By Brian Carvalho

Let's start with the bloodbath. An erosion of almost Rs 1.5 lakh crore in market capitalisation and a loss of 700 points in the Bombay Stock Exchange (BSE) Sensex in just eight days. A 900-point gyration in the 30-share index in one single trading day (on March 13), the wildest in the bourse's 125-year history. The Calcutta Stock Exchange is still sitting on a default time-bomb. That there isn't a full-blown payments crisis there is thanks largely to the intervention of a cash-rich former broker and a decision to stagger the payments due. All the broker directors on the Bombay Stock Exchange are suspended by the Securities & Exchange Board of India for alleged insider trading. The head of surveillance at the BSE is shunted. Meantime, the Ahmedabad Stock Exchange executive director puts in his papers. The UTI Bank-Global Trust Bank merger lands on the rocks. A cooperative bank in Ahmedabad faces a run on its deposits. And, yes, big bull Ketan Parekh's horns are clipped, finally.

Now for the dawn that's emerged as the bourses burned down. You probably won't see a broker on the governing boards of stock exchanges anymore. If a broker does make it as president, vice-president, or treasurer, thanks to the code of ethics put in place by SEBI, these officials will not be allowed to trade in shares. Rolling settlements-which ensure that the settlement takes place five days after trading-will now be made compulsory in 200 mainline scrips. Inordinate speculation, or rather rampant manipulation, will be curbed. But, most significant, the cosy brokers' club has been disbanded.

Indeed, the upheaval that hit Dalal Street last fortnight makes a mockery of the BSE's avowed Mission 2001: Technology-Savvy, Investor-Friendly, Global Exchange. So it said. You have to wonder why the Dirty Tricks Department doesn't get a mention.

Did the BSE say investor-friendly? Why then, for over two years, was Ketan Parekh given a free hand to manipulate share prices and take them up to unrealistic levels, which in turn spurred hundreds of 'mini-KPs'-as they're known on the Calcutta exchange-to join the party? Why was the BSE President Anand Rathi calling up the surveillance department of the exchange to inquire about operator positions in KP stocks-HFCL, Zee Global and DSQ-when he had no business doing so? And was Rathi, along with his coterie of brokers, deliberately hammering down prices over the last three months in a bid to trap KP-and of course make a killing in the bargain?

Ironically, Rathi's downfall was triggered from within the exchange itself-which only highlights the bitter rivalries and unbridled ambitions that have been running riot within the 28 floors of Phiroze Jeejeebhoy Towers, otherwise known as the Bombay Stock Exchange. Spend some time within those not-so-hallowed walls and you'll probably hear brokers talking about the machinations of the Jodhpur Club, presided by none other than Rathi himself. If you know them well enough, they'll also mention 'The Nipple', none other than Executive Director A.N. Joshi. Reason for that name? He never opens his mouth, and apparently resides snugly in the president's pocket. That Rathi had to dig into the surveillance details on March 1 was only because the ED wasn't present in the exchange on that day, point out exchange sources. ''He was the conduit between the exchange and the surveillance department. He's completely sold out to the president,'' adds the source. When contacted, Rathi refused to speak to BT.

How The Gangrene Spread

Let's for a moment cross over to the Calcutta exchange, which in comparison makes the BSE look like a temple. One broker calls it the 'gangrene of the Indian markets'. Actually, it's difficult to believe that it exists. For, much of the transactions there happen directly between individuals. So the exchange receives no margin money, has no records of any transactions, and the carry-forward rates are 'unofficial' (and even carried in newspapers). So if the official rate is 12 per cent on BADLA transactions, positions in Calcutta are carried forward at 50-100 per cent higher rates. ''That's how exposures went beyond control, and brokers were forced to default,'' says a Mumbai broker. That's also how Rs 2,000 crore of BADLA finance disappeared from the Calcutta market, triggering off the possibility of a payments crisis.

That Calcutta managed to avert the crisis-or should we say postpone it?-was thanks largely to the efforts of Sevantilal Shah. Who's he? Good question. All we know is that he isn't an active broker any more. But he's rich. And he apparently stepped in with Rs 250 crore to ensure that the payments crisis did not happen on Friday 15. A temporary solution- of a staggered payment-has been proposed at the overheated counters like HFCL and DSQ. Finance has been organised to bail out the defaulting brokers and for the moment the trade guarantee fund may not be ransacked. But the question is: can players Dinesh Singhania, Harish Biyani, and Ashok Poddar keep to the payment schedule?

