Penny stocks under PMO scanner

The Prime Minister's Office has swung into action to look into the phenomenal rise of the BSE Sensex, particularly the rally in penny stocks.

Prime Minister Manmohan Singh, along with his principal secretary, on Wednesday night met senior officials of the Securities and Exchange Board of India, the Reserve Bank of India, the Central Bureau of Investigation and the Intelligence Bureau.

A team of IB sleuths is now camping in Mumbai. It is believed to have already submitted its first draft report to the PMO. Joint secretary in charge of capital markets in the ministry of finance UK Sinha, too, was in Mumbai on Wednesday. The RBI's central board also discussed the issue at its weekly meeting.

Market sources said there was nothing to panic about as the risk mechanism was in place. "The prime minister's meetings were more fact-finding in nature," they said.

Finance Minister P Chidambaram and Sebi Chairman M Damodaran were not present at the meeting as they were in New York to inaugurate the second Annual India Investment Forum.

Meanwhile, the National Stock Exchange tightened bank guarantee norms and said, all guarantees should be backed by assets.

Under the scanner of the PMO are the sources of funds to brokers for stock purchases, the role of cooperative banks and non-banking finance companies, the roles of brokers in small and mid-cap stocks, and the phenomenal rise in penny stocks.

The penny stocks under investigation include Janice Textiles, Konkan Tyres and Shakti Met-Dor. Janice rose from Rs 2.16 in January to Rs 13.8 now. During the same period, Konkan Tyres rose from Rs 3.40 to Rs 18.80 and Shakti Met-Dor from Rs 30.45 to Rs 133.

The RBI is also keeping a close tab on the stock market movements.

"The market exposure of individual banks is within the stipulated limits. However, the banks need to be careful about any of their customers sourcing money from the banking system and using that to play in the market," sources close to the RBI said. Banks' market exposure is capped at 5 per cent of their total assets. Only one bank has been allowed to have a higher exposure.

The RBI is keeping a close vigil on the cooperative banks and non-banking finance companies.

"There is plenty of liquidity which has been driving the market. The RBI is soaking up the liquidity through its daily reverse repo operations and it is unlikely that the surplus liquidity from the banking system is flowing into the market. However, a corporate house can use a bank loan to play in the market if the lenders are not vigilant," said a senior banker. Both RBI and Sebi are also keeping a close watch on the flow of FII money into the market.

According to sources, RBI Governor YV Reddy had expressed suspicion about substantial funds flowing into the market through some commercial banks, co-operative banks and non-banking finance companies, at a recent meeting with Sebi officials and ordered a probe to find out if there were any violations in funding, particularly by co-operative banks and NBFCs.

Sebi Chairman Damodaran had earlier said the capital market watchdog would look into specific penny stocks in which unusual speculative activity was witnessed.