The ghosts of Dalal Street

Uday Chatterjee
22 May 2004

A spectre is haunting Dalal Street — the spectre of the foreign institutional investor (FII). These spooky creatures are of different nationalities and origin but have two things in common. They have lots and lots of money and they want to make more and more money.

FIIs have entered the Indian market in a big way in recent years to propagate their cause and this is how they go about their jobs. First, they dub India as a promising emerging market, A sentiment that goes down very well with investors in their countries. Next, they invest in stocks that are likely to rise or can be made to rise. Lastly, they issue delightfully vague statements like 'India is a turnaround story, a strong value proposition and we see tremendous synergies for growth.' That is enough to ensure that small investors enter the market in droves.

Till about August last year, the sensex was hovering around the 3,800 mark. In FII parlance the sensex was 'range-bound' but had the potential to breach the 'psychological' 4,000-mark barrier. If that happens, the value propositions and synergies for growth will be realised. Between August and December last year, the sensex shot up from 3,800 to 6,000 points. The FIIs made India shine even before the ousted NDA government could.

Mission accomplished, the task left for the FIIs was to pack and go forth to conquer other markets. But they did not do so immediately — perhaps there were no markets with value propositions and synergies in sight. As a result, from January till the first week of May this year, the markets remained 'range bound' within 150 to 200 points.

In the second week of May, the FIIs withdrew heavily culminating in the sensex dropping by over 500 points till the end of the trading week, which was Friday, May 14. The next Monday was the settlement date and settlements had to be completed, as per rules. This led to frenzied selling in order to meet the commitments and that Monday, May 17, the sensex fell by 565 points.

This was the second biggest fall in the history of the more than the century-old Bombay Stock Exchange and the day is rightfully being termed as 'black' Monday. The day saw lifetime savings of scores of small investors wiped out within hours