capital market behaviour
TRANSCRIPT
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The Questions?
1. What is Capital Market – Importance,
2. What is Capital Market Behaviour (CMB) ? Is CMB and Behavioural Finance are
one and the same or they are different?
3. Capital Market behavior in India – 1977 to 1992?a) Valuation of Stocks, Bonds, Convertible Debentures and Market for Debt
b) Market Efficiency
c) Dividends, Bonus & Rights Issue
4. Securities Scam of 1992 - Harshad Mehta, Ketan Parag Scam – 1999 - 2000
5. Dotcom crisis - 2000 - 2002
6. Global Financial Crisis – 2007 - 12
7. Commodity crisis - 2015
8. Research Capital Market in India?
9. What Ails the Indian Capital Market?
10. Liberalisation and Stock Market?
11. Conclusion
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What is Financial System?• The economic development of a nation reflected by the progress of the
following economic units
Corporate Government House holds
• Performing their activities - a surplus/ deficit/ balanced budgetary
situation
• Functions as an intermediary and facilitates the flow of funds from
the areas of surplus to the areas of deficit.
• It is a composition of various institutions, markets, regulations and
laws, practices, money manager, analysts, transactions, claims &
liabilities.
POST – OFFICE SAVINGS
GUARANTEED RETURN INVESTMENT
FIXED DEPOSIT
INVESTMENT OPPORTUNITIES
NON - GUARANTEED RETURN INVESTMENT
PROVIDENT FUND
PPF
EQUITY GOLD ULIPCOMMODITY REAL ESTATE
MUTUAL FUND
Stock Market
Diversified Equity Fund
Sectoral Equity Fund
MUTUAL FUND
MUTUAL FUND
Physical Form
Stock Market
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Money marketInstrument
Capital MarketInstrument
Hybrid Instrument
Stock Exchange
Investment bankers
Under Writers
Registrars, Depositories, Custodians
Mutual Funds
Portfolio Managers
Money
Market
Capital
Market
Hybrid
Market
Financial Assets/
Instruments
Financial
Markets
Financial Intermediaries
Financial System
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Seekers of funds
(Mainly business
firms and government)
Suppliers of funds
(Mainly households)
Flow of Financial Services
Income and Financial claims
Flow of funds (Savings)
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What is a Financial Market?
• A market in which financial assets are created or transferred.
• Types of Financial Markets
– Money Market – Whole sale debt market for low risk, highly liquid
short term instrument. Funds available from a single day up to a year.
– Capital Market – Long term (more than one year) financial investment
– Forex Market – Multi currency requirement
– Credit Market – Banks, FI and NBFC short, Medium and Long term
loans to corporate and Individuals
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Capital market Instruments
Equity Segment Debt Segment
1. Equity Shares
2. Preference Shares – no voting rights
3. Convertible Preference Shares
4. Non - Convertible Preference Shares
5. Non – Participating Preference
Shares
6. Cumulative Preference Shares
7. Non Cumulative Preference Shares
1. Debentures
2. Convertible Debentures
3. Non - Convertible
Debentures
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What is Stock Market?
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Capital Market Behavior –
Injection of large amount of
liquid funds in the Market –
Securities Scam
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The Securities Scam – 1992 - (Harshad Mehta)
• Harshad Mehta – A dispatch Clerk in the New India Insurance
Company. Developed interest in the Stock Market and become
a leading broker in the Bombay Stock Exchange.
• Lived like a movie star – 15000 sq.ft houses, Swimming pool,
golf ground and fleet of foreign cars.
• The scam rocked the nation, rattled the markets and triggered
a series of reforms in the stock market.
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• Longest case – 24 yrs. Cases against economic offences &
scams are ring fenced settled in shortest possible time in
developing countries (Ex – Raj Rajaratnam (Galleon group
hedge funds – 3 yr, Societe Generale unauthiorised trading
case – 2008 involving Jerome Kerviel – 2 yrs, Satyam
scandal – 3 yrs).
