INDIA BUSINESS WORLD - MAY 2006
THE MONTH THAT WAS...

BULLS HIT

 Mayhem on Monday: The bottom literally fell off the market as Sensex went into a free 1,111-point fall. It bounced back, but investor confidence didn't.

The numbers are terrifying, the story behind them sickeningly familiar. Gung-ho brokerages, over-the-top exposure of retail investors, and hedge funds, quick to spot the shift in global investment climate, have combined to cause the biggest collapse in Indian stock market history.

 In just three depression-inducing, stomach churning days, Sensex has plunged 1,803 points or 14.22% from its all-time high of 12,671 points. On Monday alone, eerily the second anniversary of the UPA government, Sensex plummeted 1,111 points, the biggest ever single day point fall. Trading was suspended for an hour, the second time in two years, after the index fell by more than the permitted 10%.

 Throughout the day there were rumours of a few brokerages facing a cash crunch due to margin pressures. All the more since many were not accepting new trades since morning due to margin pressure. The confusion in the market reached a level when the finance minister had to step in to talk up the market. Soon thereafter, the biggest local investor LIC announced that it has been buying in the market. Investor wealth of Rs 5,27,000 crore or 15% of India's GDP has disappeared since Thursday, leaving all the leading indices deep in the red. Some frontline stocks have been battered like beachfront wooden houses in the path of a rampant tsunami.

 Investor confidence, to say the least, has been poleaxed. “The way the markets fell, there was no way of exiting,” says a dazed Nirmal Kotecha, a Mumbai-based high net worth investor for the past 14 years. “It is quite a costly ticket to pay for this horror show,” he added. To many in the market, this shock was just waiting to happen. A number of retail investors, and high net worth individuals, buoyed by Sensex's rapid rise, have been buying heavily in the futures and options market for some time. For a retail investor, F&O offers an easy opportunity to take big bets with little investment in the form of margin money. As a result it holds a greater attraction than the cash market. The peak outstanding exposure in the F&O segment was Rs 45,000 crore in the beginning of the month.

Exchanges ask margins from member brokers, who in turn collect it from the clients (or investors). In a falling market the margin has to be replenished every day with more funds. The margins were already squeezed by last week's fall; several clients did not have the money. Even those clients who had the money could not immediately give the cash to the broker due to inadequacies in the banking system to transfer cash instantaneously. There were reports of stock exchanges having sold shares in the market with the brokers failing to recover money from the clients.
Twice during the month when the market crashed, these investors had an option to square off their positions in the F&O segment.

They didn't and paid mark-to-market margins using the cash in hand and other investments. They believed that the fall was temporary and that the market would continue rising. On Thursday, when SENSEX crashed by 887 points, the investors faced stiff mark-to-market margins which they paid by borrowing heavily from non-banking finance companies. Again, the positions were not squared off. As SENSEX continued its steep plunge on Friday and Monday, these investors were left with a mountain to climb. The mark-to-market margins were so stiff that many were unable to pay.

The fall on Dalal Street is unlikely to impact the booming real estate sector in a big way. However, a falling market could impact the timing and pricing of some of the property companies planning to come out with IPOs. Real estate stocks, which had soared over the past few months, have fallen heavily in the past few days.