Funding crunch squeezes Dalal St bulls

The margin financing business in India’s stock market has come to a virtual standstill. Leading high net worth individuals (HNIs), known for taking big derivative bets, are staring at a huge debt pile-up on account of the sharp fall of 25-70 per cent in the past couple of months in the share price of Titan, Tata Motors, VIP Industries, DHFL, Edelweiss Financial, Symphony, DLF, Aptech, Escorts, Bombay Dyeing, JP Associates and Kaveri Seeds, among others, according to promoters of two large Mumbai-based financial services firms, who did not want to be named.

Largely, these shares were placed as margin by HNI traders, who held them in their portfolio to avail of financing, the sources told BusinessLine .

The carnage, which started in August, saw a 70 per cent crash in DHFL shares in a single trading session in September. Brokers and non-banking finance companies holding most of these shares in their books dumped them as their call to HNIs to bring in addition margin went unheeded.

Over the past 25-30 trading sessions, the Sensex and Nifty have crashed by close to 14 per cent from their all-time high levels in August. A large number of small- and mid-cap shares are down by 50-80 per cent. Among the other reasons why interest in small and mid-cap stocks receded were a SEBI investigation into global depository receipts (GDR) in nearly two dozen companies, and new circuit filter norms such as ASM and GSM. The investigations into GDRs may have particularly affected a few bulls on Dalal Street, brokers say.

“The margin funding books of brokers and their NBFCs to just HNIs was in excess of $2 billion a few months ago,” said Sudip Bandyopadhyay, group chairman, Inditrade Capital. “Margin financing has been hit and liquidity is tight.”

SEBI has prescribed 50 per cent initial margin, based on which brokers can provide trading position to clients. Under margin funding, brokers allow leveraged trading position on initial deposit of cash or shares by clients. NBFCs or brokers charge interest of more than 15-18 per cent on funding of positions to HNIs. In addition, delay payment charges of 1-1.5 per cent are imposed on outstanding amount or debit balance of clients.

“Even for retail clients who want to take futures and option position, no leverage is being extended now. Nearly 100 per cent cash is required upfront due to high market volatility and mark-to-market losses due to daily difference in price have to be deposited via electronic fund transfer before 10 am. Brokers are reluctant to accept cheques. The situation will remain much the same for a couple of months or till markets stabilise,” said a risk management official at a Mumbai brokerage.

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