• 76 criminal cases & over 600 civil suites lodged against
Mehta Family.
• Most criminal cases dropped but civil cases continued.
• Fin. Experts say that HM “simply exploited loopholes in the
system”
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• Harshad held shares worth Rs.453 cr across 131 companies in benami
accounts (value as on June 1995 – Court submission)
• When the scam came to light the benami account holders sold their shares
and refused to cooperate with the custodian
• Total Liabilities – Rs.16,044 crore – Rs.4662 cr to various banks, Rs.11,174
cr. to IT department (interest accrued and penalties)
• As on Sept 2015, the banks were decreed (by court) to get Rs.1,688 cr, out
of which Rs.1,074 cr has already been paid (only to SBI). Others Standard
Charted and SBI Capital not paid.
• ACC shares (Rs.300 cr) & Apollo Tyres (Rs.233 cr) the custodian recovered
from Mehta Family.
• Mehta family argued that the IT department took into account the
revenues of HM and not his income.
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What is the Securities Scam?
• Period 1991-92 - Diversion of bank funds worth Rs.3500 cr to a
clutch of stock brokers.
• Harshad & his associates siphoned off funds from interbank
transactions and bought shares across sectors resulting in a
stupendous rise in sensex to surge over 4500 points.
• Stocks like ACC surged from Rs.200 per share to Rs.9000
during this period.
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• The tool used Ready Forward Deals (RFD) between banks.
• An RFD is a secured 15 day-loan from one bank to another.
The lending is done against government securities.
• The lending is done against government securities.
• The borrowing bank actually sells the securities to the lending
bank and buys them back at tenure, at a slightly higher price.
• The normal settlement process in G-Securities is that the
transacting banks make payments to each other and effect
delivery of securities.
How they carried out the Scam?
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• In the scam, the delivery of securities and payments were made
through a set brokers. Here, only the broker would know the
parties on either side.
• The brokers perfected the method and started trading on their
own account. They pretended to be undertaking the
transactions on behalf of a bank to maintain a facade (cover
up) of legality.
• The brokers also used Bank Receipts (BRs) in lieu of securities
that were traded. So in real terms, securities did not change
hands, but only Bank receipts did. A BR is also treated as a
receipts for money received from the buyer of securities.
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• The Brokers colluded with a couple of banks (Bank of Karad
and Metropolitan Co-op Bank) which issued fake BRs – Ones
with out any security backing.
• HM collected fake BRs from these banks and passed on to
other banks which paid him money under the assumption that
they were lending against securities.
• This money was then diverted to stocks. The shares were sold
at profit(thanks to pumped up markets) and the BR retired
when it was time to return money to the bank.
• HM struck such deals across banks and rolled the money at
every pay – out level.
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How he caught got?
• On April 23, 1992, journalist Sucheta Dalal in a column in
“The Times of India”, exposed the dubious ways of Harshad
Metha.
• The broker was dipping illegally into the banking system to
finance his buying.
• Once the scam was exposed, though, a lot of banks were left
holding BRs that did not have any value in the banking
system
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Capitalizing the loopholes in the
system - Ketan Parekh Scam –
1999 - 2001
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Ketan Parekh Scam – 1999 - 2001
• a former Mumbai stock broker from family of brokers -
chartered accountant by training
• Convicted in 2008, for involvement in the Indian stock market
manipulation scam (1999-2001)
• Currently debarred from trading in Indian stock exchanges
till 2017
• Trainee of HM - described as “Pied Piper of Dalal Street” -
For 2 years, market men followed his every action because all
he touched turned to gold.
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• kept a low profile, except a millennium bash he threw
attended by politicians, business magnates and film stars.
• Between 1999 - 2000, as the technology bubble was engulfing
the rest of the world, the stk.mkt. in India also sprang to life.
