The Rs 856-crore claim by Metropolitan Stock Exchange of India (MSEI) against National Stock Exchange (NSE) is scheduled for hearing by the National Company Law Appellate Tribunal (NCLAT) on 10 October 2017. MSEI had dragged NSE to the Competition Commission of India (CCI) citing monopolistic practices. The competition watchdog held NSE guilty and asked it to compensate MSEI.
Metropolitan Stock Exchange of India (MSEI), India’s new stock exchange, is recognised by Securities & Exchange Board of India. It is India’s third functional and recognised stock exchange after BSE and NSE. There is huge demand for shares of MSEI due to strong listing of BSE and upcoming IPO of NSE. A clutch of financial institutions now own more than 34% of MSEI, as do investors including Rakesh Jhunjhunwala, Radhakishan Damani and Nemish Shah.
In 2008, both MSEI and NSE launched currency future contracts almost simultaneously. NSE priced the transaction charges on these contracts at zero and given NSE’s dominant position, MSEI was left with no choice but to adopt zero pricing as well.
This made a significant and material dent in the financial position of MSEI, which filed a complaint with CCI alleging predatory pricing (waiver of transaction fees, data-feed fees and admission fees) wherein CCI found NSE guilty and imposed a fine of Rs 55.5 crore. NSE filed an appeal with the Competition Appellate Tribunal (COMPAT), which too found NSE guilty. NSE then moved the Supreme Court and its appeal is still pending.
According to the process, the exchange has filed an application for award of compensation against NSE for Rs 856 crore before COMPAT, pending the appeal. Now, as COMPAT ceased to exist (from May 26), all pending matters before COMPAT stand transferred to the NCLAT.
Udai Kumar, MD & CEO of MSEI,said, “MSEI started out as a fast-growing exchange with immense potential, when it was deeply impacted by the financial burden imposed by NSE’s predatory pricing. Speedy disposal of this matter is the need of the hour. “It will encourage transparency and compliance with existing competition laws and practices across the spectrum and also dis-incentivise anti-competitive practises and misuse of dominant position.”
Smart people learn from their own mistakes. However, wise people also learn from other people’s mistakes. Hence an investor can learn a lot from veteran stock market value investor Radhakishan Damani from Mumbai. Here is a brief on his long and highly successful investment career.
Radhakishan Damani is a low-profile stock market investor who invests on his own account. Radhakishan Damani holds stakes in a range of companies, from tobacco firm VST industries to cementmaker India Cements. Also owns hypermarket chain DMart, which has 91 stores and forms biggest part of his fortune. Damani has lately been expanding his property portfolio, buying, among much else, the 156-room Radisson Blu Resort in Alibag, a popular beach- side getaway close to Mumbai. He has pledged $8 million to a Bangalore institute and $1.8 million to the new Ashoka University.
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His close friend is fellow investor often referred as India’s Warren Buffett – the big bull Rakesh Jhunjhunwala who refers to Damani as his ‘guru’.
Damani started his career as a trader in ball bearings, far from the battlefield of bulls and bears. Following his father’s death, he shut shop and joined his brother’s stock broking business, inherited from their father. Just 32 and lacking knowledge of market dynamics, Mr Damani’s only asset was his keenness to learn.
He was not a value investor to begin with; he began his career in the stock market as a speculator, says a Damani watcher. Mr Damani was quick to realise speculation was the not the best way to grow capital. Inspired by the legendary value investor Chandrakant Sampat, he started playing for the long term.
Often, his strategy was simple. When he bet on Indian Shaving Products (now Gillette), his reasoning was, People will shave no matter what. It took Mr Damani some time to gain a foothold, and several of his initial bets flopped. But he steadfastly refused to follow the herd, and concentrated on evolving trading strategies of his own.
Gradually, he began getting his calls right, and within the next couple of years he had joined the ranks of the big boys on Dalal Street. Few players possess the kind of patience he does. But when he is convinced about any stock, he would buy his desired quantity in one sweep. And if he felt that a stock had run its course, he would dump his holdings at one go, says an associate.
Also noted was his promptness in cutting losses. Unlike many other players, ego would never get in the way of his booking losses, says the associate. Mr Damani himself once said, Cutting your losses is like performing a surgery on one arm with the other; painful, but it has to be done, otherwise the arm may have to be amputated.
Mr Damani likes to keep a low profile. He is not very articulate and does not communicate much, but he is a great listener. He patiently hears out everybody and never scoffs at any idea. It is a different matter that at the end of it all, he would back his judgement and instinct, says the associate.
All along, Mr Damani made some great calls both on the long and short sides of the market. Yet, many players viewed him as a bear rather than a bull. In India, anybody who is skilled at short selling is frowned upon, the general perception being that short sellers destroy value, says a close friend of Mr Damani.
His limited circle of friends is said to include Dalal Street’s latest cult figure Rakesh Jhunjhunwala. Often, the market believed they hunted as a pair. Even if one of them was active at a counter, broking circles would say the duo was in it.
