Introduction
About the book
Bulls, Bears and other Beasts by Santosh Nair (author) narrate the story of the Indian stock market by creating a riveting tale that brings together the world of fact and fiction. The book takes you through the ups and downs of the stock market through the eyes of the wily trader, Lalchand Gupta, popularly known as Lala.
It is primarily an 'event' book for the market that is interspersed with behind-the-scenes knowledge about traders, operators, promoters, money managers and regulators. It traces the life of an Indian trader from the late 80s till date, and in that journey, it manages to touch upon wide-ranging topics concerning the Indian Stock market, such as tech booms, tax evasions and money laundering.
This book also touches upon liberalisation, the Harshad Mehta scam, the Ketan Parekh scam, the rise and downfall of Jignesh Shah, in addition to talking about how the Indian markets evolved over time.
About the author
Santosh Nair is a veteran journalist who has been writing on the financial markets for over two decades, having worked with Business Standard, myiris.com, Crisil MarketWire and The Economic Times. He is currently working as the editor of the CNBCTV18.com (moneycontrol).
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Early Days
Lalchand Gupta, or Lala as he was lovingly called by his friends, was born into a poor family who barely managed to make their ends meet. He had fallen into bad company early in his teenage years and had grown to be rebellious and violent. His constant need to get into brawls drove his father to move out of the chawl they lived in and move into a new place. When Lala was in the twelfth standard, his father had met with a terrible accident at the factory that had rendered him unfit for work. The financial responsibility had then fallen on Lala's shoulders and he took up some meagre jobs. But nothing seemed to satisfy him. Fate made him bump into Pradeep Mohan, one of his classmates in college, and they started keeping in touch after that. Pradeep worked in the back office of a stockbroker and he maintained the client records after the trades for the day were done. Hearing Pradeep prattle about the happenings of the stock market and how fortunes were made and lost in a minute, to say that Lala was fascinated would be an understatement. Lala realised that he did not need any fancy degree or even formal education to make a fortune in the stock market. Skill, perseverance and luck was all that he needed.
After about a month of hearing him babble about the wonders of the market, Lala asked Pradeep to arrange a job for him too. Although Lala wanted to be in the midst of all the action on the trading floor, shouting orders left and right, he knew that he had to start small. Pradeep managed to get him a job at a lesser known firm and warned his friend not to be reckless. In the dying days of 1988, awareness about investing in shares was on the rise. Other than the brokers, the main players in the market were institutions like Unit Trust of India (UTI) and Life Insurance Corporation of India (LICI). Brokerage rates were a grand 1.5% at that time. Investment based on the fundamentals of the company was still on the down-low. Lack of sufficient publicly available information was the main reason behind this. A lot of what passed as 'research' in those days, constitutes 'insider trading' today.
Reliance Industries, Bajaj Auto, Castrol, TISCO (Tata Iron and Steel Corporation), Tata Tea and Tata Chemicals were among the most actively traded stocks of those days. Nemish Shah, Manu Manek and Ajay Kalyan were the high rollers back then.
By working in the back office, Lachand began to learn exactly who was buying and selling what shares. This information proved to be useful to him as some of their clients were important players in the market at that time. Lala tried to make friends from other brokerage firms early on as he knew the importance of networking. Soon, Lala was promoted to be a dealer in the trading ring. There was a public address system on every floor of the stock exchange building, on which the prices of A group and B group stocks were broadcasted. In the evening, the stock exchange would publish the bhaav copy, a report which listed the high, low and closing prices of the stocks traded on that particular day. After the trading hours, there operated an unofficial market called the 'kerb market' for some of the more liquid stocks. Of all the players in the stock market, it was the "jobbers'' that fascinated Lala the most. A good jobber needed the skills of a trained psychologist and he aimed to make a series of small profits rather than a huge profit through one giant trade.
The trades done on the floor had to be written in the sauda pad. Each sauda pad had five columns for noting down details about the deal. These were - the clearing number of the broker through which the deal was done, whether the shares were bought or sold, the name of the stock, the quantity of shares and the price at which the deal was done.
Lala had soon become good friends with Bunty who worked in a non-banking finance company. Bunty would come to Lala in need of information about various jobbers, brokers and dealings that took place in his firm. Lala would provide it to him for a hefty amount. Bunty had realized that Lala was smarter than he had thought and believed that he would go really far in the stock market business.
Dalal Street And Harshad Mehta
The Dalal street of the 1980s was quite literally the financial equivalent of the Wild West. With the introduction of the NSE (National Stock Exchange) and screen-based trading in 1994, clients could verify what prices their shares were traded for. Before the NSE was introduced, brokers had to adhere to the rules of the stock exchange, but in reality, these rules were violated quite frequently. There was no proper mechanism to resolve the grievances of investors. It was believed that the exchange was controlled by a group of influential brokers to such an extent that many joked that BSE was an abbreviation for Broker's Stock Exchange and not Bombay Stock Exchange. Cartel wars in the stock market were quite common at that time. Lala's skills were steadily improving and he began to earn ₹10,000 per month where initially he was only earning ₹2,000.
