Bulls, Bears and Other Beasts Page 6

  I was among those who had sold the shares short at Rs 1,000, thinking they were unlikely to rise further. I was wrong, and ended up squaring my position at Rs 1,100, losing more than half the jobbing commission I had made that month. I would try this again a few months later, and the results would be no different.

  The Gulf war ended in a decisive victory for the allied forces led by the US, but that did not really perk up the stock market. The crisis had aggravated India’s already precarious foreign exchange situation and there was a risk of the country defaulting on payment obligations. Inflation had climbed to a record 13.6 per cent, and there was a sense of despondency everywhere. The dismal state of finances was public knowledge, and it did not disappoint the market when the Congress party withdrew support to the stopgap Chandrashekhar government in March and called for fresh elections.

  The market remained comatose in the run-up to the general elections to be held in May 1991 as the prospect of another hung parliament loomed. Rajiv Gandhi’s assassination on 21 May was a shock for the market, as it had been betting on his return to power and continuing the reforms he had initiated during his stint in power. The market was closed the following day, but held up well when trading resumed on 23 May, with the Sensex closing flat, any panic having been averted by support from the domestic financial institutions.

  The market remained in a tight range till the end of May. Most players were expecting the political uncertainty to continue even after the elections as no party was expected to win a clear majority. Then followed more bad news. Left with barely enough forex reserves to pay for three weeks of imports, the Chandrashekhar government had to borrow from the International Monetary Fund by pledging its gold reserves. The public was outraged, but this development fully revealed the mess the country was in.

  Once again, the market did not crack as was widely expected. I learnt from the market that Harshad and brokers close to him were buying in a big way. I asked Sharma about it.

  ‘Bhai feels the government’s decision to pledge gold shows it will go to any length, to avoid a default,’ Sharma said. I remained bearish, certain that it would be some time before the new government could get the economy out of the hole it had sunk into.

  To everybody’s surprise, the Congress did well in the second phase of the polls because of a sympathy wave following Rajiv Gandhi’s assassination. It managed to form a government with support from some of the smaller parties. The Sensex climbed around 100 points, but the market reaction was still guarded.

  The party on Dalal Street began after Manmohan Singh’s path-breaking Budget of 24 July, which signalled India’s willingness to open up its economy to the world by lowering import barriers and scrapping the licence system for industries. Among other things the stock market will remember that budget for was the government’s promise to allow FIIs to invest in India. Private players were allowed to set up mutual funds. And the Controller of Capital Issues was proposed to be replaced by the Securities and Exchange Board of India (SEBI) to regulate the stock market and stock exchanges.

  Over the next month, rampaging bulls lifted the Sensex by over 300 points. The leader of the herd was none other than Harshad himself, who was now known by the nickname Big Bull, a title that had previously belonged to the UTI boss M. J. Pherwani.

  To justify the absurd valuations that many of his favourite stocks were quoting at, Harshad advocated the ‘replacement cost’ theory, which held that a stock should not be valued on the company’s earnings potential, but on the basis of what it would cost to create a similar company. The concept caught on like wildfire in the stock market, sending the prices of even the most inefficient and mismanaged companies shooting through the roof.

  Even today, Harshad is credited with having come up with the ‘replacement cost’ theory, but that is not true. He may have propagated it, but it was not his original idea in any way. As I mentioned earlier, my brief stint as a library assistant helped me develop a lifelong love for reading. Many years later, when I read the full 1956 debate in the Rajya Sabha over the Securities and Contracts Regulations Act, I came across a passage in which P. D. Himatsingka, a member of parliament from West Bengal, had made an interesting argument. He justified the steep rise in the share price of the Indian Iron and Steel Company, saying it was cheaper for a buyer to purchase shares from the open market and take control of the company rather than to incur a much heavier expense setting up a new steel plant.

  ACC shares had by then climbed to Rs 3,000, having almost doubled since the beginning of the year. The moment Harshad or his associate brokers simply made inquiries about a stock, its price would start rising, even without a single share having been actually purchased. The sixfold rise in ACC over the previous year was proof to the market of what Harshad could do to the fortunes of a stock.

  Promoters began to seek him out, and he, in turn, would seek out promoters of the companies he was interested in. Not all these meetings were fruitful, but sometimes the promoters would leak news of the meeting to the market, hoping to fire up their stock. At other times, Harshad’s associates would spread the word, creating the same effect.

  By now, Harshad’s flashy lifestyle was making headlines. With his 15,000 square-foot apartment in Worli overlooking the sea, his designer suits and fleet of imported cars, the Big Bull had become a role model for almost every player on Dalal Street.

  While the bulls were celebrating, there were subtle policy changes underway in the money market, which would have major implications for the stock market too. In August, RBI removed the ceiling on interest rates on bonds and debentures issued by public sector companies. With the new securities offering higher interest rates, the older securities declined in value, causing losses to the banks that held them. When new bonds were offering, say, 11 per cent on maturity, who would want to buy the old bonds in a bank’s portfolio that were offering 10 per cent on maturity, unless they were sold at a discount to their face value?

