I had been meaning to write on the above topic for almost a couple of months now but just kept procrastinating about it. That push came to a shove when Sucheta Dalal and Debasis Basu shared their understanding, wisdom, and all in the new book called ‘Absolute Power – Inside story of the National Stock Exchange’s amazing success, leading to hubris, regulatory capture and algo scam‘ . Now while I will go into the details of the new book as currently, I have not bought it but even if I had bought it and shared some of the revelations from it, it wouldn’t have done justice to either the book or what is sharing before knowing some of the background before it.
Before I jump ahead, I would suggest people to read my sort of introductory blog post on banking history so they know where I’m coming from. I’m going to deviate a bit from Banking as this is about trade and capital markets, although Banking would come in later on. And I will also be sharing some cultural insights along with history so people are aware of why things happened the way they did.
Calicut, Calcutta, Kolkata, one-time major depot around the world
Now, one cannot start any topic about trade without talking about Kolkata. While today, it seems like a bastion of communism, at one time it was one of the major trade depots around the world. Both William Dalrymple and the Chinese have many times mentioned Kolkata as being one of the major centers of trade. This was between the 13th and the late 19th century. A cursory look throws up this article which talks about Kolkata or Calicut as it was known as a major trade depot. There are of course many, many articles and even books which do tell about how Kolkata was a major trade depot. Now between the 13th and 19th century, a lot of changes happened which made Kolkata poorer and shifted trade to Mumbai/Bombay which in those times was nothing but just a port city like many others.
The Rise of the Zamindar
Around the 15th century when Babur Invaded Hindustan, he realized that Hindustan is too big a country to be governed alone. And Hindustan was much broader than independent India today. So he created the title of Zamindars. Interestingly, if you look at the Mughal period, they were much more in tune with Hindustani practices than the British who came later. They used the caste divisions and hierarchy wisely making sure that the status quo was maintained as far as castes/creed were concerned. While in-fighting with various rulers continued, it was more or less about land and power other than anything else. When the Britishers came they co-opted the same arrangement with a minor adjustment. While in the before system, the zamindars didn’t have powers to be landowners. The Britishers gave them land ownerships. A huge percentage of thess zamindars especially in Bengal were from my own caste Banias or Baniyas.
The problem and the solution for the Britishers had been this was a large land to control and exploit and the number of British officers and nobles were very less. So they gave virtually a lot of powers to the Banias. The only thing the British insisted on were very high rents from the newly minted Zamindars. The Zamindar in turn used the powers of personal fiefdom to give loans at very high interest rates when the poor were unable to pay the interest rate, they would take the land while at the same time slavery was forced on both men and women, many a time rapes and affairs. While there have been many records shedding light on it, don’t think it could be any more powerful as enacted and shared by Shabana Azmi in Ankur:the Seedling. Another prominent grouping was formed around the same time was the Bhadralok. Now as shared Bhadralok while having all the amenities of belonging to the community, turned a blind eye to the excesses being done by the Zamindars. How much they played a hand in the decimation of Bengal has been a matter of debate, but they did have a hand, that much is not contested.
The Rise of Stock Exchanges
Sadly and interestingly, many people believe and continue to believe that stock exchanges is recent phenomena. The first stock exchange though was the Calcutta Stock Exchange rather than the Bombay Stock Exchange. How valuable was Calcutta to the Britishers in its early years can be gauged from the fact that at one time it was made the capital of India in 1772 . In fact, after the Grand Trunk Road (on which there had been even Train names in both countries) x number of books have been written of the trade between Calcutta and Peshawar (Now in Pakistan). And it was not just limited to trade but also cultural give-and-take between the two centers. Even today, if you look at YT (Youtube) and look up some interviews of old people, you find many interesting anecdotes of people sharing both culture and trade.
The problem of the 60’s and rise of BSE
After India became independent and the Constitutional debates happened, the new elites understood that there cannot be two power centers that could govern India. On one hand, were the politicians who had come to power on the back of the popular vote, the other was the Zamindars, who more often than not had abused their powers which resulted in widespread poverty. The Britishers are to blame, but so do the middlemen as they became willing enablers to the same system of oppression. Hence, you had the 1951 amendment to the Constitution and the 1956 Zamindari Abolition Act. In fact, you can find much more of an in-depth article both about Zamindars and their final abolition here. Now once Zamindari was gone, there was nothing to replace it with. The Zamindars ousted of their old roles turned and tried to become Industrialists. The problem was that the poor and the downtrodden had already had experiences with the Zamindars. Also, some Industrialists from North and West also came to Bengal but they had no understanding of either the language or the cultural understanding of what had happened in Bengal. And notice that I have not talked about both the famines and the floods that wrecked Bengal since time immemorial and some of the ones which got etched on soul of Bengal and has marks even today 😦
The psyche of the Bengali and the ‘Bhadralok’ has gone through enormous shifts. I have met quite a few and do see the guilt they feel. If one wonders as to how socialist parties are able to hold power in Bengal, look no further than ‘Tarikh‘ which tells and shares with you that even today how many Bengalis still feel somewhat lost.
