The Hindu : Business : Margin pressure tells on brokers

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Wednesday, Jan 23, 2008
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Business

Margin pressure tells on brokers

Special Correspondent

Foreign institutional investors turn net sellers; emerging markets in a tailspin

MUMBAI: Indian stock markets halted a huge erosion in value of its stocks in the last one-hour of trading on Tuesday. As a continuation of mayhem witnessed on Monday, the benchmark, BSE 30-share sensitive index (Sensex) lost more than 2000 points stopping the trade by both the major exchanges for one hour. However, the Sensex closed at 16729.94 with a loss of 875.41points or 4.97 per cent, recovering nearly 1600 points compared to the previous trading day loss of 1408.35. However, the surprise cut in rates by the U.S. Federal Reserve by 75 basis points on Tuesday is likely to bring in the much-needed positive sentiment to markets when it opens on Wednesday.

It was also reported that there was a margin pressure (margin money given by brokers and as the market is falling the margin increases) and many brokers were unable to meet the requirement. However, a broader picture will emerge in the next few days.

While the global and emerging markets were showing downward trend, the Indian markets were gaining strength in late 2007 and the first half of January 2008. A possible reason for the Indian bourses’ relative strength in early January 2008 could be the hype surrounding Reliance Power’s IPOs.

“As soon as the IPO closed, two things happened: People started paying closer attention to the negative overseas cues and the high domestic valuations; and liquidity got sucked out of the market,” said V. R. Srinivasan, Director and CEO of Brics Securities.

The Reliance Power mega IPO has been oversubscribed 72 times blocking cash worth Rs. 1,12,063 crore.

Even the relatively smaller Future Capital IPO has sucked out a few thousand crore. This has resulted in massive amounts of retail and HNI (high networth) money becoming temporarily inaccessible.

Foreign institutional investors (FIIs) have been net sellers. This is not because they do not believe in the India story, but in many cases to make up for losses in international markets. “When they started selling into a liquidity-starved Indian market, stock prices collapsed like a house of cards. This led to margin calls on leveraged players which only served to accelerate the move to the downside. On top of this, funds from the banking system to the stock market were not forthcoming as banks have to abide by sector lending norms.

“There is still liquidity in the system,” said Mr. Srinivasan. Domestic mutual funds have over Rs. 20,000 crore in cash. Insurance companies have a few billion dollars of serious long-term money that have to come to the stock market.

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