Manic Monday brought the SEBI chairman rushing back from Jordan to take stock of what worked and what ought to be improved, here are some examples.
After the Sensex crashed by 330 points on Friday, May 14, even savvy market players predicted a recovery on Monday. That is why GN Bajpai, Chairman of SEBI took off for Jordan with his senior executives, to make a strong pitch to host the next meeting of the International Organisation of Securities Commissions (IOSCO).
Just after the Conference began on Monday, the frightening collapse of India stock prices had commenced. After the first circuit break, the Chairman decided to take the next flight back, even though it meant a circuitous journey, travelling economy class and attempting to remain in constant touch with the Indian situation .
He finally landed up in Mumbai at 4.30 a.m. and was in office early Tuesday morning in order to review the situation without sleeping a wink. Extraordinarily enough, the crisis was over by then and there was only the calm after the storm. Although he ended up missing the conference, the SEBI team ensured a unanimous approval for India to host the IOSCO Conference in 2007.
How bad was it?
On a closing basis, the 564-point fall in the Sensex on May 17 was lower than the 570-point drop after the Harshad Mehta scam of 1992. But the intra-day fall was a stunning 820 points. Compare it with other difficult situations and the market reaction appears bizarre. For instance, on May 12, 1998, even after the nuclear tests at Pokhran, the Sensex had dropped just 77 points on a Sensex level of around 4000. A day later it fell 162 points when it seemed that the Americans would impose sanctions on India. Even when the H.D.Deve Gowda government fell on March 31,1997, the Sensex fell 302 points. Nothing compared to the alarm triggered by a few irresponsible remarks by the Communist parties.
What led to such an outrageous reaction this time? Probably the fact that Indian markets have seen almost $10 foreign portfolio investment over the last 12 months and they were especially bullish about certain PSUs and banks. Add to this the fact that a few lakh new investors had bought PSU stocks at near all-time highs in March this year and it led to a fear that unless investors unloaded their holdings quickly, they could suffer big losses. The stampede may have triggered a domino effect leading to events getting put of control.
HDFC v/s Canara Bank
For brokers as well as stock exchanges, Manic Monday opened their eyes to the real capabilities of various clearing banks and revealed whether they empathised with those who were affected how much they were willing to help in a crisis. Reliable sources say that HDFC Bank, which earns substantial revenues from the capital market, was particularly helpful. The bank worked almost round the clock to help brokers meet payment demands, top up margins and get their trading terminals re-started.
ICICI Bank, which is otherwise aggressive and hugely competitive, was not upto the mark according to those in the know. They say its systems suffered frequent breakdowns, which is indeed a sad reflection on the second largest bank in the country. Canara Bank was almost unsympathetic and this approach of the Bank marks a complete about turn from its position under the late B Ratnakar in the 1980s when it was dynamic, aggressive and extremely market savvy.
The closure of broker terminals raised an curious problem for investors that ought to be tackled by bourses and regulators. Most investors have no idea how well their brokers are capitalized and if it is their bad management and lax margin collection that causes trading terminals to be shut down by the stock exchange.
Today, if a broker’s terminals are disabled during times of sudden volatility, clients cannot immediately switch to another broker (without first setting up an account) and thereby lose the opportunity to avoid a loss or make a profit.
Brokers, who are in trouble, usually blame the stock exchange for their problems and investors are in no position to know the truth. One solution would be for stock exchange websites to permanently post details of how well every member is capitalized and how many times their terminals were disabled for margin requirements in the previous calendar year.
Himachal Futuristic Communications Ltd (HFCL), which was touted as the “turnaround” scrip of the century and compared to Dell Computers has collapsed even further. The scrip, traded at a phenomenal Rs 2553 at its year 2000 peak. On Manic Monday the share traded at Rs 8.89 per share, a shade above its all time low of Rs 8.71 in BSE back in March 1991.