Book Review #33: Bulls Bears and Other Beasts: Author: Santosh Nair

The book, Bulls Bears and Other beasts tells the story of the evolution of equity markets in India as seen through the eyes of the protagonist Lalchand Gupta. While the visible hero is Lalchand, the invisible hero is the Indian stock market ecosystem, including the stock exchanges, SEBI (Securities and Exchange Board of India) and the GOI (Government of India) that introduced significant market reforms that catapulted the Sensex from 750 in the 1990 to almost 34000 by the end of 2017.

Both stories run in parallel in this fascinating book. One is the story of Lalchand himself, his ups, downs, fights, wins and loses. You tend to sympathize, empathize and get excited with him. The other is the evolution of India from a closed economy - consisting of close knit group of powerful brokers, market manipulations, only one Institutional Investor (UTI), minimal retail participation in the markets and a slowly growing economy - to open economy - consisting of globalization, SEBI, National Stock Exchange, wider retail participation and of course the mother of them all the arrival of Foreign Institutional Investors (FIIs)

Having worked with Economic Times and then with Moneycontrol.com, Mr.Nair writes from a vantage point of having 'been there, done that'. He is as much an author as a participant in this brilliant book.

This well written, fast paced and easy to read book paints a large canvas, the evolution of equity markets in India starting from the beginning of the tumultuous years from about 1988. Lalchand is a product of the Mumbai (it was called Bombay in those times) underbelly of the 80s. He was born and brought up in the slum areas and got into lot of bad company. However, he quickly corrected himself and while working in a chemical company, got opportunity to know about the workings of the stock market.

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In the early eighties only few stock exchanges existed in India, the biggest of them being Bombay Stock Exchange (BSE) followed by Calcutta Stock Exchange (CSE). In the late eighties, where this story begins, there was hardly any retail participation in the stock market. Easy money was made by a lucky few who has subscribed to the IPOs of MNCs. UTI was the only domestic institutional investor. Brokerage rates were 1.5 percent and investment based on the fundamentals of a company was still in its infancy. There was hardly any publicly available information on the companies. A lot of 'research' done those days would constitute as insider trading today.

More than the stock market professionals, company promoters used to speculate heavily in their own shares through their favored brokers, known as 'house brokers', who were known to be proxies for the promoters.

UTIs business was crucial to the prosperity of the brokers, since it was the largest institutional investor. Since UTI traded in large blocks of shares, there was good money to be earned by way of commission. More money was made by front-running UTI trades. If it was a buy order from UTI, the broker would buy shares on his personal account. Then when the block purchase was done, the share prices will go up and the broker will sell his personal stocks and make good fortune. The reverse process happened in case of sell order from UTI.

There were few high rollers like Nimesh Shah, Manu Manek and Ajay Kayan who were revered and feared at the same time for their ability to make or break a company. Sometimes the companies fought back. The personality clashes between stake holders is very exciting to read. For example, the story of Manu Manek's fight with Reliance Industries makes fascinating reading.

Prior to 1995, the stock market processes and reporting were very primitive. Most of the transactions were manual and used crude forms of data entry and reporting tools. Speakers installed in various trading floors were used to communicate and blackboards were used to update the prices of the frequently traded shares. Trading data was entered in colour coded sauda pads, end of the day reporting was through bhav copies and disagreements were sorted through mutual discussion based on a strictly observed 'caste' system of the stock exchange.

When you are discussing India's stock market, you cannot avoid Harshad Mehta, the original big bull. The way he manipulated the banks to fund his stock purchases, how he routinely moved money between money market and stock market, how he ran up the prices of ACC to unheard of 10500 rupees based on a vaguely constructed 'replacement cost' theory, how he spend lavishly and attracted attention to himself and finally how this ponzi scheme that he ran was discovered, he and his cronies were arrested and the markets went through a major tailspin....all are discussed in much detail.

The year 1992 was significant for the Indian markets. Significant financial sector reforms were initiated. SEBI (Securities and Exchanges Board of India, in the lines of SEC in the US) was formed. The office of the CCI (Controller of Capital Issues) was abolished. Companies were given freedom to price their IPOs as they wanted, (prior to that, the shares had to issued only at the face value), FIIs (Foreign Institutional Investors) were allowed in the country from October 92. Initially they were hesitant to come to India. In the first six months, by March 93, only 15 Crores of FII investments came to the country.

India's response to the Mumbai serial blasts of '93, form a pride of a place in India's history. One of the blasts happened in the basement of BSE on a Friday. By working overtime over the weekend, the staff of BSE made it operational for trading on Monday, showing to the world that India will not be cowed down by terrorism. 

