Nightmare on the bourses

 

 

It was sad, emotional and, in a way, black humour to see the reactions of the retail investors across India. In Mumbai, they ridiculed the metal sculpture of the bull in Bombay Stock Exchange (BSE); some said that the direction of the animal wasn’t according to Vastu. In a Delhi club, two friends talked about the losses they incurred on Monday (January 21, 2008); the first lost Rs.3.5 lakh, and the second Rs.3.24 lakh. The first said he had always made money on shares that he purchased; the second that he had lost as the scrip prices went up immediately after he had got rid of the shares.

People in Kolkata latched on to conspiracy theories. Someone said that the supporters of Mukesh Ambani were responsible. The reason: Mukesh didn’t want his estranged brother, Anil, to emerge as the richest Indian businessman, as was expected due to the deluge of applications received for the public issue of Anil-owned Reliance Power. Another one felt that the US-based Citibank could announce bankruptcy due to the housing mortgage crisis in America. If Citi went down, so would other banks and, hence, there would be no money to invest in the markets in emerging nations. On Wednesday (January 23), when I spoke to an investor friend, his response was telling. “Phew! Thank God, the markets have bounced back. Or else, we would have witnessed several suicides like the one in Bhavnagar (Gujarat) yesterday”, he said. Others too heaved a sigh of relief. But what amazed me was the inherent optimism among the common investors. As early as Tuesday night, many of them asked me a single question: “Do you think this is the right time to buy more shares?” I simply hemmed and hawed as I knew very well that this market has no “deen or imaan (faith or morals).”

Yes, I am talking about the bloodbath on the Indian exchanges on Monday and Tuesday, when the BSE index, Sensex, lost nearly 2,300 points. I am referring to the fact that by the end of trading on Tuesday, the Sensex had tanked by over 20%. But even now, as we go to print on Wednesday evening, not many people know about the whys and hows of what happened out there. And there are only speculation and rumours about who were responsible for the massacre on the exchanges. Sticking our necks out, we offer the readers a sense of how fact and fiction converged to create the panic.

The first instinct among those who have witnessed the past scams of Harshad Mehta and Ketan Parekh was that this great fall was triggered by another scandal. For years, they had waited for a new one to surface; they were convinced that there was something wrong with the sustained bull run, as the Sensex had zoomed from under 5,000 points in May 2004, to over 21,000 points, before the recent crash. The immediate reaction was that the foreign institutional investors (FIIs), who had pumped in billions and billions of dollars in the past few years in India, had engineered the crash. Once sobriety took over, people blamed the unaccounted money that had been invested in Indian stocks. M.K. Narayanan, the PM’s security advisor, had hinted in the past that terrorists were making a killing on Indian exchanges. A finance ministry committee had observed that illegal and unaccounted money may be finding its way into Indian stock markets. Many felt that the black money that Indians had stashed away in banks in tax-haven nations was being invested in India to earn attractive returns.

Another set of pessimists said that a ‘big fall’, or what they called correction, was always on the cards. “A correction to the extent of 900-1,000 points was expected, on the cards but this huge fall came as a surprise to us,” says an analyst with the Mumbai-based Angel Broking. Agrees P.V. Jarolia, an analyst with Asit C. Mehta, a domestic brokerage firm, “The correction was long overdue.” Global investment bankers had also predicted that the Sensex could fall from its high of 21,000 points to as low as 15,000 points. Any bull market can remain bullish, only if it witnesses regular corrections.

Then there was another explanation: Anil Ambani had sucked out money from the market and, therefore, people were selling to remain liquid. The recent Reliance Power issue mopped up over Rs 7 lakh crore (and don’t even try to count the number of zeroes). Thus, when the Sensex tanked Monday morning, investors sold from their existing portfolio of shares to arrange for margin money that one had to pay as a speculator. This resulted in a cascading effect. “Since a huge amount was locked in Reliance Power subscriptions, there was little cushion available to soften the bearish onslaught,” adds Jaloria.

If this was not enough, people speculated about how global events inflicted a crash in India. “Clearly, the fears of an economic recession in the US dealt a major blow to sentiments,” feels R.K. Gupta, MD, Taurus Mutual Fund. Although the American federal reserve refused to accept it, consumer spending is down in the US. The increase in sales during the Christmas-New Year holidays in the US have been the lowest since 2002. Most experts have predicted a slowdown in the US. And everyone knows that when the US economy sneezes, most of the emerging nations, including India, catch a cold.

In addition, there was the subprime crisis in America. Forget what it means, because only a dozen understand it. But its implications are clear: it will result in huge losses for global banks. If that does happen, the banks will have less money to lend to investors. They won’t even have enough to invest directly. They will, as a result, become huge sellers in emerging markets, including India. “The market is being affected by liquidity problems. Foreign inflows have been hit by the subprime issue, which is showing in FII numbers for January,” explains Sanjay Sinha, chief investment officer of SBI Mutual Funds.

So, that’s it. A mix of rumours, sentiments, fears and apprehensions, and economic fundamentals caused the stockmarket bedlam. As I saw it, it was pretty much like watching a 21st century movie titled ‘Fear and Loathing at Dalal Street’.