Markets reach a flashpoint

A further fall may force leveraged HNIs to sell mid-caps to meet fresh margins.

The domestic stock markets are precariously poised following Thursday's fall - the second biggest single-day drop in the Sensex "" with panic likely to set in if the rout continues, say market experts.

Though not comparable with last May's situation, most brokerages do have big leverage positions from high networth clients (HNIs), who, in order to meet the margin requirements in the derivatives segment, would start selling their holdings in mid- and small-caps, if the downward spiral continues.

Till now, mid- and small-caps have seen stiff resistance, despite the big mauling in large caps. On Thursday itself, the Sensex and the S&P CNX Nifty Index fell by 4.28-4.38 per cent, but the BSE mid- and small-caps fell around 3 per cent. Normally, the fall is steeper in mid- and small-caps in big crashes, but, at present, there is no major selloff in stocks of small and medium companies.

The benchmark Sensex shed 1,442 points or nearly 10 per cent from last month's peak, but things might turn worse, if FII selloff gathers pace. In comparison, the mid-cap index has come down by just over 7 per cent, while the small cap index is down about 6.6 per cent from their highs seen last month.

"Investors have to make mark-to-market margins for their F&O positions. When the market falls in a big way, investors usually sell their stocks in mid- and small-caps to provide margin money in F&O positions. If the fall continues for two more days, we have a job on our hands," said Arpit Agarwal of Arihant Capital.

A major relief this time round is that most retail investors have been cautious after the last May's fall (they also missed the rally since then), but senior executives of brokerages said HNIs have leveraged positions.

"There is no panic at the moment. But, panic might kick in, if we see big sell off by foreign investors in coming days. We don't know how much has been the losses by hedge funds in subprime mortgages. If they have bigger losses, there could be major sell-off in markets such as India, where they are sitting on decent profits," said Sandeep Jain, vice-president and head of sales (private client group) at Ambit Capital.

Last May-June period, FIIs pulled out over $2.75 billion, which triggered a 30 per cent correction within two to three weeks.

But this time around, the fall is not as big, though FIIs have been net sellers of over Rs 8000 crore ($2 billion-plus) in August, mainly owing to strong buying by domestic institutions. Domestic institutions were net buyers for about Rs 2,613 crore this month, cushioning the fall.

"We have been advising clients to remain cautious early last month. We have brought down the open positions of our clients dramatically in the last one month. There is no leverage position at all," said Giby Mathew of JRG Securities, a retail brokerage, which does not cater ti HNIs.