The Rise of BSE
Now, while Kolkata Stock Exchange had been going down, for multiple reasons other than listed above. From the 1950s onwards Jawaharlal Nehru had this idea of 5-year plans, borrowed from socialist countries such as Russia, China etc. His vision and ambition for the newly minted Indian state were huge, while at the same time he understood we were poor. The loot by East India Company and the Britishers and on top of that the division of wealth with Pakistan even though the majority of Muslims chose and remained with India. Travel on Indian Railways was a risky affair. My grandfather had shared numerous tales where he used to fill money in socks and put the socks on in boots when going between either Delhi – Kolkata or Pune – Kolkata.
Also, as the Capital became Delhi, it unofficially was for many years, the transparency from Kolkata-based firms became less. So many Kolkata firms either mismanaged and shut down while Maharashtra, my own state, saw a huge boon in Industrialization as well as farming. From the 1960s to the 1990s there were many booms and busts in the stock exchanges but most were manageable.
While the 60s began on a good note as Goa was finally freed from the Portuguese army and influence, the 1962 war with the Chinese made many a soul question where we went wrong. Jawaharlal Nehru went all over the world to ask for help but had to return home empty-handed. Bollywood showed a world of bell-bottoms and cars and whatnot, while the majority were still trying to figure out how to put two square meals on the table. India suffered one of the worst famines in those times. People had to ration food. Families made do with either one meal or just roti (flatbread) rather than rice. In Bengal, things were much more severe. There were huge milk shortages, so Bengalis were told to cut down on sweets. This enraged the Bangalis as nothing else could.
Note – If one wants to read how bad Indians felt at that time, all one has to read is V.S. Naipaul’s ‘An Area of darkness‘ .
This was also the time when quite a few Indians took their first step out of India. While Air India had just started, the fares were prohibitive. Those who were not well off, either worked on ships or went via passenger or cargo ships to Dubai/Qatar middle-east. Some went to Russia and some even to States. While today’s émigrés want to settle in the west forever and have their children and grandchildren grow up in the West, in the 1960s and 70s the idea was far different. The main purpose for a vast majority was to get jobs and whatnot, save maximum money and send it back to India as a remittance. The idea was to make enough money in 3-5-10 years, come back to India, and then lead a comfortable life.
Sadly, there has hardly been any academic work done in India, at least to my knowledge to document the sacrifices done by Indians in search of jobs, life, purpose, etc. in the 1960s and 1970s. The 1970s was also when alternative cinema started its journey with people like Smita Patil, Naseeruddin Shah who portrayed people’s struggles on-screen. Most of them didn’t have commercial success because the movies and the stories were bleak. While the acting was superb, most Indians loved to be captured by fights, car-chases, and whatnot rather than the deary existence which they had. And the alt cinema forced them to look into the mirror, which was frowned upon both by the masses and the classes. So cinema which could have been a wake-up call for a lot of Indians failed. One of the most notable works of that decade, at least to me, was Manthan. 1961 was also marked by the launch of Economic Times and Financial Express which tells that there was some appetite for financial news and understanding.
The 1970s was also a very turbulent time in the corporate sector and stock exchanges. Again, the companies which were listed were run by the very well-off and many of them had been abroad. At the same time, you had fly-by-night operators. One of the happenings which started in this decade is you had corporate wars and hostile takeovers, quite a few of them of which could well have a Web series or two of their own.
This was also a decade marked by huge labor unrest, which again changed the face of Bombay/Mumbai. From the 1950s till the 1970s, Bombay was known for its mills. So large migrant communities from all over India came to Bombay to become the next Bollywood star and if that didn’t happen, they would get jobs in the mills. Bombay/Mumbai has/had this unique feature that somehow you will make money to make ends meet. Of course, with the pandemic, even that has gone for a toss. Labor unrest was a defining character of that decade. Three movies, Kaala Patthar, Kalyug, and Ankush give a broad outlook of what happened in that decade. One thing which is present and omnipresent then and now is how time and time again we lost our demographic dividend. Again there was an exodus of young people who ventured out to seek fortunes elsewhere. The 1970s and 80s were also famous for the license Raj which they bought in. Just like the Soviets, there were waiting periods for everything. A telephone line meant waiting for things anywhere from 4 to 8 years. In 1987, when we applied and got a phone within 2-3 months, most of my relatives both from my mother and father’s side could not believe we paid 0 to get a telephone line. We did pay the telephone guy INR 10/- which was a somewhat princely sum when he was installing it, even then they could not believe it as in Northern India, you couldn’t get a phone line even if your number had come. You had to pay anywhere from INR 500/1000 or more to get a line. This was BSNL and to reiterate there were no alternatives at that time.
