Bulls, Bears and Other Beasts Read online

  I protested, saying I had seen enough for the evening. But Lucky was insistent.

  ‘Don’t be such a sissy. You have been quite irritating as it is. I introduced you to one of the girls who has turned down some of the big stars of the market, and you, like an idiot . . . never mind. Come along now!’ he almost ordered me in.

  This is it, I thought, as we made our way through a narrow passage towards the mujra hall. He might just push me into one of the adjoining rooms, get some whores to strip me and pin me down on the bed, have all of us photographed and then blackmail me using those pictures for the rest of my life.

  Finally we reached the mujra hall. The doorman said there would be no show that day. ‘Everybody is busy watching the match (there was a World Cup match that evening), business has been slack for the past few days,’ he said.

  I was relieved.

  At last, we stepped out into the sultry night.

  ‘You surprise me,’ Lucky said, as we took a stroll. ‘I thought you were like any other normal trader who has his indulgences.’

  ‘I am no saint, Lucky, but in matters of women I have stuck to one rule from the first time I had sex: I only eat what I kill; whores do not excite me,’ I told him.

  I then asked Lucky if he enjoyed visiting dance bars.

  ‘Not really, but I have become a regular at some of these places without wanting to. When we have overseas fund managers visiting us, my boss asks me to show them some of the “happening places” in Mumbai. Of course, most of the fund managers are eager for such action. To get business from foreign fund houses, we have to keep the fund managers happy. After all, why should they place orders with any one particular broking firm in a trade where none of the firms have anything unique to offer?’ Lucky said.

  I swore never to visit that place again, and certainly not with Lucky. But a few weeks later, when he again suggested that we meet over a drink at White House, I agreed without the slightest reluctance.

  ‘But don’t create a scene like the last time,’ he told me with some irritation. ‘And I must tell you this – Payal seems to have taken a shine to you. Last week, when I went there, she was asking me about you. I promised to bring you along the next time. But be a good boy and don’t insult her again,’ he said.

  ‘Don’t try your cock-and-bull story on me. Keep it for the fund managers,’ I said. But deep in my heart I was hoping what he said was true. Much as I hated to admit it to Lucky, I was smitten by Payal in that single meeting. I kept thinking of the seductive glances she had thrown me, nearly to the point of distraction. In fact, I was looking for an excuse to go back to White House, and was delighted at Lucky’s invitation.

  To cut a long story short, I went there a few more times. Payal was the hottest item in White House at the time, and she had many suitors vying for her attention. And yet she chose me as the object of her attention, much to the annoyance of aspirants far wealthier and powerful than me. Among them happened to be an uncouth businessman in his mid-forties who ran a chain of Udipi hotels and a diamond trader rumoured to have underworld connections. They showered her with all kinds of expensive gifts, and yet she would have eyes only for me whenever I was there.

  The hotelier was so mad at me that on one occasion he threatened me in public.

  Once I was at the White House and it happened to be Payal’s birthday. After her performance, she sent word that I join her in her room with some of her colleagues for the customary cake-cutting ritual. Of all the patrons present that evening, I was the only one she chose to invite. And it was done in such a manner that everybody around got to know of it.

  I thought I was in love with Payal and felt that she too had a soft corner for me. But that delusion was shattered a couple of months later when I learnt from Lucky that she was having a good time with both the hotelier and the diamond trader. The only reason she chose to indulge me in public was to get the other two worked up and lavish more money on her. In market parlance, she was using me as a bait to get them to up their bids.

  The experience drained me emotionally and affected my trading too. Even otherwise, 1996 was a terrible year for the stock market. The economy was slowing, companies were struggling after having embarked on ambitious capacity expansions, and the primary market had slipped into a coma.

  14

  Storms of Change

  The introduction of dematerialization of shares would change the character of the Indian market forever, and for the better, much in the way electronic trading had. It would give another leg-up to the Indian market in its quest to rub shoulders with its global counterparts, eliminate frauds by companies and brokers, improve the efficiency of stock exchange clearing houses, reduce brokerage rates and attract more FIIs.

  Many FIIs were reluctant to invest in India because of the problem of fake shares. Companies were as guilty of forging share certificates as the brokers and other market players. Physical share certificates had distinctive numbers. Companies would pledge one set of shares with lenders, borrowing money against them. They would then print another bunch of certificates with the same distinctive numbers, and introduce them in the market through a friendly broker or through one of their own privately owned companies. They could do so, safe in the knowledge that the original set of shares would be in the custody of the lenders so long as there was no default on the interest payments to the lender.

  Much to the dismay of those who played the market with forged shares, dematerialized shares were fungible; they did not have any distinctive numbers or specific identification. In fact, it was during the process of dematerialization of shares that many instances of fake shares came to light, which otherwise would have gone unnoticed for a very long time. Many companies had more shares in circulation than were legitimately issued by them. Dematerialization immensely helped reduce the settlement risk and shortened settlement cycles, both of which were critical for upgrading the clearing and settlement system.

