Bulls, Bears and Other Beasts Read online

  Then, on one occasion, I got a really poor price for a block of shares he had asked me to sell for him, despite my best efforts. His cronies told him that I was regularly ripping him off on deals. Earlier, I could pick up the phone and speak to him directly whenever I had a block of shares he was interested in. But now a wall seemed to be gradually growing between us. He was either too caught up with bigger things to spare time on small fry like me, or he had begun to suspect me because of the tales he was being fed. Once I had a good block on offer and called his office to inform him about it. His dealer came on the line and told me that they would get back. They never did. Two days later, I learnt that they had done the deal through somebody else. This happened once again, and by now I was really mad at the shoddy manner in which I was being treated. It would be a long time before I would speak to Harshad again.

  The reckless manner in which Harshad was ramping up his stocks meant that he was pushing his luck too far. People say that had he slowed down a bit, he could have walked away a rich man without anybody the wiser, and perhaps the game could have gone on for longer. I think he fell into a trap of his own making. Once stock prices rise to a certain level, you need increasingly bigger purchases to maintain the stock price. Else, the price will simply collapse and trigger further selling as more people exit the stock in panic. I feel that even if the game had been prolonged, the end result would not have been any different, knowing Harshad and his eternally bullish world view.

  The Big Bull eventually ran out of luck in April. The starting point of his trouble was the government’s decision to establish SEBI to supervise the stock exchanges in the country. The first major decision by SEBI was to ask brokers to re-register themselves by paying a higher registration fee. The powerful broker lobby, which until then used to set its own rules, did not take to the SEBI diktat kindly. In protest, many exchanges across the country went on strike from 16 April to 24 April. All trading activity came to a standstill.

  This made matters difficult for Harshad as he was counting on the pay-out from BSE to repay the funds he had ‘borrowed’ from the State Bank of India (SBI), promising to buy them securities. While reconciling its books, SBI found that Harshad had not delivered the securities he had taken money for. The bank pressured Harshad to either deliver the securities or repay the money, and before Harshad could reach a settlement with the bank, the matter found its way to the press.

  That effectively blew the lid off the scam, and it was found that many banks and financial institutions were not holding the securities they had paid for, or were holding fake or forged bank receipts instead of the actual securities. News of the scam sent the market into a tailspin, and the Sensex crashed to below 3,000 by the end of May. The size of the scam was initially estimated at a little over Rs 4,000 crore. Later, the Central Bureau of Investigation (CBI) put the figure at over Rs 8,300 crore, based on the cases registered.

  Harshad was not the only one in trouble. The scam tarnished many reputations on Dalal Street, ended many promising careers at the banks involved in the scam, and also ruined the lives of many junior employees who were only following orders.

  Later, a report by the Joint Parliamentary Committee probing the scam would say that irregularities in bank receipts had been going on since 1986, and that the matter had been brought to RBI’s notice but nothing was done about it. The report would also say that foreign banks in the country had not only been the major players in the scam, but had also initiated the entire process of the scam. And, in exactly the same way that Harshad had become the face of the biggest rally in the stock market, he was now made out to be the kingpin of the biggest scam to have hit the stock market.

  9

  A Fresh Start, a New Mentor

  Harshad’s arrest in the first week of June took the battle out of the bulls. Later, it emerged that the bear cartel had managed to escape by the skin of their teeth. Harshad’s reckless purchases and the resultant surge in share prices had pushed some of the smartest stock market bears to the brink. But it also emerged that most of them – if not all of them – had managed to somehow obtain funds to be able to stay in the fight longer than otherwise seemed possible. Had the scam not been exposed they would have been in serious trouble. I would not go so far as to use the word ‘bankruptcy’. But the bears would certainly suffer wounds that would take long to heal.

  I made over Rs 1 lakh from my trades in April. What saved me was my decision to put aside some money for the donation to get Satish into an engineering college. A good chunk of my winnings since the start of the year was in the bank by the time stock prices began their prolonged slide. I took a hit on most of my trading positions though. But looking at the losses most of my friends and acquaintances had suffered, I had reason to be thankful to the Almighty.

  Despite having been in the stock market for nearly a year and a half now, I had still not made a single investment myself. I owned no shares in my name. I had taken delivery of shares a few times, but would sell them off in the very next settlement. The main reason for this was my lack of understanding of companies’ businesses; I only understood prices. Another reason was my lack of conviction about the merits of investing for the long term. I had heard plenty of stories about retail investors subscribing to the initial public offerings of MNCs in the late 1970s and early 1980s to become millionaires. But I had also heard about quite a few Indian blue chip firms that had become history after being overrun by competitors.

  And lastly, I had heard too many horror stories about fake shares. The perils of delivery-based investment – in which the buyer takes delivery of the physical shares – were once again manifest in the wake of the securities scam.