The 1990s and the Harshad Mehta Scam
The 90s was when I was a teenager. You do all the stupid things for love, lust, whatever. That is also the time you are introduced really to the world of money. During my time, there were only three choices, Sciences, Commerce, and Arts. If History were your favorite subject then you would take Arts and if it was not, and you were not studious, then you would up commerce. This is how careers were chosen. So I enrolled in Commerce. Due to my grandfather and family on my mother’s side interested in stocks both as a saving and compounding tool, I was able to see Pune Stock Exchange in action one day. The only thing I remember that day is people shouting loudly with various chits. I had no idea that deals of maybe thousands or even lakhs. The Pune Stock Exchange had been newly minted. I also participated in a couple of mock stock exchanges and came to understand that one has to be aggressive in order to win. You had to be really loud to be heard over others, you could not afford to be shy. Also, spread your risks. Sadly, nothing about the stock markets was there in the syllabus. 1991 was also when we saw the Iraq war, the balance of payments crisis in India, and didn’t know that the Harshad Mehta scam was around the corner.
Most of the scams in India have been caught because the person who was doing it was flashy. And this was the reason that even he was caught as Ms. Sucheta Dalal, a young beat reporter from Indian Express who had been covering Indian stock market. Many of her articles were thought-provoking.
Now, a brief understanding is required to know before we actually get to the scam. Because of the 1991 balance of payments crisis, IMF rescued India on the condition that India throws its market open. In the 1980s itself, Rajeev Gandhi had wanted to partially make India open but both politicians and Industrialists advised him not to do the same, we are/were not ready. On 21st May 1991, Rajeev Gandhi was assassinated by the LTTE. A month later, due to the sympathy vote, the Narsimha Rao Govt. took power. While for most new Governments there is usually a honeymoon period lasting 6 months or so till they get settled in their roles before people start asking tough questions. It was not to be for this Govt. Immediately, The problem had been building for a few years. Although, in many ways, our economy was better than it is today. The only thing India didn’t do well at that time was managing foreign exchange. As only a few Indians had both the money and the opportunity to go abroad and need for electronics was limited. One of the biggest imports of the time then and still today is Energy, Oil. While today it is Oil/Gas and electronics, at that time it was only OIl. The Oil import bill was ballooning while exports were more or less stagnant and mostly comprised of raw materials rather than finished products. Even today, it is largely this, one of the biggest Industrialists in India Ambani exports gas/oil while Adani exports coal. Anyways, the deficit was large enough to trigger a payment crisis. And Narsimha Rao had to throw open the Indian market almost overnight. Some changes became quickly apparent, while others took a long time to come.
Satellite Television and Entry of Foreign Banks
Almost overnight, from 1 channel we became multi-channel. Star TV (Rupert Murdoch) bought us Bold and Beautiful, while CNN broadcasted the Iraq War. It was unbelievable for us that we were getting reports of what had happened 24-48 hours earlier. Fortunately or unfortunately, I was still very much a teenager to understand the import of what was happening. Even in my college, except for one or two-person, it wasn’t a topic for debate or talk or even the economy. We were basically somehow cocooned in our own little world.
But this was not the case for the rest of India and especially banks. The entry of foreign banks was a rude shock to Indian banks. The foreign banks were bringing both technology and sophistication in their offerings, and Indian Banks needed and wanted fast money to show hefty profits. Demand for credit wasn’t much, at least nowhere the level it today is. At the same time, default on credit was nowhere high as today is. But that will require its own space and article.
To quench the thirst for hefty profits by banks, Enter Harshad Mehta. At that point in time, banks were not permitted at all to invest in the securities/share market. They could only buy Government securities or bonds which had a coupon rate of say 8-10% which was nowhere enough to satisfy the need for hefty profits as desired by Indian banks. On top of it, that cash was blocked for a long time. Most of these Government bonds had anywhere between 10-20 year maturity date and some even longer. Now, one loophole in that was that the banks themselves could not buy these securities. They had to approach a registered broker of the share market who will do these transactions on their behalf. Here is where Mr. Mehta played his game. He shared both legal and illegal ways in which both the bank and he would prosper. While banking at one time was thought to be conservative and somewhat cautious, either because they were too afraid that Western private banks will take that pie or whatever their reasons might be, they agreed to his antics.