• Formed a network of brokers - Identified & targeted 10
stocks (K-10 stock, KP Index)
• Zee telefilms (Rs. 127 to Rs. 2330) Himachal futuristic (Rs. 194 to Rs.2553)
Aftek Infosys
DSQ Software
Global Tele systems
Himachal Futuristic Communications
Penta Media Graphics
Satyam Computers
Silver Line Technology
SSI Zee Tele Films Pritish Nandy Communications
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How they did it?
• Simple borrowing mechanism - Badla System – Indigenous
carry-forward system invented on Bombay Stock Exchange.
• The process of buying stocks with borrowed money. Example
- you buy 1,000 shares of Infosys at Rs 3,500, = Rs 35 lakh.
Instead of paying cash, you can ask your broker to find a
borrower to finance your trade.
• Interest rate for borrowing determined by the demand for
that stock under badla trading. Higher the demand for
Infosys under badla higher will be the interest rate.
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• Borrowing can be unpaid for a maximum of 70 days, after
which need to be paid back to the badla financier through
the exchange.
• When stock prices were high, they were pledged with
banks as collateral. No problems as long prices were rising
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How KP manipulated the Stock Market?
• KP did not have the money to buy large stakes (Rs.750 mn. July
1999 - Global - Rs 200 mn.,Aftek - Rs 50 mn., Zee and HFCL - Rs 500 mn)
• KP used bank and promoter funds to rig the markets.
• He bought shares when they were trading at low prices and
saw the prices go up in the bull market while continuously
trading. When the price was high enough, he pledged the
shares with banks as collateral for funds. He also borrowed
from companies like HFCL.
• KP & his associates started tapping MMCB (Madhavapura
Mercantile Cooperative Bank a small Ahmedabad-based bank,) for funds in
early 2000.
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Pay order fraud (A bank issues a pay order after it is clear that the
customer's account has sufficient funds)
– In Dec. 2000, when KP faced liquidity problems in settlements he used
MMCB in two different ways.
– First, the pay order route, wherein KP issued cheques drawn on BoI to
MMCB, against which MMCB issued pay orders. The pay orders were
discounted at BoI, SBI, and PNB.
– MMCB issued funds to KP without proper collateral security and even
crossed its capital market exposure limits (As per a RBI inspection
report - MMCB's loans to stock markets limit - around Rs 10 bn., out of
which over Rs 8 bn. lent to KP and his firms.
– Another Bank that crossed its prescribed limit to issue loans to KP is
Global Trust Bank (GTB)
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• Second, borrowing from a MMCB Mumbai branch (Mandvi)
through 16 accounts KP and his associates had in this branch -
Few brokers also took loans on behalf of KP.
• Vinit Parikh (MMCB Chairman Ramesh Parikh’s son) acted
on behalf of KP to borrow funds.
• Madhur Capital (KP owned) used his BoI accounts to discount
248 pay orders worth about Rs 24 billion between Jan – Mar,
2001. BoI's losses eventually amounted to well above Rs 1.2
billion.
• The MMCB pay order issue hit several public sector banks
(SBI,BOI, PNB) all of them lost huge amounts in the scam.
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• KP's modus operandi worked well as long as the share prices
were rising, but reversed when markets crashed in March
2000 due to fall in NASDAQ, saw K-10 stocks declining.
• KP has to either pledge more shares as collateral or return
some of the borrowed money. Either case, pressure on his
financials.
• By April 2000, mutual funds substantially reduced their
exposure in the K-10 stocks.
• May - June 2000, Sensex declined by 23%, NASDAQ - 36%,
the K-10 - 67%.
What went wrong?
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• K-10 stocks picked up in May 2000 global technology (Rs
1,153), HFCL (Rs 790 to Rs 1,353), Aftek Infosys (> Rs 1000)
• December 2000, the NASDAQ crashed again and technology
stocks took the hardest beating ever in the US.
• Doubts regarding the future of technology stocks, prices
started falling across the globe and mutual funds and brokers
began selling them.
• KP began to have liquidity problems and lost a lot of money
during that period.
