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Podcast #20: Surviving a bear attack – how Dhirubhai did it


“The bear cartel was successful in bringing the share price down but Dhirubhai was smart. He realized that if this bear cartel was allowed to go on, they would have taken the share price down to wherever they wanted, and you know who would have lost? Ambani wouldn’t have lost, it’s the small investor that would have lost money and they would have lost faith in Reliance. So he said, you can’t hammer my shares”

On today’s show, Deepak Shenoy (CEO) and Aditya Jaiswal (Analyst) take you back to the 80s, when the Indian stock market was all wild wild west!

It’s the April of 1982, a powerful bear cartel has raided the shares of Reliance, they short sell Reliance shares so heavily that it plummets from Rs 131 to Rs 121 in a short span of time. They have done it in the past and they have done it to many, but this time they have messed up with Dhirubhai Ambani- a businessman who was known for his astute business acumen.

Will the bears succeed? or will the tables be turned?

Grab your popcorn and listen in!


(The transcript has been sourced from a premium transcription provider. Yet, it may contain some inaccuracies.)

Aditya Jaiswal: Today’s episode is special because today we’ll be telling you an interesting story. We will take you back to the 80s when there was only one big exchange, BSE and few regional stock exchanges, such as the Calcutta Stock Exchange.

This story has two characters. On one side we have the late Dhirubhai Ambani, the founder of Reliance Industries, a businessman who had a fascinating rags to riches story, starting his career as a petrol station attendant, and then went on to build a multi billion-dollar empire without any formal education. He was known for his astute business acumen and some people say Ambani is an acronym for ambition and money.

On the other hand, we have a very powerful bear cartel, who had the power and muscle to make or break a stock. What happened when both came face to face? This story is about how the bear cartel, took on Dhirubhai Ambani and heavily short sold Reliance Industries and how Dhirubhai Ambani led an equal strong counter attack. And as a result the BSE had to be shut for three days. So, this story will be narrated by Deepak . Deepak, welcome to the show and please enlighten me. I can’t wait anymore.

Deepak: Hi Aditya. It’s a lot of interesting things that you’ve just mentioned and I suppose this was more than 30 years ago, so even I was just eight years old when it happened, so I want to put a disclaimer, here that I depended on the book by Gita Piramal called Business Maharajas-we’ll send in a link on the podcast. Interesting thing that happened, this was 1982, I think around April when the stock of Reliance Industries, which was listed on the Bombay Stock Exchange, they start to see a fall and the stock fell from 131 to 121 in a very short span of time. This is a different time- when you bought a stock, you didn’t have to pay for it instantly. There was a 14 day settlement period, which means that truly everyday in the evening, trades are settled. When I say  settled, it means whatever you’ve bought, you have to pay for and whatever you sell, you have to deliver and you get a day, T +1 or T+2 is what it’s called today.

Deepak: At that time it was a 14 day settlement period. So whatever you had bought it was a window of 14 days and every 14 days, people would have to either pay or deliver shares and there was a system called badla and I’ll come to that a little bit later. But what used to happen was you didn’t need a lot of money to just short shares because you didn’t have to deliver them. And so in this 14 day period, if you shorted a share and bought it back within the 14 day period, it was effectively like what is intra day today. So effectively, you could buy or sell today, that is a Monday, and buy it back, say next Monday, it would still fall within this 14 day period and it would be fine. Nobody would ask you for any money in the interim, it was almost, it was considered within the settlement period.

Aditya Jaiswal: Now I have a question. So, a lot of people who listen to us are new to the stock market. So let’s not assume that people know what short sale is. So can you please explain in very simple words

Deepak: Okay, it is an interesting thing where- so people think you’re to buy something, then you own it. Then you can sell it.

Aditya Jaiswal: Yes.

Deepak: What if I told you that you can sell something today and buy it back later so the sale can happen first. You’re wondering if I don’t have it, how do I sell it? That’s what’s called a short sale. Short sale means I don’t have it. I’m short that stock. I actually don’t own it and I’m selling it before I own it. So when I say I’m short, it’s almost like saying if I go to a shop and I want to pay for something for a hundred rupees with ninety in my pocket, I’m ten rupees short, right?

