Sucheta Dalal :When the market fell by 10% in two days
Sucheta Dalal

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When the market fell by 10% in two days  

May 22, 2006

Only the most naive or foolish investors would say that a sharp correction in the capital market was either unanticipated or unwarranted. But the savage 10 per cent crash in just two trading sessions has indeed massacred small traders and punters, many of who are recent investors and have not seen a bear market.


After the two-day fall of 826 points and 452 points took the Sensex below 11,000, it triggered the usual rumours about a looming payment crisis. Those were swiftly scotched by the regulator and the National Stock Exchange.


Although there was no crisis, there was certainly a lot of blood on the street. Thanks to the ruthless margin collection and risk management systems of the two leading bourses, several brokers’ terminals simply did not open on Friday morning.


Many over-leveraged investors who have been dabbling in derivatives have seen all the profit earned over the last 15 months wiped out in just two sessions.


On Friday, the signs of gloom were everywhere. In Mumbai’s suburbs, two commercial complexes—the Kailash Plaza at Ghatkopar and Unique Plaza at Goregaon— are monuments of India’s three year Bull Run.


Investors call them mini exchanges because they are packed with brokers’ offices (including branches and franchisees of the top brokerage firms) that each attract hordes of day-traders who want to watch the screens and exchange notes with others when they trade.


On Friday morning, Kailash and Unique wore a deserted look—the small punters had vanished as brokers chased them for margins and disallowed fresh trades.


The derivatives market took the biggest hit. Several wannabe traders, with no clear understanding of how Futures and options contracts worked, were notorious for trading in ‘two futures contracts’.


Often the profits were re-invested to increase their leverage for bigger positions, since it seemed like the easiest way to make money. Several brokers too have also been offering 5-day funding to clients at 15 per cent interest to encourage trading volumes.


They know that such investors have no staying power and are asking them to stay away for the moment. The forced unwinding of wildly speculative positions has decimated thousands of individual traders, but this time around, nobody can say that there weren’t plenty of warnings.


Almost every expert has warned of possible price corrections and worried about the seemingly unrelenting bullishness that propelled the Sensex from 10,000 to 12,000 at incredible speed.


While there is sympathy for those who lost money, investors concede that they have only themselves to blame if they did not book profits even after the sharp dips in April and last week. That is why investors are not shouting slogans or demanding an investigation this time, except maybe the former Finance Minister Yeshwant Sinha.


The role reversal between Sitaram Yechury of the CPI (M) and Yeshwant Sinha was the big irony of this crash. Yechury after some initial ambiguity and demands about capital gains was largely statesman-like.


He acknowledged that India was affected by the world wide turmoil in equity, currency and commodity markets. On the other hand, Sinha seemed delusional and out-of-touch.


Some one needs to remind him about the collapse of Unit Trust of India (UTI) and the fact that there is absolutely no progress over action against its then chairman; especially after his lawyer threatened to go public about his political links. And, that Participatory Notes (PNs) were a problem even when he headed the Ministry.


In fact, unlike the Scam of 2000 where Ketan Parekh and his crony industrialist manipulated prices, there is no identifiable manipulator this time; if Sinha knows about any specific price manipulators, he owes it to the nation to go public with their names and help start an investigation.


Even in terms of handling the situation, there has been no panic. After 17 May 2004, brokers are prepared for ruthless margin collection by the bourses and weren’t complaining.


Scores of trading terminals did not open on Friday morning until margins were paid up. More importantly, brokers themselves assessed the financial comfort of their clients and ruthlessly squared off all speculative positions. They have also refused to allow any fresh trades, ruling out the temptation to gamble on averaging to reduce losses.


While the correction, or at least its aftermath may last a while longer, it is already having a salutary impact on the overheated primary and real estate markets.


The IPO bubble may be the first to be punctured. Deccan Airways’ and issues that opened with it are struggling for subscription.


Sebi must now ask companies to return shareholders’ money if they fail to cross the 5 per cent subscription mark. It must also examine the quality of money to ensure that short term subscriptions are not arranged to beat the rules.


We learn that some high-premium issues that were scheduled to hit the market in the coming weeks may be postponed.


The realty market, which has seen more hype than transactions, may also cool down.


Real estate and construction companies planned to raise funds on the basis of absurd valuations and catapult their promoter to the ranks of India’s wealthiest individuals.


Since there is no way of knowing whether these companies would ever justify their pricing, they could probably have ended up weighing down various mutual fund portfolios.


In the short term, the dampening of IPO and realty markets may be the mostpositive fallout of the savage correction.


Even otherwise, the hike in the US treasury rate to 5 per cent will cool the rush of money into emerging markets and slow the pace of the Bull Run even when it resumes.


-- Sucheta Dalal