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Bulls, Bears and other Beasts by Santosh Nair

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.

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