  Another major market reform undertaken by SEBI in 1996 was getting stock exchanges to set up clearing corporations and trade guarantee funds. With this, investors no longer had to worry about counterparty risk. The clearing corporation would ensure pay-out even when a party to a deal defaulted on an obligation, and would later recover the dues from the defaulter.

  Trading volumes continued to soar because of the ease with which shares could now be bought and sold. On the flip side, retail investors increasingly started speculating instead of buying and holding shares for the long term as they used to earlier. They would buy and sell within the weekly settlement, happy to make a small profit. Of course, they would lose money as well. Speculation was addictive, and even though most retail investors rarely made consistent profits, the memory of their winning trades would raise hopes of bigger gains and keep them going.

  As a result, the percentage of shares that resulted in delivery or actually changed hands fell steeply. To deter overtrading, SEBI introduced daily margins and fixed intra-day trading limits for brokers. There were limits to the positions brokers could take in individual stocks. This was done to make it difficult for any one broker to manipulate an illiquid stock.

  Despite having made it mandatory for brokers to collect margins from clients, the authorities rarely enforced this rule. Brokers knew that if they insisted on margins their clients would shift business to rivals willing to overlook margin requirements. Many brokers had suffered huge losses in 1992 because of client defaults. Yet, the fear of losing clients would see brokers repeating the mistake and suffering the consequences when the market crashed in 2001, and later, in 2008.

  With computerization, it became easier for stock exchanges to monitor brokers’ positions and pull up members who were stepping out of line. The broking community chafed at some of these restrictions, but there was little they could do. The Indian market had no choice but to adopt global best practices if it wanted to be counted among the best international markets. And the government steadily empowered SEBI to ensure safety and integrity in the mark
etplace, increasing India’s appeal to global investors.

  SEBI tightened the rules for the primary market too, alarmed at the ease with which dubious companies raised money and then duped investors. This led to a fall in the amount of money raised by companies from the primary market.

  On the whole, 1996 was a tough year for making money. In addition to a slowing economy, the political uncertainty following the general elections in April-May further dampened the mood. The Congress party lost the elections, winning only 140 seats – its lowest tally ever. The BJP emerged the single largest party, with 161 seats, and was sworn into office. Within thirteen days, the Atal Bihari Vajpayee-led government quit as it failed to muster a simple majority to win the vote of confidence.

  I had a fair idea of what FIIs were doing, thanks to data supplied by Mouse. But that was not of much help, as prices often moved counter to my calculations. On a couple of occasions, I made good money but promptly lost much more the following week.

  ‘It is time you both started building long-term portfolios for yourselves,’ GB told me and Dilip one afternoon after we were done for the day. ‘Speculation is a good way to build your initial capital, but you cannot make your retirement money through trading alone.’

  ‘Investment too is speculation after all, isn’t it? Only that your time frame is longer,’ I said.

  GB grinned. ‘You are right, Lala. But the odds of making money are higher; you won’t be under pressure to cut your positions just because the price has moved against you by a few rupees. More often than not, long-term investments work out well,’ he said.

  ‘But this is turning out to be a terrible market, and it looks like things will only get worse. Does it make sense to buy now? Why not wait for some more time?’ Dilip asked.

  ‘Some rules in the market never change. And one of them is that nobody can ever catch the top or bottom. Besides, to make a good profit, you need to buy cheap. And when can you do that? Only when there is despair all around. Is this the best time to buy stocks for the long term? I really don’t know. Maybe the market could fall some more. But what is the probability of making a good profit by buying at these prices? I would say, quite high,’ GB replied.

  I found merit in GB’s argument. But I was not good at understanding business models or reading balance sheets. Frankly speaking, I don’t think anybody could claim to be an expert in identifying potential winners. People took calculated bets and some of them paid off. I took GB’s advice on the stocks to buy for the long term. He too was no expert and had no pretensions of being one. But from doing trades for the big boys, he had a reasonable understanding of companies.

  Once in a while, he would try to pass off some theory of theirs as his own. He would not say that it was his original thought, but he would not attribute it to anybody either. And I would try to needle him while keeping a straight face.

  ‘Does Nemishbhai think it can happen?’ I asked at the end of one such spiel.

  ‘Who said Nemishbhai said that?’ GB snapped.

  ‘I thought . . . ’

  ‘Don’t always assume things . . . I have some ideas of my own too,’ he said, somewhat testily.

  The year 1997 began on a promising note.

  The market steadily rose in the run-up to the Budget.

  Finance Minister Palaniappan Chidambaram’s first full-year Budget surpassed market expectations. Peak personal income tax and corporate tax for domestic companies were slashed. In a major boost for the IT sector, export profits were exempt from Minimum Alternate Tax. The FII investment limit in listed companies was raised, and dividends were made tax-free for the shareholder. The Budget also laid the foundation for the first round of disinvestment in PSUs, and announced in-principle approval of buyback of shares, subject to certain conditions. The peak customs duty rate was lowered, and so were duty rates on a wide range of imports. The media, industry and stock market were simply bowled over by what was dubbed as a ‘Dream Budget’.

  But the celebrations were premature. On 30 March, a Sunday, the Congress party, without any warning, pulled the rug from under the United Front (UF) government. Tension between the Congress and the UF had been building for a while, but nobody saw matters reaching a flashpoint so very soon.