After the Janata-Dal-led national coalition came to power in 1989, there was little activity on Dalal Street. The stock market appeared to be existing in a world of its own, unmindful of the economy as a whole. Investors did not concern themselves beyond such policies that impacted specific companies or sectors. The action was slowly building up in the murky interbank market for government securities, the reverberations of which would soon be felt in the stock market.
The Sensex had risen to 1,100 by the end of July 1990. Harshad Mehta's scale of activity had increased considerably and the big moves in stocks like ACC, Apollo Tyres and Tata Tea were being attributed entirely to him. He had become a powerful broker in the money market too. At that time the CRR and SLR added up to nearly 50%. This reduced the bank's ability to earn profits as well as issue loans. To get around the rigid CRR/SLR rules, banks came up with a "buyback" or "ready forward" arrangement.
The issuance of bank receipts was on the rise at that time and before long, Bank receipts began to be misused on a large scale. Banks were permitted to trade securities only with other banks. However, Harshad rewrote the rules when he decided to become a counterparty. This helped him to rapidly scale up the size of his transactions. Sharma, one of his associates, worked in the same firm as Lala. Sharma was the one who had introduced Lala to Harshad. Harshad was quite impressed with Lala and asked him to call him up if he had any interesting ideas. A couple of weeks later, Lala started doing trades for Harshad. Lala's orders started getting bigger and his commissions were growing steadily.
The Bharatiya Janata Party (BJP) withdrew its support to the VP Singh government in October. The Sensex crashed the following January as a war in the Gulf seemed imminent. However, Associated Cement Companies (ACC) was rising steadily. This rise stemmed from Harshad's heavy purchases in the stock. After the Gulf war ended, inflation climbed to a record 13.6% and there was despondency everywhere. Then Finance Minister Manmohan Singh's sturdy response to the crisis was a groundbreaking budget, which allowed FIIs (Foreign Institutional Investors) to invest in India.
The Controller of Capital Issues was proposed to be replaced by the SEBI (Securities and Exchange Board of India) to regulate stock markets and exchanges. The bulls managed to lift the Sensex by 300 points over the next month. Their leader was none other than Harshad himself who had then become the "Big Bull". The moment Harshad and his associates would make inquiries about a stock, its prices would start rising. Harshad's flashy lifestyle made headlines and he became a role model for every player on Dalal Street. Very soon, Harshad started to have delusions about his power and he believed that a company's performance could be easily influenced by him. The post-budget excitement in the market lifted the Sensex to around 1,900. Soon, Lalchand began earning an average of ₹40,000 per month.
The daily trade turnover had risen to around ₹4000 crores towards the end of 1991-92. Along the way, Harshad had lost his sense of proportion and had become dangerously overconfident. The bear cartel constantly attempted to fell him by short-selling the stocks Harshad was long on. Between January and April of 1992, the Sensex rose to a high of 4,546. Harshad's prophecy about ACC going beyond anyone's imagination came true when the stock touched 10,500 on the day the Sensex peaked.
Over the three months of the bull run, Lala made close to ₹3.5 lakh. He had also begun to get closer to Harshad. People resented their growing proximity and fed Harshad tales about how Lala's loyalty lay with the bear cartel. Lala got along well with Manubhai and did some trades for him as well. Soon Harshad's trust in Lala started fading and he started doing deals with other firms.
While protesting against some rules set forth by the SEBI, many exchanges had gone on a strike in mid-April. While checking its books, SBI (State Bank of India) had found that Harshad had not delivered the securities that he had taken money for. Before a settlement could be reached, the matter had already gone to the press. This blew the lid off the scam and it was found that many banks and financial institutions were not holding the securities that they had paid for or were holding forged bank receipts. The size of the scam was estimated at over ₹8,300 crores. The scam tarnished many reputations and ended dozens of careers. Harshad Mehta became the face of the biggest scam in the history of the financial markets, popularly referred to as the Scam of 1992
A New Start
Harshad's arrest in June took the battle out of the bulls. Lalchand had made over ₹1 lakh from his trades in April. A good chunk of his profits had already been in the bank for a long time and he suffered less than any of his peers. Lala owned no shares in his name. This was due to his lack of conviction about the merits of investing for the long term.
Delivery-based investment - in which the buyer takes delivery of the physical shares - became a norm once again in the wake of the securities scam.
