MUMBAI, MARCH 11: The stock market continues to reel from the negative impact of Yashwant Sinha's third budget. In fact, the Sensex, which is already down over 350 points since budget day, does not quite reflect, the current pessimism because software stocks continue to be buoyant. The market is shocked that the Finance Minister (FM) chose to hammer at soft targets - the corporate sector and the middle class - and is skeptical about his claim that failing to cut expenditure or announce a coherent disinvestment programme were "tactical" moves. But the stock market which is as narrow, overheated and over-leveraged as ours, is never merely about a broad macro picture. It is a lot about the individual trading positions of big market operators and their ability to influence prices. Sinha's budget has created an opportunity for the bears and a polarisation of bull and bear groups is beginning to emerge. These operators influence prices through fake rumours and are in a position to weaken the market even further. In 1992, the rivalry between the bull and bear cartels spawned the most unhealthy market practices and ultimately led to a huge crash. Sinha's budget, by casting a damper on the sense of unlimited optimism of the last six months (remember brokers asserting that we are in for a 10 year bull run?) has created an opportunity for bears to make a killing. Also, some operators who short-sold software stock on budget day have been caught on the wrong foot and are working at talking down prices to find an exit. Let us go back to the budget day. On February 29, before the trading session, a group of brokers met at a posh South Bombay eatery for strategy session. They decided that with Bill Clinton scheduled to visit India, nearly US $ one billion of Foreign Institutional Investment (FII) could be expected to flow into the country. The relaxation of the FII limit from 30 to 40 per cent, which was known by then, was expected to counter any "harsh measures" that Sinha would have announced. This view was endorsed by a notorious foreign brokerage firm and within minutes the rumor machine was working overtime to spread the news. The group ensured that the buying pushed the market up over 124 points in the pre-budget session. As the budget provisions unfolded and when Sinha announced the tax on software exports, these operators and others influenced by them panicked. They not only dismantled their earlier positions but also went heavily short. Later in the day the exclusion of units located in Software Technology Parks was clarified and the operators had to rush again to square up their positions. The Sensex which had dropped 300 points on budget day, recovered 200 point due to the bear covering in software scrips. But this was no indicator of any firm trend. For bears who have been in hibernation, the budget has created an enormous opportunity to hammer share prices over the next few weeks. Naturally the soft targets of the rumour machines are the already over-valued software and communication scrips. To small time punters the entire actions is being projected as a tussle between Ketan Parekh who has emerged as the biggest big bull operator in the stock market over the last year and the traditional bear lobby of the Bombay Stock Exchange (BSE). In fact, sources close to the bull operator say that he is lying low and has even exited out of at least three of the 10 scrips which he had pushed earlier (known to the market as the K-10 stock). One source, quotes him as saying he too would not want to buy at these prices. But even if the broker is not buying, the same cannot be said of FIIs and mutual funds which are riding the K-10 tiger are finding it impossible to step down. The depreciation in prices will immediately impact their Net Asset Values (NAV). For instance, Parekh is understood to have more-or-less exited from Zee Telefilms, but the scrip continues to soar. It is the same with Aftek Infosys. A very vulnerable target is a communications company, with controversial antecedents, which is a part of the K-10 portfolio and has just made a public offering. It has attracted huge investments from FIIs and mutual funds. The tussle therefore is not between bear elements and Ketan Parekh, but bear operators and the FII-Mutual fund investors who have huge positions in the K-10 scrips. If these scrip prices are maintained at a high today, it is mainly because FIIs and Funds continue to buy them. A third set of bulls are the bank operated portfolio management schemes for retail investors. These schemes which are soft ofmini-Mutual Funds with more discretion to individuals have also invested heavily in the "high risk-high return" IT/Communications/entertainment and pharma scrips. The question then is how long will software stocks continue to buck the negative trend? And if prices drop what happens to the big bank lending to brokers and market operators? RBI Governor, Bimal Jalan has gone public with his view that bank lending to investors is well within manageable limits. But even senior brokers are skeptical about this claim. Bank lending to brokers and investors is understood to be upwards of Rs 12,000 crore. This is through lending against shares, against stock exchange membership cards, through overdraft facilities and guarantees for margin payments. All these can turn dangerous unless banks slowly ask investors to dismantle their positions. Let us look at the bank guarantee for margin payments. Market circles say that a broker, with a market position of say Rs 10 crore has to pay an average margin of around 25 per cent or Rs 2.5 crore. Banks who provide the guarantee have been doing so against a Fixed Deposit (FD) of 10 per cent of the guarantee amount or pledge of shares ofthat value. This means that a broker can have a Rs 10 crore position by locking up merely Rs 25 lakh through an FD or pledging his core holding. Does the Reserve Bank consider this safe? Similarly, banks (mainly private banks) who have been lending aggressively against shares are most willing to do so against volatile scrips. They claim that a 50 per cent margin against the existing market price is adequately safe. In practice, it would require just six days of the scrip hitting the lower circuit barrier for 50 per cent of market value to be wiped out. Also the circuit barriers will block the exit routes for everybody. Do the banks really believe that the margins are safe once the bull party is over? Now that Sinha's budget blow has dented the bullish fervour, it's time that the Reserve Bank of India sheds its dangerous complacency and go out to conduct investigations. But for that it will have to beef up its demoralised supervision department. Author's email: suchetadalal@yahoo.com
