Nifty, Sensex crash: Margin calls, over-leveraged positions to extend the pain further

Friday the 13th. Lucky or unlucky? For the Indian equity markets, it sure was one of the worst trading days in history. With the Nifty hitting lower circuit and trade being halted for 45 minutes, punters and veterans in the Indian stock market would concur that the past few days of mayhem in the market has been unprecedented on several counts. With the market now resuming trade and appearing to gain sanity, is the worst is over?

Not quite

In our interaction with various market players and brokerages, it is becoming evident that with the market sliding steadily over the past few days, most margin calls at the brokers’ front have already been triggered accentuating the pain in the market. The 10 per cent fall in the market today has only made matters worse, with margin calls being triggered in NBFCs that have lent against shares. Unless US markets stabilise soon and the threat over COVID-19 eases, markets could get nastier going ahead.

Big fall

The bloodbath in the global equity markets over the past few days has rattled investors. In the Indian context, the Nifty 50 falling 5 per cent last Friday and another 8 per cent on Thursday, has triggered off margin calls, leaving practically no positions naked.

“We may have already seen margin calls being triggered over the past few days, before today’s disastrous opening. For us, no position has been naked and with today’s fall the pain is only likely to accentuate,” said Ashish Shankar, Head-Investment Advisory at Motilal Oswal Private Wealth.

The worry now is over NBFCs that have lent against shares. The deep fall today in the early part of trade has likely forced these NBFCs to sell off shares and the worst may not be over yet.

“The fall has been fast and steep. NBFCs sitting on LAS (loan against shares) book could trigger yet another sell-off unless the market stabilises,” said Ashish.

The panic set off by the growing threat of COVID-19 has seen massive selling by foreign investors across markets. Large global ETFs have been on a selling spree and unless that eases, the market could continue to fall.

After selling about ₹2,200 crore in Indian equities last Friday, FPIs sold ₹3,500 crore on Monday and nearly ₹10,000 crore in the past two days. With the FPIs hitting the panic button and programmed trading triggering off massive sell-off, the market has only plunged rapidly. Unless this selling cools off, the market could continue to see red.

“Large selling by global ETFs have triggered margin calls and if fears over COVID-19 accelerate, selling could intensify. However, I believe the panic in the market is multiple times the actual threat from the virus. There are signs of the virus concerns easing off in China and the ETF selling should taper off soon,” said Paras Adenwala, Founder & MD, Capital Portfolio Advisors.

Will intervention help?

There are now widespread expectations that the government or the RBI could intervene to ease the pain in the market. Will it help?

Given the market fall has been fast and margin calls already being triggered, many believe that there isn’t much that the powers that be can do at this point.

“In the past, there have interventions in the form of allowing only delivery trades and upping margin limits. Some of this could be explored. But how much it would help at this point is unclear. If the market plunges sharply then these measures could offer some respite,” said Paras.

Others believe that at this time, nothing much can come about on the margin front. “But the RBI could continue to provide liquidity and consider rate cuts. Removal of LTCG and softening of other taxes that have long been on the table may have to be reviewed,” said Ashish.

No time to bottom fish

With the sharp fall, valuations have corrected sharply in recent weeks. The Nifty 50 that was trading at about 17 times one-year forward earnings about a month back is now at around 14 times. Through most of 2019, Nifty 50 was trading at 20-21 price to earnings. Is this a good time to buy?

It is true that many blue-chip stocks such as Tata Motors, ONGC, GAIL, Tata Steel and RIL have fallen 20-30 per cent since last Friday, opening up attractive opportunities for long-term investors.

“We have been deploying cash over the past few days, and buying into growth stocks with a good dividend yield with a long-term perspective,” said Paras.

Many others believe that the worst may not be over and even if one has liquidity now, it is more important to assess investors’ ability to tide over shor- term volatility. “If the market plunges further, then it may be difficult for retail investors to weather the near-term pain,” said Ashish.

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