All the clients of Lala's firm had invested heavily in Harshad's favorite stocks. The firm and its owners took hefty hits and were on the brink of a shutdown. By July, Lala's employer decided to shut his business and gave Lala ₹1 lakh in his severance package. He recommended Lala to one of the masters of the trade, Govindbhai or GB as he was popularly known. He was what people called a broker's broker. Lala went to meet him at his office. Govindbhai valued integrity, honesty and confidentiality about his business over everything else. He agreed to pay Lala ₹10,000 excluding his share of jobbing trades. Lala joined him and felt it to be the beginning of an enduring protege-mentor relationship. He felt that his association with GB would fill his gaps in learning. The decks for foreign investments cleared in the stock market and FIIs started sending out their teams to check out the market's potential. Nearly 550 companies raised close to ₹11,000 crores through IPOs in that financial year. The grey market was an illegal market for trading in IPOs before they were listed on the stock exchange. Lala preferred to play the IPOs with those grey markets.
By the end of the second month itself, GB had taken a liking to Lala. GB had explained to Lala that the grey market for IPOs had developed as a black market where one could get extra shares by paying a higher price. This market was quite active because of the staggered payment structure. GB told him how it was the success of share issues by MNCs that got retail investors interested in the stock market. The MNCs were not given the freedom to fix the price at which they could sell to the Indian public. It was fixed by the Controller of Capital Issues. The equity cult got a big boost in 1977 when Hindustan Lever and Reliance Industries brought out their IPOs within a few weeks of each other. Indian companies such as Hero Honda, TVS and Apollo Hospitals also became notable names in the market in the 1980s. People became worried about a possible bubble in the public issue market just waiting to burst. In 1993-94, around 770 companies raised over ₹13,000 crores through IPOs. US-based investment bank, Morgan Stanley was the first foreign player to start a mutual fund company in India. In 1993-94, FIIs pumped in over ₹5,000 crores into Indian equities.
NSE's arrival as a competitor to BSE dramatically changed the way business was transacted. BSE was the biggest and the most important stock exchange across the country. It had the maximum number of companies listed on it and it was more liquid compared to the others. Mahendra Kamani tried to computerize the trading process and convert the open outcry system into a screen-based one. This would help to increase liquidity as more investors would be able to access the system simultaneously and there would be greater transparency about the prices at which the shares were bought or sold. This would have dented the profits of many jobbers and brokers who thrived on the wide spreads.
Thus, Kamani faced huge opposition from the broking community and the idea was postponed. Had BSE opted for computerization at that stage, NSE would not have been able to snatch market share from it. It was seen that the BSE's broker lobby had become too powerful for its own good and was beginning to pose a challenge for the government.
NSE was run by professionals and it was permitted to start an exchange for trading in 1994. It started its operations with an electronic trading system. Investors who had been at the mercy of the brokers and aspiring brokers who were not given membership at the BSE, all flunked to the NSE. The screen-based trading system made the whole process faceless and easier. Lala adapted to the new system and began to thrive. In 11 months, the NSE nosed past the BSE and became the top exchange in the country.
With the FIIs setting up their operations in India, the frenzy in the primary market continued. However, the quality of companies seeking to raise money was progressing from bad to worse. Aware of the happenings of the market, SEBI stepped in to keep the merchant bankers as well as promoters on a leash. Regulations were laid down especially for merchant bankers and people seeking business from companies that needed to have a license issued by SEBI.
Other rules were also introduced such as the requirement of companies to disclose all material facts, follow a code of advertisement, vetting of offer documents by SEBI and furnishing of annual statements. In 1994-95, about 1300 companies raised ₹21,000 crores through public issues. The primary market in turn boosted the secondary market, and for players like Lala, there was money to be made there and in the booming grey market for public issues. That same year, Lala got married to Bina, a match arranged by his parents.
Lala warmed up to the concept of screen-based trading and began to understand patterns and decipher the movement of share prices.
In 1995-96, industrial output grew to a record of 11.7% and GDP by 7.1%. The seeds of reform sown in 1991 were slowly beginning to reap a rich harvest. But the primary market appeared to be the losing team even as the economy seemed to be growing steadily.
Storms Of Change
Eventually, there came a point, in the mid-1990s, when demand far exceeded supply and there were signs that the economy was overheating. The RBI tightened the monetary policy partly to discipline the government and partly to get a hold of the economy. Higher interest rates squeezed the profit margins of companies and in 1995-96, over 1400 companies raised ₹14,000 crores.
Lala's bets in the grey market for IPOs had fared badly and he had lost a lot of money. Soon he had grown to be a broker's broker too.
Because of their large size, the buy and sell orders of FIIs influenced the stock prices. Much of the institutional activity happened in stocks like SBI, Tata Motors, ITC, Tata Steel since these scripts were quite liquid.
