December 30, 2012 2 Comments
April 30, 1982. Dhirajlal Hirachand Ambani became famous this afternoon. However he had no inkling of this when he woke up that morning. The only emotion he perhaps felt that hot summer morning, as the mercury crossed the 33 C mark, was wrath. For the past six weeks, a syndicate of stockbrokers had been hammering his company’s shares on the Bombay Stock Exchange,and he didn’t like it.
April 30 was a Friday, the day he could vent his anger, take his revenge. On the BSE, alternate Fridays were settlement days when all transactions which had taken place the previous fortnight were cleared.Sellers delivered shares to buyers, buyers accepted delivery, or either party asked for the transaction to be postponed to the next clearance day after paying badla or compensation for the delay. This day was one of the settlement Fridays. It would go down in the BSE’s history as a day of total chaos.
The stage for this drama was set a few days earlier, on March 18, when a selling hysteria shocked the BSE. In twenty-five minutes of panic, starting at 1.35. p.m. the price of blue-chips like Century and Tisco crashed by ten per cent. They fell like dominoes on the back of Ambani’s Reliance Textile Industries which fell from Rs 131 to Rs 121 as 350,000 of its shares hit the market.
The free fall had been engineered by a Calcutta-based bear syndicate led by a Marwari industrialist, perhaps a member of the powerful Birla clan. Using the technique of short selling–where a speculator believes that prices will fall, sells shares he doesn’t have, and covers the sale by buying them at lower prices later when the prices have fallen.
The bear syndicate sold 1.1 million Reliance shares worth over Rs 160 m. They planned to later pick up these same shares very cheaply and thereby make a tidy profit on the difference. For the plan to succeed, it was important that there should be no big buyers mopping up the stock as it was being sold. The rich bears discounted the promoter of the company they were targeting. It was unlikely that Ambani, then a modest yarn trader and budding industrialist, would have the cash to beat off the attack.
The Marwari and his syndicate badly misjudged their victim. The moment they unloaded Reliance’s shares on March 18, Ambani brokers stepped into action, collared every share in sight and pushed the price to Rs 125 before the day was out. They continued buying the next day, and the next, forcing the scrip to rise giddily.In India, technically managements cannot buy their own companies’ shares, so a brand new organization, the ‘Friends of Reliance Association’, emerged which bought 857,000 of the bears’ 1.1 million shares.Instead of being pushed around, Ambani neatly turned the tables on the Marwari.
In an obvious attempt to teach the bear syndicate a lesson for battering at his share price, Ambani delivered the coup de grace on that fateful Friday by demanding delivery. Meticulously knowledgeable about every aspect of his business, Ambani knew that the sellers couldn’t possibly have the shares they had sold. Caught with their pants down, the panic-stricken bears bid for every Reliance share in sight in order to fulfill their commitments. It wasn’t enough and the bear syndicate was forced to ask for time to deliver the …. elusive shares. Ambani’s brokers refused any postponement of the deal except at a staggering Rs 50 badla charge.
In the bedlam that followed, the BSE had to be shut down for three days while the exchange authorities tried to bring about a compromise between the unyielding bull (Ambani) and the flustered bears. Once it became clear that no understanding could be reached, the panic buying began in earnest. The Reliance price skyrocketed as the syndicate scoured stock markets across the country. By May 10, the gap between sales and availability was almost covered and the crisis was over.
The crisis created a legend out of Ambani.