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Finmin blames brokers

MONDAY WAS no better than Thursday or Friday on the Sensex. After a free fall of 1,111 points, trading was suspended for the first time since May 17, 2004, and only the second time in the history of the bourse. Be it margin calls or bears smelling blood on Dalal Street, in an unprecedented selloff, the Sensex hit the lower circuit filter of 10 per cent. This stopped the BSE machine in its tracks, halting trading for one hour.

india Updated: May 23, 2006 00:58 IST
ARUN Kumar

SENSEX LOSES 1,111, RECOVERS, STILL SHORT

MONDAY WAS no better than Thursday or Friday on the Sensex. After a free fall of 1,111 points, trading was suspended for the first time since May 17, 2004, and only the second time in the history of the bourse.

Be it margin calls or bears smelling blood on Dalal Street, in an unprecedented selloff, the Sensex hit the lower circuit filter of 10 per cent. This stopped the BSE machine in its tracks, halting trading for one hour.

The erosion in investors' wealth in the past three trading sessions: Rs 540,000 crore.

There was drama right through Monday.

A crisis management team under Finance Minister P. Chidambaram went into confabulation mode at North Block to contain the damage. Strong statements emanated from the minister and his team. Chidambaram clarified that there was no liquidity problem and the RBI had been told to provide sufficient liquidity to meet settlement payments arising from margin calls.

DEA secretary Ashok Jha said FIIs and mutual funds were buying.

While saying there was no payment crisis, the government admitted that there was margin pressure, particularly on account of proprietary trading by brokers.

Telling retail investors to stay invested, Chidambaram said: "The system is in place and whatever has to be done, has been done. My information is that brokers operating on proprietary accounts were under margin pressure, so they were selling."

At about the same time SEBI chairman M. Damodaran said in Mumbai that there was no liquidity problem and no systemic failure. “There is no reason to worry as there is no liquidity problem,' he said. “Investors should take informed decisions and not pay heed to rumours. There is no reason to worry. SEBI is in touch with the RBI and finance minister and stock exchanges, and I've been assured that there's enough liquidity in place.”

Meanwhile, when trading was suspended for an hour, the National Stock Exchange ran the margin call afresh. (Theoretically, it should have asked for fresh margins only after the closure of market hours -- brokers were supposed to deposit the margins by 10.30 a.m. on Tuesday.)

Since the market was down 1,111 points, almost all the brokers were caught unawares and were required to deposit fresh margins.

At 12.45 p.m., they were asked to pay the margin. Technically once the demand is raised, these brokers cannot trade unless they cough up the margins. In the process, the terminals of many of the brokers were started around 2.30 or 3 p.m.

As a result, when the market opened after an hour, shares recouped their earlier losses. The Sensex ended the day at 10,482 -- a loss of 456 points.

Some stocks, including a few large caps, managed to ended the day in positive territory. Among them: Reliance Energy, Cipla Ltd, Ranbaxy and Satyam Computer. It is now official that FIIs have sold equity to the tune of $302 million (Rs 1361 crore) since last Friday. In the process, they have become net sellers of $276.80 million in May.

In the past seven trading sessions, FIIs have made net sales of $1.12 billion. In fact barring, May 12 -- when they bought equity worth $4.1 million -- they have been selling continuously since May 11.