India's brothers grim

The spectacular fall of the Indian sharemarket has decimated the fortunes of India's young entrepreneurs. The wealth of brothers Mukesh and Anil Ambani has plunged by a total of $US83.2 billion.

Until a few months ago, it was considered down-market in India to bank with a nationalised bank or to park one's savings in bank fixed deposits or post office instruments. Among the upwardly mobile youth in particular, it was fashionable to dabble in the stock market or to hold money in mutual fund schemes where a basket of stocks determined the returns.

The inspired youngsters had the example of many of their friends who had made a 'killing' on the stock markets. In the obsessive passion to get rich quick, they were delirious as stocks soared. Market analysts were no less carried away by the zooming market. As the Bombay Stock Exchange (BSE) index soared past 20,000 in January 2008, many of them speculated on TV and in newspapers on when the index would touch 40,000.

They looked up to relatively new business icons like the House of Ambanis, which had touched dizzying heights in a short span of time. Dhirubhai Ambani, the late founder of the Ambani empire, started out as a worker in Besse & Company at age 16 in Aden in 1949 at a measly Rs 300 a month. He returned to India in 1962 and when he died four decades later in 2002, his net worth was $US15 billion. After his death, his two sons Mukesh and Anil fought bitterly and parted ways. In March 2008 they were fourth and fifth in the Forbes list of world's billionaires. Together, they were the richest family in the world.

In the wake of the global financial crisis, the share markets and mutual funds have taken such a beating that many of those young investors are doing the unthinkable – parking money with those very banks which they considered a joke. The State Bank of India, the biggest among nationalised banks, is swamped with customers who are looking for security of investment and stable returns.

When the BSE sensitive index (Sensex) recorded the second-biggest single day fall in absolute terms on October 24 – crashing by 1,071 points, or 11 per cent to close at 8,701 – it had dropped more than 12,000 points, or nearly 60 per cent since its January 8 peak of 20,873.

For months, until January 21, the Indian stock market had defied gravity as other regional markets went down like ninepins. But then, like many other countries, disaster struck Indian markets. The Sensex crashed by 1,408 points, the biggest one-day drop in the 133-year history of the BSE. Just over $151 billion of investor wealth was wiped out in a single day.

The market cap of all the companies traded on BSE evaporated by a staggering $940 billion during the period from January 8 and October 24. At peak valuation when the Sensex crossed 21,000, total market capitalisation was over $1.58 trillion. This is down to less than half.

An analysis by the authoritative Economic Times of promoter wealth loss between January 8 and October 24 shows that the two Ambani brothers saw the biggest fall in wealth among promoters of the top business houses in the country.

Though still dominating the market cap ranking, Reliance Industries chairman Mukesh Ambani saw his personal wealth crash from $57.6 billion as on January 8 to $14.4 billion – a fall of 75 per cent.

A major part of the wealth erosion happened in the flagship company, RIL, whose market cap declined by $57 billion. The market cap of two other group companies, Reliance Petroleum and Reliance Industrial Infrastructure, fell by $15.3 billion and $0.7 billion during the period.

Mukesh's younger brother, Anil Ambani, saw his wealth tumble from $48.4 billion to $8.4 billion – a loss of 83 per cent. His five companies – Reliance Communication, Reliance Capital, RNRL, Reliance Infrastructure and Adlabs Films - recorded an aggregate market cap loss of $53.7 billion.

Realty major DLF was the third biggest loser where the promoter wealth eroded from $44 billion to as low as $6 billion. DLF was followed by Tatas who saw their wealth in 27 listed companies plunge from $38.2 billion to $12.8 billion, a loss of 67 per cent. TCS, Tata Motors, Tata Power, Tata Communications and Tata Teleservices are among the key companies in the Tata Group to have taken a big hit on market cap.

Tata Motors – which bought Jaguar and Land Rover before the market crash, and was forced to relocate its much-heralded small car project from West Bengal to Gujarat recently in the wake of political agitation by displaced farmers – saw a 34 per cent drop in its second quarter profit and has now virtually dropped plans to raise as much as $600 million from overseas markets due to the global credit crisis. It is now re-thinking the re-financing plans for the $3 billion bridge loan it took to purchase the two UK-based units from Ford Motor which it has to repay by June 2009.

Given the importance of foreign institutional investment (FII) in driving Indian stock markets and the fact that cumulative investments by FIIs stood at $66.5 billion at the beginning of this calendar year, the pullout of $11.1 billion by them in the first nine-and-a-half months has contributed greatly in triggering a collapse in stock prices.

In addition, this withdrawal by the FIIs led to a sharp depreciation of the rupee. Between January 1 and October 16, the RBI reference rate for the rupee fell by nearly 25 per cent, from Rs 39.20 to the dollar to Rs 48.86.This was despite the sale of dollars by the RBI, which was reflected in a decline of $25.8 billion in its foreign currency assets between the end of March and October 3.

The stock market crash has indeed dampened spirits in India but the federal government remains nonchalant. With general elections due by May, 2009, there is heightened interest in whether the market will pick up by then and if not, what effect it would have on the Indian electorate. It is indeed a time to wait and watch.