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Tuesday, May 23, 2006

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Biggest crash in stock market

Oommen A. Ninan

Black Monday repeats as Sensex falls by 1111.70 points; partial recovery later

— Photo: Arunangsu Roy Chowdhury

WRIT LARGE ON FACES: The expression of the turmoil in stock markets is vivid on the faces of share traders at a share trading house in Kolkata on Monday.

MUMBAI: The Indian stock market recorded its sharpest-ever fall in prices on a single day on Monday, though by the close of the day's trading, it partly recovered lost ground. The recovery was aided by official assurances on the health of the economy and Indian companies and the reliability of the market regulatory system.

Even as the stocks plummeted, spreading nervousness everywhere, the authorities suspended trading for an hour, after which the stock prices started recovering.

The worst-ever slump in the 30-share Sensitive Index (Sensex, which reflects the market prices of front-ranking companies) saw the index fall by 1,111.70 points in the course of the day, though it recovered later by 654 points to close with a loss of 457 points. The day's slump in the market came on top of a sharp fall recorded last weekend in tune with the trends in the world's gold, metals and stock markets.

Apart from global trends impacting India's capital market, which has opened itself since 1991 to the flow of foreign institutional funds in an increasingly integrating world economy, a circular issued by the Central Board of Direct Taxes with possible implications on taxation of market players, domestic or foreign, caused the stock plunge, say market observers.

The market crisis coincided with the second anniversary of the UPA Government, whose ascent to power was similarly accompanied by nervous selling and a price slump, only to be reversed within days. Since then, the Bombay Stock Exchange's Sensex has crossed new milestones of successive thousands with increasing frequency.

The Finance Minister attempted to bolster investors' confidence, saying brokers came under margin pressure and that enough money was available to meet margin calls. After the fall of more than 1,000 points around noon, many large caps stocks looked undervalued and some buying interest came back into the market as margin calls worked their way through the system. The market recovered by 654 points to close at 10,481.77 with a loss of 456.84 points from its previous close of 10,938.61. The Sensex touched a low of 9,826.91 intraday and a high of 11,142.90 at the opening of the trade in the morning.

Another major Index, Nifty, closed at 3,081.35 posting a decline of 166 points.

The Reserve Bank of India (RBI) too came to the rescue of the market, allaying fears of a liquidity crunch. "In the light of the developments in the stock exchanges, the RBI has been in touch with major settlement banks and both major stock exchanges to ensure that the payment obligations on the exchanges are met smoothly. Banks can get in touch with the Reserve Bank for any liquidity assistance," it stated.

Another significant impact of the fall is the impact on corporate raising of funds. Market expects some pressure on valuations of Initial Public Offerings (IPOs) to adjust to the market fall, even though there is considerable interest in many good growth stories. A longer drawn-out fall would have appeared as a bear phase and softened investor interest in what remains a very exciting growth market.

Last Thursday, the Sensex shed 826.38 points, the previous biggest fall in the history of Indian stock markets while it lost 887.36 points intraday. Another biggest fall experienced was on May 17, 2004, when the Sensex lost as much as 842 points in the intraday trade.

On May 17, 2004 the Sensex dropped by 565 points at the close, its third biggest fall ever, following the formation of UPA Government. The biggest ever fall recorded before was on April 28, 1992 when the Sensex lost 570 points following the emergence of the Harshad Mehta-led securities scam. On May 15, last Monday, the Sensex lost 462.91 points on global meltdown of metal prices.

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