Most retailers in the market make money by buying stocks and holding them until they achieve significant returns. With markets moving up, people tend to invest more, and that in turn fuels further investment.
However, the markets aren’t moving up all the time. The market corrects sometimes, but sometimes the market tends to fall. This is called a Market Crash. A Market Crash is defined as a sudden and sharp decline in the prices of securities in the markets and the overall market due to unanticipated events. A market crash might have many factors behind it such as: -
- A prolonged period of rising stock prices across a wide variety of industries.
- Excessive market optimism.
- End of a speculative bubble
- If the market participants have been using high-margin debt and leverage.
- Economic crisis or major catastrophic events.
Let’s take the example of America’s stock market crash in 2000-01.
In the late 1990s, when the internet was the big thing, investors were dumping money into tech companies, hoping to fund the next Intel or Oracle. Capital flowed freely into the stock markets, doubling American indices in a single year!
However, when funding dried up in mid-2000, poorly managed but highly funded tech companies began collapsing one after the other. Investors began pulling money out and that resulted in a massive sell-off (end of a speculative bubble). The bearish sentiment carried over into 2001 as American markets were still falling.
In such recessionary market trends, the World Trade Centre was attacked and America witnessed one of its worst attacks on American soil (catastrophic event). Since several brokerages operating from the World Trade Centre and the government feared a panic selling, the market had to be closed for a week!
After the market opened a week later it fell over 7% in a day!!
Although India takes pride in having a robust domestic economy, it isn’t immune to such crashes. Some of the most prominent stock market crashes in India were:
Top 6 Indian Stock Market Crashes:
1865: Crash Before the BSE Was Set Up!
India witnessed its first-ever stock market crash well before the Indian stock market was set up! In 1860, foreign investment was flowing into India and sectors like banking, tea, telegraph, and gold mines received the most investment. In 1861, the USA witnessed a massive civil war which ended up spiking demand for Indian cotton.
Cotton businesses began making abnormal profits and the excess profits began flowing into the little space in front of Bombay’s Town Hall. This led to a speculative bubble whereby the number of companies traded grew from 10 in 1862 to 100 by 1864!!
Stocks traded there began jumping as misled optimism in the markets was fuelling an unprecedented Bull Run. For example, the stock of Back Bay Reclamation jumped 10x times from Rs 5,000 to Rs 50,000!!
However, when the Civil War ended in 1865, cotton exporters realized that they couldn’t maintain the higher prices and high levels of profit they had during the war. They began pulling funds out of the market as the market crashed in May 1865! The stock of Back Bay Reclamation fell 96% from Rs 50,000 to Rs 2,000!! Many speculators were wiped out due to the crash, but this crash helped Indians understand how interconnected their markets were.
1982: When Dhirubhai Ambani Beat the Bears
Bear cartels refer to a group of traders that make money by shorting stocks. These traders target stocks and short-sell them to bring their prices down and then buy them back at a lower price to gain from the difference.
In 1982, a major group of Bears targeted Dhirubhai Ambani’s Reliance and dragged its price down from Rs 131 to Rs 121 per share in a day! And it wasn’t just any day. It was the day when Reliance’s party convertible debentures were set to be repaid by allotting shares at market prices.
Dhirubhai Ambani wanted the market price to be as high as possible to ensure minimum dilution of control in the company. However, the Bears were doing the exact opposite as Reliance’s share was breaking. Over 350,000 shares of the company hit the market, but there were no buyers on scene!
However, what surprised market participants the most was the fact that suddenly a group of brokers (later named the “Friends of Reliance”) came in and swept up majority of the shares offloaded and pushed the prices back up to Rs 125.
At the time, the BSE had a settlement system where trades were settled every other Friday. Another settlement mechanism in place was the Badla system. According to this system, if buyers/sellers could not honour their part of the deal on the settlement day, they had to pay a Badla to postpone settlement to the next date.
The drama reportedly continued for the next two weeks and settlement day finally arrived. The Bear cartel expected the brokers to be unable to pay the price for the shares. Friends of Reliance turned the tables on them as they presented the entire amount (later revealed to have been from shell companies called Fiasco and Lota, owned by a mysterious man called ‘Shah’)!!
They demanded physical delivery of shares from the bears, which they obviously didn’t have, and demanded an absurd Badla amount of Rs 50/share!! Bears refused to pay and the BSE was shut for 3 days due to this entire ordeal! Ultimately, the Bears had to pay a Badla of Rs 2/share and buy the Reliance shares from Friends of Reliance at a premium.
This skyrocketed Reliance’s share to Rs 201 and Dhirubhai Ambani became a stock market legend who defeated a major Bear cartel.
1992: Harshad Mehta’s Market Manipulation
Harshad Mehta’s scam of 1992 is still one of the largest share market scams in Indian history. The scam was so simple yet executed so perfectly that other market participants couldn’t believe it. In fact, the scam was so iconic that it got its own TV series!