Every institutional investor had a custodian that handled shares and payments for them. The FII activity data from all custodians had to be filed with the SEBI. Lala then befriended a low-ranking official in SEBI to get information about all the important deals and mentally named him "Mouse" due to his sneaky nature. Lala got information on a few important trades every day and in certain deals that he asked for. He never mentioned this to anybody else. As it turned out, 1996 was a terrible year for the stock market. The economic growth had slowed down, companies were struggling after undertaking expansions beyond their capacity and the primary market had slipped into a coma of all sorts.
The introduction of dematerialization of shares eliminated frauds, improved the efficiency of the stock exchanges, reduced brokerage rates and attracted more FIIs. Dematerialization helped to reduce the settlement risk and shortened settlement cycles. It was found that many companies had more shares in circulation than were legitimately issued by them. Another crucial reform undertaken by SEBI in 1996 was getting stock exchanges to set up clearing corporations and trade guarantee funds. Meanwhile, trading volumes continued to soar.
To dissuade overtrading, SEBI also introduced daily margins and fixed intra-day trading limits for brokers. The government steadily empowered SEBI to ensure the safety and integrity of the marketplace, which in turn increased India's appeal to global investors. All things considered, 1996 was a tough year for making money. 1997 however, began on a promising note. The market rose steadily in the run-up to the Budget. The media, industry and the stock market were simply bowled over by what was known as the "Dream Budget".
Capital controls in India forbade our companies to borrow in foreign currency at will. It also restricted foreign investments in the country.
These rules were abolished:
Reliance Industries, announced a bonus issue of one share for every one held. The bears short-sold their shares while the bulls loaded up on the stock. The bonus share announcement was made and the price of the stock surged. Frantic short-sellers soon began to buy back what they had sold, pushing the stock price even higher.
Trouble in Southeast Asia had started in May 1997, when Thailand had tried to defend its currency against speculative attacks. The chaos and disorder in the currency and stock market of Thailand had spread across Southeast Asia. Mass layoffs began in the Indian broking industry too. The market was in a downtrend till mid-December.
Lala had become friends with a guy named Lucky sometime back. He was a dealer at a foreign broking firm. Lala had accidentally mentioned his deal with Mouse, the SEBI official, to Lucky that one time. After hearing about the deal, Lucky had eagerly wanted to meet Mouse. Lucky offered him a lot more money than Lala and switched Mouse's loyalty towards him. Lala was beyond furious with Lucky. To make it up to him, Lucky had made him meet his Godfather who Lala nicknamed as "Monk". Lala was informed that the decision to poach Mouse was Monk's and not Lucky's. After a brief chat, Monk was impressed with Lala and offered him a brokerage card of his own. He agreed to fund half the cost of the BSE card and also make arrangements for an office. In return, he asked Lala to do a few trades for him occasionally. Lala had informed GB about this and took up the offer. He now had his own membership card and could plan to swim with the big fish in the deep seas.
Sometime in February 1998, Harshad Mehta had sent Lala feelers through one of his confidants. He was planning to make a comeback and had chosen BPL, Videocon and Sterlite for his second round. Lala had been asked to buy the shares of these three companies as a broking transaction where he would receive a higher commission. However, Lala had turned down the offer knowing that the authorities would be eyeing Harshad's every move. The Sensex was on a roar in April and so were Harshad's shares. The only buyers for these stocks were Harshad and his group of brokers because everyone else was scared of being associated with him in any way.
By June, the prices of these three companies had almost doubled and trebled. However, very soon the three stocks started tumbling rapidly and obeyed the law of stock market physics - "the faster the climb, the harder the fall".
The crash put most of the brokers doing trades for Harshad out of business. As Lala was grappling with his trading losses because of the overall market downtrend, there came another bit of bad news for him. His father had been diagnosed with lung cancer and he did not have much time left. Amid the gloom in the market, Ketan Parekh's stars were rapidly on the rise. He had made a killing in shares of Pentafour Software.
Rumblings Of Another Crash
At the core of the unexpected boost in the IT industry was the Y2K bug. Fixing the bug required a huge volume of manpower which only a country like ours could provide. The spurt in the undersea fiber-optic cable lines between India and the US, brought in great fortunes.
None of the major Indian IT companies were dotcom players. However, the shares of Infosys, Wipro and Satyam were on the rise. By the end of May, Pentafour was among the five most traded stocks on the NSE and the BSE. Ketan got fund houses to buy his holdings rather than selling them off in the market. The Pentafour formula was repeated with other stocks as well. Soon, stocks that were fancied by Ketan had begun to soar to unbelievable levels and he became the face of the bull run that began in January 1999. Unlike Harshad, Ketan was not the one who created the wave. He just rode it skillfully. The Stock market had then split into two parts - new economy stocks and old economy stocks.