To play the game, Harshad Mehta needed lots of cash, which the banks provided him in the guise of buying securities that were never bought, but the amounts were transferred to his account. He actively traded stocks, at the same time made a group, and also made the rumor mill work to his benefit. The share market is largely a reactionary market. It operates on patience, news, and rumor-mill. The effect of his shenanigans was that the price of a stock that was trending at say INR 200 reached the stratospheric height of INR 9000/- without any change in the fundamentals or outlook of the stock. His thirst didn’t remain restricted to stocks but also ventured into the unglamorous world of Govt. securities where he started trading even in them in large quantities. In order to attract new clients, he coveted a fancy lifestyle. The fancy lifestyle was what caught the eye of Sucheta Dalal, and she started investigating the deals he was doing. Being a reporter, she had the advantage of getting many doors to open and get information that otherwise would be under lock and key. On 23rd April 1992, Sucheta Dalal broke the scam.
The impact was almost like a shock to the markets. Even today, it can be counted as one of the biggest scams in the Indian market if you adjust it for inflation. I haven’t revealed much of the scam and what happened, simply because Sucheta Dalal and Debasis Basu wrote The Scam for that purpose. How do I shorten a story and experience which has been roughly written in 300 odd pages in one or two paragraphs, it is simply impossible. The impact though was severe. The Indian stock market became a bear market for two years. Sucheta Dalal was kicked out/made to resign out of Indian Express. The thing is simple, all newspapers survive on readership and advertisements with advertisements. Companies who were having a golden run, whether justified or not, on the bourses/Stock Exchange. For many companies, having a good number on the stock exchange was better than the company fundamentals. There was supposed to be a speedy fast-track court setup for Financial crimes, but it worked only for the Harshad Mehta case and still took over 5 years. It led to the creation of NSE (National Stock Exchange). It also led to the creation of SEBI, perhaps one of the most powerful regulators, giving it a wide range of powers and remit but on the ground more often that proved to be no more than a glorified postman. And the few times it used, it used on the wrong people and people had to go to courts to get justice. But then this is not about SEBI nor is this blog post about NSE. I have anyways shared about Absolute power above, so will not repeat the link here.
The Anecdotal impact was widespread. Our own family broker took the extreme step. For my grandfather on the mother’s side, he was like the second son. The news of his suicide devastated my grandfather quite a bit, which we realized much later when he was diagnosed with Alzheimer’s. Our family stockbroker had been punting, taking lots of cash from the market at very high rates, betting on stocks wildly as the stock market was reaching for the stars when the market crashed, he was insolvent. How the family survived is a tale in itself. They had just got married just a few years ago and had a cute boy and girl soon after. While today, both are grown-up, at that time what the wife faced only she knows. There were also quite a few shareholders who also took the extreme step. The stock markets in those days were largely based on trust and even today is unless you are into day-trading. So there was always some money left on the table for the share/stockbroker which would be squared off in the next deal/transaction where again you will leave something. My grandfather once thought of going over and meeting them, and we went to the lane where their house is, seeing the line of people who had come for recovery of loans, we turned back with a heavy heart.
There was another taboo that kinda got broken that day. The taboo was that the stock market is open to scams. From 1992 to 2021 has been a cycle of scams. Even now, today, the stock market is at unnatural highs. We know for sure that a lot of hot money is rolling around, a lot of American pension funds etc. Till it will work, it will work, some news something and that money will be moved out. Who will be left handing the can, the Indian investors? A Few days back, Ambani writes about Adani. Now while the facts shared are correct, is Adani the only one, the only company to have a small free float in the market. There probably are more than 1/4th or 1/3rd of well-respected companies who may have a similar configuration, the only problem is it is difficult to know who the proxies are.
Now if I were to reflect and compare this either with the 1960s or even the 1990s I don’t find much difference apart from the fact that the proxy is sitting in Mauritius. At the same time, today you can speculate on almost anything. Whether it is stocks, commodities, derivatives, foreign exchange, cricket matches etc. the list is endless. Since 2014, the rise in speculation rather than investment has been dramatic, almost stratospheric. Sadly, there are no studies or even attempts made to document this. How much official and unofficial speculation is there in the market nobody knows. Money markets have become both fluid and non-transparent. In theory, you have all sorts of regulators, but it is still very much like the Wild West. One thing to note that even Income tax had to change and bring it provisions to account for speculative income.So, starting from being totally illegitimate, it has become kind of legal and is part of Income Tax. And if speculation is not wrong, why not make Indian cricket officially a speculative event, that will be honest and GOI will get part of the proceeds.
I wish there was some positive conclusion I could drive, but sadly there is not. Just today read two articles about the ongoing environmental issues in Himachal Pradesh. As I had shared even earlier, the last time I visited those places in 2011, and even at that time I was devastated to see the kind of construction going on. Jogiwara Road which they showed used to be flat single ground/first floor dwellings, most of which were restaurants and whatnot. I had seen the water issues both in Himachal and UT (Uttarakhand) back then and this is when they made huge dams. In U.S. they are removing dams and here we want more dams 😦