Street sees more purge this week

Stress Signs: FII Exits, Margin Calls

Santosh Nair MUMBAI

    IT COULD be a stressful week for investors. Relief may not yet be at hand for beleaguered equity investors even though benchmark indices are down nearly 60% from their record highs seen in January this year. Much of the panic has been driven by global developments, but Dalal Street observers say there are also excesses in the home market yet to be purged.
    There are a number of stress points. FIIs, under pressure in Western markets, are exiting from emerging markets. This is particularly true of hedge funds. Domestic factors include promoters, who had pledged shares, are facing margin calls. "The market may not have bottomed out yet, considering there is still an overhang of global factors," Ambit Capital director & head of private client group Sandeep Jain said.
    "In addition, there is a large number of margin calls, leading to forced liquidation of positions. Deleveraging will lead to more pain in the market," he added.
    Many promoters had pledged shares with banks and non-banking finance companies (NBFCs) to raise funds — not always for official purposes. These promoters are now facing margin calls due to a steep erosion in stock prices, and are unable to honour them, thus forcing lenders to offload shares and recover their money. Promotors exiting dubious investments
    IN addition, some promoters had 'parked' their shares held in 'benami' accounts through an arrangement with 'friendly' mutual funds. These accounts usually belong to investment companies or individuals associated with the promoters. With fund houses witnessing a sharp drop in fund flows, they are now exiting dubious investments when there is still time. There are also rumours of promoters who had allegedly been channelling funds abroad into their companies through 'friendly' FII sub-accounts, which are nothing but fronts for promoters. This money, too, is leaving Indian shores for other safe havens.
    "Global factors are definitely at play, but the kind of selling that we have been seeing is definitely unwarranted, given that India will not be as badly affected like some of the other economies," said Birla Sunlife Mutual Fund chief investment officer A Balasubramanian. "There appears to be an attempt by some players to aggravate the panic in the market," he adds. The market is abuzz with instances of promoters and senior management officials facing margin calls.
    On Friday, shares of a prominent telecom firm plunged, and talk was that the fall had a lot to do with the unwinding of long positions in the derivatives segment by a senior management official who was unable to meet margin calls. Brokers say that in a few cases, promoters may have played into the hands of NBFCs by pledging shares with them.
    "In a falling market, some of the NBFCs have gone short on futures of stocks pledged with them. This puts pressure on the share price," says a broker. "The NBFCs then ask promoters to cough up additional margins, and if that fails to come through, they start dumping shares in the market. Once the share price weakens, prices of stock futures too fall correspondingly. The NBFCs then cover up short positions in the futures market for a tidy profit," the broker added.