Small stocks crash on margin call triggers

Margin funding, used by top traders for leverage play in stock markets, has come under a cloud once again. Brokers in Kolkata and Delhi today offloaded huge positions in select stocks held by some operators who were under the regulatory scanner. This had a domino effect on several small- and mid-cap counters, leading to a crash in their prices. Many stocks, including Tulip Telecom, Pipavav Defence and Parsvnath Developers, crashed 20-40 per cent intra-day. The small- and mid-cap indices on the Bombay Stock Exchange (BSE) fell two per cent each, while the benchmark Sensex slid 1.2 per cent.

Traders are under stress after the market regulator Securities and Exchange Board of India (Sebi) tightened norms for derivatives and 51 of the 210 stocks are being moved out of the segment. As a result, margin financiers have been calling for more collateral for the past two days. Also, there were rumours of another report from the Intelligence Bureau naming more operators and instructions from the home ministry to crack down on hawala traders.

Margin financing refers to off-market deals where brokers ideally extend funds to traders for further speculation — mostly cash deals struck in the backroom — by keeping their other shares as collateral Thus, operators can’t provide cash in emergency or panic situations, brokers offload these shares. “Confidence and stability in markets will suffer till margin funding positions are made public,” said Deven Choksey, MD, K R Choksey Shares and Securities.

DOMINO EFFECT
Price on BSE	July 26	Intra-day fall (%) #	% chg*
Tulip Telecom	88.05	-44.81	-25.98
Era Infra Engineering	114.90	-19.99	-19.99
Pipavav Defence	62.15	-19.96	-19.96
Parsvnath Developers	46.25	-19.91	-19.91
Subex	19.75	-19.18	-18.56
Everonn Education	145.80	-19.78	-13.96
*Over previous close; # % change of days low and previous close Compiled by BS Research Bureau

Interestingly, Tulip Telecom, which was excluded from the F&O segment in February, has no circuit filters on the National Stock Exchange. Others that were removed from F&O, like KS Oil and Kingfisher Airlines, have 20 per cent circuit filters. While the BSE website showed 20 per cent and 60 per cent as upper and lower circuits, respectively, for Tulip, end of the day bulletin showed it had a 20 per cent lower circuit limit. Going by the bulletin, today’s fall indicates the circuit filter didn’t get triggered. Exchange officials were not available for comment.