By observing the stocks that Monk was buying through him, Lala realized that Monk was quite close to Ketan. The boom in technology shares swelled Lala's net worth beyond imagination. A combination of war against Pakistan and political instability made the Sensex rise nearly to 30%. Technology stocks were soaring and making money had become a child's play. Everyone knew that this kind of mad rise in stock prices could not go on indefinitely. Sensex touched the 5,000 mark in October. Financially, 1999 was the best year of Lala's life. However, on the personal front, he had to endure a huge loss. His Bauji had lapsed into a coma from which he never recovered.
Fascinated by the surge in stocks, most players expected the next year (2000) to be even better. They believed that the FIIs would allocate more money to India since it was performing quite well globally. The index had risen by 7.5% in the first quarter itself. The bull market that ranged from January to March that year could only be described as 'madness'. Infosys soared from ₹14,500 to ₹28,000, Wipro from ₹2,600 to ₹9,800 and so on. Analysts started justifying the high valuations based on price-earnings growth (PEG) ratio. The Union Budget raised the FII ceiling in listed companies to 40% which fired up the markets even further. By the end of February, Lala's paper wealth had grown beyond bounds.
The party on Nasdaq ended abruptly with a 4% drop. Overnight the technology stocks became pariahs. The panic selling that took place on Dalal street halved the prices of these shares. For many investors, paper wealth diminished considerably or vanished completely.
In October, the Sensex had fallen to around 3,700 from its peak of 6,000 plus. Ketan was foolishly trying to support the prices of his stocks even in the face of relentless selling. Monk had remarked that the Bears would surely make a meal out of Ketan very soon. Ketan had been done in by overconfidence and things were going downhill for him quite rapidly.
After a taped conversation between the BSE President, Anand Rathi and the surveillance official was leaked to the press, SEBI had dismissed the entire board of directors of the BSE. Amidst the growing suspicion that the Bears were responsible for the chaos in the market, SEBI banned naked short selling. This meant that a trader could only sell shares owned by him. The Sensex shed another 500 points following the ban.
Meanwhile, Ketan's situation had been getting worse. The raids by investigating agencies and the freezing of his bank accounts had left him with no funds. Many of his brokers had started to offload his positions. On the CSE, there was a cumulative shortfall of ₹106 crores as Ketan's associates had been unable to pay the exchange. On 30th March, Ketan was arrested. The slowdown in the US after the Nasdaq crash had then begun to pinch Indian software firms.
On Nasdaq, the new economy stocks were being punished by investors with a feeling of vengeance. After its peak barely a month ago, it had come down nearly 35%. Many of the earlier high-flying stocks had begun to appear cheaper and the new entrants in the market had found it to be tempting. The buyers had failed to understand that the stocks were not really cheap but that they only appeared to be so when compared with their peak prices.
Lala too had lost a lot of money at that time but he was not disheartened. This was partly because he feared that if he had too much money, it would attract the attention of the tax department and the underworld, and partly because he felt that too much money would blunt his trading skills. Despite the market crash, it had been a good enough year for him. He had invested in property, acquired a bigger flat in Ghatkopar and also bought a new car.
No Stopping The Bulls
Just when it felt that the market had stabilized, the 9/11 attacks in the US took place which plunged markets worldwide into another spell of gloom. The ripple effect of the US recession was felt all over the world. The Sensex slumped to an eight-year low of 2,600. Instead of companies, this time entire stock exchanges were shutting down.
GB had remarked to Lala that the products and services of various companies were trusted by clients. And that trust was what it took to stay in business and not a high stock price. By 2003, Lala had split with Monk and was on his own. He had returned the money that Monk had loaned to him for the membership card. The beauty of public issues was that they were liquidity guzzlers. By June, it was certain that a bull market was underway again. Every bull needed a leader to look up to and this time the Big Bull was "Rakesh Jhunjhunwala". He began to be referred to as 'India's Warren Buffet'.
As the elections approached in 2004, the left parties backed the Congress-led UPA without being part of its government to block BJP from coming to power at the center. The bull run reversed faster than anyone would have imagined and the market sank lower.
As the bull market began to gather steam again, promoters realized that the higher the earnings and earnings growth potential, the more value the market would assign to a stock. Thus, began the game of "market capitalization" and "wealth creation" as the promoters went in for an image makeover.
In a growing market, promoters were keen to show off a fat bottom line, real or fake, as it helped them raise equity capital at fancy valuations. Increasing costs of plant and machinery also helped to divert the company's money to the promoter's accounts. With the market rising once again, Ketan Parekh was back in action. He was operating through fronts. To Lala's surprise, Monk refused to do business with Ketan as he was particularly bitter towards him.
The IPO boom continued in 2005 as well. Jet Airways and Suzlon Energy were the most sought-after stocks of that year. However, many investors started to regret their decisions within a month of their purchase as the companies' financial performance kept worsening steadily. Often merchant bankers and even some promoters would ask a number of the reputed institutional investors to bid for a large number of shares in their issue. This helped to create the impression that the issue was in demand with fund managers.
