Bloodbath on Dalal Street

The 30 scrip sensitive index witnessed a historic fall on Thursday amid massive selling by foreign funds as also local operators losing an unprecedented 826 points (6.77 per cent) over the previous closing to end at 11,391 levels.

There was blood all over Dalal Street with only four of the top 500 shares managing to avoid battering.The market has thus crashed in two of the last four trading sessions perhaps indicating the three-year bull-run may be coming to an end.

It was the biggest-ever fall in absolute terms (i.e. in terms of points) though not in percentage terms. In April 1992, the market had tanked by 12.77 per cent – the biggest fall ever in terms of percentage though the sensex had dropped only 570 points as the value of sensex in those days was small.
Brokers attributed Thursday’s fall to the global meltdown and confusion over the proposal of the Central Board of Direct Taxes to impose higher tax on foreign institutional investors. As per one version, the foreign funds may need to pay tax at about 40 per cent if they are treated as traders. Currently, they are being treated as short-term players and paying 10 per cent as short-term capital gains tax.

The draft guidelines issued by the CBDT give 15 conditions to assessing officers to determine whether one is stock trader or investor. The CBDT has invited comments from all the stakeholders before May 25 on the draft guidelines. Given that FIIs are big players on the Indian markets, operators were apprehensive about a possible FII response to the government move and pressed sales. The foreign funds themselves also have reportedly made huge sales. In fact, they have been net sellers for the past four trading sessions in a row.

A look at the data made available by SEBI reveals that the FIIs were net sellers (selling being more than purchases) to the extent of Rs 2,900 crore between May 11 and 17. Whereas, domestic mutual funds were net buyers (buying being more than selling) worth Rs 1,600 crore.

Thus, the selling by foreign funds could not be absorbed by the buying effected by domestic funds resulting in bearish trend. The FIIs buying/selling figures for Thursday were not available. But it is believed the FIIs pressed heavy selling on Thursday.

Mr Umesh Kamath, Fund Manager, Canbank Mutual Fund, said the market is at 12,000 levels and so the fall is sharper. The sensex had gone up from 9,000 to 12,000 levels without any meaningful correction. He, however, felt the 11,300 levels could get support.

At the time of Demat scam, the market had gone down to 11,344 levels from which point it had bounced back. Similarly, last week it had gone down to 11,374 levels before getting support.

However, if these levels fail to get support, the sensex could go down to 10,800 levels.

According to Mr Kamath, any clarification from the CBDT about the tax treatment of FII gains would help market recover. As it is the sensex has already undergone a correction of over 1,300 points and thus expected to look up from present levels.

When asked which sectors have fallen the most, Mr Kamath said all sectors have gone down. He pointed out that barely two weeks ago, the market was bullish about cement and steel. However, they have been proved to be the worst performers now.

When asked as to how small investors should look at Thursday’s crash, he said investors should not go for overexposure to the equity market nor should they be underinvested in shares. They should take a medium to long term view and the exposure to various asset classes like shares, gold, real estate and cash should be properly balanced.

A look at the BSE indices table reveals that all the 18 indices closed in the red. BSE Metal index was the worst performer losing 1180 points or 11.37 per cent to close at 9199. Consumer durable index lost 8.24 per cent . Auto, capital goods, oil and gas also suffered heavy losses.

BSE IT that tracks shares belonging to the information technology sector lost 5.34 per cent. The advancedecline ratio was hugely negative with 2241 shares declining and only 288 shares gaining during the day on the Bombay stock exchange. Among the biggest losers were ACC (12 per cent), Hindalco (11.97 per cent), Tata Steel (10.91 per cent) etc. Reliance Energy, Maruti Motors, Gujarat Ambuja Cement also suffered huge damage. Despite the massive fall, the volume of trading was not very high with BSE recording turnover of Rs 4,862 crore and NSE Rs 10,593 crore in the cash segment.

The more broadbased Nifty index computed by NSE lost 6.77 per cent or 246 points to close at 3388 levels.