, somebody would know enough to sell it and the price would decline. As nothing happens one way or another nobody talks about it or does anything.
Then a turn comes in the line of business the company is engaged in: the business becomes highly profitable. Who is the first to know it, the insiders or the public? You can bet it isn’t the public. What happens next? Why, if the improvement continues the earnings will increase and the company will be in a position to resume dividends on the stock; or, if dividends were not discontinued, to pay a higher rate. That is, the value of the stock will increase.
Does the management tell the public? Does the president tell the stockholders?
Not yet. Not a single word is said by anyone and no statement whatsoever is printed by newspapers or tickers.
The value-making (insider) information is carefully kept from the public while the insiders go into the market and buy all the stock they can lay their hands on. As the buying continues, the stock soars.
After a steady rise, financial reporters knowing that the insiders ought to know the reason for the rise, start asking them questions. The anonymous insiders unanimously declare that they have no news to give out. They do not know that there is any warrant for the rise. Sometimes they even state that they are not particularly concerned with the vagaries of the stock market or the actions of stock speculators.
The rise continues and there comes a happy day when those who know have all the stock they want or can carry. The Market at once begins to hear all kinds of bullish rumours. The tickers tell the traders “on good authority” that the company has definitely turned the corner. The same modest director who did not wish his name used when he said he knew no warrant for the rise in the stock is now quoted, of course, not by name as saying that the stockholders have every reason to feel greatly encouraged over the outlook.
Urged by an influx of bullish news items the public begins to buy the stock. These purchases help to push the price even higher. In due course, the company resumes dividend payments or increases the rate, as the case may be. With that, the bullish sentiments reach even higher heights. There are not only more bullish investors than ever but are even more enthusiastic. A “leading director,” asked point-blank for a statement of conditions, informing the world that the improvement is more than keeping up. A “prominent insider,” after much coaxing, is finally induced by a news-agency to confess that the earnings are nothing short of phenomenal.
As long as the earnings continue to be good and the insiders do not discern any sign of a let-up in the company’s prosperity they sit on the stock they bought at the low prices. There is nothing to put the price down, so why should they sell? But the moment there is a turn for the worse in the company’s business, what happens?
Do they come out with statements or warnings or the faintest of hints? Not much. The trend is now downward. Just as they bought without any flourish of trumpets when the company’s business’ turned for the better, they now silently sell. On this inside selling the stock naturally declines. It keeps on going down. It can’t help it. There has been too much stock fed to the market from the inside to be digested.
And the cycle continues
It is important to keep in mind that when a stock keeps on going down you can bet there is something wrong with it, either with the market for it or with the company. If the decline were unjustified the stock would soon sell below its real value and that would bring in buying that would check the decline.
In a bull market and particularly in booms the public at first makes money which it later loses simply by overstaying the bull market. The public should beware of explanations that explain only what unnamed insiders wish the public to believe.”
The idea of ‘pumping and dumping’ a stock is as common as they come. It feels like I didn’t get scratch the surface. The true picture might as well never see the light of day. The general investor should be well aware of the stock market practices prevalent in Nepal. NEPSE and SEBON need to take action as the integrity and credibility of the security market is at stake here. But will they?
What are your thoughts? What questionable practices have you seen?