In a probe conducted by SEBI in 2006, investigators found that in 21 IPOs, shares meant for retail investors had been cornered by a group of 85 financiers working through players that were fronting for them. The drama continued with 75 companies raising ₹24,779 crores in 2006.
FIIs were buying everything available and retail money flows into mutual funds was also on the rise. By April, the Sensex had rocketed to 12,000 and to 14,000 by December. Reliance Petroleum was the blockbuster IPO of that year.
2007 turned out to be the high noon of the IPO boom, as 100 companies together raised over ₹34,000 crores. Property prices shot through the roof across the entire country. Nearly 43% of all the money raised through IPOs that year was by realty companies. The public issue of the year was the KP Singh promoted DLF.
Outsized pay packages became quite common across the corporate world as companies were making massive profits. In the last quarter of the year, three well-known brokerages - Motilal Oswal Securities, Religare Enterprises and Edelweiss Capital issued IPOs. They fetched an overwhelming response and got off to a flying start as soon as they got listed.
Margin Of Errors
Owing to the fantastic run-up in share prices, there were plenty of mini-operators known as jockeys who gained plenty.
The engines of the economy were running at full power and tax collections were at a record high. Over the years, Lala had developed his own set of indicators to warn him about the impending danger in the market. The ease of money-making was one of them. It was a given fact that the bubble would burst soon, the only question was 'when'.
By October, the Sensex had reached above 20,000. The largest-ever IPO in the history of the Indian stock market, Reliance Power was also introduced that year. There was a gigantic build-up of leveraged positions in the futures and options market. Even though Lala was wary of going short on the market, he began reducing his trading positions from December onwards. Lala knew that a misstep at this stage of his career would set him back a few years.
Lala had been thinking of putting some money in the Reliance IPO himself but looking at the madness around him, he had wondered whether that would be a good idea. The market had started to overheat and a correction looked imminent. Everywhere, retail investors and HNIs (high networth individuals) were pulling money out of their trading accounts to invest in the Reliance Power IPO.
Taking up an extremely bold gamble, Lala had decided to short Nifty futures as heavily as possible. The Sensex and the Nifty began tumbling down. All around brokers and investors had started to panic and the proverbial tide of liquidity that had lifted every boat of the market suddenly seemed to have drained away as people started incurring losses after losses. Most of Lala's fellow traders were scrambling around for cash. However, unknown to them, Lala was sitting on a handsome pile of profit.
The government had to swing into action to calm the agitated market players. Banks were asked to extend additional credit lines to brokers and people were assured that there would be enough liquidity in the system. With an almost 25% dive from its peak over just seven sessions, the bull market appeared to be over.
Lala on the other hand had made the boldest bet of his career and had emerged victorious. His satisfaction lay in the fact that he had stood up against the market right in the midst of a raging bull run and came out on the top.
The final act of the tragedy of the market was still pending. Reliance Power's debut was still two to three weeks away. The first indications that the stock's listing could be an anticlimax of sorts had come from the grey market. Investors in the issue had believed that they could make a decent return. It seemed that the market had begun to stabilize in the run-up to the listing and many players felt that the worst was over.
Minutes after its listing, RPower’s share price sank. Only a handful of investors managed to exit their positions at a decent profit. In the grey market, many players reneged on their commitments. The grey market was illegal and therefore nobody could drag anyone to court.
The market began to trend even lower every time it attempted to climb after a bout of selling. 'Borrowed' short sales, while earning handsome profits for FIIs, further collapsed share prices. Short-selling tested a trader's nerves in a way that going long did not.
In a span of just six months, three of the Big Five US investment firms - Lehman, Merrill, and Bear Stearns - had become history and the surviving ones - Goldman Sachs and Morgan Stanley had changed in character.
There followed an even more brutal sell-off in October which was triggered by the appreciation of the Japanese Yen against the Dollar. The double whammy of a rising yen and falling asset prices set off a vicious cycle, the tremors of which were felt across financial markets all over the world.
Lala's performance up till September was average but he had been perfectly content with the way things were working out for him.
The Turn Of The Bulls
Relentless selling by the FIIs had driven the Sensex to fall below 9,000 and the Nifty below 3,000 by October 2008. The indices were crumbling under the weight of panic selling. Some people were even talking about the demise of equity investment. Although Lala had made a fortune by going short on the market, there could never be any real winners in a bear market.
Across the world, central banks and governments had started to take steps to halt the rapid slide in their respective economies. In India, many brokerages had started to lay off employees. Lala's experience had taught him that behind the market stoicism operated a desperate government that wanted to ensure that their markets send out an "it's business-as-usual" signal to the world.
