What Caused Havoc On The Stock Exchange?

What Caused Havoc On The Stock Exchange?

The Securities & Exchange Board Of India (SEBI) implemented new margin and share pledging norms from 1st September. It has taken the step after several incidents of misuse of client funds were reported. Let’s have a look at the changes and its consequences that lead to, for the first time in history, disruption in the functioning of the stock exchange.

Before you delve into the story, if you want a layman understanding of the financial jargon like margin, intraday, leverage, etc, click here.

Crux of the Matter

What Are The Changes?

  • Traders must keep a higher margin in their accounts to receive the same leverage as before.
  • Brokers not allowed to extend any higher-margin limit than prescribed.
  • The required margin must be paid (by client) or collected (by broker) within T+1 (for derivatives) and T+2 (for equities and commodities).
  • Clearing corporations will impose a penalty if the broker fails to collect, or the client fails to pay.
  • Now clients’ trades will be carried out directly with the Clearing Corporation. It is associated with exchanges to handle the confirmation, settlement, and delivery of transactions.
  • Clients need a minimum margin at the beginning of the transaction as compared to required at the end of the day before.
  • Most importantly, traders will not be able to utilize funds from the selling of shares for 3 days from trading.
  • Now onwards, intraday profit cannot be used to buy new shares.

Experts say that the new margin rules aim to safeguard retail brokers who fail to manage margin leverage.

Another Reason For Change – Misuse of PoA
Previously, brokers used to give margin if the client pledged shares or signed the Power
of Attorney
(PoA). Now brokers will not have power of attorney over their clients’ Demat account. Earlier, some brokers were using one client’s assets as margin collateral for another client who was likely short of funds.

In the past Karvy Stock Broking Ltd. illegally transferred investments of 95,000 clients to its own account and pledged without any authorization. Similarly, brokers misused the PoA assigned to them.

Immediate Chaos
National Stock Exchange (NSE) could not process clearing and settlement for the first time in history on 1st September 2020. Overloading of orders choked the Clearing Corporations’ systems.

SEBI says that chaos happened as brokers waited till the last minute to pledge and re-pledge large quantities of shares. Whereas brokers pointed fingers at the lack of preparation from the depository to implement new changes. In an interim relief to investors, brokers, and the system, SEBI stopped exchanges from imposing fine till 15th September for not paying margin.

Curiopedia
  • The 1992 Indian stock market scam was a stock market scam orchestrated by Harshad Mehta. The scam was the biggest stock market scam ever committed in the Indian Stock Market. It was a systematic stock fraud using bank receipts and stamp paper which caused the Indian Stock market to crash.
  • Popularly referred to as the “Warren Buffett of India”, Rakesh Jhunjhunwala is an Indian businessman and investor. He is the 48th richest person in India, with a net worth of $2.5 billion.
  • The Big Bull is an upcoming Indian Hindi-language biographical crime film based on Harshad Mehta’s life involving his financial crimes over a period of 10 years, from 1980 to 1990. It stars Abhishek Bachchan as Mehta.

Will Adani Power’s Delisting Impact Existing Shareholders?

Will Adani Power's Delisting Impact Existing Shareholders?

Recently, the board of Adani Power Ltd approved the delisting the company’s public shares from stock exchanges. Company has decided the floor price of ₹33.82/share to buy back the shares from public shareholders. Let’s understand what delisting means how will it impact shareholders and the company?

Crux of the Matter

What Is Meant By Delisting?
Delisting means the removal of stock from the stock exchange, meaning the stock will no longer trade on specified stock exchanges. There are two types of delisting i.e Voluntary and Involuntary. Delisting can happen due to various reasons such as bankruptcy, failure to comply with exchange laws, takeover, merger, and lower than required stock price, etc.

Voluntary delisting is when a company buys back the public shares at the decided floor price. Such delisting is only considered successful when the company acquires 90% of the total shares. Whereas, Involuntary delisting is when directors, promoters, and/or firm are banned from accessing the securities market. In this case, promoters are under compulsion to purchase the shares from public shareholders.

Adani’s Decision To Delist
The board of Adani Power approved the voluntary delisting of its shares from the Bombay Stock Exchange and the National Stock Exchange. Adani Power Limited is the power business subsidiary of Indian conglomerate Adani Group. It is India’s largest private thermal power producer.

Experts say that the low performance of the share price makes it difficult for the company to borrow more money. Thus, by delisting it can improve the share price, which will help it borrow more at a time when interest rates are low.

But, public shareholders will be negatively impacted by it as investors holding the stock since IPO will have lost ~60% of their investment – without even taking into consideration the time value of money for 11 years – if the company buys back shares at ~₹40.

