The Bharatiya Janata Party withdrew support to the V. P. Singh government in the last week of October after Bihar chief minister Laloo Prasad Yadav had L. K. Advani arrested during his rath yatra in that state. Although the market moved in a contrary direction, gaining a bit, the Sensex crashed the following January as a war in the Gulf appeared imminent after all diplomatic efforts to persuade Iraq to withdraw from Kuwait had failed.
However, one stock was steadily and mysteriously rising through all these market swings – that of Associated Cement Companies. The sudden fancy for it stemmed from Harshad’s heavy purchases in the stock. I had sourced a sizeable chunk of it myself for him, and knew that he was buying whatever ACC shares he could lay his hands on. The stock had more than doubled over the last six months, and the bears had lost a packet short-selling it on the hunch that it was overvalued.
I was among those who had sold the shares short at Rs 1,000, thinking they were unlikely to rise further. I was wrong, and ended up squaring my position at Rs 1,100, losing more than half the jobbing commission I had made that month. I would try this again a few months later, and the results would be no different.
The Gulf war ended in a decisive victory for the allied forces led by the US, but that did not really perk up the stock market. The crisis had aggravated India’s already precarious foreign exchange situation and there was a risk of the country defaulting on payment obligations. Inflation had climbed to a record 13.6 per cent, and there was a sense of
despondency everywhere. The dismal state of finances was public knowledge, and it did not disappoint the market when the Congress party withdrew support to the stopgap
Chandrashekhar government in March and called for fresh elections.
The market remained comatose in the run-up to the general elections to be held in May 1991 as the prospect of another hung parliament loomed. Rajiv Gandhi’s assassination on 21 May was a shock for the market, as it had been betting on his return to power and continuing the reforms he had initiated during his stint in power. The market was closed the following day, but held up well when trading resumed on 23 May, with the Sensex closing flat, any panic having been averted by support from the domestic financial institutions.
The market remained in a tight range till the end of May. Most players were expecting the political uncertainty to continue even after the elections as no party was expected to win a clear majority. Then followed more bad news. Left with barely enough forex reserves to pay for three weeks of imports, the Chandrashekhar government had to borrow from the
International Monetary Fund by pledging its gold reserves. The public was outraged, but this development fully revealed the mess the country was in.
Once again, the market did not crack as was widely expected. I learnt from the market that Harshad and brokers close to him were buying in a big way. I asked Sharma about it.
avoid a default,’ Sharma said. I remained bearish, certain that it would be some time before the new government could get the economy out of the hole it had sunk into.
To everybody’s surprise, the Congress did well in the second phase of the polls because of a sympathy wave following Rajiv Gandhi’s assassination. It managed to form a government with support from some of the smaller parties. The Sensex climbed around 100 points, but the market reaction was still guarded.
The party on Dalal Street began after Manmohan Singh’s path-breaking Budget of 24 July, which signalled India’s willingness to open up its economy to the world by lowering import barriers and scrapping the licence system for industries. Among other things the stock market will remember that budget for was the government’s promise to allow FIIs to invest in India. Private players were allowed to set up mutual funds. And the Controller of Capital Issues was proposed to be replaced by the Securities and Exchange Board of India (SEBI) to regulate the stock market and stock exchanges.
Over the next month, rampaging bulls lifted the Sensex by over 300 points. The leader of the herd was none other than Harshad himself, who was now known by the nickname Big Bull, a title that had previously belonged to the UTI boss M. J. Pherwani.
To justify the absurd valuations that many of his favourite stocks were quoting at, Harshad advocated the ‘replacement cost’ theory, which held that a stock should not be valued on the company’s earnings potential, but on the basis of what it would cost to create a similar company. The concept caught on like wildfire in the stock market, sending the prices of even the most inefficient and mismanaged companies shooting through the roof.
Even today, Harshad is credited with having come up with the ‘replacement cost’ theory, but that is not true. He may have propagated it, but it was not his original idea in any way. As I mentioned earlier, my brief stint as a library assistant helped me develop a lifelong love for reading. Many years later, when I read the full 1956 debate in the Rajya Sabha over the Securities and Contracts Regulations Act, I came across a passage in which P. D.
Himatsingka, a member of parliament from West Bengal, had made an interesting argument. He justified the steep rise in the share price of the Indian Iron and Steel Company, saying it was cheaper for a buyer to purchase shares from the open market and take control of the company rather than to incur a much heavier expense setting up a new steel plant.
ACC shares had by then climbed to Rs 3,000, having almost doubled since the beginning of the year. The moment Harshad or his associate brokers simply made inquiries about a stock, its price would start rising, even without a single share having been actually purchased. The sixfold rise in ACC over the previous year was proof to the market of what Harshad could do to the fortunes of a stock.
