Mid-cap shares tumble on margin calls

Small- and mid-cap F&O stocks crash 7-20% as known market operators exit counters

Margin calls returned to haunt Dalal Street traders today after a gap, as a sharp fall in some stocks had a rub-off effect on mid- and small-cap shares, too. What started as an innocuous round of profit booking in mid- and small-cap shares snowballed into an aggressive sell-off mid-way through the session, with stock brokers calling clients for more deposits in futures and squaring off the positions of those who could not bring more money.

Brokers raise margin calls when the value of clients’ positions bought through borrowed money falls below the trigger point. Then, the client has to deposit additional money.

In addition to mid- and small-cap shares, stocks such as Reliance Communications (RCom), HDIL and IVRCL Infra saw steep falls in their values.

“It was nothing short of a mini-bloodbath for the mid-cap stocks. The fall started with the high-beta and interest-rate sensitive stocks, which had a cascading effect on the entire mid-cap pack,” said Yogesh Radke, head of quantitative research at Edelweiss.

The BSE mid-cap index fell 176.63 points, or 2.51 per cent to 6,848.68. The BSE small-cap index declined 176.94, or 2.44 per cent to 7,069.84.

Both indices fell the most since February 27, 2012. Meanwhile, the benchmark Sensex fell just 0.51 per cent, to end at 19,923.78.

RCom, enjoying a bull run this month on news of a mega-crore deal to sell stake in either its telecom tower network or that of subsidiary Flag Telecom, fell nine per cent. Officials with the Anil Ambani group told Business Standard such talk was baseless.

Siddharth Bhamre, head of derivatives at Angel Broking, said, “Investor sentiment worsened due to heavy selling in counters like HDIL and IVRCL. Smart traders took advantage of the situation and short-sold the stocks further.”

Infrastructure firm IVRCL tumbled 20 per cent on reports that the death of a consultant, who was overseeing a road project of the company, would trigger investigations against company officials. The sell-off in IVRCL had a rub-off effect on other stocks in the sector, including IRB, Punj Lloyd and Jain Irrigation.

“The drama of derivative roll-over has just begun. Stability will return to the market after expiry of the January series, which was a long month. While individual stocks have crashed, Nifty traders should be cautious in the coming days,” said Kishor Ostwal, managing director of CNI Global Research.

Of the 250 stocks in the mid-cap index 210 ended with losses, while on the small-cap index 421 out of the 515 stocks closed lower. In other words, there were over six stocks that fell for every one stock that gained.

“There are clear signs of caution and fear among the long holders. The Nifty has seen hardly any addition of open interest since expiry and even the Nifty futures premium has come down from 50 to just four in spite of one week remaining for expiry,” said Radke.

“A lot of weaker hands who had missed the market rally, had built positions in the mid-cap stocks. These stocks had become long-heavy as a result of positions from investors who had missed out on the rally. These weaker hands are again exiting their positions after today’s correction,” said Bhamre.