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Margin financiers behind Sensex fall?

Virendra Verma
Jayanta Mallick

MUMBAI/KOLKATA, Aug. 4

MARGIN trading and private funding in equity buying are believed to have caused the recent volatility in stock markets. According to stockbrokers in Mumbai and Kolkata (the major bourses where margin trading takes place), there has been heavy selling from margin financiers, leading to a fall in stock prices in the last one month.

The stock market witnessed a similar fall in May this year when margin traders failed to meet their additional margin money due to fall in stock prices.

Since July, the BSE Sensex has fallen by around 260 points or around eight per cent from 3,244.70 on June 28 to 2,985.01 on August 2. Similarly, the NSE's S&P CNX Nifty wilted by 114.2 points or 10.68 per cent (from 1068.95 to 954.75) and the CNX Junior Nifty by 182.8 points or 11.18 per cent (1634.20 to 1,451.40).

Even though there has been concern in the market over the poor monsoon this year, the recent fall had been mainly due to a leading market player along with his associates failing to pay the additional margin to their financiers, said a broker.

Under margin trading, if the borrower of the funds fails to bring additional margin, the financier can sell the shares (against which they financed) in the market.

According to a dealer at a top broking firm, apart from private financiers, some private sector and foreign banks had also sold the shares of these players. Some of the stocks that saw heavy selling included NIIT, Polaris Software, Satyam Computer, Zee Telefilms and some mid-cap stocks such as Rolta, Aftek Infosys, Hinduja TMT, United Phosphorous and Geometric Software.

Dealers said heavy selling in these shares also had an impact on the other index and non-index stocks as these players sold shares in order to meet their obligations to margin financiers.

Due to the financial crisis, around dozen Kolkata brokers have also been affected. They received around Rs 10 crore, out of the Rs 50 crore owed to them till Friday. According to a Kolkata broker, there has been a commitment that the remaining amount would also be paid by next week.

On the on-going concern over the payment problems, the BSE in a statement said, "all pay-in obligations have been completed by member-brokers of the exchange and all pay-out have been declared by the exchange as per the schedule till date". The exchange further stated that all margin obligations, including mark-to-market margins, have been collected from the member-brokers on time by the exchange till date. Settlement on the NSE had been also gone through without any problem.

A Kolkata Stock Exchange official also confirmed that all the pay-in and pay-out on the exchange had been completed. "One can hope that pay-in and pay-out due on Monday, Tuesday and Wednesday will be through without any hitch".

There are talks in the market that these players have been able to come out of the financial problem with a leading NBFC and a foreign bank financing them.

Under the margin trading, market players borrow money either through private financiers, mainly NBFC or banks. For private financiers, margin money varies between 20 and 35 per cent per annum. Since the margin trading norms prescribed by RBI for banks are not very broker-friendly, most market players prefer to borrow money from NBFCs.

Market sources said that even though the quantum of funds involved in this market could be ascertained, it was believed around Rs 300 crore was being circulated in the market.

Many top broking firms in Mumbai and Kolkata are believed to be using this route to fund their clients. This facility was available for retail investors, said a broker. There are some Kolkata financiers who also finance Mumbai brokers.

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