In January 2009, Ramalinga Raju the founder of Satyam Computer Services had written to SEBI and the stock exchanges and had confessed that he had been cooking the company's books for the last couple of years by showing non-existing revenues and bank balances. A total of 34.67 Cr shares of Satyam were traded on both exchanges on the same day.
However, Satyam's advisor had soon stated that it was terminating the assignment as the company was not forthcoming on certain crucial disclosures. The entire incident only reinforced the popular belief - that only the promoter of a company really knows what goes on inside a company. The Satyam incident had investors worried about more such frauds surfacing and it cast a shadow on the shares of the remaining IT companies. The scam also gave a blow to India's claim about having the best corporate governance standards among the emerging markets.
For all his market wisdom, Old Fox, one of the astute traders of Dalal Street, had begun to overplay his hand without realizing it. By 2009, the market had started climbing up again. Old Fox had kept selling even as the trend had shifted from bearish to bullish. A large number of HNIs and promoters who bought shares through fronts had entered the market. Lala continued to increase the size of his trades and watched profits pour in. In May, when the UPA had returned to form the government, the Sensex rose to a whopping 14,284. By July, many companies decided that the market conditions had become suitable for another round of fund-raising through QIPs. They tried their usual tricks, for instance - they got market operators to bump up the stock price just before bids were sought from the interested buyers.
The severe bear run had brought about some changes that were hard to reverse. It had exposed the fragile business models of many companies, mostly those in the infrastructure and real estate sectors. Many of them never regained the fancy of institutional investors. For brokerages, the days of juicy commissions and brisk business were over. The bear market of 2008 had brought the high-flying promoters of numerous mid-cap companies down on their knees.
Making It To The Big League
Due to Lala's unusually long winning streak, soon people in corporate circles began to hear his name. He got to meet some interesting market operators too among whom JC was the most notable. He had been in the market since the last 1980s and it was his bearish bets that had earned him the attention he relished.
In 2008, SEBI had approved a facility called Direct Market Access (DMA) through which clients could access the stock exchanges' trading system through their brokers' infrastructure, without his manual intervention. This fuelled the growth of programmed/algorithmic trading. The exchanges feared that algorithms without adequate safeguards could wreak havoc in the market. NSE and BSE also introduced a new facility called "co-location". Through this, brokers could, for a fee, get to place their servers close to the exchanges' trading engine. This helped to enable the brokers to get faster access to the buy-sell quotes. By the time a trader would punch an order after checking the prices on his screen, the algorithm software would have already snatched the trade from him. SEBI also asked institutional players to start paying upfront margins on their cash market transactions.
There were two blockbuster public issues in 2010. One of them was SKS Microfinance (Now Bharat Financial Inclusion-lapped up by IndusInd Bank) which introduced a new concept in the stock market. People knew that MFIs (microfinance) loaned money to the financially weakest sections of our society, that is, the poorest of the poor - people who had no access to banks and other financial institutions. SKS was founded by Vikram Akula, an Indian American.
For the first time, investors were being served capitalism and altruism together on Dalal Street and everybody wanted a taste of it. The stock had a good run over a month after its listing but problems started arising when the CEO of the company resigned. A series of suicides by borrowers in Andhra Pradesh drove the government into issuing an order to curb the activities of the MFIs. SKS's growing presence had also threatened the livelihood of many politicians who had a vested interest in keeping the poor poor. Retail investors got a fair shot at making some decent returns through the Coal India IPO. The Sensex topped 21,000 after a gap of nearly thirty-four months. Market wisdom dictated that a blockbuster IPO usually signaled the peak of a bull run. This turned out to be true again as the market began to flag after the listing of Coal India shares.
Fudging And Pleading
A loan-for-cash scam towards the end of November derailed market sentiment further. It involved Money Matters, an NBFC and some other corporations. By 10-11, Money Matters had made a profit of ₹75 crores that had sent its stock price through the roof. The company's growth made its founder, Rajesh Sharma a force to reckon with in the financial services industry. However, one of his rivals had snitched about his bribing practices and soon he was arrested by the CBI. The stock plunged straight from ₹663 to ₹130. While Lala had managed to make a decent profit, the regulatory glare in the wake of the scam had worried him.
The year 2011 had begun on a solemn note for the bulls. Ths high-profile arrests in the 2G spectrum scam had sent stock prices crashing. The mid-cap and small-cap companies had to bear the impact of the selling fury that took place.
After the Satyam fraud, SEBI had made it mandatory for companies to disclose the quantum of shares pledged by promoters. The promoters did not want this as their stocks would have become vulnerable to attacks by bear operators. Bears are forever known to be sniffing around for stocks where the promoters have pledged a substantial position of their holdings and are using the money to ramp up the stock prices. Some promoters would delay in reporting the pledge transactions to the exchanges to keep the bears wondering about the price at which the shares were pledged. As once the price was known, it became easier to smash the stock price.
