By Ruma Dubey

Rumours. They have the power to ignite an entire forest and reduce it to either ashes or spread the flames to other forests around, engulfing all as it catches the drift of more wind. These rumours are a strange thing – markets cannot function without them and sometimes, it is the tool used by the manipulators to ride high and leave the rest high and dry!

The trend is to buy on rumours and sell on facts. The moment a rumours emerges, people scramble to buy and take positions, like as though they are at the starting line of a race; albeit a short race. But the moment, the actual official word comes in from the company, be it a confirmation of the rumour or denial, the stock plummets. So the actual happenings in the company has little to tempt the trader, it is only rumours which help them play the market.

Companies too cannot paint themselves as being victims of these rumour mills; sometimes the rumours originate from them and sometimes they give wind to these rumours too. And when rumours emerge, companies take an awful lot of time to issue a denial too, especially when the rumour is good and giving wind to its stock price. Or sometimes, even when the stock price plunges, the management plays deaf and dumb.

Take the recent case of JP Associates. Last week, rumours emerged that the company’s subsidiary had shelved plans to sell its cement unit, Jaypee Cement unit in Gujarat. Within two trading session since the rumour emerged, the stock tanked over 8% and on 25^th June, the stock hit a new low. Today, though the company has not issued any statement to the stock exchanges, denying the rumour, the chief of the company, Manoj Gaur went on a business news channel and stated that the sale of cement unit had not been shelved, it had been postponed and is likely to happen by end of 2013. It did take the company a long time to reassure the investors!

Then today itself we saw Shriram EPC issuing a clarification, stating that it denied the contents mentioned in today’s Times of India article, which stated that “Vicat may buy Shriram Cement unit”. This was very swift action – at around 10.30 in the morning the denial was issued by the company. But despite this denial, there is another very popular website which went on to announce that Vicat is expected to buy controlling shares in Sree Jayajothi Cements, which is a part of Shriram Ventures, the holding entity of the group's non-financial services businesses, for $250million or around Rs.1000 crore.  So does one believe the company or believe the fact there is no smoke without fire?

Another such company is Elder Pharma. The company has been consistently in the limelight over the past few days. On 11^th June, Economic Times had published a news titled “Debt-hit Elder Pharma Put On the Block”  and the stock had reacted positively. Just before the market closed for trading that day, the company issued a clarification stating that the news was not true. Again yesterday, rumours caught wind that many MNCs were looking to buy out the company’s formulation business. Again the stock price zoomed and the company issued a clarification just before market close, refuting these rumours, though the stock price, despite the denial remains strongly in the green today.

The case of Reliance Capital yesterday was interesting, making one believe that there is no smoke without fire. The stock price was up yesterday morning opening, on unconfirmed reports that the company is spinning off its consumer lending business into a new unit and would sell stakes of just under 5% to two Japanese firms - Sumitomo Mitsui Trust bank and Nippon Life Insurance.  This move to sell stake was being made to boost its chances of getting a banking license ahead of the deadline for applications on July 1. And the company confirmed by 11am the very same “unconfirmed news”.

Today there is really no good news coming from anywhere and all economic statistics are depressing and at such times, the media and analysts wear not just one thinking cap but many of them and put one and one together and come up with four!  Markets reacting instantly. The market reacts like quick silver to any such seemingly good news and it is up to us to react logically to these rumours. The basic thing to observe is the stock price – whether the price reacted to the news or the price made the news, rising much before the “rumours” started making news.

Rumours are usually about sale of unit, merger or acquisitions, promoter being involved in a scam or IT raid, corporate governance issues, fund raising plans, pledged shares and till a few days ago, it was the delisting theme which was rife with rumours. And how does one react to such unconfirmed news? If the rumour is good, obviously stay put but if the rumour is a serious corporate governance offence, back track and look at its past track record, credibility of management and then take a call.

Read between the lines – if the report calls it a rumour, it most likely means it has emerged from thin air but if the report says “unconfirmed news” it could mean that the report had a source. The line between the two is very thin and it is ultimately only logical and unemotional thinking which will help you separate the chaff from the grain.