COMMENTARY
INTERVIEWS
SPECIALS
CHAT
ARCHIVES

Sensex crashes by 224 points, goes below 3,000

Syed Firdaus Ashraf in Bombay

The crisis in the Unit Trust of India and depressed market sentiments worldwide resulted in the Bombay Stock Exchange Sensitive Index crashing by a massive 224.22 points today.

The Sensex plunged below the psychological mark of 3,000 points to close at 2,878.07. Its previous closing on Wednesday, September 30, was 3,102.29 points.

Nervousness was plainly visible at the National Stock Exchange too as the S&P CNX Nifty closed at 840.25, down 64.70 points (7.14 per cent) from Wednesday's closing figure of 904.95 points.

The markets crashed after UTI's new chairman P S Subramaniam said one of the Trust's oldest and most popular schemes, US 64, had a negative reserve of Rs 10,500 million.

Earlier in the day, the markets had opened on a weak note after a four-day holiday. There were almost no buyers on the bourses, only sellers.

But if you thought the morning was bad, the afternoon got worse when a rumour spread that UTI was on a selling spree to recover money to repay its investors. UTI is probably the biggest Indian institutional investor.

This depressed the stocks of all blue-chip companies. Hindustan Lever, State Bank of India, ITC, Reliance, L&T, ICICI, Bharat Heavy Electricals, and IDBI were sold heavily and nearly set off the circuit breaker.

Ajit Ambani, managing director, Share Deal Financial Consultant Private Limited, told Rediff On The NeT, "The markets saw depressed selling in the blue-chip companies as there was a rumour that UTI was selling all its important stocks to recover the money. Also, there were rumours that people were queuing outside UTI's offices to recover their money invested in US 64."

(A senior UTI official, however, denied that investors were making a beeline to the Trust's offices to recover their investments.)

The Unit Scheme 64, launched by UTI in 1964, has more than 21 million subscribers all over the world and a corpus of more than Rs 200,000 million. In all, UTI manages Rs 600,000 million for over 48 million investor accounts.

Subramaniam, who took over as UTI chairman on September 8, said last week that all is not well at the Trust and its flagship scheme US 64 has a negative reserve of Rs 10,500 million. He added that the sanctions imposed on India after its nuclear tests at Pokhran in May had caused the crisis.

While a strong rumour did the rounds of the markets that UTI would be bankrupted by the crisis, top brokers and foreign institutional investors disagreed.

"I don't think an institution like UTI will collapse. After all it is a Rs 60,000 crore company and the negative balance stated by the chairman is not a very big amount compared to its total assets," said Ambani.

Agreeing with this assessment, U R Bhatt, director and chief investment officer of Jardine Fleming, said, "Investors follow a herd mentality when this kind of crisis occurs. I don't think it's a major crisis for UTI. If they come up with proper policy decisions, everything will be set right in a few days."

Interestingly, this is the first time in 20 months that the market has crashed so badly. The last time the Sensex fell by nearly 200 points was when the Congress withdrew support to the H D Deve Gowda government in April 1997.

According to Kirit Vora, director, Asit C Mehta, a member of the BSE and NSE, "The fall in the global markets also contributed to the fall. The recent decision by the US government not to allow trading with certain Indian companies also affected the markets."

As for the poor start in the morning, Vora said that was nothing unusual and the general trend in the market after a closure of four days is to sell, not buy.

But other observers worried that if UTI, a major player on the bourses, turns a seller at this juncture, it could spell disaster.

One broker pointed out on condition of anonymity that UTI had been supporting the market by pumping in money despite the depressed sentiments. "If they too become sellers, the market will crash further," he warned.

George Iype adds from New Delhi: Senior finance ministry officials went into a huddle to take stock of Monday's stock market crash.

Finance Minister Yashwant Sinha is currently in the United States, attending a meeting of the International Monetary Fund.

One official said a selling spree by financial institutions, foreign funds, and speculators had shaken the markets. "But panic set in after reports of net-worth erosion of UTI's flagship scheme flooded the BSE," he told Rediff On The NeT.

He said the trends also reflected the Asian crisis, concerns about the economic sanctions enforced by the United States, and doubts about the fiscal adjustment and reforms contained in the 1998-99 Union Budget.

"India's internal debt is nearly Rs 818,517 crore on which the interest payment in this year's budget is Rs 75,000 crore. Clearly, the government cannot take on an additional liability," a senior economist said on condition of anonymity.