A string of successes notwithstanding, it was the epic battle of 1992, in which he emerged victorious, that would mark Mr Damani as a stock market legend. It was the battle with the Big Bull, Harshad Mehta.
Reining in the Big Bull
The flashy Harshad Mehta shot into prominence thanks to a daring rally that lasted the better part of 1991, only to eventually fizzle out in April 1992. Mr Damani, on his part, was bullish on the market only till February 1992. Even as the Big Bull was pumping up the shares, Mr Damani began to go short.
He reasoned blue chips had already run up a lot and fundamentals no longer justified the rally. What Mr Damani had not bargained for was the seemingly limitless supply of funds to Harshad Mehta. The market kept rising, but rather than cutting his losses, Mr Damani rode on his conviction and doubled up his short positions. The market took off vertically between February to April, and RK was trapped badly, recalls a veteran broker. His losses were huge, and if the rally continued for a few more weeks, he may even have had to shut shop.
But then, it emerged that Harshad had been siphoning off funds from the banking system and using them to buy stocks. When the scam got exposed, the market went into a tailspin. Mr Damani not only regained the lost ground, but walked away with a tidy profit.
Harshad Mehta was to lock horns with Mr Damani once more in 1998, but this time with fatal consequences for the Big Bull. Harshad now focused on three stocks, BPL, Videocon Industries and Sterlite. The prices of these shares touched dizzy levels even as the broader market fell. It was as though Harshad’s picks were defying gravity.
All the time, Mr Damani was biding his time on the sidelines. A disciple of the old school of investing, his assessment was that the stock price had run far beyond fundamentals. At the time he thought was right, he started building short positions.
Prices continued to climb and he had to square off some initial positions at a loss. But soon, signals came that the Big Bull was having trouble financing his positions. And Mr Damani moved in for the kill. He simply doubled his short positions, under the weight of which, the market caved in.
Panic set in. The prices of the three chosen stocks plunged 60%. Some brokers say exchange authorities even tried to bring together Mr Damani and Harshad for a compromise but the talks failed. It would be wrong to say that RK’s call was motivated by a desire for revenge, says a market watcher who once worked with Mr Damani.
It was all about the price… He would have short sold those stocks irrespective of whoever had a bullish view on them, he says.
When Mr Damani came to know that some small shareholders were left with positions they could not exit, he covered up a part of short positions by buying shares from these investors at a negotiated price. This was not the first time he had done such a thing. In the early 90s, Mr Damani had accumulated a pile of ACC shares.
When a payment crisis loomed, Mr Damani responded to a request from authorities and offloaded a part of his holding at a discount. He was among those probed by regulators for suspected price hammering, but was eventually given a clean chit.
Towards the fag end of 1998, the overall market sentiment began to improve. Before long, the market was in the grip of a bull run led by technology stocks, which would peak out in February 2000. RK continued to trade, but those close to him say he had already begun scaling down the number and size of his bets.
Was he preparing for a self-imposed exile from the market beginning somewhere in 2001 for the next few years? Friends say he was always passionate about retailing, but were there other factors also that influenced Mr Damani to retreat from Dalal Street?
After the stock market crash of 2001, bear operators were once again under the regulatory scanner, the allegation being that they had colluded to hammer stock prices. Needless to say, Mr Damani also figured on the list of suspects. Like any other operator, RK made most of his money being on the long side of the market, says a broker who knows Mr Damani for long.
He had a finger on the pulse of the market and would not hesitate to sell short if the situation called for it. Unfortunately, his short (selling) calls attracted more attention than some of his long (buying) calls, he says.
Some players say that Mr Damani found himself a bit out of depth during the technology boom of 1999-2000. He stuck to the classic rules of trading, short selling shares that he felt were over valued and going long on the under valued ones.
But stocks from the sectors that he had an sound understanding of, cement, automobile, steel, were out of favour. Technology was the buzzword at the bourse, and irrespective of whether those companies were making money or not, investors were falling over each other to buy into them.
And Ketan Parekh had now taken over the as the reigning Big Bull, and carved out a reputation for himself as a champion of new economy stocks. Mr Damani’s old school strategies did not work well for him in this period.
If anyone had not noticed, Mr Damani’s right calls on Tata Steel and State bank of India made them aware of his return to the stock market this year. But this time, it has been a mixed bag of hits and misses, those close to him say. “Over the last one month, he has been as successful or unsuccessful as other players in his league,” says a Damani watcher.
It may be premature to judge the old fox when the markets have not shown a clear trend. India, like other equity markets around the world, has been volatile over the last month as a result of the crisis involving sub-prime loans in the US. It is anybody’s guess how things will go from here.
The market has also undergone a sea change during Mr Damani’s absence. The number of participants, stocks and liquidity have risen manifold. If there is greater transparency, there is also more volatility to contend with. Admirers or critics, everyone is impatient to know whether and how Mr Damani is going to pull it off this time.