So I don’t have the ten rupees. In this case, I don’t have the stock. I have sold the stock without having it, which means I have short sold the stock so it’s not just selling, it’s short selling. You didn’t have it in the first place. That’s why it’s called short. Now, you could do this as an individual on the stock exchange on a daily basis. It’s short in the morning buy back in the evening. No reason to ask you. You didn’t have the share ready to sell it because within the same settlement period, that means you don’t need to have actually owned the stock. If I am actually short selling it. Now, there are new things in the stock exchange today that I can borrow a share from you and there’s a system called stock lending and borrowing, but I can borrow a share from you and then short it because now I’ve actually got the share, but it’s not my share, it’s your share. I’ve borrowed it from you and let’s short it.

And I pick it back up, let’s say a month later and I can give it back to you. Meanwhile, I have to pay you a certain borrowing fee, let’s say, for a month. Why am I shorting the stock? I am expecting the price to fall down. If I’m a large enough player, I can go and beat other stock by just selling, selling, selling, selling, and I don’t own the stock, remember,

Adiya: Without paying a penny?

Deepak: If you’re a broker, you have to pay a little bit of margin to the exchange. This was 1982 it was the Wild Wild West. I don’t think people cared about margins as long as you were a broker and a lot of the brokers can have wink, wink, nod, nod. BSE was at that time a coterie of brokers. It was broker owned, now it’s more professionally owned. Even today I think it’s broker owned, but it was broker managed as well. So there was a little bit of a tacit understanding and a sense of trust between players that people around the world leveraged themselves.

Deepak: Well, there’s also time when, 35 years ago, the word crore was a huge thing. You know, people’s average salaries are like 200 or 500, 1,000 rupees a month, so a crore was literally a very large number. So for a lot of people now to come to what happened, around 10 lakh shares or 11 lakh shares were shorted by this cartel and this was a bear cartel that was known to short shares. They would actually come in and short one share and that share would get hammered.

Deepak: Everybody would scamper away and the stock price would fall 20%. They would go and buy it back 20% below and then life would be fantastic. They would’ve made the 20% in the interim. Now remember, I can short sell at a hundred. If I keep selling the share, somebody else is thinking: “Oh my God, Deepak is this big player in the market, he is selling. I will have to sell my shares…”

Aditya Jaiswal: Because there might be something fundamentally wrong. They would think like that.

Deepak: Yeah, they think like that. And then they bring the share down was 80 rupees. The 80 rupees you’ve brought down the share to 80 rupees, I go and buy it back at 80. Now I have effectively sold at 100, bought back at an 80 a which means I made a 20 rupee profit. So, remember if I do it for 10 lakh shares of Reliance, bring the share price down from 131 to 121. I have made one crore by earning that 10 rupee, but that’s only if I was able to buy back at 121.

The problem really in this case was a bear cartel was successful in bringing the price down but Ambani was smart. He realized that if this bear cartel was allowed to go on, they would take the share price down to wherever they wanted, create panic in the share, and you know who would lose? Ambani would not lose because Ambani not selling his shares. The small investor that would lose money and they would lose faith in Reliance. So he said, listen, I got to do something about this. And he said, you can’t hammer my shares. There was a set of people, now companies were not allowed to buy back their own shares, so a bunch of people called the “Friends of Reliance”.

Aditya Jaiswal: Okay.

Deepak: Brokers friendly to the reliance community and stock and they came in and they started to buy the Reliance shares more than 8.7 lakh shares, I think out of the 10 or 11 lakh that was shorted. Now remember, nobody is paying any money here, right? So one guy shorted another guy has bought, the settlement period is 14 days away or a few days away. And this plan was, these shares were being bought, this was a lot of money. You’re talking about a crore, buy eight lakh shares of Reliance, which was 121 rupees. You still needed about 10 crore rupees, which was a lot of money. So you really had to figure out where this money was coming from, but that means the money hadn’t yet been paid for. So it was waiting for the settlement period for any payment to happen and people who are shorting also would have had to effectively produce the shares of whenever the settlement period was done.