Also Read: Adani Wins World’s Largest Solar Bid

Curiopedia
  • Mundra Thermal Power Station is one of the coal-based power plants of Adani Power. Located at Mundra in Kutch district from Gujarat, it is the world’s 11th-largest single location coal-based thermal power plant as well as India’s second largest operational power plant after NTPC Vindhyanchal.
  • In 2017, Adani Power was named the Most Innovative Young Power Professional by IPPAI at the 18th Regulators & Policymakers Retreat. And in 2018, it received the Recognition for Best Environment Management practices by Srishti Publications.
  • Adani Green Energy Limited (AGEL) is an Indian renewable energy company owned by Adani Group. In May 2020, Adani won the world’s largest solar bid by the Solar Energy Corporation of India (SECI) worth $6 billion.

Are Markets Not In Touch With Reality?

Stock markets across the globe are going through the roof even though GDPs are shrinking. Stock markets had observed strong bearish movement when Covid-19 was officially announced to be a pandemic. But now stock markets are reaching pre-Covid level, recovering most of the losses. Are markets not in touch with reality?

Crux of the Matter

Thumb Rule Of GDP And Markets
Sound GDP generally means good overall corporate earnings backed by strong financial stability in the nation, and people having more money to spend. If GDP is crippled, then the overall financial stability of the country remains weak and unstable, and businesses do not have a strong base to flourish. Increasing GDP is generally a sign of a bullish trend (rising trend) in the stock market, whereas weak GDP is generally a sign of bearish trend (declining trend). Stock markets may show opposite trends to the theory for short terms but in the long term, it is always expected to follow economic development.

Why This Exuberance?
Experts say ‘Irrational Exuberance’ is one of the reasons. In simple terms, Irrational Exuberance is an increase in an asset price without any fundamental justification, just out of investors’ enthusiasm. Investing in stock markets has also become easier with the advent of technology – direct access to stock markets via apps. Many brokers do not charge any fee or charge a negligible fee to open trading accounts and allow commission-free trading or trading with a negligible commission. One such company called Robinhood does not charge any fee to open trading accounts or even charge any commission on trading.

Nowhere To Invest?
Moreover, people are investing surplus money they have during the lockdown in stock markets as interest rates in banks and yields on government bonds are low. For instance, 10-year US treasury bonds had a yield of 0.65% only, and if you take inflation of 1% (in US as of July 2020) into consideration, then return on investment may be -0.35%.

At such a time, stocks have become an attractive avenue for investing. Experts say that investors are also investing with a future outlook, hoping that things will be normal soon – with a V-shaped recovery.

What Do Statistics In India Say?

  • 4.9 mn increase in demat accounts in India in FY20 to total 40.8 million as per SEBI.
  • 53% rise in NSE internet trading volumes in April 2020.
  • 1.2 mn new investors opened Demat Accounts with the Central Depository Services (CDSL) alone in March and April 2020


Even though India is experiencing the worst growth levels in 4 decades, its stock market is rising. The participation of retail investors has increased substantially. Share of non-institutional investors in terms of volume in the market surged to 72% in July – highest in a decade.

Big Companies Driving Markets?
Experts say that in Indian stock market is being majorly driven by large market capitalization stocks like Reliance. Most stock indices are constructed on the basis of the weighted average of its market capitalization. Thus, movement in a high market cap stock has a significant impact on the movement of the stock market.

Experts say that in the US, if it were not for Facebook, Amazon, Apple, Netflix, Google (FAANG) and Microsoft, the S&P 500 stock index of the US would be below 4% than current level (as of August 1st week). FAANG and Microsoft collectively are up ~43%, and thus are driving this rally. Many are also viewing this as a sign of caution. ‘Exuberance’ has become the buzzword in the financial market today.

Curiopedia
  • An economic bubble is a situation in which asset prices strongly exceed the asset’s intrinsic/real value. The Great Recession is an example of the aftermath of a bubble.
  • In finance and economics, the greater fool theory states that the price of an object is determined not by its actual value, but rather by the local and relative demand of a specific consumer. In the stock market, the greater fool theory applies when many investors make a questionable investment, with the assumption that they will be able to sell it later to “a greater fool”.
  • SAC Capital Advisors was a group of hedge funds founded by Steven A. Cohen in 1992. In November 2013, the firm itself pleaded guilty to insider trading charges and paid $1.2 billion in penalties, although no formal charges have been filed against Cohen himself.

