Markets have bottomed but aftershocks to continue

Markets went crazy on Friday the 13th and we had a reversal which is unparalleled in recent times. The benchmark indices hit the lower circuit of 10 per cent and on reopening, they fell further briefly before they recovered not only the losses of 10 per cent of the morning but closed in positive territory by about 4 per cent. Such volatility is sure to increase the health bills of many a senior citizen.

BSESENSEX lost 3,473.14 points or 9.24 per cent to close at 34,103.48 points. NIFTY lost 1,034.25 points or 9.41 per cent to close at 9,955.20 points. The broader indices like the BSE100, BSE200 and BSE500 closed with losses of 9.55, 9.65 and 9.85 per cent, respectively. BSEMIDCAP lost 11.17 per cent and BSESMALLCAP lost 11.77 per cent.

BSESENSEX on Friday the 13th, hit a low of 29,389 points before recovering to hit a high of 34,769 points and closing at 34,103 points, a net daily gain of 1,325 points. NIFTY hit a low of 8,555 points after which it touched a high of 10,159 and closed at 9,955 points, a gain of 365 points. The intra-day swing on the BSE was 5,381 points while it was 1,604 points on NIFTY. Clearly unheard of and unparalleled.

The Indian Rupee was volatile in league with the markets and managed to recover lost ground. It closed with weekly losses of 2 paisa or 0.03 per cent at Rs 73.74. Dow Jones was all over the place and like India and many other countries around the world, had a fearful and then fiery Friday. Friday saw Dow Jones open at 21,973 points, make a low at 21,285 points, high at 23,189 points and finally close at 23,185 points against the previous day's close of 21,200 points. This happened after Asia and Europe had recovered.

Is the bottom established? Yes, and I strongly believe so. Some of the indicators which support my belief are as follows. There was a sell-off on the day and even the exchange has liquidated positions on account of margin calls. Two primary market issues from Rossari Biotech and Burger King which were to have their roadshows in Mumbai on Friday, decided to postpone the same in view of the struggling market. A primary issue which is currently on, Antony Waste Handling Cell, after being extended is to close on Monday the 16th of March is still struggling.

Unless the merchant banker pulls out a rabbit from his hat, the current indicators are not suggesting that the issue would go through. The recovery which the markets saw, was accompanied by huge short covering and significant volumes. All of this suggests, that the bottom is in place but after such a massive earthquake, the aftershocks would continue, but certainly the worst is over.

SBI Card would list on Monday the 16th of March at the bourses. The issue was expected to generate a lot of enthusiasm and was expected to garner huge subscriptions, but something went wrong at the last moment which caused the subscription levels to fail to come up to expectations and the market sentiment went awry. Even the grey market premiums which were being quoted at about close to 45-50 per cent of the issue price have turned negative to neutral.

SBI Card had in the DRHP mentioned that there would be a shareholder's quota in the issue of SBI Card for existing shareholders of SBI. It was but natural that India's largest bank by number of branches and customers would attract new shareholders after this information became public knowledge. Accordingly, the number of shareholders saw an increase of roughly 50 per cent in number from 13 odd lakh to 19.5 lakh in the previous 4.5 months to the record date of 18th February 2020.

The shareholders quota consisted of 1.30 crore shares and there were 4,94,970 valid applications for 30,29,66,153 shares. Of these 4.95 lakh applications more than half or 2,59,463 applications were for one lot of 19 shares. Another 65,445 applications were for 247 shares or 13 lots and 1,22,626 applications were for 14 lots or 266 shares. Effectively this meant that this shareholders quota was largely subscribed to by retail shareholders in terms of number of applications. This certainly is a very good thing and should be encouraged.

Now comes the tragedy. Because of the pro-rata system of allocation, of the 2.59 lakh applicants who applied for 19 shares, only 11,179 were allotted 19 shares, balance got ZERO. The top 100 allottees in the shareholder quota who have applied for 6 lakh shares each or thereabouts, have been allotted 66 per cent or 2/3rd of the total 1.30 crore shares.

Very clearly this was not what the regulator or the company intended. Top 200 successful applicants were given 81 per cent of the allocation which is against natural justice. There is a HNI bucket and because the regulator wanted a larger participation he gave a higher allocation to retail investors in the retail category. Creating a backdoor entry for HNIs to borrow and leverage their application and come through the shareholder category is most unfortunate and appears to be against the very spirit. What has happened has happened, and one hopes that this serves as a fine example to the promoters, regulator and merchant bankers for future.

Yes Bank reported losses of over Rs 18,500 crore in the third quarter of FY20. The government has also notified a plan for the resurrection of Yes Bank which involves 7 banks putting in money into the equity of Yes Bank. The banks include State Bank with Rs 7,250 crore, HDFC Bank Rs 1,000 crore, ICICI Bank Rs 1,000 crore, Axis Bank Rs 600 crore, Kotak Bank Rs 500 crore, Bandhan Bank Rs 300 crore and Federal Bank Rs 300 crore. Further there would be a lock-in of shares of existing and new shareholders holding over 100 shares to the extent of 75 per cent of their shareholding.

This would force people to cut their positions in the market and futures open interest would see a substantial paring as the collateral of shares of Yes Bank would now reduce by 75 per cent. This lock-in is with effect from close of business on Friday the 13th of March. The massive loss, huge recapitalisation of bank and lock in being created to the extent of 75 per cent would make the counter of Yes Bank interesting to watch and follow on Monday.

The week ahead may have some aftershocks to the huge movement one witnessed on Friday, but Covid-19 notwithstanding, the bottom has been established. Use dips to build positions and if in doubt, one needs to stay away not short the market.