Promoters began to seek him out, and he, in turn, would seek out promoters of the companies he was interested in. Not all these meetings were fruitful, but sometimes the promoters would leak news of the meeting to the market, hoping to fire up their stock. At other times, Harshad’s associates would spread the word, creating the same effect.
By now, Harshad’s flashy lifestyle was making headlines. With his 15,000 square-foot apartment in Worli overlooking the sea, his designer suits and fleet of imported cars, the Big Bull had become a role model for almost every player on Dalal Street.
While the bulls were celebrating, there were subtle policy changes underway in the money market, which would have major implications for the stock market too. In August, RBI removed the ceiling on interest rates on bonds and debentures issued by public sector
companies. With the new securities offering higher interest rates, the older securities declined in value, causing losses to the banks that held them. When new bonds were offering, say, 11 per cent on maturity, who would want to buy the old bonds in a bank’s portfolio that were offering 10 per cent on maturity, unless they were sold at a discount to their face value?
getting out of the older securities. Brokers were only too glad to help stricken banks, and banks returned the favour through cosy arrangements benefiting the brokers.
Back in the stock market, Harshad continued to drive the prices of his favourite stocks even higher by continuing to peddle the ‘replacement cost’ theory. The market was curious about Harshad’s source of funds, and there was much speculation about it, including rumours that the Big Bull was being financed by politicians and the underworld.
As Sharma would later tell me, Harshad’s foes knew exactly where the money was coming from. The only trouble was that they too were guilty of misdemeanours similar to Harshad’s, albeit on a much smaller scale. Many – if not all of them – played around with bank funds, but were careful to deploy them in less risky short-term instruments, including badla
financing. This allowed them to get extra returns on their deals but kept them in a position to return the funds at short notice.
Harshad was now threatening this second income of theirs by recklessly investing the money in stocks and drawing public attention with his glamorous lifestyle. His foes were now eager to trap him but lay low, knowing their own source of funds would be cut off once the authorities got to know about the loopholes. It must have caused them immense frustration to be outsmarted by Harshad in both the money and stock markets, and be able to do nothing about it.
Harshad’s initial bets were companies with sound fundamentals, but I guess he gradually got carried away by his success and the following he had. He started buying shares of mediocre companies, and his purchases soon extended to outright dubious ones. Perhaps Harshad started to have delusions about his power – that companies’ performance would improve because he had invested in them!
The post-Budget excitement in the market lifted the Sensex to 1,900 by mid-September. In less than two and a half months of the Congress government’s coming to power, the index had rallied an astounding 50 per cent.
July and August had been bumper months for me. I netted Rs 41,000 in jobbing
commissions in July and Rs 46,000 in August. And yet, I was disappointed for not having been able to hit the Rs 50,000 mark. Each month I took Rs 25,000 out of these profits home, depositing the rest with my employer, with the intention of taking bigger bets when the opportunity arose.
Bauji and Ma were awestruck when I handed them my earnings. Bauji had some idea about the stock market and its fickle ways, but he found it hard to believe that a 23-year-old could make Rs 25,000 two months in a row.
‘I hope you are not doing something wrong, Lalchand,’ he told me one evening after dinner.
‘No Bauji, every rupee has been earned the hard way. And this is just the beginning. With my efforts and God’s grace, we should be able to move to Ghatkopar in two years’ time,’ I said. I could understand his concern; my wayward ways during our days in Bhandup were still fresh in his memory. I could see that he was not entirely convinced by my answer, and that he did not want to voice his doubts either.
‘Bauji, I know I have caused you grief in the past, but that’s a closed chapter. I give you my word that I will never do anything that will cause you to hang your head in shame,’ I said, clasping his hand. That put him at ease somewhat.
‘But tell me, Lala, if you can make Rs 25,000 two months in a row, you could also lose that much, isn’t it?’ he asked.
‘True, that’s why I pre-decide the quantum of loss I can bear and stay within that limit. If I exceed that, I am likely to get fired from my job,’ I said.
Unlike me, moving into a bigger house was not Bauji’s priority. Satish had enrolled for a B.Sc. that year as his Higher Secondary score was not high enough to get him a seat in a good
engineering college purely on merit. And we lacked the resources to pay for a seat in the management quota. We could have just about managed that, but Bauji was not certain if the investment would be worth the money. But now that I was making decent money, Bauji saw a chance to realize his cherished dream to see at least one of his children become an engineer.
‘Lala, would it be asking for too much from you to set some money aside so that we can get admission for Satish in a decent engineering college next year?’ he asked with some hesitation.
‘For all the trouble I have caused you, that is the least I can do to make up for it,’ I told him.
He was so moved that he embraced me. I had never felt so close to him as I did in that moment.