Bulls, Bears and Other Beasts Read online

  Self-proclaimed merchant bankers would cold-call promoters asking if they wanted to raise money. A typical conversation between the merchant banker and the promoter would go something like this:

  Merchant banker: Sir, would you like to raise Rs 10-15 crore?

  Promoter: Not at the moment.

  Merchant banker: But markets won’t be as hot for long. You must raise money when it is available.

  Promoter: What is the rate of interest?

  Merchant banker: There is none.

  Promoter: Really? But I still have to return the money at some point, right?

  Merchant banker: No, and that is the beauty of it.

  Promoter (suspiciously): You mean, I get the money, I don’t have to pay interest, and I don’t have to return it. Is that what you are saying?

  Merchant banker: Exactly.

  Promoter: You have got me interested.

  In less than a week, a flaky prospectus with ambitious projects and projections would be ready and the company would be all set to go public. The merchant banker would get to keep anywhere between 15 and 20 per cent of the capital raised.

  GB once told me about a promoter of an electronic goods trading firm who happened to be a good friend of his. ‘Seeing everybody around him make a beeline for the capital market, this friend of mine too decided to try his luck. Sure enough, he managed to get a merchant banker who assured him that his company would find plenty of takers. When I met him at a party, he told me he was planning to price his issue at Rs 50. I told him he would be out of his mind to do so. “On what basis can you price it at Rs 50, and who would want to pay that much when you do not have the earnings to support such a valuation? It is much safer to price your issue at one-third of that,” I told him. He promised to think over it.

  ‘I happened to bump into him a week later. He came up to me and said: “Govindbhai, I thought about what you told me at the party the other day. And I kept asking myself about the logic of pricing my issue at Rs 50. Two days back, as I was having a shower, a thought struck me. Why can’t my issue price be Rs 75; why should it be just Rs 50? So I have decided to price my issue at Rs 75.”’

  GB’s friend was successful in raising Rs 10 crore. That may sound like chicken feed today, but it was a significant sum at the time. More so for GB’s friend, who made less than one-tenth of that sum annually as net profit. It was certainly good enough for some people who would never need to work again for the rest of their lives if they invested it wisely.

  I asked GB what happened to his friend.

  ‘I guess he would never have dreamed of coming across such a huge sum in so short a time. He did not know what to do with it. Or maybe he figured it out. One fine day he simply vanished,’ GB said.

  Aware of the crazy things happening in the market, SEBI stepped in to keep the merchant bankers as well as promoters on a leash. Regulations were laid down for merchant bankers, and those seeking business from companies had to have a licence from SEBI. Merchant bankers were classified as grade I, II, III or IV, depending on their resources and pedigree.

  There were other regulations to make the market a safer place for retail investors, 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. The minimum percentage of the issue to be reserved for the public was reduced to 25 per cent from 60 per cent. When the rule was first introduced in 1993, FIIs and mutual funds had not yet begun to invest in a big way. But as their domination increased over the years, retail investors would gradually be marginalized in the public issue market.

  On paper at least, SEBI had put in sufficient checks and balances to avoid a Wild West setting in the primary market. In reality, it was not too difficult for unscrupulous promoters and their merchant bankers to get around the rules, as the MS Shoes fiasco in early 1995 would show.

  Usually, when a company received an acknowledgement card from SEBI clearing its prospectus, the promoter would take a bridge loan – a short-term loan – from banks against the expected IPO proceeds. The money borrowed from the bank would be used to ramp up the price in the grey market to ensure the stock quoted at a big premium on listing day. If the company was already listed and doing a follow-on public offering, the bank loan would be used to boost the stock price in the secondary market.

  It was not just the promoters and merchant bankers who were greedy. An ex-sheriff of Mumbai and a respected name in social circles was known to charge Rs 5 lakh in shares and Rs 5 lakh in cash to allow his name to be listed as a director on the board of some of the IPO-bound companies. This gentleman would stay on the board for a few months post-listing, and then head for the next company that was looking for credible names.

  In 1994-95, over 1,300 companies raised Rs 21,000 crore through public issues. That figure would not be surpassed for some years to come. Some quality companies were part of the procession too, though investors would realize their true worth only many years later.

  The boom in the primary market fired up the secondary market, and for players like me, there was money to be made in the secondary market and in the booming grey market for public issues. By mid-September 1994, the Sensex had climbed to a high of 4,643. From then onwards it would be downhill for a long time to come, even though most brokers had taken it for granted that a 5,000 for the Sensex was less than a couple of months away.

  That year, I got married to Bina, a match arranged by my parents. I was reluctant to take time off for my honeymoon because of the action in the stock market. But it was GB who prevailed on me to take a break.

  ‘The market isn’t going anywhere, Lala. Also, don’t make it obvious to Bina that the stock market will always be your first love,’ he said in one of his rare jovial moods.

  After a two-week holiday, during which we toured Delhi and Himachal Pradesh, I was back at work. Screen-based trading had begun to pick up, despite the misgivings of the older generation of brokers. Initially, like most other traders, I was not happy at having to punch in trades on the screen. It made me feel more like a computer operator than a stock market player. Slowly, I overcame my reservations and warmed to the concept.