The evolution of the Indian markets starting 1993 are fascinating to read. In the FY 93-94 alone, 770 IPOs raised about 13000 crores from the market. Most of them were raised by greedy promoters who raised money at crazy valuations. FIIs pumped in 5000 crores in the year. The highlight of the year was the NFO (New Fund Offer, used to be called IPO back then) of Morgan Stanley Growth Fund. It was a 15 year close ended fund, and raised 1000 crores against a target of 300 crores !!

It listed in the market at a discount to the face value. Many investors, who wanted to make quick buck, lost money. 

The history of India is the story of forces of modernization fighting against forces of status quo. It was no different in Indian markets. While there was a lot of suggestions to computerise and modernize BSE, the strong Broker Lobby opposed it vehemently. They did not allow new brokers into BSE by rapidly hiking the membership charges. They were blind to the regulatory changes taking place all around them. In November '94, National Stock Exchange (NSE) started operations and this led a crippling blow the entrenched interests in BSE.

This was a self goal by BSE

NSE and BSE were different like chalk and cheese. From day 1, NSE started operations with an electronic trading system. While NSE had a weekly settlement system, unlike BSE, positions were not allowed to be carried forward. Unlike BSE which was run by brokers, NSE was run by professionals and did not have a single broker member in its board. In addition, unlike BSE, which was restricted to Mumbai, NSE had a pan-India reach offering services across the country. Unlike BSE, where membership was severely limited and expensive, anyone could become an NSE member by paying a refundable deposit fee and clearing an exam. This democratized the trading ecosystem in the country unlike any other action. 

In just eleven months after going live, NSE overtook BSE in terms of daily traded turnover, becoming the top exchange in the country!!

While electronic trading had its benefits, it created certain pitfalls. Since the very nature of electronic trading was faceless, a group of brokers could get together and trade in a stock among themselves to give an impression of heavy volumes. 

Asian currency crisis hit the market in 1997 and led to a prolonged bear market. For the first time in India, companies started downsizing. Downsizing was unheard of in India till then and many equity analysts that were earning huge packages found themselves without jobs, worst the MNC brokerages that employed them downed shutters. There was bloodbath all around.

The book celebrates Indian market, warts and all. The rampant manipulation of IPOs in the mid 90s, the MS Shoe scandal, the high interest rates (retail investors received interest of about 16% on their bond investments, I still have some like ICICI money multiplier bond and Zero coupon bonds), the depression of the mid 90s, series of market reforms initiated by SEBI, P Chidambaram's 'Dream Budget of 1997 that revived the market sentiments, Asian Currency Crisis  of 1997 that led to a bear market, the retrenchment of equity analysts, rise and fall of Ketan Parekh, the boom and bust of 'New Economy Stocks', Unit-64 fiasco, IPO manipulation of the early millennium through benami Demat accounts, disastrous IPO of Reliance Power, the carnage of 2008 in the aftermath of subprime crisis, the run on ICICI Bank, the return of UPA in 2009 and the ensuing bull market, Satyam Scandal ...

All of these are covered in just enough detail to sate the curiosity of a reader who just want to have an overview or for a researcher who may want to dig deeper...

UPA 1s maiden budget of 2004 which abolished LTCG (Long Term Capital Gains Tax) and introduced Stock Transactions Tax was another major morale booster for the market and single-handedly enabled the arrival of long-term retail investors into the Indian market through expansion of mutual fund industry. 

Seamlessly weaved together with the story of the stock market is the story of Lala. His progressive elevation as a respectable broker, his father's demise, his brother's graduation, the playing out of his dreams...

In Lala, we see a pragmatic and ethical stock market professional, playing dual role of a bystander story teller as well as a successful market participant. There are lessons to be learned for a newbie investor there..

This book is a must read for anyone who is interested in the India's stock market. If you are an investor, this book will give you perspectives about the benefits of long-term investments in equity market, after all Sensex moved up from 750 in 1990 to 34000 today, an annualised return of 15% . If you are historian, this book has details about some of the critical incidents that happened in the markets in the last 30 years. If you are policy wonk, this book will give you some ideas of what works in the market and what does not.

Finally, for my generation, we were lucky and unlucky at the same time, I would say. We came of age around the 90's, when the major changes were initiated. To that extent, one could say that we were lucky to have been living through these exciting times. However, the sad part is, we lived our life by the day, oblivious to these path breaking changes and unable to yield any major benefits from them. In the last thirty years, people have won everything. lost everything and recouped the losses and became millionaires twice over. Many of us missed the exciting journey.

There is still time. India is just starting to grow. Join the fun and run with it....

I give this book a rating of 5/5, the second book in this series of '50 Finance Books' that is getting this rating.

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Buy the book 'Bulls, Bears and Other Beasts' @Amazon