When the trade data for manic Monday (May 17, 2004) is analysed, the focus will naturally be on the firms that sold heavily in the first two minutes, triggering an incredible collapse that lead to a five per cent fall and a circuit break in just over five minutes of trading. Data available with us shows that 20-odd firms traded heavily during those two minutes and half of them were Foreign Institutional Investors (FIIs) or brokers. Yet, the overall FII trades were relatively low that day. Instead of investigating these sales, the government continues to harp about a vague political conspiracy.
A high networth investor pressed big sales through his own brokerage outfit; he later made several TV appearances expressing surprise at the mayhem that day. All four firms that were caught by shorting the market in the run up to big public sector issues in March were again huge sellers. Finally, a low-profile firm that sounds global but is rumoured to be linked to a pan masala manufacturer also sold heavily. Will SEBI go behind these initial names to solve the mystery of the panic that day?
Even after legalising margin trading, it has acquired some dangerous new dimensions that the regulator must halt immediately. A few well-funded brokerage houses are indulging in dangerous pyramid financing by not only funding the purchase of shares (for delivery) but then using those very shares as ‘margin’ for fresh derivatives positions. In other words, an investor is first funded to buy shares in the cash market and those shares (which he has yet to pay for) in turn become the margin for a much larger derivatives exposure. This funding would work without mishap when the market is moving steadily in one direction, but when there is a big price swing, the pyramid is bound to crash.
Since the SEBI permitted margin trading from April 2004, the extent of illegal ‘margin trading’ that went on in the past is slowly becoming public. What used to happen was simple. The broker would fund the margin trades and collect the interest as a ‘late payment charge’. No money moved out of the books; instead when the clients’ shares were sold, it was shown as a revenue receipt and the debit balance would be nullified.
Two brokerage firms whose IPOs have recently been cleared by SEBI have reported hefty income from margin trades. One claims in its prospectus that its income from margin trading in 2003-04 is almost equal to its brokerage income. Doesn’t this mean that margin funding was rampant even when it was officially disallowed? Now that it is legal, SEBI apparently doesn’t want to rake up the past. That’s how securities now regulation works in the US.
While on scams, students and parent seeking visas to go abroad must watch out for tricksters. The student daughter of an IT company head who applied for a British visa received a telegram (from Malad, Mumbai) with a phone, fax and mobile number of one Minish, asking her to contact him for British Immigration Verification. The man answering the number wanted credit card details, sources of funds and fees (he offered to collect a demand draft). The landline on the telegram was merely a call-forwarding service. When asked probing questions, ‘Minish’ turned tough. The potential victim’s father then called a contact at the British High Commission and was astonished to find that this scam wasn’t really unknown.
The tricksters target gullible people doing the rounds of various embassies for visas and it is suspected that some travel agency staff provides them with the basic data about visa applicants. This is then used to demand more information through the ‘verification’ process. Obviously some people are conned but some are not.
Several weeks ago, this column said that PricewaterhouseCoopers (PWC) had resigned the Ashok Leyland audit. We learn that PWC has also give up the IndusInd Bank audit—that is two Hinduja company audits gone in just over a month. The IndusInd Bank audit has gone to Ernst & Young (E&Y) which, however, didn’t want to handle Ashok Leyland. We learn that E&Y will also be looking at the feasibility of merging Ashok Leyland Finance with IndusInd Bank and will scout around for a foreign strategic investor. After a spate of controversial exits of partners, the new account has been a sort of morale booster for E&Y. Meanwhile, the feud sparked by the late Priyamvada Birla’s will continues to cause audit changes. The grapevine has it that the exit of Lodha & Company from the S.S.Kanoria Group’s Rs 200-crore company, Kanoria Petroproducts International Limited, is linked to the ‘will’ and seen as a show of solidarity with the Birla clan. That account is understood to have gone to M/s Singhi & Co. of Kolkata.