MAYHEM IN THE MARKETS

Mumbai, May 18 | Updated: May 19 2006, 05:30am hrs
It was a virtual bloodbath on Dalal Street on Thursday. The benchmark indices, taking a cue from the global markets and the confusion over a draft circular issued by the Central Board of Direct Taxes (CBDT), recorded their highest ever fall in a single trading session.

The 30-share Sensex of the Bombay Stock Exchange (BSE) lost a staggering 826 points (down 6.76%) while the S&P CNX Nifty of the National Stock Exchange (NSE) tanked by as much as 246 points (down 6.77%) at close.

The losses recorded by both the leading benchmarks of the Indian bourses is the highest ever closing as well as intra-day loss in the equities markets.

Deven Choksey, managing director, KR Choksey Shares and Securities, said, The culmination of the weakness in the overseas markets and the lack of clarity on the CBDT circular on the tax issue led to the fall, which accentuated later due to margin calls triggered following the steady fall. The correction, though overdone, was required. Traders will take some time to recover from this shock.

The markets opened very weak with the Sensex opening with a massive negative gap of over 50 points and then slipped further throughout the day without any signs of recovery. The weak opening was on account of overnight losses in the Dow Jones Industrial Average and its resultant impact on the Asian markets. The weaker than expected results from Tata Steel added to the market woes but the worst time for the markets came when the news with respect to a draft CBDT circular trickled into the market. The market interpreted the draft to mean that FIIs may be subject to a 41% capital gains tax as they will be classified as traders and not investors.This further triggered the margin calls and there was no coming back for the markets from there.

According to marketmen, the fall has resulted in exchange authorities switching off hundreds of terminals as brokers could not arrange for the required base minimum capital on time following sustained fall in the stock prices.

Amitabh Chakraborty, head of research-private clients group, BRICS Securities, said, The fall in the initial half of the day was due to weak overseas market trend. Misinterpretation of the CBDT proposal (to distinguish share traders from investors) also triggered foreign fund selling. The fall precipitated after Tata Steel results, which triggered more margin calls. The trend in global markets, especially the US, on Thursday night will be crucial for domestic markets tomorrow (Friday). Any clarification from the government on the CBDT discussion would boost sentiment in a big way.

Sashi Krishnan, chief executive, Chola Mutual Fund, said, There was fair amount of volatility in the market due to fall in US markets and meltdown in metal stocks overseas. The long-term secular trend is good. Correction from around 12,800 to 11,391 will always happen. Corrections will be a certainty. But the India story remains intact. The earning growth as seen in the start of the season has been good. Technology sector has reported good number. This fall is an opportunity for investors to accumulate. Investors can still expect 15-20% return in Indian market for next one to three years.

The sell-off was so severe that the market breadth was highly negative as out of 2,557 stocks traded on BSE, only 288 (11.26%) advanced 2,241 (87.64%) of them registered sharp to moderate losses while 28 remained unchanged.

The fall was supported by higher turnover on both the bourses. The combined turnover on BSE and NSE was higher at Rs 15,458 crore as against previous Rs 12,647 crore. The NSEs derivatives segment recorded higher turnover at Rs 44,906 crore as against previous Rs 31`,724 crore registered on Wednesday.

The FIIs continued to be net sellers on the bourses on Wednesday as they sold equities worth Rs 423.50 crore. However, still in May 2006 till date, they were net buyers at Rs 901.40 crore.