Sucheta Dalal :India Shining: Only FIIs seem to be buying the story (26 Jan)
Sucheta Dalal

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India Shining: Only FIIs seem to be buying the story (26 Jan)  

Last week’s daily roller-coaster ride in the stock market, which saw the benchmark BSE Sensitive index zoom or dip by over 250 points on at least two occasions, has no easy explanations. Was it Foreign Institutional Investors (FIIs), who were booking profits in a thin market that caused havoc?

The numbers do not bear this out. In fact, FIIs have been net buyers in the cash market all of last week. And on January 20 Net FII purchases were a hefty Rs 344 crore although the Sensex crashed 230 points from a high of 6,130.09 points to a low of 5,899 during the day. On January 21, when the Sensex fell 164 points, they bought a net Rs 135 crore worth of shares. Indian Mutual Funds, who are flush with new investor funds, supplemented their buying. Was the scare about the ban on Participatory Notes (PNs) responsible for extreme volatility in the market?

Again, the numbers do not bear this out. Sebi has been clamping down on PNs over the last several months (these are derivative instruments issued abroad by FIIs and represent underlying Indian shares). SEBI has reported that as of September 2003, only 12 out of 509 FII sub-accounts had issued PNs. And their total net investments were Rs 15,528 crores, out of the total net FII investment of $30 billion dollars. Since then SEBI has asked FIIs to report beneficial ownership and has acted against two entities who were reluctant to part with data. It would hence be safe to assume that there has been no significant increase in PN holdings representing hot money since then.

At the end of the week, Sebi’s clarification on PNs, saying that its restrictions will only apply to unregulated entities and even those will be give a long five year period to unwind their positions, makes one wonder whether the media-generated scare about PNs was deliberate. Were FII operations in the derivatives market responsible for falling prices? Data on their activity in the derivatives segment indicates that FII cash market operations are significantly hedged in the derivatives market.

Clearly, FIIs seem to be buying the Indian Shining story, while some powerful Indian operators are interested in creating short-term volatility and blaming it on the foreigners. What did happen in the last week was a great deal of unwinding of leveraged positions of large market operators, when their financiers (official and unofficial ones) asked them to top up margins or liquidate long positions. But it must be remembered, that the margin calls followed a sudden and sharp fall in stock prices that has happened with alarming regularity during every trading session.

These precipitous mid-day plunge in prices began to happen since January 9, just after the Finance Minister’s mini budget. Traders attribute it to a deliberate manipulation of the system by a powerful group, and back their claim by pointing to some curious trading patterns. For instance, when the Sensex dropped a sharp 164 points on January 21, the BSE turnover was Rs 3000 crore.

Sources say that between 2.45 p.m and 3.15 p.m that day, the Sensex fell a steep 100 points. When BSE officials isolated the trading turnover during this precise period, they found it was a mere Rs 200 crore. Their conclusion: some operators deliberately manipulated the trading to induce a sharp fall and trigger off panic selling by day-traders and margin holders across the market.

The fall in prices, in turn, had the domino effect of forcing financiers to call for additional margins or unwinding of positions. This caused a free and indiscriminate fall in prices, because financers are usually unconcerned about what shares they sell to secure their lending. The fall was so severe last Thursday that companies like TISCO and TELCO took a beating despite outstanding results, which had even exceeded market expectations. The same was witnessed on January 9, when Infosys’ third quarter showing had surpassed expectation. Did the manipulators target these specific days? A section of the markets thinks so. Separately, a peculiar trend is witnessed in the futures market. Just one example is the trading pattern on January 20 in Nifty Futures.

Market sources say that between 12. 30 and 12.45 that day, there was a sudden and sharp spike in the selling of large futures contracts, which far exceeded the trades in the previous two hours. These sales seemed to be made just a tad ahead of the fall in the cash market.

The advance movement of Nifty futures ahead of the changes in the cash market has been a regular feature for the past few weeks. It could well be that traders/dealers have advance information of some kind which they utilise to take position in the Nifty futures market.

That the regulators are also worried about manipulation is evident from the National Stock Exchange’s (NSE) threat to initiate strict disciplinary action, including de-activation of trading terminals of members who place orders on the derivatives segment at artificially high prices. On Friday, when the Sensex rose a stupendous 223 points, Nifty futures traded at a 20 point premium to the Nifty spot prices with only three days for the contracts to expire. That day, the market opened strong, dipped 100 points, retraced the entire fall and soared to the huge single day gain. When the market fell, the premium on Nifty futures kept rising. Why weren’t investors nervous about the futures’ position? Or, did they know that a big buying was on the way? That was the day SEBI was worried enough to call a late night meeting of the bourses to take stock of the situation.

Friday’s enormous recovery has given the regulators some respite, but suddenly, the shine has gone out of the bull run.

There is also a fear that such sharp volatility, which traps day traders and short-term investors who provide the needed much-needed liquidity to the market, will drive them away. Also, there is a growing sense of anxiety and frustration among market operators that despite stringent reporting requirements and an automated trading system, the regulator cannot seem to spot the precise source of such brazen manipulation of market sentiment. Clearly, somebody is making money by engineering sharp swings in stock prices, but the regulator cannot seem to follow the money and track these large operators with the money to move the markets.

-- Sucheta Dalal