Harshad Mehta came from humble beginnings so he certainly didn’t have enough money to manipulate the market. What he took advantage of was a weak banking and securities system. He colluded with bank employees to generate fake Bank Receipts (BRs), which represented government securities (G-Secs).
He would then approach banks with these BRs to get loans from banks, which were used to boost share prices. After boosting share prices to a certain level, he would exit the position and return the principal to the banks while earning hefty profits from money that was never his!
His scam worked as it juiced up the prices of some shares by almost 4,400%! The SENSEX more than doubled under his manipulation and people began jumping in as a Bull Run took over the markets. However, his manipulation was exposed by journalists which sent markets tumbling, leaving thousands of investors with massive losses.
The extent of his scam is estimated to be between Rs 2,000 to Rs 4,000 crores in 1992 (A little over Rs 10,000 crores today!!)
2008: The Year of Black Monday
2007-08 was the largest financial crisis in the early 21st century as global markets tanked due to the Lehman Brothers collapse. This was also on account of a speculative bubble burst, where financial giants were investing in subprime mortgages recklessly.
The American markets bled as stocks fell uncontrollably. Investors began pulling money out of global markets as markets worldwide declined as poor investment sentiment drove markets down. Investors reassessed their risk appetite as they began pulling money out of emerging markets to develop in stable and developed markets.
The banking and financial services sectors were particularly hammered as investors lost faith in these sectors and their ability to function. India was not spared either as investors began pulling out of the markets immediately and that sent major stocks and the indices tumbling.
By the end of 2008, SENSEX had declined from 20,465 in early 2008 to 9,716! This crash cost thousands of crores to investors as it took the index two years to regain the 20,000 level in September 2010.
2015-16: China, Greece, Brexit, and bad weather
The economy of Greece hadn’t recovered from the 2007-08 crisis as the country’s economy was in trouble since late 2009. Poor monetary policies, and overall weakness in the economy, and poor monetary policies plagued the Greek economy. On 30th June 2015, Greece became the first developed economy to fail to repay an IMF loan on time.
This, combined with the slowdown in China’s economy and declining oil prices, ended up sparking a global selling pressure that plagued all economies. A poor monsoon season and disappointing earnings made the sell-off even worse for India as the SENSEX fell over 1,600 points in a single day in August 2015!
2016 was not any better for Indian markets as adverse global sentiment and growing bank NPAs kept the selling pressure on. The SENSEX had lost a record 26% in 11 months!
Although there was recovery, the 2016 demonetization drive by the Narendra Modi government led to another short-term meltdown. At the time, the Nifty 50 had fallen below the 7,000 mark for the first time in almost 2 years!!
2020: When China Screwed the World
The Covid-19 pandemic, which was spreading like wildfire throughout the world saw many infections and deaths before a vaccine was developed.
However, most people are unaware of its impact on the financial markets. The lockdowns induced by COVID-19 resulted in massive business slowdowns as investors began pulling money out of the markets, which resulted in a selling frenzy throughout the world.
Another major factor that contributed significantly to the decline was the Yes Bank crisis. The bank was lending out risky loans while its customers were withdrawing funds at an alarming rate. The RBI took over management of the bank and placed a 30-day moratorium on the bank that suspended its lending authority but allowed customers to withdraw funds up to a limit.
The meltdown was significant as the Nifty 50 fell from 12,000 to 7,500 in less than 2 months, wiping out all the gains the index had made over the past 4 years!!
2023: Adani and the Falling Banks
2023 wasn’t a major market crash, but it certainly was a difficult time. In the second half of January 2023, Hindenburg Research launched its malicious report against the Adani Group, which had risen to fame due to its astronomical growth since the COVID-19 pandemic.
That led to a massive investor sell-off which resulted in the Nifty 50 tanking almost 1,000 points! Adani stocks saw massive declines, with some falling over 50%, but the index recovered soon after that. By mid-February, the index had regained the 18,000 mark, but another global trouble was brewing.
FTX had gone bankrupt in November 2022 and banks that offered crypto-related services were having a hard time. Silvergate Bank witnessed a bank run as its deposits had tanked by over 60% but the number of withdrawals kept increasing. It collapsed when it had to sell a significant amount of its assets at a loss to meet the demands.
This was followed by the collapse of the Silicon Valley Bank, Signature Bank, and the First Republic Bank. However, this was a US-only crisis so far. But the magnitude of this crisis turned global when the collapse of the Silicon Valley Bank, combined with surging litigation expenses, triggered the collapse of Credit Suisse.
Switzerland is the banking capital of the world and one of Switzerland’s largest banks collapsed. This eroded global trust in the banking sector, resulting in a banking stock selloff globally.
The Nifty 50 lost 1,000 points in less than 2 months, driven down by banking stocks, while the Nifty Bank index tanked almost 3,000 points!!
1,499
