Casino Kolkata's Big Black Hole

Virender Kumar Aggarwal and his wife Ramkali used poison in a seedy Delhi hotel. Abhishek Banka drowned himself in Calcutta, his wife Sona threw herself from the ninth floor. Sanjay Aggarwal and his wife Sapna first killed their children Ashita and Chirag and then hanged themselves. Virendra Kumar Maini used a dupatta to hang himself from the ceiling fan. The stockmarket crash is claiming its victims.

It's undeniable that what led these unfortunate people to end their lives was their own greed—the prospect of high returns on the bourses, leading them even to borrow or embezzle huge amounts. But it's equally undeniable that the Indian stockmarkets could overnight turn into a very dangerous place for the small investor. And that no bourse exemplifies the dark shenanigans better than the Calcutta Stock Exchange (cse).

Like the Indian cricket team, the cse authorities won a cliff-hanger on March 22, but unlike Ganguly's men, is about to lose the series. According to the market grapevine, stockmarket watchdog Securities and Exchange Board of India (sebi) has decided to supersede the cse board and institute a probe into the way this exchange was being run—dominated by the principal defaulter, Dinesh Singhania. And if the investigation is properly conducted, skeletons will cascade out of cse's cupboard. But then, say marketmen, the three major defaulting brokers are astute operators who function through a number of satellite brokers and agencies and it'll be very difficult to pin any major wrongdoing on them. Three board members have reportedly resigned, and the cse will probably be run by a sebi-appointed administrator.

The cse adopted a simple but effective device to overcome the genie of the pay-in crisis in settlement no. 150 on March 22 and reduce the shortfall to just Rs 16 crore. Out of a total pay-in of Rs 231 crore, the shortfall of the 10 main defaulting entities was Rs 62 crore. Of this, Rs 53 crore of transactions were found to be "non-genuine and collusive in nature". These were excluded from the payments list. This reduced the shortfall to just Rs 9 crore for the major brokers. To this was added a shortfall of Rs 7 crore for others. The total of Rs 16 crore was adjusted against the cse's Settlement Guarantee Fund (sgf). The rejection of the Rs 53 crore of dubious transactions was sebi troubleshooter Naginder Parekh's idea.

Parekh has been going through the exchange's transactions with a toothcomb. Although this decision has averted an immediate payment crisis, sources say this has given the exchange just a temporary reprieve as a number of the rejected trades will be found to be valid and the cse will have to make payments at a later date. The cse will also face another tricky problem. Its total withdrawals from the sgf now stands at Rs 38 crore, nearly 50 per cent of the corpus. If an exchange draws more than 25 per cent of the total sgf in a year, it may be barred from conducting modified carryforward operations. But few expect this rule to be enforced as it would deal a death blow to the already bleeding cse. The exchange has announced that the three major defaulting brokers—Dinesh Singhania, Ashok Poddar and Harish Biyani—who operated through 10-member firms will be declared defaulters and steps initiated to recover their dues.

A top cse broker and a former board member said: "Although the cse has been hurt by becoming the focal point of all that ails the Indian stock exchanges, if this leads to reforms it will ultimately save it from the stranglehold of a group of manipulators who have been using this exchange to serve their personal interests. " He unhesitatingly named Dinesh Singhania as the king of cse. According to him, "Singhania (an ex-president and a current member of the nine-man cse board) had virtual control of the board with five other members aligned with him. Even when his cheque of Rs 17 crore for margin payment bounced on March 5, his terminals were not disconnected and he was allowed to continue carry-over trading for another week."

Now that the dust is settling down, nearly all agree that the root of the problem is Calcutta's unofficial badla market. Here punters were allowed to build up huge positions without margins, other securities and without the limit of Rs 40 crore per broker imposed in the official market.

The badla financiers also had a field day in lending to this market, where the interest rates were much higher than the official market. For instance, when last year Ketan Parekh was making his bull charge, unofficial badla rates were as high as 120 per cent. This year this rate has been 30-50 per cent, but still much higher than the official interest rate of 11-14 per cent. A broker said the badla market even attracted some middle-class lenders who have now been wiped out along with the high net worth individuals. The total loss has been roughly estimated at Rs 1,000 crore but the final figure could be much more.

Everyone, including the market controllers, knew of this parallel market but not even a feeble protest was raised. Any Calcutta broker who pointed out the dangers was pushed out of decision-making positions. How pervasive the parallel market is can be realised from the fact that unofficial badla sessions were conducted on the floor of the exchange and the pink press regularly published the rates. But KP's inability to pay his Calcutta brokers for his own trade has shaken this market's foundation and possibly signalled its end.

Meanwhile, the woes of the unofficial market continue to affect official markets. Badla financiers, seeing the price of the shares they hold as collateral fall much below their exposure, are selling them at rock-bottom prices in the official exchanges, often finding no buyers even when the price drops eight per cent in a day to the lowest price band. Buyers are staying away in the hope that prices will fall even more. And the crisis will not blow over till the shares originating from the unofficial Calcutta market are sold. Neither will confidence return till the non-transparent and corrupt cse is given a thorough scrub.