How a Dhirubhai Ambani game led to the closure of the stock exchange for 3 days
If I were to produce a TV series, this plot would make one of the best financial thrillers of all time. Alas, I’d rather try and pay off my education loan first before venturing into something of that sort.
Dhirubhai Ambani was a rags-to-riches entrepreneur, a corporate mastermind and a financial wizard who had made his way into the society’s top tier in less than two decades. Up against him was a syndicate of the ‘Satta Bazar’, men with generations of experience in sky-rocketing and tumbling the valuations of companies.
India’s largest private sector company, Reliance Industries Limited went public in October 1977. After the IPO, the share price started rising. In 1978, it crossed Rs. 50, in 1980 it crossed Rs. 100 and in 1982, it touched a high of Rs. 186.
Using the technique of short-selling (where traders sell shares they do not own in the hopes of the share price falling and buying them later at a lower rate), a group of operators started short-selling Reliance. They quickly shorted over 350,000 shares of the company, resulting in a fall in price from Rs. 131 to Rs. 121.
Then, something unusual happened. A buying wave began (any guesses who used his vast network for this?) and NRIs from the West-Asian countries started buying any RIL shares on offer. There were 1.1 million shares on offer, and every single one was bought. Dhirubhai Ambani had gotten a hold of the game.
On April the 30th, 1982, the buyers demanded the delivery of the same from the sellers. However, the sellers did not have any shares, as they had shorted them. But they could’ve bought from the market and delivered them, right? No, there were no sellers in the market! Ambani’s men would not cede and demanded their shares. This sent the exchange into a frenzy, which had to be shut down for three days while it tried to strike a deal between the involved parties. However, the buyers were in no mood to compromise.
Stock markets across the country were swept clean of RIL shares as the prices rose to a peak of Rs. 201. The sellers had to eventually buy the shares at very high prices and had to sell them back at Rs. 150. Their gamble had come back to haunt them.
I recently started trading and have an idea about short selling myself, but there is one company I know I’m not going to short for sure!
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