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• KP's stocks eventually led to payment problems in the
markets. The Calcutta Stock Exchange's (CSE) payment crisis
was one of the biggest setbacks for KP. The CSE was critical
for KP's operation due to three reasons.
1. the lack of regulations and surveillance on the bourse allowed
a highly illegal and volatile badla business
2. CSE had 3rd highest volumes in the country after NSE & BSE.
3. CSE helped KP to cover his operations from his rivals in
Mumbai. Brokers at CSE used to buy shares at KP's behest.
Though officially the scrips were in the brokers' names,
unofficially KP held them.
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• KP used to cover any losses that occurred due to price
shortfall of the scrips & paid a 2.5% weekly interest to the
brokers.
• Feb 2001, the scrips held by KP's brokers at CSE reduced to
an estimated Rs 6-7 bn. from their initial worth of Rs 12 bn.
• The situation worsened as KP's badla payments of Rs 5-6
billion were not honored on time for the settlement and about
70 CSE brokers, including the top three brokers of the CSE
(Dinesh Singhania, Sanjay Khemani and Ashok Podar)
defaulted on their payments.
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• Mid-March 2001, the value of stocks held by CSE brokers
went down further to around Rs 2.5-3 billion. The CSE
brokers started pressurizing KP for payments.
• KP again turned to MMCB to get loans. The outflow of funds
from MMCB had increased considerably form January 2001.
• Earlier loans against proper collateral and with adequate
documentation, this time without any security.
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SEBI’s control measures put a check on KPs operations
• An addl. 10% deposit margin was imposed on outstanding
net sales in the stock markets.
• limit for application of the additional volatility margins was
lowered from 80% to 60%.
• To revive the markets, SEBI imposed restriction on short
sales and ordered sale of shares had to be followed by
deliveries.
• It suspended all the broker member directors of BSE's
governing board.
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• SEBI also banned trading by all stock exchange presidents,
vice-presidents and treasurers.
• A historical decision to ban the badla system in the country
was taken, effective from July 2001,
• a rolling settlement system for 200 Group A shares was
introduced on the BSE.
• SEBI allowed banks for collateralized lending only through
BSE and NSE
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How he got caught?
• Stock market crash of 2000 – Nasdaq Crashed.
• IT department found discrepancies in sources of funds of KP
• Routine market surveillance of 5 stocks.
• RBI started inspecting accounts and sub-accounts twice a year
in spite of once in two year.
• One of the biggest Fall in BSE -700 points
• Bank of India’s complaint of bouncing of 1.3 billion pay
orders issued to the broker by Madhavpura Mercantile
Cooperative Bank
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Aftermath of the scam
• Parekh was arrested on March 30, 2001. In custody for 53
days.
• The trading cycle was now reduced from one week to one day..
Forward trading was formally introduced in the form of
exchange-traded derivatives to ensure a well-regulated futures
market.
• Investigations by SEBI and CBI reveal that sheer magnitude of
money moved by Parekh was a staggering 64 billion• Defrauding Bank of India $20mn.• Bank of India and Global Trust Bank merger failed.
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Benefits of the scam
• The market crashed but ended up pushing much-needed
modernisation
• It's perhaps thanks to the Pentafour Bull that India's stock
markets are today considered safe
• And to his credit, Parekh forced lethargic policy-makers to
institute reforms in the financial system.
• many gaping loopholes in the market were plugged
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Dotcom crisis (March 11, 2000 to October 9, 2002)
• The two important crises crippled the liquidity of the stock markets of many
countries in the World are Dotcom crisis and Sub-prime crisis
• The dotcom crisis, wiped off $5 tn of investors wealth.
• dwindled internet and technology related IPOs (from 457 in 1999 to 76 in
2001) and
• ruined 78 per cent (from 5047 fell to 1114) of the value of NASDAQ
Composite.
• The total global losses from Sub-prime crisis, also known as the World
Financial Crisis could be as large as US $ 15tn (Mark Adelson former Chief
Credit officer of Standard and Poor whose guidance helped set the stage for
unprecedented downgrade of US Debt.)