  Trading volumes in the money market surged as banks tried to minimize their losses by getting out of the older securities. Brokers were only too glad to help stricken banks, and banks returned the favour through cosy arrangements benefiting the brokers.

  Back in the stock market, Harshad continued to drive the prices of his favourite stocks even higher by continuing to peddle the ‘replacement cost’ theory. The market was curious about Harshad’s source of funds, and there was much speculation about it, including rumours that the Big Bull was being financed by politicians and the underworld.

  As Sharma would later tell me, Harshad’s foes knew exactly where the money was coming from. The only trouble was that they too were guilty of misdemeanours similar to Harshad’s, albeit on a much smaller scale. Many – if not all of them – played around with bank funds, but were careful to deploy them in less risky short-term instruments, including badla financing. This allowed them to get extra returns on their deals but kept them in a position to return the funds at short notice.

  Harshad was now threatening this second income of theirs by recklessly investing the money in stocks and drawing public attention with his glamorous lifestyle. His foes were now eager to trap him but lay low, knowing their own source of funds would be cut off once the authorities got to know about the loopholes. It must have caused them immense frustration to be outsmarted by Harshad in both the money and stock markets, and be able to do nothing about it.

  Harshad’s initial bets were companies with sound fundamentals, but I guess he gradually got carried away by his success and the following he had. He started buying shares of mediocre companies, and his purchases soon extended to outright dubious ones. Perhaps Harshad started to have delusions about his power – that companies’ performance would improve because he had invested in them!

  The post-Budget excitement in the market lifted the Sensex to 1,900 by mid-September. In less than two and a half months of the Congress government’s coming to power, the index had rallied an astounding 50 per cent.

  July and
August had been bumper months for me. I netted Rs 41,000 in jobbing commissions in July and Rs 46,000 in August. And yet, I was disappointed for not having been able to hit the Rs 50,000 mark. Each month I took Rs 25,000 out of these profits home, depositing the rest with my employer, with the intention of taking bigger bets when the opportunity arose.

  Bauji and Ma were awestruck when I handed them my earnings. Bauji had some idea about the stock market and its fickle ways, but he found it hard to believe that a 23-year-old could make Rs 25,000 two months in a row.

  ‘I hope you are not doing something wrong, Lalchand,’ he told me one evening after dinner.

  ‘No Bauji, every rupee has been earned the hard way. And this is just the beginning. With my efforts and God’s grace, we should be able to move to Ghatkopar in two years’ time,’ I said. I could understand his concern; my wayward ways during our days in Bhandup were still fresh in his memory. I could see that he was not entirely convinced by my answer, and that he did not want to voice his doubts either.

  ‘Bauji, I know I have caused you grief in the past, but that’s a closed chapter. I give you my word that I will never do anything that will cause you to hang your head in shame,’ I said, clasping his hand. That put him at ease somewhat.

  ‘But tell me, Lala, if you can make Rs 25,000 two months in a row, you could also lose that much, isn’t it?’ he asked.

  ‘True, that’s why I pre-decide the quantum of loss I can bear and stay within that limit. If I exceed that, I am likely to get fired from my job,’ I said.

  Unlike me, moving into a bigger house was not Bauji’s priority. Satish had enrolled for a B.Sc. that year as his Higher Secondary score was not high enough to get him a seat in a good engineering college purely on merit. And we lacked the resources to pay for a seat in the management quota. We could have just about managed that, but Bauji was not certain if the investment would be worth the money. But now that I was making decent money, Bauji saw a chance to realize his cherished dream to see at least one of his children become an engineer.

  ‘Lala, would it be asking for too much from you to set some money aside so that we can get admission for Satish in a decent engineering college next year?’ he asked with some hesitation.

  ‘For all the trouble I have caused you, that is the least I can do to make up for it,’ I told him.

  He was so moved that he embraced me. I had never felt so close to him as I did in that moment.

  8

  Swimming against the Tide

  However bullish the overall sentiment, the market could not keep on rising indefinitely. And for all its logic, even the replacement cost theory had its limitations. The bulls were beginning to tire after a nearly one-sided rally that began in July and lasted up to mid-September, taking the Sensex up from around 1,275 to a new peak of 1,916.

  The market then began to flag, and over the next one month shed around 200 points. I saw this as a good opportunity to have another go at ACC and recoup my losses of the previous year from short-selling the stock. The entire market had been baffled by the spectacular rise in ACC shares, and the short-sellers who tried to predict its peak price had to pay dearly. That, however, did not deter the more adventurous from taking up the challenge, but only to meet with a similar fate.

  The stock had come close to hitting Rs 4,000 in early September, and even the most diehard supporters of ACC felt it was unlikely to go much higher.

  Except Harshad.

  Nemish Shah, a close friend of Harshad’s and as much of a bull on the stock as he, sold out at around Rs 3,500 a share. This was a clear signal that the stock was now overvalued. What else could it mean, when one of the finest investors on Dalal Street decides to sell out in the face of strong demand for the stock? I told Prakash that there was good money to be made by short-selling ACC.

  ‘A player of Nemishbhai’s stature feels the stock is overvalued. What more do you want?’ I told Prakash excitedly. But he did not share my enthusiasm.