Deepak: Now here comes the interesting thing about badla. If you’re shorted and you didn’t have the shares or if you went long, that means you bought the shares and you didn’t have the money to pay for the shares, you simply went to the guy and said: “listen, let’s move this settlement to the next cycle. The next 14 day cycle, after 14 days, I’ll pay you.” So effectively you give me credit for 14 days.

Aditya Jaiswal: So I just want to delay the delivery.

Deepak: So what I could do literally is I could do this and say next 14 days maybe the share will go up and then I will sell it. Then I don’t ever settle. So if it’s 120 rupee share, usually they’ll say, okay, give me 2 rupees or 1 rupee and move it up another 14 days. So that was the badla.

Instead of paying 10 rupees to buy or eight lakh for shares of Reliance, you pay me one rupee per share. So it’s eight lakh rupees. So I pay only eight lakh instead ten crores. And I moved the settlement over by one week or by two weeks. In two weeks more let’s say the price has gone up by five rupees. I will just say cancel my shares. I have paid only eight lakh rupees I want five rupees on it, lakh rupees or eight lakh shares, which is 40 lakh rupees, the badla financing cost was just eight lakh rupees. So pass, you need to relax, the remaining is my profit.

I don’t have to ever produce the Reliance shares. So typically that was badla, okay, if I bought the shares, for instance, if I’m long and I don’t want to pay the money, the guy who has sold the shares as to receive the money, but he’s allowing you to extend the period by another two weeks.

So he will receive the badla for that. So you’ve actively, it was like a guy lending his money, lending his money for another two weeks and you will get some interest for it. Now if a person has shorted and he cannot deliver the shares, but the other side says: I’m willing to pay the money. You pay the short seller pays something called Undha badla the other side. The Undha badla for actually having short sold the share, now remember the share is the same share, whether it is bought or it is sold, it’s the same share of the same company. So effectively, the under Undha badla will happen if more people are shorting and the long players are willing to buy the shares and the normal badla will happen, which is happening for more others where you will not want to pay the money for the shares and you will want to stretch the payment date by another month.

Then equivalent today, which is called futures, but it’s a slightly different mechanism. So I’ll come to that later. What happened in this case was there was massive buying and massive selling of Reliance shares. This happened over a consistent, period of the settlement period. At the end of the settlement, the Dhirubhai Ambani went in and said I now want delivery. I am willing to pay this money for these shifts.

Aditya: You sold it, now you give me the shares.

Deepak: The guy said: Yes, whatever. What is your Undha badla rate?

Deepak: Ambani said 50 rupees per share.

Aditya Jaiswal: Oh, for a 121 rupee share.

Deepak: For a 121 rupee share. Now, you can’t pay 50 rupees for two weeks, right? So you’re almost like looking at this and saying: this is crazy. I’m not going to pay. He’s like: well, that’s my rate, otherwise give me the shares. Oh, so one could ask wild rates. So it’s even today any concept of Undha badla, rollover or anything, it’s a rate that is based on the market. You can have one person saying, I want the shares today. I don’t care whether you have it or not. You find the shares from somewhere because I want the shares. That’s what Ambani, he says give me the shares. He also knew very clearly because he knew the the number of shares that are outstanding, who held how many shares and so on.

Deepak: He knew that these people could not locate the shares. So the question really was: where do these people find the share? They don’t have the shares. They never expected to have the share. They expected to roll over the badla and carry on. Now what Ambani said was, unless you settle this trade, the stock exchange cannot open. Three days while this negotiation was happening, the stock exchange did not open. Now, there were a lot of things that these brokers could do. The bear cartel-they could go to an LIC or they could go to some of the big players in the market and simply say give me whatever shares you have and I deliver against those shares. But I may as well pick it up from the market and give it back to you. But Ambani was smart and he was very well connected and he made sure that none of those things were allowed to happen as well.

