Skid on economic slowdown, weak rupee, liquidity dry-up and corporate governance issues

The overall slowdown in the economy and the general liquidity crunch, have taken a toll on almost every other stock listed on the NSE. An analysis by Business Line indicates that over 45 per cent of the stocks listed on the National Stock Exchange are now ruling below their 2008 lows. Yet, the benchmark NSE index Nifty, which closed at 5,685 on Monday, has fallen just 10.57 per cent from the all-time high of 6,357 it hit in January 2008.

While infrastructure, banking, realty and a few other new economy sector shares have touched new lows, the bears have not spared even some large-cap old economy stocks. For instance, Coal India, which launched its public issue in 2010, saw its stock hit an all-time low of Rs 248 on Monday, a shade above its IPO price of Rs 245.

A Chennai-based broker summed up the situation thus: “A secular decline”.

According to him, while policy paralysis and debt concerns triggered the collapse during the first phase of the fall in 2010-11, for many mid- and small-cap stocks, corporate governance issues dominated investor sentiment in the second phase of the slide between 2011 and 2012. And, now, the weakening of the rupee and the acute slowdown in the economy have made matters worse.

For many mid- and small-caps, the fall has been a whopping 70-90 per cent. Within four years, many of these sought-after shares have turned into below-par stocks, while some large-cap stocks have become mid-caps.

The manner in which some of these shares were decimated at the bourses raises one uncomfortable question: Are bear operators at play out there?

Market participants however, attribute the current fall chiefly to the liquidity crunch that put some of the brokers in a tight spot.

Negative developments at the corporate level too, played havoc with the prices of some stocks, they said.

The linkages

As just a thin line separates the commodity, currency and equity trading platforms, systemic risks at any one of these segments are bound to affect the other segments at the broker level.

According to Arun Kejriwal of KRIS Securities, “A shock at one platform will definitely paralyse the activity of the other segments, too.” Bears would have taken advantage of such a situation, he added. Many broking houses are members of equity/derivatives, currency and commodity segments.

So, if there is a margin problem at any one of these verticals for a client, brokers will ask the trader to bring in extra payment. If they fail to honour the margin commitments, the broker will sell the equities that were given as collateral by the client, in the open market, to meet the margin requirements at the exchange.

Exchanges can also force brokers to sell the equities. They generally monitor the outstanding exposure of members on a daily basis.

(This article was published on August 5, 2013)
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