  The special court appointed to try the scam-related cases had ‘notified’ entities suspected of involvement in the scam and against whom criminal charges had been filed. These entities included Harshad Mehta, his associate firms and some others. Any share certificate that bore the name of any of the notified entities was seized by the custodian entrusted with recovering the dues owed to the banks and the taxes owed to the government. It did not matter that in many cases the shares had been bought before the entities had been notified. In other cases, the shares had changed hands a few times after the notified entities had sold them. Often, investors who were the buyers of shares sold by the notified entities did not send the shares for transfer to their own names. They would hold on to the shares for a while before selling them, and the shares would change hands several times until the investor at the end of the chain sent them for transfer to his name. This further hardened my resolve against buying shares for delivery.

  Barring one or two, all our firm’s clients lost heavily when the market tanked. They had all invested heavily in Harshad’s favourite stocks. A few of them defaulted on huge payments, and the losses had to be borne by the firm. My owner himself had taken some big positions on which he took hefty hits. Our firm was now poised on the brink of a shutdown.

  By July, my employer decided to get out of the broking business and try his hand at something else. He owed me around Rs 50,000, including my commissions. He added another Rs 50,000 to it. ‘Lala, I would have liked to be even more generous, but I am really stretched at this point,’ he said apologetically.

  I believed him. He never haggled while sharing profits from the deals I made, and never questioned me on the deals that went wrong. I really respected the man. And, while he may not have been able to give me a handsome severance package, he recommended me to one of the masters of the trade, Govindbhai, who happened to be a good friend of his.

  I had heard about Govindbhai though I did not know him personally. He was what they called the broker’s broker. His speciality was execution of trades for the big boys of Dalal Street across rival groups. He was not a regular in the ring; he usually worked the phone to source and offload large blocks. At other times, his dealers would be seen bargaining in the ring. His clients trusted him on two counts: one, he would not front-run their trades (take advantage
of their orders by putting in his own buy/sell orders, as used to often happen in the case of UTI ), and two, he would not discuss their trades with anybody. Govindbhai’s business model was clear: he chose to make his money from plain vanilla broking, which did not entail any risk other than clients defaulting. He had multiple broking memberships and an office in Calcutta (now Kolkata). It was a rainy morning in late July when I walked into his office in one of the nondescript buildings on Nagindas Master Road, which sits at a right angle to the famed Dalal Street.

  Govindbhai was of medium height, square-jawed, and had a broad forehead with hair slicked back, but what struck me were his unfriendly eyes. He was in his late thirties or early forties, and I had heard that he had been around for over fifteen years. I do not know if it had to do with his eyes, but there appeared to be a permanent scowl on his face. As I would learn later, it was just a facade. Govindbhai wanted to create an impression of being unapproachable. But he was a genial person once you got to know him, and he trusted you well enough. He had a wry sense of humour too, which I enjoyed a lot.

  He greeted me with what I thought was a forced smile. Smiling did not come naturally to him. My first impression of him was of a man mistrustful of the world at large. We discussed the market for a few minutes, and that put me at ease somewhat.

  ‘My friend has a good opinion of you, and I have heard about some of your exploits,’ he said, smiling. This time the smile looked natural.

  It was now my turn to force a weak smile. I did not know what to say.

  ‘I know you are good at your work, Lala, because I rarely go by recommendations, even if they happen to come from some of my best friends,’ he said. The smile had gone, to be replaced by the scowl. ‘But let me also tell you that I prize integrity more than smartness. The nature of any broker’s business demands that, as you know,’ he said, now in a slightly more friendly tone.

  ‘My staff is small, as you can see. I had two dealers, one of whom quit last month. I have two dealers in Calcutta too. I prefer a small team so that secrecy is maintained as far as possible. That is crucial for me if I am to get the best price for my clients,’ he said.

  I felt a twinge of irritation. Of course I knew the importance of secrecy in this business. After all, I had now been in the market for nearly eighteen months. As though he was reading my thoughts from my expression, Govindbhai suddenly said, ‘Lala, I am aware that you know all this. Still, I thought it would be worth your while to know how particular I am about the confidentiality of my clients’ trades. They pay me the best brokerage, and I owe it to them to get the best possible rates. I do not tolerate indiscretion. If I hear you have been indiscreet about my trades, I will not demand any explanation. I have enough friends who keep me informed about what is happening in the market. Dealers who betray me find it hard to get another job with a decent broker. I hope you get the drift.’

  I nodded.

  ‘What were you getting paid?’

  ‘10,000 plus a share of my jobbing profits.’

  ‘I will match that. Just ensure that your jobbing trades are not based on the orders we get.’

  ‘I will keep that in mind. Do I start today?’

  ‘No. Go back and think over what I have said. Take my offer only if you feel you can abide by my terms. Let me be frank, I can be a very demanding boss.’

  ‘You will find me equal to the task.’

  ‘I like your confidence. Still, I insist you give it a thought.’

  I did not have much to think about. I was quite impressed with Govindbhai. I joined him the following day, and it was to be the beginning of an enduring protégé-mentor relationship. Until this time I had been a self-taught trader. But there were plenty of gaps in my learning and I sorely lacked a good tutor. My association with Govindbhai would gradually fill those gaps.