In September 2011, Lala's attention was drawn to the stock of VST Industries (formerly Vazir Sultan Tobacco), which owned the Charminar brand of cigarettes. Radhakishan Damani was one of its stakeholders and among all the market- men on Dalal Street, he was the one that Lala respected the most.
Mid-cap companies raised funds through an instrument called the FCCB ( Foreign Currency Convertible Bonds) for capacity expansion, acquisitions and part retirement of expensive debt. The money was raised in a foreign currency and repaid in the same currency. FCCB had features of debt as well as equity. By that time, earnings had begun to come under pressure due to reasons such as high input costs and weakening demand. India's economic fundamentals had started to dwindle from 2011 onwards and thus the rupee had started to weaken against the dollar. This invited trouble for companies as they now needed more rupees to repay the dollars. By the end of 2011, a series of bad debts had left Lala shaken and he was worried that his skills were becoming blunt.
The Long Arm Of The Regulator
The March of 2012 was a series of bad news, beginning with ONGC's botched Offer For Sale (OFS) through which the government planned to raise ₹12,700 crores by selling a stake of 5%. The issue had to be bailed out by LIC as there was an absence of demand from other investors. It had to soak up almost 90% of the shares. It was likely that LIC was doing this at the behest of the government.
After many hurdles, MCX-SX had finally launched its equity trading platform in February 2013. Market conditions were far from idle for a 3rd stock exchange but Jignesh was convinced that people would start investing more just because there was a new exchange on the block. However, Lala knew that at best, MCX-SX would be able to snatch business from its rival exchanges by offering incentives to the traders and investors. The market observers were worried that it would turn out to be a race for the bottom if the stock exchanges decided to relax margin requirements to attract more members. More than any other factor, it is liquidity that is the deciding factor for a trader or investor's choice of exchange to place his trades on. With MCX-SX flagging off operations, high-volume traders like Lala were in demand. The exchange wanted them to do a small part of their business through it. As the rupee weakened, FIIs started pulling money out of Indian equities, setting off a vicious cycle. The impact of this was soon felt in the stock markets.
The hardest hit were private sector banks like Yes Bank and Kotak Bank. The country was caught in the classic 'impossible trinity' trilemma, in which it was grappling with weak growth, high inflation and a weak currency.
When Raghuram Rajan formally took charge as the RBI governor, things started to turn around. He introduced such policies that helped the market to get back on track.
The year 2014 started on a rather positive note. With each passing day, the market was becoming more confident about BJP coming to power. Tired of recurring scams and inflation, everyone believed that Modi had a plan to set things straight. As the golden period of the economy was approaching, things had started to go rapidly downhill for Lala. He had received letters from the regulator seeking clarification about the unlawful trades done by him. Lala had concluded that somebody powerful was targeting him. Soon Lala found that he was in the bad books of Mr.V who was among the top twenty-five industrialists of the country. Lala had gone after his stock at a vulnerable time in his business, and thus Mr. V had sworn to force Lala out of the market. Mr. V was in a much sounder position now and he had some powerful friends in the right places too. GB suggested Lala to retreat for some time and return to the market after things got cleared up.
GB had found a leading industrialist who wanted Lala to manage the share prices of his group companies and make money from trading in other stocks. Lala had begun working for him and got a free hand in deciding his trading strategies. Soon, Lala happened to renew contact with Dipesh who had been his close friend back in school. Dipesh had been regularly trading in small stocks for nearly a year and had wanted to invest more. He would call up Lala quite often and clear his doubts. Lala's sound trading advice helped him a lot.
Epilogue
Towards the end of 2014, Lala had parted ways with the industrialist as amicably as he could. Lala had started to take a deeper interest in his farm at Murbad and had also started working with a non-profit organization. He used to meet up with GB and Monk and reminisce about the old times.
The rules of the game had changed completely in the last seven years. The dealers at foreign broking houses and money managers used to be kings. But as the market grew bigger, the sphere of influence of each of these players had shrunk considerably. When BJP had come to power in 2014, everybody thought that the market would launch into another bull run. But two years later, the Indian market was still struggling like most of its peers for reasons beyond its control. That itself proves how difficult it is to make money in the stock market. Lala hadn't heard from his friend Dipesh in a while and he hoped that his pearls of wisdom had worked and that Dipesh was doing so well that he no longer needed his advice.
Conclusion
The story in its entirety does assume a certain morality and perhaps that is one of its major triumphs - that there are neither bulls, nor bears, nor other beasts in the stock market game but only vulnerable humans.
It highlights the importance of money in hard times and how the ruthlessness of an indifferent world can turn even the most compliant man into someone they fail to recognize.
The kind of detail that Nair gets into, to flesh out the actual modus operandi, lends a kind of authenticity to the narrative, which is as shocking as it is compelling.
