The Telegraph
Since 1st March, 1999
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The penny drops on marching market

Mumbai, Sept. 21: Stocks went through a stomach-churning rollercoaster ride today with the sensex plunging 260 points early in the day after market watchdog Sebi collared prancing penny shares with stringent rules.

Speculators dumped shares in panic but sanity was restored later and the Bombay Stock Exchange sensitive index bounced back almost to the levels from where it had started the day.

The sensex had opened on a steady note, but then went into a bone-jarring fall, collapsing to 8261.58. But it clambered back to a high of 8521.75 before ending the day at 8487.14. It meant a marginal loss of 13.14 points from yesterday’s close of 8500.28.

Last Friday, finance ministry mandarins met Sebi and intelligence officials to work out a strategy to check the market’s “irrational” exuberance in the past six months, determine whether rogue traders were up to their shenanigans again and devise ways to head off the possibility of another catastrophe.

In only 13 weeks, the sensex has gone from 7000 to 8500.

The big worry has been over penny stocks ' the name deriving from shares that cost a penny ' and their huge gains with some like Sunshield Chemicals rocketing up by as much as 5000 per cent.

Sebi unveiled two steps to check these stocks. First, it imposed a 5 per cent cap on all trade-to-trade and Z category stock movement. Investors in stocks belonging to the trade-to-trade category are compulsorily required to take delivery of the shares they buy and must pay for them immediately. Z category scrips are papers of those companies that have violated the listing norms of the exchanges.

Earlier, these stocks could rise or fall by as much as 20 per cent during a day’s trading. Now, that has been cut to 5 per cent, restricting volatility.

The second step was to make brokers pay 100 per cent margin for these stocks. This means for every purchase worth Rs 100 that has to be paid on the same day, an investor has to keep another Rs 100 with the exchange.

The market was spooked by these measures.

Although the main indices recovered, the measures representing the small and mid-cap companies were mauled.

It had been raining incessantly in Mumbai. “Investors had come prepared (for the volatility) with an extra pair of clothing. At the end of the day, many left for home naked,” said Arun Kejriwal of KRIS, a consulting firm.

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