  I soon got to know that one of the reasons for Govindbhai’s success was the strength of the relationships he had forged over the years, even though he was very choosy about them.

  ‘It is easy to initiate a relationship, but the challenge is to sustain it, and you can never say which one will turn out to be helpful in a crisis,’ he once told me.

  I learnt a lot watching Govindbhai at work. He would do his best to ensure that the market did not get the full picture of what his clients were up to. He would do that by executing half the trades on the BSE and the other half on the CSE. He would also keep shifting his positions between exchanges before smart traders could get wind of what was happening. Since he was dealing in large quantities, it was not always possible to camouflage the orders beyond a point. But he had a good strike rate, and that was what mattered most.

  The Harshad Mehta-inspired rally may have petered out, but a couple of developments helped the market stabilize after the initial burst of selling. The first was the government’s decision to abolish the Controller of Capital Issues, which allowed companies to price their issues as they chose; the second was SEBI’s notification of guidelines for FIIs to invest in India.

  With the wisdom of hindsight, one could say it was a mistake on the government’s part to swing from one extreme to the other. The new regulator had no infrastructure to vet the companies that were rushing headlong into the stock market to raise money. Rules were yet to be formed, and the regulator was still learning. The premium asked by companies for the shares they were issuing to the public were not justified by their fundamentals at all. In fact, there was competition among companies to ask for the highest premium.

  In the first place, many of the companies themselves were not sure what they were raising money for. Self-proclaimed merchant bankers offered to help companies raise equity capital for fat commissions.

  Meanwhile, with the decks cleared for foreign investment in the stock market, FIIs started sending out reconnaissance teams to check out its potential. The representatives of these firms were put up at the Taj, Oberoi and other plush hotels. I was told a horde of brokers could be found in their lobbies on any day, waiting to make a pitch to these officials – derogatorily referred to as goras (white-skinned).

  One Friday, post trading hours, I decided to check out for myself the stories about brokers falling over each other to curry favour with the foreign investors in the hope of getting business from them. I visited one of the five-star hotels where officials from one of the FIIs were cocooned. Sure enough, many of the high and mighty of Dalal Street were milling about in the lobby, awaiting their turn for an audience with the foreign officials. This ritual was to continue for many more months, till the FIIs were convinced that they had to have a full-fledged office in India.

  Foreign investors began cautiously, despite all the talk about India being a reforms story. While the FII guidelines were notified in October 1992, FIIs invested less than Rs 15 crore during the period up to March the following year.

  Meanwhile, the revelry in the primary market continued unbridled. Nearly 550 companies raised close to Rs 11,000 crore through IPOs in that financial year. This was almost twice the amount raised in the preceding year. Some were worried that another bubble was building up. Who was to know that the bull market in IPOs was just warming up?

  The Mumbai serial bomb blasts in March 1993 – one of them right in the basement of the stock exchange building – had market players worried for a while. The main concern was that FIIs would turn their backs on India if they did not see it as a safe place to do business.

  I was in the trading ring when the blast shook the building at around 1.30 p.m. I was chatting with a couple of jobber friends who specialized in trading debentures. Those dealing in debentures gather away from the centre of the ring, whose hemispherical roof made for a lower ceiling height at the sides. The blast was so powerful that the plaster of paris ceiling developed deep cracks, spraying us with the powder from it. There was panic all around; people were screaming and stampeding for the exit. There were no casualties inside the stock exchange building, but we could see that the windowpanes of offices even on the twenty-fifth floo
r of the exchange were shattered by the impact. The glass shards from them killed a few passers-by and some of the food hawkers plying their trade near the entrance of PJ Tower.

  I recall broker Mohan Vijan gathering a few of us together and heading for the basement where the explosion had happened, to check for people trapped there. Some of the drivers who hung around in the basement next to their cars were killed in the blast, and I can still recollect the horrible smell of burnt flesh and blood that made me retch.

  The blast happened on a Friday. The entire staff of BSE slogged through that weekend to ensure that its systems and infrastructure were in place for regular trading to resume on Monday. By keeping the market open, the government wanted to send a signal to the world at large that India was not to be intimidated by terrorists.

  I did not go to the market on Monday; Bauji and Ma insisted that I take the day off and be with them that day. I tried talking them out of it, but later yielded to their request, seeing that my presence at home would calm them down a little. They were more shaken by the incident than I was.

  The Sensex rose around 100 points in the first two trading sessions of the week. In all likelihood, the government had directed domestic institutions to buffer any panic selling. But the rally fizzled out, and by the end of he March the Sensex was slightly below where it stood before the blasts happened. Still, the market took the blasts in its stride and chose to focus on the positive developments in the economy resulting from policy reforms.

  As for me, I preferred to play the IPOs through the thriving grey market in these issues. The grey market, as it was called, was an illegal market for trading in IPOs before they were listed on the stock exchanges. Back then, it took nearly two to two and a half months for an issue to get listed on the stock exchange after the subscription period. In the intervening period, there was money to be made . . . or lost.