  Watching the screen and the constant flickering of prices was an education in itself. I would look for patterns and try to guess which way prices were headed. Over the years, I could, with a reasonable degree of accuracy, figure out which operator was manipulating the prices too. In the initial days it had been hard to make out what was happening, as circular trading by cartels often presented a misleading picture of what was going on.

  The trading bug slowly spread to retail investors too, now that they could get quotes in real time. Earlier, they were getting the quotes only at the end of the day. Easy access to prices led to many retail investors buying and selling more often than they otherwise had during the days of the trading ring.

  Being with GB too made for education of a different kind. I admired his ability to keep cool in the most trying situations and liked the earthy wisdom he dispensed to people seeking his advice.

  The promoter of a mid-sized pharma company (which would later grow to become one of the largest firms in the sector) once approached him with a problem.

  ‘Operator X is short-selling my shares almost on a daily basis,’ he told GB.

  ‘Is there something about the company that he knows but the market doesn’t?’ GB asked him.

  ‘There is nothing wrong with the business or the books, if that is what you mean,’ the promoter said.

  ‘If you want me to help you, be upfront. Only then can I give you the right solution. Have you pledged a big chunk of your shares with somebody?’ GB asked the promoter.

  ‘Trust me, there is nothing wrong. I want you to help me boost the price so that I can teach him a lesson,’ the promoter said.

  ‘If there is nothing wrong with the company, my advice to you is to not do anything. Be patient,’ GB advised.

  ‘But my stock price will end
up getting hammered for no reason. I can’t let that happen. I have money to support the price, so why shouldn’t I?’ he argued.

  ‘You shouldn’t, because that is exactly what he wants you to do. Once you start to support the price by buying through friendly brokers, he will see that you are panicking and start hammering the price even more. At some point, when you stop supporting the stock, it will be seen as a sign of weakness on your part and the other bears too will be emboldened to take you on. Let the fundamentals prevail; he will not be able to beat down your stock below a certain level because other informed buyers will find it attractive and start buying. The operator will then be forced to cover his positions,’ GB said.

  The promoter was not very convinced with this argument. But out of respect for GB he did as he was told. The stock price weakened for a week, but things turned out exactly the way GB had predicted. In less than a month, the price stabilized, and then started inching up as the operator decided to cover up his short positions.

  Among GB’s clients, I found Radhakishan Damani to be the most disciplined when it came to trading, and most patient when it came to investing. Radhakishan had made a killing in the market crash of 1992 following the securities scam, but had managed to keep a low profile. I got to know from the market that he had come perilously close to bankruptcy and had pledged a sizeable chunk of his blue chip holdings to be able to stay in the game for a few more days. His gamble paid off, and never in his career after that was he revisited by a similar situation.

  Radhakishan, at 32, was a relatively late entrant to the stock market, though his father and brother had already been in the stockbroking business for a while when he joined them. He began his working life dealing in ball bearings before he decided to try his hand at share trading. The family’s broking card was in the name of his brother Gopikishan S. Damani, and the firm was known in market circles simply as GS. Many years later, even after he had made a name for himself, Radhakishan Damani would still be known in market circles as GS.

  The soft-spoken and extremely reclusive Radhakishan found an unlikely partner in the outspoken and high-strung Rakesh Jhunjhunwala, a few years his junior. The duo were like chalk and cheese in many respects but shared a common ideology of value investing, even if they did not always bet on the same stocks. In fact, there were occasions when they took opposite calls on the same stock without their strategies affecting their camaraderie.

  Almost everybody on Dalal Street starts his career as a speculator, and the smart few manage to grow their initial profits into a fortune by evolving into long-term investors. By the mid-1990s, the Radhakishan Damani-Rakesh Jhunjhunwala duo (GS-Rakesh, as the market knew the pair) were in the process of that transition after having made a fortune as traders.

  Radhakishan had built a sizeable portfolio dominated by MNC blue chips, with Indian Shaving Products Limited (ISPL, later renamed as Gillette India) being one of his big bets. Rakesh was not as big a fan of MNCs as his trading partner, and while his portfolio did have MNC names, it was dominated by domestic companies. I tried to study the strategies of the masters of the game like GS and Rakesh, and improvised on them with some techniques of my own.

  Meanwhile, the party in the primary market carried on. Junk companies and their dubious promoters were having a free run, with the underlying strength in the economy giving investors the confidence that the best was yet to come. Then, in February 1995, investors got their first reality check as to the quality of companies and promoters that were raising money from the market. The botched MS Shoes public issue revealed how easy it was for promoters and merchant bankers to hoodwink the regulator. Worse still, the episode also exposed the lax oversight by SEBI in this particular case, and the corruption within its ranks.

  The Pavan Sachdeva-promoted company wanted to raise Rs 700 crore to fund a hotel project and a yarn project. It decided to make a composite public issue-cum-rights share offering. The public issue was for fully convertible debentures – bonds that could be converted to equity later on.

