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Stock, shock and smoking barrel

The question is if these banks could relax the norms on Tuesday, then why did not they do it a day earlier? Arun Kumar questions...

india Updated: Jan 23, 2008 21:13 IST
Arun Kumar

I had an investment of Rs 48 lakh as on last Friday. More than half of this was in physical shares where I had taken delivery of shares and around Rs 20 lakh, I had paid as margin money to buy some stocks in futures segment. India is growing at around 9 per cent. There was no reason to believe that the situation would change so dramatically over the last two days. I was asked to pay additional margin money on Monday and Tuesday, which I could not. On Tuesday evening, my broker called to ask me to pay another Rs 3 lakh. A net loss of Rs 51 lakh and no shares in any company — Nancy (name changed), a senior executive in a multinational company.

Two days of carnage in the stock markets have wiped out many investors like Nancy. What took years to build in terms of investor confidence was destroyed in two working days. However, the writing on the wall was clear all along. But everyone failed to read it. The government intervened on Tuesday when the bloodbath on Dalal Street spiralled out of control.

Here are some facts: Following the weakness in the global financial market, the Indian market was under sustained correction since January 15. Experts are no longer hesitant to accept that the US market, which is still the centre of gravity of the global financial market, is recession-hit. And that its impact is bound to be felt across the globe including India, irrespective of the fact that ours is a robust and growing economy.

While no one is doubting the impending correction, the question is the pace.

The overwhelming response of Reliance Power’s initial public offer (IPO), gave enough strength to the bear cartel to trap the market. The Rs 10,200 crore IPO bids worth Rs 7,45,353 crore and by Friday evening, investors had taken out Rs 112,063 crore to apply for the IPO. This includes small investors — Rs 11,327 crore, high net worth individuals (HNI) — Rs 49,949 crore and Rs 50,787 from institutional investors.

This figure was available for all to see on Saturday morning: there was hardly any cash available with the investors. Even the regulators, banks and the government must have been aware of this. If retail and HNIs have invested over Rs 61,000 crore and locked it in for three weeks till the time for the refund, could it be possible that the market could have remained strong and not be vulnerable to such people?

Since the market has witnessed sustained selling for the whole of the previous week, it was obvious that all the players in the futures segment needed to fork out additional margin money on a daily basis, which they were doing since January 15. On Black Monday, January 21, the bear cartel got a whiff that the market had cashed out completely. They hammered it down further. For obvious reasons, the default in the margin money had a cascading effect.

The turn of events played out exactly the same way. While foreign institutional investors were on a selling spree to reduce the global losses, the margin call created havoc in the market. Brokers had to sell part of their clients’ shares to meet the margin requirement, since the demat account was also linked with them. But fresh selling pulled down the price further. This generated a fresh requirement for margin. While banks refused to give additional funds to meet the margin, they started asking their borrowers to pay additional margin as per the Reserve Bank of India stipulation for loans against shares.

Since the share price was falling, the banks needed an additional margin and its executives had no option but to sell the shares given as collateral to recover the margin. This created fresh selling pressure and additional fund requirement to meet government stipulation. As there were no buyers in the futures market, the investors had no option but to give additional margin money at every fall.

After brokers started defaulting on margin payment, the stock exchange started switching off their terminals. In fact, every one was following the prescribed law, which, in turn, was helping the bear cartel, which had been trapped many times by the same heavyweights.

Had the government not intervened on Tuesday, the crisis would have continued for the third day as the fiis were continuing to add fuel to the fire.

Despite the fact that the Indian market was hitting new lows, the fiis were on a ruthless selling spree. They are discerning fund managers and we cannot accept or believe that they adopted a herd mentality. No one in their right sense, no one with even a rudimentary knowledge of the stock market would sell in such a market which was sinking so rapidly. But the selling went on as if there was no tomorrow. The selling at this level reflects that the problems in the FIIs’ home countries are far more serious than what are perceived. In the two days of meltdown, the FIIs sold more than Rs 7,500 crore.

The question is if these banks could relax the norms on Tuesday, then why did not they do it a day earlier? Were they not aware of the ground reality, which was in the public domain? Had they done so, it could have helped in arresting the collateral damage it caused to investors but also to the market, which is an intermediary to raise resources to create capital. While the bear cartel had the last laugh, it will take some time to woo these investors back into the market and join the growth story.