The defaults last fortnight were largely in the KP stocks-HFCL, DSQ, SSI, and GTB. ''The reason is the nature of the purchases made at these counters,'' says Vivek Mahajan, a former Vice-President at the CSE. What he does not say is that, in the first week of March, brokers like Singhania, Poddar, Biyani and Pramod Maheswari have repeatedly stepped in to provide support to the KP stocks without providing for adequate cover. That resulted in the first default, of Rs 96 crore, on March 8. That's when Singhania, a governing body member with a huge exposure of around Rs 40 crore in the HFCL counter, resigned from the CSE board. And Biyani, who was active on the DSQ counter along with KP, was declared a defaulter.

According to market insiders, the brokers in the KP stable-like Poddar, Biyani and Maheshwari-firmly believed that the KP magic would pull them through. But that didn't happen. That these stocks were hugely overvalued only compounded the crisis. ''The bears are being blamed for bringing the market down but the fact of the matter is the stocks that are shedding weight are doing so because they were hugely overpriced. The Rs 1,100 HFCL price in October 2000 is completely unreal and there is no reason why we should not take advantage of the situation now prevailing (by short-selling),'' says Ajay Kayan of C. Mackertich, a firm that is being probed by SEBI for bringing down the market. What we did was perfectly legal and in fact we have exposed the bubble,'' he goes on. Adds Radhakishan Damani, Chief of Damani Shares & Stock Brokers: ''You have to remember that the trigger for the selling came from the NASDAQ. After all, the NASDAQ has fallen by over 60 per cent from its peak, as against which the Dow is down by just 15 per cent.'' Damani, along with brother Gopikishan, was also investigated by SEBI as his firm's name sprung up on the taped conversation between the BSE President and the surveillance department. ''I have made it clear to SEBI that neither me nor my brother nor any of our companies and associates have shortsold shares in the current financial year,'' says R.K. Damani.

Yet, the bear cartel theory can't just be wished away. SEBI, for its part, has seen some substance in it, and zeroed in on First Global Securities, Credit Suisse First Boston, Anand Rathi, and Nirmal Bang. According to BSE insiders, if Rathi is the head of the Jodhpur Club, Bang is his second-in-command. A couple of years ago, Bang was just another sub-broker, at Suresh Rathi & Co, a broking firm owned by Anand Rathi's brother Suresh. Now Anand was a partner in that firm too. ''Since then, he's risen phenomenally and today he owns four or five BSE cards, officially,'' says an insider.

He goes on to add that since the beginning of January 1, this cartel would meet periodically and plan out their hammering strategies. The last such meeting was held immediately after Yashwant Sinha's pro-markets Budget, which propelled the Sensex by 177 points. And the effects of the hammering were on display on March 2 (a Friday), when the index lost all those gains.

Where The Bears Crossed The Line

Of course, as Kayan points out, the bears were justified in hammering stock that they perceived to be overvalued. But where Rathi crossed the line was when he dialled up surveillance for sensitive details of operators' long and short positions in the so-called momentum stocks. What's more, it's the modus operandi of the cartel that begs investigation. Sources reveal that the bears not only shortsold huge quantities of shares, but also managed to deliver them. How?

By borrowing from custodians, in this case mainly from the Stock Holding Corporation of India (SHCIL), the custodian for the Unit Trust of India. Here's how it worked. The bear cartel first shortsold a huge chunk of HFCL, Zee and Global Tele stock. They then borrowed these shares after paying by cheque plus 20 per cent in margin money. This can't be confirmed, but apparently 1 crore shares of Zee at Rs 250, and 1 crore shares of HFCL at Rs 800, totally worth Rs 1,050 crore, were shortsold and then borrowed.

Five days before settlement, the bears delivered these shares in the market. So not only have the bears not covered their positions but they've delivered the borrowed stock, resulting in huge liquidity in the market. Naturally, with no buyers present, the price of these stocks plummeted, and the bull in those shares-read KP-is stranded. It doesn't end there.