  MS Shoes was already listed, and the promoter, in collusion with associate brokers, ramped up the stock price to charge a hefty premium for the issue. Shares of MS Shoes climbed from Rs 268 in July 1994 to a record high of Rs 505 by January 1995, thanks to rampant manipulation by brokers backed by Sachdeva. When the stock price of MS Shoes collapsed, the brokers who were buying on behalf of the company could not meet their pay-in obligation to the stock exchange. The BSE had to be closed for three days as the exchange officials sorted out the mess caused by the defaulting brokers. Sachdeva was raided by the taxmen, and soon after, arrested by the CBI. FIRs were filed against two officials of SBI Caps, the merchant banker to the issue and three senior SEBI officials. The government was keen to send out the message that promoters could not take the investing community for granted.

  There was some good news for BSE brokers in July that year when SEBI revived badla trading, although the system was revised and was applicable only to A Group stocks on the BSE. The banning of badla had impacted trading volumes on the BSE, though the frenzy in the primary market had compensated for it to a large extent. In 1995-96, industrial output grew a record 11.7 per cent and GDP by 7.1 per cent. The seeds of reform sown in 1991 were beginning to reap a rich harvest and, as it always happens during good times, investors expected the run to continue forever.

  But the primary market was slowly beginning to lose steam even as the economy appeared to be in good health.

  13

  Another Bubble Bursts

  The first sign of trouble was a rise in interest rates. In absolute terms, interest rates were quite high at 15-16 per cent in the mid-1990s. Still, companies were able to make good returns on their business even after borrowing at those rates, and continued to expand capacities. Eventually, there came a point when supply exceeded demand and the economy started slowing. Heavy borrowing by the government to balance its books also served to push up interest rates. In addition, the RBI tightened monetary policy, partly to discipline the government and partly to prevent the economy from overheating.

  ‘I think the party is nearing an end; rising interest rates is bad news for the stock market,’ GB remarked to me one day as we were having tea after the day’s trading.

  Seeing the quizzical look on my face, GB explained the link to me: ‘Higher interest rates means companies have to pay more on their loans, and this squeezes their profit margins. That itself will cause stock prices to fall in anticipation of reduced corporate earnings. But more importantly, when people can earn 12 per cent on their fixed deposits without breaking a sweat, why would they lose sleep to make 20-25 per cent from equities where the risk is much higher?’

  In 1995-96, over 1,400 companies raised a little over Rs 14,000 crore. The year before they had raised around Rs 21,000 crore. The primary market was floundering by now, and the secondary market was doing worse. As long as the primary market did well, a good chunk of the profits would find their way into the secondary market. And while the Sensex remained in a narrow range, there were enough non-index stocks making money for investors. But once the public issue market began to dry up, the secondary market soon began to show withdrawal symptoms.

  Towards the end of this phase, my bets in the grey market for IPOs fared badly and I lost a handsome sum. But by then trading was not my only source of income. My ability to find counterparties for investors looking to buy or sell large blocks of shares helped me carve out a niche for myself. As I said earlier, despite the improved transparency and liquidity, it was not easy to buy or sell big quantities of shares through the screen at the punch of a button. These trades would have to be first negotiated over the telephone and then put through the screen.

  Soon I grew into something of an inter-institutional broker – or a broker’s broker, a more apt term to describe my activity – of whom there were not many on Dalal Street. All I had to do was to point out the interested buyer or seller, and I would get a small fee for my effort. The role required me to be
well networked with financial institutions, big brokers and high net worth individuals (HNIs). There were occasions when the temptation to make unethical profits from the information I was privy to tested my willpower. I was on good terms with the dealers at most of the foreign broking firms because of my regular interactions with them. A few of them did proposition me with the lure of a share in the profits. I politely declined, not knowing who might be making a genuine offer and who was simply checking me out.

  One of those who made me a proposition, a Punjabi whom I shall call Lucky, persisted in dangling the bait at me. I had to be careful not to offend him because he worked for one of the top broking firms and regularly did business with me.

  ‘What are you trying to prove, Lala? One can’t take this high-stress job for long. Make money when you get the opportunity so that you can be out of this game by forty,’ he once told me. Like mine, Lucky’s too was a rags-to-riches story. He started his working career as an insurance salesman, straying into the broking industry by a quirk of fate and doing well for himself. He lacked refinement, but his street-smart ways and good relationships with people who mattered helped him land a job as a dealer at a foreign brokerage that was among the early entrants in the Indian market.

  I had heard many stories about Lucky, one of them about his being on very good terms with a market operator who had got him the job at the foreign brokerage. Lucky repaid his debt to him by occasionally leaking to him information about big trades.

  Burly and jovial, Lucky adopted a philosophy that was as earthy as his mannerisms.

  ‘It is God’s wish that I should make good money and enjoy life; that is why he put me in the stock market though I had no intention of coming to this industry,’ he once told me.

  I found Lucky’s Pinglish (English with an unmistakable Punjabi accent) quite amusing, and more so when he ranted in English after downing a couple of pegs.