Was it an Operator trap for small investors? Public-owned companies and Government officials making such irrational decisions in Publicly Listed Companies can dent investors' sentiments about the Indian Stock Market.
Classic examples of rising by elevator and falling by stairs.
The share price of IRCTC on 1st October 2021 was at 745 and reached a high of 1280, making investors' wealth double in 2 weeks; however, the rally was short-lived, reaching a low of 640 on 29th October 2021. The sudden rise of the shares in this bull run is way ahead of fundamentals, given that companies' profits do not support such valuations. Such euphoria in the stock market creates a trap for layman investors and traders. There is some big money that creates a trap, but the main cause of concern, in this case, can question the involvement and credibility of Indian government-owned publicly listed companies and their subsidiaries. As an Investor in PSU, we rely on the credibility of the government; such a thing can dent foreign and domestic institutions' investment in govt owned companies at a time when the government is planning to raise billions of dollars by listing LIC to raise 1 lakh crore from IPO to meet budget deficit by disinvestment from PSU companies.
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The Ministry of Railway caused damage and recovery by revoking the decision. The stock recovered sharply after the statement, but small traders lost crores of rupees. Will the Railway compensate the layman traders who lost crores of rupees due to margin calls triggered by such action? It's an open-ended question that questions the credibility of the law formed by the government on the Securities Contract Regulation Act 1956.
What was the news which questions the integrity of the Ministry of Railways in the IRCTC case?
On October 28th, 2021, a senior official from the Ministry of Railways issued a press release that stated that IRCTC would have to share revenues acquired from convenience fees for bookings made on its platform in a ratio of 50:50 with the parent company i:e Ministry of Railway. The first question arises of how the parent company can make such a decision when the subsidiary is publicly listed, and investors' interests should be protected at any cost. The sentiment of public shareholders is taken for granted. The decision was revoked the next day by the afternoon, stating that the “Interest of minority shareholders should be kept in Mind” by DIPAM. DIPAM is the Department of Investment and Public Asset Management. Still, the damage was done, and small traders lost their money due to a margin call trigger as the stock crashed 25% in the early morning of 29th October. Brokers would have squared off small traders' and investors' positions due to the margin call. Investors and small traders' hard-earned money was looted by such an irrational decision by the Ministry of Railway.
Trading in the stock market in the derivatives segment is done with the help of margin, which means we do not need to have 100% funds to enter a trade. For example, if you want to purchase shares worth 1 lakh rupees and the stock initial margin is 20%, then you need to have only 20000 rupees in the broker's trading account to buy/sell contracts by paying 20% token money.
Margin Call: The next day, if the market falls more than the margin you paid to the broker in the trading account, he has the right to square off the position. Brokers can square off the position when 80% of the margin the trader pays is a notional loss. IRCTC's margin was around 25%, so the broker could square off the position the next day when the 20% price went against the trade. IRCTC stock made a low of 20% in the early morning of October 29th and hit the first lower circuit. When the circuit opened, brokers squared off the position of traders who were in a loss of 20%, and the stock fell a further 5%, which means small traders made a loss of around 25%.
After wiping out the money of small investors and traders, the Ministry of Railway stated that the revenue would not be shared with the parent company but left an open-ended question for all stock market investors and traders about the integrity of government-owned companies……….
(The derivatives shares circuit opens once the daily price range hits the circuit limit, given that they have DPR but do not have a circuit, and it opens once the price hits the DPR).
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