Trapped traders aggravate fall

Seven sessions, 1496.8 points down, 4.25 lakh crore lost. Marxists move to twist knife by demanding capital gains tax.

MUMBAI: First, the bad news: Blood-letting continued on Dalal Street on Friday as the visceral unwind of the past seven sessions trapped traders across the country, leading to margin calls and widespread closure of trading terminals.

The knife was twisted by the State Bank of India, which said fourth-quarter net profit fell 20 per cent.

Now the good news: Foreign institutional investors sold massively yet again in the cash segment - tentative figures say by an eye-popping Rs1,459 crore on Friday. But, interestingly, they have taken an almost equal position in stock futures - of Rs1,395 crore.

Now, considering that you get on average three times leverage in futures (taking position in a stock by paying just 30 per cent margin money), FIIs have actually taken a much larger long position in the markets.

So, why this flurry of sales in equities now?
Paras Adenwala, who manages about $500 million of stocks as chief investment officer at ING Investment Management in Mumbai, told Bloomberg, "It's essentially about valuations."

Indian markets have been "at a premium to the region for quite some time. All fund managers have been cautious, but that caution was thrown to the winds because of what the markets were doing", he said.

Friday almost saw another 800-point fall in the Sensex — if you consider that the market had risen 306 points at the opening bell and ended down 452 points. The cascading effect of margin calls — when brokers ask clients to pay margins for their positions in stock futures whose values are diminishing fast — was such that traders across cities — some estimates say 70 per cent of the active ones — pulled the plug and spent time chasing clients for cheques and dissuading them from taking fresh positions.

The Sensex was in the minus 200 points range around 1:30pm when the London markets opened.

As on Thursday, pressure increased from thereon. Accelerating the fall were two things. First, of course, was SBI's net profit figure. Then the Communist Party of India (Marxist) decided to roil things more.  Turn to p16

The leftists demanded that long-term capital gains tax be reintroduced. They also sought a review of the double-taxation avoidance treaty with Mauritius to check the influence of overseas funds and volatility in the stock market.

"If this happens, it will be negative" for sentiment, Srividhya Rajesh, who manages the equivalent of $241 million in stocks at Sundaram Newton Asset Management Company in Chennai, told Bloomberg.

The net result? Investors lost Rs1.3 lakh crore on Friday alone.

The refrain among analysts is that the trend will stabilise over the next week - though a question mark remains because of the expiry of May contracts on Thursday.

"Over a one-year period, we are still bullish," said R Venkataraman, director of India Infoline.

The Sensex closed down 3.98 per cent or 452.82 points at 10,938.61, while the Nifty ended down 4.19 per cent at 3,246.90.

It has lost 12.41 per cent since it closed at a peak of 12,612 on May 10, 2006.

What should an investor do now? "At this juncture, we need to look at the percentage fall rather than the absolute fall. A person who feels that he has invested soundly, need not worry at all," said Ranjeet S Mudholkar, chief executive officer of Financial Planning Standards Board India.