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Global Financial Crisis (sub-prime crisis) - 2007-12
• In US - Easy availability of credit + large inflows of foreign
funds (after Russian debt crisis,1998 & Asian financial crisis,
1997) led to housing construction boom & facilitated debt-
financed consumer spending.
• Lax lending standards and rising real estate prices also
contributed to the real estate bubble.
• Loans of various types (mortgage, credit card & auto) were
easy to obtain and consumers assumed an unprecedented debt
load.
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• New financial innovative products (mortgage-backed
securities (MBS) & collateralized debt obligations (CDO)
increased. As a result investors around the world invested
in US housing market.
• As housing prices declined, major global financial
institutions that had borrowed and invested heavily in
subprime MBS reported significant losses.
• Lehman Brothers, Merrill Lynch, AIG, Freddie Mac,
Fannie Mae, HBOS, Royal Bank of Scotland, Bradford &
Bingley, Fortis, Hypo and Alliance & Leicester
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Adverse Economic effects of the Housing Crisis
• The RGDP decreased at an annual rate of approximately 6%
in the 4th qtr of 2008 & 1st qtr of 2009,
• Unemployment rate increased to 10.2% by Oct. 2009, the
highest rate since 1983 and roughly twice the pre-crisis rate.
• The average hours per workweek declined to 33 (the lowest
level since the government began collecting the data in 1964.)
• The foreclosure epidemic that began in late 2006 in US and
only reduced to historical levels in early 2014 drained
significant wealth from consumers, losing up to $4.2 tn. in
wealth from home equity.
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• Questions regarding bank solvency, decline in credit
availability and damaged investor confidence had an impact
on global stock markets,
• Securities suffered huge losses (US$14.5 trillion or 33 per cent
of the value of the world’s companies have been wiped out by
the crisis (Bloomberg) during late 2008 and early 2009.
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Commodity Crisis - 2015
• Prices of commodities from crude oil to industrial metals
(aluminum, steel, copper, platinum, and palladium (lustrous
silvery-white metal) have collapsed
• Crude oil crumbled below $37/ barrel first time since Feb. 2009.
• Bloomberg Commodity Index, which tracks a wide swath of
raw materials, plummeted to its weakest level since June 1999.
• De Beers (mining giant) suspending its dividend and selling off
60% of its assets, which could lead to a reduction of 85,000 jobs.
• Dow falling over 200 points - raising concerns about the state
of the global economy.
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• In the U.S., roughly 123,000 jobs have disappeared from the
mining sector, which includes oil and energy workers, since
the end of 2014 (US Govt.) statistics.
• Financial trouble for commodity companies have already
lifted global corporate defaults to the highest level since 2009
(Standard & Poor's Ratings Services).
• U.S. manufacturing activity contracted in Nov. 2015 first
time in 3 years.
• The S&P 500 energy sector has lost 23% of its value 2015.
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What is the reason for the Commodity Crisis?
• Real driver is the supply side, compared to the collapse in
demand during the Great Recession
• Cheap borrowing costs, inability to predict China's slowdown
led producers to expand too much in recent years. Now
flooding the market with too much supply.
• Continues underperformance of the European economy.
Europe is the market for many countries
• China and other emerging markets (Brazil) have slowed
dramatically in recent quarters, lowering their demand for
steel, iron ore and crude oil.
• That means more plant closure and announcements like the
one announced by Anglo American.
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Some positive developments in the Indian Financial sector
• Positive development that made a large section of the people to
presume that the Indian financial market is well integrated with the
global financial market.
– Establishment of Securities and Exchange Board of India (SEBI) in
1988,
– the Structural Adjustment Programmes (SAPS) in 1991
– implementation of the recommendations of the Narasimham
Committee Report on Financial Systems in 1992
– the removal of capital controls,
– the financial innovation and technological advancement in
communications and trading systems presumption
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