What could Rs 30 have bought you four months ago? Perhaps a bar of chocolate. Or a scoop of ice cream. Or a basket of one share each of 17 companies ranging from trading to pharma to infotech. You probably would settle for the chocolate or the ice cream. Now, if you were told that in four months, without you or these companies doing anything, the value of this basket of shares would jump 650 per cent and your Rs 30 would be worth Rs 216, what would you opt for?

Confused? As Indian stock markets go through yet another bull run, a clutch of penny stocks have sky-rocketed in defiance of investing fundamentals. Penny stocks are very low-priced shares with market values sometimes even below a rupee. Their rapid rise in the past four months reflects the Indian stock markets' abiding principle-in a bull run, every stock must rise irrespective of its fundamentals. In fact, the lower the scrip price the bigger is the rise. This requires the connivance of price riggers and unscrupulous promoters but the bottom line is the same: the small investor is left holding junk shares.

Scam after scam-and the Indian stock markets have had no dearth of them-have shown how during a bull run, the value of scrips of obscure companies suddenly shoots up to stratospheric levels. Some scrips have risen by over 1,000 per cent since April (see graphic).

The modus operandi is simple. Since the price is low and there are very few shares in the market, a few operators corner a large chunk of the floating stock of these companies. Then they create the impression that the stock is in very high demand by buying and selling between themselves. The high volumes of trade and the spurt in the share price catch the attention of small investors and they also start buying shares of these companies. By this time, the share price has already reached a high level. But once the operators offload their holdings, the scrip price usually drifts down to its original level and small investors end up losing their shirts. As the joke goes, some of these penny stocks are not even worth scrap paper if they are in electronic form in a depository.

The current bull run is no different. The 1500-plus point rise in the benchmark 30-share Sensex since April has lifted the sagging fortunes of many scrips that were lying in cold storage. Given the broad-based nature of the current rally, penny stocks across the board are on the rise. Although the Securities and Exchange Board of India (SEBI) has made all the right noises-like the announcement that price riggers will not be spared-so far there has been no instance of the regulator cracking down on any operator or promoter. Recently, Finance Minister Jaswant Singh expressed concern on how penny stocks were rising in defiance of all fundamentals.

Take the case of the Western India Shipyard scrip. The company posted a net profit of Rs 12 lakh in 2002-3 and a loss of Rs 4.2 crore for the first quarter of the current fiscal. Its current earning per share is 10 paise. This did not stop its share's rise from 65 paise on April 25 to Rs 6.25 on August 25, a 861 per cent jump in four months.

Or take Bhansali Engineering and Polymers, a company that made a net profit of Rs 2 crore in 2002-3 but reported a loss of Rs 50 lakh in the first quarter of the current fiscal. Its stock has risen 780 per cent to Rs 70 since April. An unknown trading and finance company, Visisth Trading, has seen its stock price rise 1,351 per cent from a little over Rs 2 in April to Rs 34 in August. Pharmaceutical firm Vista Pharma, which posted a loss of Rs 2.7 crore in 2002-3 and a loss of Rs 73 lakh on an income of Rs 19 lakh for the first quarter of the current financial year, has seen its stock zoom from Rs 1 to a little below Rs 8.

"When you go horse racing, you get options to punt on various denominations of tickets. Similarly, penny stocks are where the smaller punters in the market take a fling and try and make quick profits," says G.V. Ramakrishna, former SEBI chairman. "Serious investors should, in any case, stay away from such stocks."

Stock exchanges seem to have woken up to the threat. Last week, there was a massive crackdown on penny stocks when hundreds of scrips were moved to the dubious category of scrips where all transactions have to be delivery based. While the Bombay Stock Exchange (BSE) moved 700 companies to its "Z" group, the National Stock Exchange moved 135 scrips to its trade-to-trade segment. Moreover, the BSE also slapped special margins on 113 shares to curb volatility in these stocks and discourage speculators.

"We have asked the stock exchanges to crack down in instances where the rise in share price is not warranted by the fundamentals of the company," says a senior SEBI official.

What is more disconcerting is the sudden rush for public issues by small time companies seeking to raise as little as Rs 60 lakh. Of the nine IPO documents filed with the SEBI in August, seven belong to small-time companies seeking to raise between Rs 1 and Rs 4 crore.

"In boom times, people stop chasing value and start chasing prices," says Prithvi Haldea, managing director, Prime Database. "The small investor has lost many times and should learn lessons from the past."

Sources say SEBI-which has come in for a lot of flak for failing to check the unusual price rise fuelled by Ketan Parekh in 2001-is probing several scrips where the prices have risen unusually. It is also planning a mega advertisement blitz for investors, alerting them to the need to watch where they put their money. A broader group is also proposed to be set up to investigate unusual price movements in penny stocks.

"We have asked SEBI to interact with stock exchanges and, if need be, even appoint a larger group of people to study the rise in penny stocks. Investors should stay away from any company whose shares have been dormant for some time. There has been no case in India of a company bouncing back after having vanished," says Kirit Somaiya, BJP MP and head of the Investors' Grievances Forum. "SEBI should immediately start investigation into this abnormal behaviour of stock prices."

Market watchers, however, are already raising the caution alarm for small investors. "Going by what has happened in the past, small investors should not touch penny stocks," says Dhirendra Kumar, CEO, ValueResearch, a mutual fund tracker. "If you see the portfolio of all mutual funds, most have stayed away from such stocks. This means the small investor, promoter and the operator are pretty much the only ones in the game." And it is anybody's guess who ends up making the losses.