The sharp rise in prices of penny stocks on the back of a sustained bull rally has not gone unnoticed by Finance Minister Jaswant Singh.

Realising that it was the small investor who burnt his fingers during a bull run, Singh assured a group of parliamentarians last week that necessary steps were being taken to prevent any untoward development.

Singh told the parliamentarians that he was keeping a watch on the current boom in share prices.

The bellwether Bombay Stock Exchange Sensex gained over 200 points last week and crossed the 4,125-mark on Friday.

The minister has also underscored the heavy investments made by foreign institutional investors in the debt market.

A government official said the ministry was curious about the momentum in the stock markets since April. Between May and August, the Sensex has climbed over 1,100 points.

While it stood at less than 3,000 points at the end of April, it has consistently increased during the last four months to touch 4,125 now.

In the first week of July, the finance ministry had asked the Securities and Exchange Board of India to check whether the rise in the Sensex was in tune with the fundamentals of the economy.

As a precautionary measure, it also asked the market regulator to look at the movement of the Sensex vis-a-vis other global indices.

According to a recent Business Standard Research Bureau study, while the Sensex gained 39 per cent between April-end and August 20, 344 penny stocks, trading at or below par value, posted returns of over 100 per cent.

These stocks spanned various sectors, including information technology, textiles, non-banking financial companies, pharmaceuticals, steel, chemicals and engineering.

While the regulator told the ministry that there was nothing to worry about and the momentum was backed by fundamentals, the recent incidents of dabba trading and rise in Z-group stocks has raised eyebrows.

The regulator, too, recently asked investors to base their decisions on the fundamentals of the economy and not get carried away by rumours.

Avoiding a mishap in the markets is also vital, with the Centre planning to offload its residual shares in companies like Videsh Sanchar Nigam Ltd, CMC and Balco during the year.

Further, with the forthcoming Assembly elections and general elections next year, the finance ministry is keen to ensure that there is no adverse fallout on small investors.