Bulls, Bears and other Beasts by Santosh Nair
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.