Fear and misinformation — Our theory on what happened on Friday

A potent combination of news, misinformation, and rumors sent the market into one of its biggest drops of the year

For a day that began like any other, it proved to be quite an interesting afternoon.

Lets go through what we know

At around 12.30 pm, shares of Dewan Housing Finance Corporation Limited (DHFL) began falling, and falling fast. In half an hour the stock fell from 570 to 274. It ended the day at 337, a 45% drop.

DHFL was not alone, other NBFCs including Indiabulls Housing Finance fell, but managed to recover.

Then at around 1 pm, the NIFTY at large began to nosedive, hitting a low of 10,866 before pulling back. It then wavered before finally ending the day at 11,143.

And all this while poor Yes bank was being pulverized and closed off a miserable day, down 29%.

Now, we theorize

When IL&FS defaulted last week, holders of its debt took a hit, chief of whom was DSP. And today news came that on wednesday, a DSP fund had sold around 300 crores of DHFL bonds at an yield of 11%, a full percent above the prevailing yield.

The sale was likely to cover redemptions on DSP’s funds.

As reported on Bloomberg Quint,

DSP Mutual Fund’s assets under management fell from Rs 1,11,912 crore in August to Rs 1,06,245 crore on Sept 19. due to redemption on the back of advance taxes and goods and services tax, said Kalpen Parekh, its chief investment officer. “Our deal (to sell DHFL bonds) was to meet payment obligations next week.”

This fact was however, not known at that time.

All that the market knew was was that DSP had sold DHFL bonds at a discount.

This sets of a firestorm of rumors

Why was a major fund house selling DHFL? Is something wrong?

Lets sell…

IL&FS is selling 700 crores worth of DHFL shares on the open market?

Sell

The Algos begin reacting to the sudden fall of DHFL, bringing other NBFCs down

Sell

What if its not limited to the company? What about IndiaBulls?

Sell!

NBFCs are going down!

Damn it, Sell!

The wider market looks on in horror

Sell! Sell! Sell!

It was not until 1.15 pm that the panic ceased and the Index began recovering. The day still saw almost all midcaps in the red, in fact only 200 shares on the market were green today.

What happens next

A lot will depend on news (or lack of) about DHFL over the weekend. If there is nothing, then all is well.

DSP itself came to the company’s defense —

“We are very unhappy that it has happened like that and there was no reason to stab somebody. There is nothing against DHFL and they are a good housing company.”
Hemindra Kothari, Chairman, DSP Mutual Fund

But any hint of investigations or cooked books will see a wider fall in the NBFC sector.

As for the market itself, it will likely behave as it did after demonetization, and the 2017 surgical strike; recovery.

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