Rumours spread that prices of certain shares were already artificially inflated, that there was "dirt in the dal", or something rotten in the state of the stock exchange.

SEBI always tends to take its eye off the ball when prices are rising

Foreign investor Delhi

Investors panicked, prices slumped, and stockbrokers found they couldn't meet their commitments under India's complicated system of delayed payments.

A Bombay financier, facing ruin, hanged himself from a fan. An employee of a Calcutta firm of stockbrokers, believed to have been dealing on his private account, drowned himself in the river Hooghly and his wife jumped from the ninth floor of a high-rise building.

In Delhi, a bank employee and his wife killed themselves in a hotel room. It's believed he might have speculating with money which was not his own.

Now SEBI has come out with a preliminary report on the slump.

Manipulation uncovered

The Board has uncovered manipulation of the market, collusion between companies and brokers, unsecured bank loans to boost share prices, and creative accounting to postpone payments.

The report has named some of those who were pumping money into certain stocks to artificially inflate their prices.

But The Hindu, one of India's most sober newspapers, while congratulating SEBI on completing this stage of its report in just over a month has asked "why was the board not able to detect market aberrations much earlier and before any crisis?"

One reason is that SEBI like so many Indian institutions is long on bureaucrats and short on experts who really understand the market.

But then SEBI isn't given the funds to pay the sort of salaries the experts could earn elsewhere. One foreign stockbroker also said to me,"SEBI always tends to take its eye off the ball when prices are rising."

New controls

But even if the board's eye had been on the ball it is far from certain that they would have acted in time. SEBI has a much better record of introducing controls than implementing them.

That's why the new regulations that SEBI is now introducing for settlements and the new limits on borrowing to finance share purchases might not be as effective in practice as they appear on paper.

Compliance with the new regulations would certainly be better if brokers were afraid of being punished if discovered manipulating the market.

Two leading brokers have been arrested but if the fate of the legendary Harshad Mehta - who single-handedly manufactured a bull market nine years ago - is anything to go by they have little to fear.

He is out and about, and, brokers say, still active in the market.

To be fair it has to be said that much has been done to improve the functioning of stock markets since that scandal.

What's needed to restore confidence after this one is a more professional and active SEBI and a judicial system which does not, through delay, deny justice to investors who have been cheated.