So therefore, these bear cartel was in trouble and they would have lost five crore rupees to pay this or more than five crore rupees in fact, because initially they had a number of shares more. To play just the undha badla or even to square off the shares. So the problem was the stock exchange was closed. What do you do now? They said, okay, listen, we’ll open the stock exchange special session just for the Reliance shares so that the bear cartel can buy the shares from the market and give it to Ambani or the “Friends of Reliance”. It turned out it was not Ambani himself, but it was the “Friends of Reliance”. Another question was, how do you do this? How do you deal with this? Now obviously Dhirubhai was not angry because these people who are trying to make a profit, but he was also angry because people are trying to hoodwink the small investors. The company’s fundamentals were sound and you want to beat down the sound company by just destroying the value of the share just because you have money.

Deepak: He said: well I’m here, you come and try me now. So when he said this, the bear cartel, which was connected, well-connected to famous clans and they were a bunch of people who said they were all sort of Marwadi broker clan or this or that, but you don’t know the…

Aditya Jaiswal: Especially, Calcutta based cartels.

Deepak: They were a Calcutta cartel based group and so everybody knew who they were except nobody wants to talk about names. But the interesting thing was when they open the market for stock exchange for this special trading, for Reliance shares, the share price zoomed up to the point where you see 120 plus 50 is 170 and that’s where it will trade. So then these people start to buy shares they had to pay that 170 price and effectively they had sold at 120/130 and they were buying back at 170.

Aditya Jaiswal: Heavy losses.

Deepak: It’s massive. This would have bankrupted most of them, but essentially this amount allowed them to actually be able to collect those shares. And it’s possible. I’m not saying this actually happened, but it’s possible that the “Friends of Reliance” were are the ones who had sell back the shares in the first place through other anonymous people.

Deepak: So effectively, the guy who made the loss of 40 rupees per share and the guy who made the gain of 40 rupees per share, were two different people, right? The short sellers, the bear cartel, who sold those shares were the ones who lost. And ones who gained possibly were the “Friends of Reliance”. The effective thing was that in the end the stock exchange was closed. It was not allowed to open. The bear cartel had to lick their wounds and run back with their tail between their legs.

And it turned out that this whole thing came about in a completed way when the then finance minister, Pranab Mukherjee, in 1983 announced in some parliamentary session saying somebody asked him who is the beneficiaries of a controversial NRI scheme. They found out there’s a bunch of companies called Crocodile, Fiasco and bunch of other names which brought in 220 million which is 22 crore rupees to buy Reliance. So they effectively invested in Reliance shares. And when was this? Between April 1982, which is when this crisis happened or started to happen and to about somewhere in 1983 so it turned out that nobody knew the source of the money. Remember 10 crores was a lot of money and the “Friends of Reliance” was saying: listen, we’ll put the money down, please give us the shares.

Where do they get the money from? 10 crores were not easily available. It’s possible that this foreign NRI investment was the one that brought it together and people still say they don’t know the source of that 22 crores because a lot of those companies were created a few days before the investment actually happened. They didn’t have much capital. How do they get the money? And then the RBI probed into it. But my point is, those times the rules were just silly. The real story here is that a bear cartel were to take down Reliance and they wanted to take it down temporarily because they intended to buy back the shares at a lower price and therefore it was not really a permanent short of any sort and they had done this with hundreds of other companies and succeeded and they continue to be operational in the market.

This is over 30 years later. There’s a bear cartel always there and some of them have wisened up to the fact that you can’t short good companies, so they short bad companies and they make money on bad companies. There’s no problem with that because if you short, for instance, a company that is really doing badly like Yes Bank for instance, it may not be a bad company and a fraud company. It’s just that it’s a bad cycle. It’s completely fair to make money when it falls from 400 rupees to 40 rupees. That’s perfectly fine and I think that’s how the market operates. You need a seller for every buyer, but at the same time to hammer down a company for no reason at all, to invent perhaps rumors and then hammer down companies. These things are not acceptable and if you have players like Ambani who will counter those shorts, then you have a real market. So you don’t have the might of one side of the market taking down shares just because they want to.

Of course you do have the might of people who have a lot of money who take up shares whenever they want to, but you hope that the short sellers will keep them at bay and the strong bulls will keep the crazy bears at bay.