  The phone lines of the kerb dealers – those who dealt in the illegal market – were ringing off the hook in Mumbai and Kolkata as panicky traders rushed to offload their outstanding buy positions. You could negotiate deals with them after market hours and then legitimize that trade by feeding the details into the stock exchange terminal the following morning. Most operators had been bullish on the market following the upbeat Budget and had huge buy positions. As for me, this was the second time within a month that I was caught on the wrong side.

  The bears were plain lucky, though just for a day. The Sensex crashed nearly 300 points when markets opened for trading on Monday, but bounced back over the next couple of weeks as the Congress offered to support the UF government with the soft-spoken Inder Kumar Gujral as prime minister.

  The index may have recovered quickly, but traders who lost money in that crazy session on Monday had to wait much longer to make up their losses.

  15

  Caught in a Global Whirlpool

  Trouble in Southeast Asia had started brewing in May as Thailand tried to defend its currency against speculative attacks. Thai companies had borrowed heavily in dollars and were struggling to pay interest on it because of a slowdown in the economy. The contagion spread to Malaysia, Philippines and Indonesia within a week, and all three countries had to devalue their currencies. There was mayhem in currency and stock markets across Southeast Asia.

  Despite the storm raging next door, the Indian market, strangely, was an oasis of calm. The Sensex, in fact, rose a little in July when Thailand, Malaysia, Philippines and Indonesia were battling to save their currencies. It helped that capital controls in India did not allow our companies to borrow in foreign currency at will, and also restricted foreign investments in the country.

  Amid all this turmoil, the bull and bear cartels continued to snipe at each other at every opportunity. One of the Sensex companies announced a bonus issue of one share for every one held (a 1:1 issue, in industry parlance), which exceeded market expectations. There had been talk of the company announcing the bonus issue at its annual general meeting. Similar chatter in the past had mostly resulted in disappointment, and some of the seasoned players had felt the bonus issue, even if announced, would not be a generous one. But many in the market had high expectations from the company.

  The bears short-sold their shares, betting that the bonus share issue would disappoint the market. The bulls thought otherwise, and loaded up on the stock. I suspect they had some definite information. The bonus share announcement came on a Thursday, and the price of the stock surged. Friday being the last day of settlement on BSE, the stock was expected to rise further as the weaker bears rushed to cover their positions.

  The stronger of the bears chose to shift their short positions to NSE, where the settlement was on Tuesday. The bears were confident that one of the domestic financial institutions, which was also a big shareholder in that company, would sell some of its holdings on Monday. What they did not count on was the bull cartel sending two envoys to the house of a senior fund manager of that institution on Sunday and convincing him not to sell on Monday at any cost. In return, the duo assured the fund manager that he would be able to get a much better price for his unitholders on Tuesday as the bears would have to cover in desperation.

  The fund manager was convinced, and agreed to hold fire on Monday. By Monday noon the bears were sweating. They had learnt that the institution would not be selling that day, and there was no guarantee that it would sell on Tuesday either. Frantic short-sellers began buying back what they had sold, pushing the stock price higher. The institution finally sold in the last hour of trade on Tuesday. But it was too late for the bears, who had already got out of their positions at a loss.

  A week l
ater, over drinks, Lucky told me how the bulls managed to turn the screws on the bears. I was curious to know about the two envoys who had met the fund manager.

  ‘I can tell you about only one of them,’ he said.

  ‘Do you know him personally?’ I asked.

  ‘Very well; that was me. Don’t ask me who the other person was, I can’t tell,’ he said.

  In the last week of October, Hong Kong became the latest casualty of the financial crisis sweeping the region. The US market, which was until then unaffected by the chaos in Asia, capitulated a couple of days later. The Dow Jones Industrial Average crashed a record 554 points, and trading had to be suspended.

  Bad news was pouring in from every corner. Despite its economy being in a much better shape, India seemed as vulnerable as any other market. Foreign investors, who had so far shown faith in the India story, had to make up for the losses suffered in other markets, particularly in Southeast Asia, by selling their profitable investments in India. Over the next one year, some of the foreign investors would withdraw altogether from India.

  Until that time, mass layoffs were unheard of in the Indian broking industry. Particularly cruel was the manner in which Peregrine Securities fired its employees. Two officials from the Hong Kong office landed up at the Mumbai office for a review meeting. After the usual PowerPoint presentations, the entire staff was taken out to lunch. The officials from Hong Kong left immediately after lunch, saying they had a flight to take. When the analyst, sales and dealing teams got back to the office, they were barred entry and their ID cards were taken away. The agitated employees demanded an explanation but got none from the security people, whose only instructions were to prevent the employees from entering the office and to collect their IDs. Their possessions would be packed in boxes and handed to them the following day, the staff was told.

  For the employees at foreign brokerages that downed shutters or fired staff, the downfall was hard to come to terms with. For one, they were earning twice or thrice more their counterparts at the local brokerage firms. And even if they were willing to take a hefty pay cut, there were not enough jobs going because of the market downturn.