Home loan scam socks equities at fag-end

Multi-city raids by the Central Bureau of Investigation (CBI) and arrests of high ranking banking and finance officials had investors unloading shares in affected sectors and the Sensex losing 315.92 points on an intra-day basis.

It later recovered to close with a loss of 231.99 points or 1.18% at 19459.85.  The Nifty closed at 5865.75.

In a press conference held after market hours, the CBI issued a statement that it had arrested the chief executive officer of LIC Housing Finance and officials from Bank of India, Central Bank of India, Punjab National Bank and an official from the Life Insurance Corporation.

The arrests took place on the allegations that officials had taken bribes in order to secure corporate loans. Searches for incriminating documents had been conducted at six cities including Mumbai and Delhi.

News of the scam broke towards the end of market hours and the stock of LIC Housing Finance and banking stocks declined sharply.

“After recent events the housing loan scam unearthed by CBI seems to have dampened the investors sentiments further. We may see markets headed downwards towards 5700-5800 levels in short term but then we may see buying emerge once again,” said Lalit Thakkar, managing director (institutional), at Angel Broking.

A build-up of short positions over the last few days on account of weak domestic and global cues may be further accentuated by the day’s events, according to analysts.

“This huge selloff on Wednesday due to banking scam may precipitate further fall for the markets as nobody knows the size of this scam. This would affect the investor’s sentiments and rollovers may not be too aggressive. There has been build up of shorts over last few days and Nifty may be headed towards 5700,” said Monal Desai, head of institutional equities (derivatives) at Prabhudas Lilladher.

At the end of the day, the banking index was the worst performing of the sectoral indices, down 2.94%, while the realty index was down 2.88%.

The banks that are said to be involved were worse hit.

Bank of India was down 5.88%, Punjab National Bank was down 3.10%, Central Bank of India was down 8.02%.

LIC Housing Finance was down 18.32%.

An immediate bounce-back of the banking sector seems unlikely suggest some.

“Although it is premature to form an opinion of the sector without clarity on the impact at the level of non-performing assets, re-rating of these banks are expected to be affected by concerns over corporate governance,” said Ramanathan K, chief investment officer at ING Investment Management.

Foreign institutional investors were net sellers by Rs473.31 crore, while domestic institutions sold Rs94.94 crore on Tuesday, according to stock exchange data.