Wall Street mimics Dalal Street nosedive

Stock markets across the globe are bleeding because of the impact of the Coronavirus. Wall Street took a hit as US’s New York Stock Exchange declared that it will halt all trading floors but keep electronic trading open as two people tested positive for Coronavirus at the exchange. Stock markets across the world have on average lost 30% value since last month.
Complete Coverage: Coronavirus

Crux of the Matter

Market Meltdown Continues
Markets across the world seem to be heading towards a recession after the ripple effect of crashing oil prices and Coronavirus lockdown compelled many nations to take preventive measures like reduction of interest rates. Oil prices have plummeted nearly 20% from $30 at the beginning of this week. With the real economy coming to a halt – shutdown of manufacturing, businesses, shops, etc. – a recession tougher than the 2008-09 Financial Crisis awaits.

Wall Street Mimics Dalal Street Circuit Breaker
US benchmark index Dow Jones hit circuit breakers on March 9 and March 12, 2020, as the US Federal Reserve announced an unexpected interest rate cut, which leveled the 2008-09 Global Financial Crisis rate. On Wednesday, 18h March 2020, as US index S&P 500 dropped 7%, circuit breakers triggered again and trading was halted.

India’s benchmark index SENSEX also triggered circuit breakers on Friday, 13th March 2020, as it dipped nearly 10% in the opening session. Stock markets of both India and the US have taken a hit of nearly 30% since the outbreak exacerbated in February.

Complete Coverage: Monday Market Mayhem After Circuit Breaker Friday

Curiopedia

The Great Depression was a severe worldwide economic depression that took place mostly during the 1930s, beginning in the United States. The timing of the Great Depression varied across nations; in most countries, it started in 1929 and lasted until the late 1930s. It was the longest, deepest, and most widespread depression of the 20th century. It started in the United States after a major fall in stock prices that began around September 4, 1929, and became worldwide news with the stock market crash of October 29, 1929, (known as Black Tuesday). Between 1929 and 1932, worldwide gross domestic product (GDP) fell by an estimated 15%. By comparison, worldwide GDP fell by less than 1% from 2008 to 2009 during the Great Recession. More Info

Monday Market Mayhem after Circuit Breaker Friday

On Monday, 16 March 2020, India’s benchmark stock index SENSEX witnessed its second-worst drop of 2,713 points. This Monday market mayhem can be attributed to the unexpected move of the US Federal Reserve to cut interest rates to2008-09 Financial Crisis level of 0 – 0.25%.

Crux of the Matter

SENSEX Showdown

  • 9 March 2020 – SENSEX drops 1,942 points after the US Federal Reserve announced an interest rate cut. It records the worst drop in history.
  • 12 March 2020 – SENSEX drops 2,919 points amidst virus scare, oil price drop, and Yes Bank crisis. It records the worst drop in history, beating the previous worst drop recorded just 4 days ago.
  • 13 March 2020 – The first half-hour of trading sees a 3,000 point drop in SENSEX. A circuit breaker triggers and trading on the market halts for 45 minutes. The index recovers nearly 5,000 points and ends nearly 1,300 points higher.
  • 16 March 2020 – SENSEX records its second-worst drop in history with a 2,713 point drop. It reacts to the tumbling global markets after the US Federal Reserve made an unexpected interest rate cut. RBI mulls over banning the trade of Derivatives.


Complete Coverage: Worst Sensex Fall In The Shadow Of Yes Bank And Global Market Meltdown

#GlobalFinancialCrisis2
Global Markets seem apprehensive of the dawning Global Financial Crisis as the Coronavirus outbreak has put brakes on trade & commerce. UK’s FTSE 100 index recorded its second-worst fall on Thursday. France and Germany lost 12% and 14% respectively. Coronavirus-hit Italy recorded its worst drop of 17%.

Dow Jones also lost 2,352 points to end at 21,200 on Thursday. To improve the market situation, the US Federal Reserve announced that it will inject $1.5 trillion in the economy to boost liquidity. It observed that the Coronavirus panic is causing the public and companies to stock up more liquid funds like cash, and thus there is a selling spree in the market. In reaction to the Federal Reserve’s ailment package of $1.5 tn, global markets improved a little on fabulous Friday.

However, on Monday, 16 March 2020, the Federal Reserve announced an emergency interest cut of 100 basis points or 1% to stay ahead of the downward spiraling market. This has brought the interest rate level at 0 – 0.25%, a rate observed last during the 2008-09 Global Financial Crisis.

Complete Coverage: Coronavirus

Curiopedia

What are Circuit Breakers?
A financial regulatory mechanism, Circuit Breakers are a halt on trading on the stock exchange that is used when people are panic-selling. At a certain predefined percentage fall, the exchange automatically halts trading. On March 9, 2020, US benchmark index Dow Jones fell more than 7%. Circuit Breakers were triggered and trading was halted. On 13 March 2020, India’s benchmark index SENSEX fell more than 10%, triggering a halt. The trading halt lasted for 45 minutes. More Info