The money received at pay-out after giving delivery was used to buy up more of that stock at lower prices. After all, those shares have got to be returned to the borrower. But the bears by then have made a neat killing, and that sum is used to borrow more shares and repeat the exercise. Thus, at an investment of just a 20 per cent margin, the bears were actually raking in returns that were much higher than the value of the securities they borrowed. For, the prices of those stocks had fallen by more than half-Zee, for instance, had come down to Rs 100 levels. Unconfirmed reports suggest that the bear cartel raked in over Rs 3,000 crore in this manner since January 1.

How many retail investors have been hit is anybody's guess, but it's clear that the Big Bull's magic is over, for now. His famous K-10 index-which punters swore by-is a burnt-out case, with some of those stocks plummeting by as much as 90 per cent since their peaks early last year. Zee, for instance, had climbed to 2,330 last February, Himachal to Rs 2,553 and Global to Rs 3,550. Hold on, was the market buzz, the ride's not yet over. Global, for instance, was expected to touch Rs 5,000. As on March 14, HFCL had dropped to the Rs 194 range, Global around Rs 180 and Zee Rs 127. Then there's another KP favourite, DSQ, which KP took to Rs 2,820. The price as on March 14? Rs 127. Of course, whilst bear hammering did play its part, the trigger did come from NASDAQ's disenchantment with tech stocks. That the bears could indulge in such an operation was possible only because the overall trend was down. For, if prices of the stock borrowed by them had to go up, the bears themselves would have been trapped by the ballooning high margin rates they would have had to pay the stock lenders.

That the erosion in his favourite scrips resulted in a funds crunch for KP is amply evident in the woes of the banks that lent to him. The Ahmedabad-based Madhavpur Cooperative Bank, which is rumoured to be controlled by KP himself, faced a run on its deposits because the bull was not able to pay back his borrowings. As a result, the bank had little option but to sell the shares it held as collateral, adding further fuel to the hammering the KP stocks were anyway receiving.

So now you know where KP was getting his funds from. There's Global Trust Bank (GTB), too, which lent a chunk of its Rs 500-odd crore exposure in the capital markets to KP and his myriad companies. GTB officials have claimed that it demands a 133 per cent collateral for financing pay-ins. This obviously meant that there was plenty of pressure on KP to meet those collateral norms, which are fixed as a percentage of the shares' market value, when prices were falling. The bank, for its part, too would like to cut its losses by selling the collateral, although GTB officials have denied this.

KP may emerge unscathed if his borrowings from GTB are investigated. Since, although the figure may be over the RBI-stipulated 20 per cent of the bank's net worth (which is Rs 550 crore), the individual exposures of all his associate companies might just about meet those norms. But where SEBI has been able to dig up dirt on KP is in his involvement in the rigging of the GTB scrip prior to the merger deal with UTI Bank, in an obvious bid to improve the swap ratio. In mid-October, the GTB stock spurted from Rs 70 to Rs 113 in less than three weeks, which marketmen in Hyderabad attribute to KP's backing. And by December it shot up to Rs 120, with Parekh's companies being the major traders.

Whilst the banks were one major source of funds for Parekh, marketmen don't rule out his collusion with managements in order to raise their stock prices. Here's how that works. Some promoters would immobilise a part of their shareholding by placing it in KP's hands, thereby giving him a safety net in case he burned his fingers when rigging prices. And when KP's around, volumes are usually huge. For instance, 1 crore shares of HFCL at Rs 1,500 was par for the course for KP. Now, even if he took delivery of just 5 per cent of those shares, we're still talking huge volumes here. ''It's the critical mass that gave him the ability to swing volumes,'' says a broker.

That's also why the foreign institutional investors and mutual funds cottoned onto the KP stocks, because the swings are the widest here, enabling them to make big money. ''Amidst all this, one question that has to be asked is why were the mutual funds taking cues from KP,'' asks Rajesh Jain, Director & CEO of Pranav Securities. Indeed, the portfolios of most mutual funds, right from the UTI, more or less mirror the K-10 index. One answer to Jain's question: The funds have been under tremendous pressure to outperform and shore up their net asset values. After the massacre on Dalal Street last fortnight, those NAVS don't make a pretty sight; the NAVS of roughly 50-odd funds have fallen below par.

Continuing 

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