  ‘Having seen two more Diwalis than you in this trading ring, I can tell you one thing confidently. No matter how big or accomplished a player, nobody can correctly predict the top or bottom of a stock,’ he said.

  I still went ahead, and short-sold the stock at around Rs 3,150. Over the next week, the stock gained Rs 100 as the market as a whole started rising again. I met up with Sharma over tea a few days after I had short-sold ACC. We discussed many stocks, and towards the end of our conversation I casually asked him about ACC.

  The seasoned trader that he was, Sharma could deduce which side of the trade a market player was on from his very tone.

  ‘You are trying too hard to be indifferent about ACC, which tells me that you are in a spot of bother. In case you have been stupid enough to short-sell ACC, my advice to you would be to square immediately,’ he said with a wry smile.

  ‘Okay, I will be upfront. I am short on the stock. How high can it go from here?’ I asked.

  ‘Bhai says it can go to a level beyond anybody’s imagination,’ Sharma said.

  ‘And what is that level likely to be?’ I asked.

  ‘You seem to be a bit hard of hearing. I just said beyond anybody’s imagination, and that holds for me as well. Honestly, Lala, I don’t think even Bhai would have expected ACC to come so close to hitting Rs 4,000; and it is very likely he does not know how high it can go from here either,’ Sharma said.

  My chat with Sharma made me a bit nervous about my trade, and I regretted having spoken to him. With the stock price showing no signs of weakness, I decided to wait for one more day before squaring up my position. That evening I went over to Prakash’s place at his invitation for dinner. There I met an elderly relative of his, a gentleman in his mid-seventies who had been working at a broker’s office till five years ago. Though not a trader himself, he had many interesting tales to tell.

  Soon the conversation veered to the bull run in ACC. I asked him if he recollected having seen anything like this during his career in the stock market. ‘Crazy things used to happen in the market even then,’ he said, after mulling over my question. ‘I remember a similar bull run in the shares of Tata deferred (‘deferred’ being a class of shares back then) sometime in the late 1960s. The stock went from Rs 30 to Rs 2,500 in a matter of months. A few players were made for life but far more were bankrupted trying to short-sell the stock,’ he said. The next morning I covered my ACC position at a loss. But I was still lucky, considering the stock rallied by Rs 300 over the next three days after my exit. While the bulls paused for a breather in October, there came another important development in the money market. New government bonds with higher interest rates took the sheen off the older bonds, whose prices started to drop. The government bond portfolios of state-owned banks diminished in value. This triggered another round of frenzied trading in government securities by banks, as they tried to tide over the losses that ensued. Again, this passed unnoticed by the stock market, a wide section of which viewed the rise and fall in share prices in isolation.

  The bull market in shares resumed in January, with Harshad’s purchases believed to be the driving force. Harshad may have been the biggest buyer in the market, but to say that he was single-handedly forcing the market up was to exaggerate his influence. Again, I am making this observation with the benefit of hindsight. Back then, even I was a believer in Harshad’s powers to make the market dance to his tune.

  Shallow as the market may have been back then, the daily traded turnover had risen to around Rs 400 crore towards the end of 1991-92. Harshad may have had the charisma to drive the market, but it was impossible for him – or for anybody else, for that matter – to have enough money to dictate the market day after day. Even the most powerful of market operators can influence the market for at most a day or two, and that too only when they are on the same side as the majority. It may appear that the market operators are driving prices, when in reality they are just riding the wave. Stock market history is replete with players who went bankrupt after having made the err
or of thinking they had become bigger than the market.

  Somewhere along the way, Harshad seemed to have lost his sense of proportion. He was becoming dangerously overconfident. The bear cartel repeatedly attempted to fell him by short-selling the stocks he was long on. Not only did they fail, but they also suffered huge losses in the bargain as those stocks continued to spiral skywards.

  I doubt if there will ever be another bull run like the one in the market between 1 January and 2 April of 1992. During that period, the Sensex more than doubled, from 1,957 to a high of 4,546. Harshad’s prophecy about ACC did come true – the stock touched Rs 10,500 on the day the Sensex peaked. It was indeed a price beyond anybody’s imagination.

  Harshad celebrated his triumph over the bear cartel by actually feeding peanuts to a bear in the city zoo, and getting that recorded by the video magazine Newstrack. Some of the old-timers felt he had overreached himself by publicly humiliating his rivals in this way.

  Over the three months of the bull run, I made close to Rs 3.5 lakh. In the meantime, my relationship with Harshad had frayed. After that somewhat tentative start with him, we had begun to get closer. On a few occasions, I had got good deals for him, which he appreciated. He also trusted me enough to give me open-ended orders to buy shares for him, certain that I would not betray him.

  A couple of people in his inner circle resented my growing proximity to him. Sharma hinted about them to me but did not name them, but I had a fair idea who he was referring to. Once in a while I would go short on some of the Big Bull’s favourites. This was faithfully relayed to him. I do not think he would have taken offence to that, though it did mean I was challenging his judgement in taking an opposite position. But he was informed that my loyalty lay with the bear cartel. Since I got along well with Manubhai and did some trades for him as well, some thought of it as more than just a business relationship.