So this was our first example. We haven’t seen much of those kinds of things, but we’ve seen short squeezes-people who’ve tried to short and then have gotten squeezed massively. One of the biggest was I think in the Volkswagen, Porsche- one of those companies, because they ended up having shorted so much of one of these companies, I don’t remember whether it was Volkswagen or Porsche, but the one of them became the most valuable company in the world because the guys who shorted had to buy back the shares.

It has happened in India as well. There was a company called, I think now it’s called Hubtown, I believe earlier it was called Akruti, where there was a situation where this shares went from some 400 or 500 rupees to 2,000 rupees within a month because whoever was shorting the shares was squeezed out and the buyers just took the share up quite a bit and they wanted to squeeze the short players out. It didn’t play out very well because the share price fell after that. They were removed from the futures and option and here it comes to where we are today that you can short companies in the futures and options market. But the way that works is you put a certain margin upfront, typically 20% of this whole size, which was not really a requirement in Badla. The margining was, there was a different concept there, but here, every day you pay mark to mark so the price goes up. You pay that price.

If the price falls, you get that money back if you’re a shorter. So if you’re shorting, you make money when the price goes down. So you short one share in the futures market and if that share price falls, the person who is on the other side, which is the long future, why would you do this versus buying the shares is to buy a shares and we need 10 lakh rupees. But to do a future you need only 2 lakh rupees. So you would go and take this 5x  leverage and say, listen, I’m for 2 lakhs, I can get exposure for 10 lakhs. So if the stock goes up by one rupee, I make five rupees, right? So effectively on my money. So to leverage yourself, you want to do that. And the people who short are simply saying, listen, I don’t have the shares, I want to short it, please allow me to short it by putting only two lakh rupees down.

If the share goes up one rupee, I’ll pay five rupees, effectively for my trade. So it’s a way to leverage. It’s a way to short the market. There is a settlement period every one month for futures and because the margining is strict and you have to pay mark to market to the exchange every month. And apart from the mark to market the price change every day. There’s also a margin that must be maintained for every position, this is a lot safer than the badla option. What you will do for badla this time would not be if I’m long, if I bought some share in the futures market, then I want to move it from January to February. I have to sell the January contract and buy a February contract, so I have to actually do this badla by myself that but badla can be like the February contract might be, 10% higher or it can be 1% or it can be 0.5% higher.

Deepak: So you won’t know what that is in advance, but typically you know these rates. The differential is usually the interest rate of the day. So today’s industry is at 6% you would say roughly 0.5% per month. You can go up to 1 or 2% based on the share itself. So that’s what the derivatives market is today.

This is an interesting thing that happened in 1982 that actually probably changed a lot of things for Indian equities because when people got to know about this, they hailed Ambani as a hero because no matter what, you can see some “Friends of Reliance”, Crocodile. Everybody believed at the time that this was Reliance and he batted for the little guy.

Aditya: And you can’t mess with him.

Deepak: And you can’t mess with him and the point is the small investor benefited when the bears who were so used to taking the small investor out because the losers would be the smaller investors. Who would actually come in and panic and sell the shares because they made a loss. He batted it for those guys and that’s why I think he’s an unrecognized hero in a lot of ways.

Deepak: But this was one of his really heroic acts. And look, I’m a fan because I think a guy coming out from nowhere, a little town coming in making himself big and I think you know that deserves a lot of praise for his conviction, for whatever he did. There were things of course that people may disagree with and all that, but in this particular instance I believe he batted for the little guy. He brought the lure of equity investing for retail participants and made that popular in India. And for that we have to be thankful because that’s one of the reasons why we continue to participate in the markets as well.

Aditya Jaiswal: Amazing. Amazing. Thanks a lot Deepak. So I would request our listeners, they can let us know if they like such concepts of short narrative based podcasts where we pick up stories from the past and we discuss.

Deepak: I think any questions please connect on Twitter. I’m @Deepakshenoy. We also are @capitalmind_in. We’d love to hear your questions, your thoughts. We’ll give you a link to the books that we mentioned here on our post that accompanies the podcast and we’d love to hear from you a or for our portfolio management services. And it’s been an interesting last year. I hope this year is going to be a lot more fun, a lot more podcasts and stories like this. Thanks so much for listening.

Aditya Jaiswal: Thank you.



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