Dhirubhai Ambani, founder of Reliance Industries, the man who was nothing less than a hero for a common man in the 1970’s70s. Do you know how he earned that respect, well there will be many reasons but today i am going to share with you a story of Mr. Dhirubhai Ambani which i came across recently. To the people who are not familiar with some common terminologies used in the stock market, I will briefly drive you through the ones that I will be using ahead.
Bear Cartel: group of people who have the ability to push down a stock price.
Brokers: people who acts as intermediaries between traders/investors and exchange
shorting/short: selling a stock beforehand and buying later
Liquidity: amount of money circulating in market
Promoter: owner of the firm
So let's start the story. Earlier the stock markets were ruled by the brokers. If a retail investor lost his money due the mistake of the broker, the retail investor was held responsible for it instead of the broker. Due to a strong unity among the brokers, ‘broker-raj’ used to exist in the stock market. Brokers treated each other as brethren and protected when needed. On the other hand, a bear cartel was already present in the market and they were the most feared group in the market. Everyone feared them and no one would ever wish to cross roads with them.
It's around 1970’s, Mr. Dhirubhai Ambani has established Reliance Industries and was planning for an IPO. Mr. Ambani’s debut in the stock market was a great success which prickled in the eyes of the bear cartel. Stock price of Reliance doubled in a short span and everyone was talking about it. Due to strong fundamentals of the company, retail investors went crazy behind Mr. Ambani. Reliance share was listed at around 30 Rs and in a span of 6 months it grabbed the height of 100 Rs. In this era the liquidity in markets was lower than that we see today, it was easy for the promoter to track who had acquired the bulk shares of his company.
The Bear Cartel who were the lions at that time saw this as an opportunity to crush Mr. Ambani. A meeting was called and a strategy was made to bring down Reliance, it was decided in the meeting to short shares of Reliance in a bulk deal. At that time the stock market had a 14 days settlement cycle, meaning if you sell a stock today you have 14 days to deliver it to the buyer. As the Bears started shorting reliance’s shares, its share price dropped from 130 to 110 Rs which is around 15%, it might have looked like a great fall but at that time it was a good figure. It was enough to induce fear of reliance in the market so that a free fall can take place.
Mr. Ambani came to know about it and was very concerned about the situation of retail investors if a free fall happens. He knew whenever such events happen it is the retail investors who loose their hard earned money and can never recover from this loss and somehow or other everyone else will come out safe with a minor bearable loss. So Mr. Ambani played a masterstroke to teach these bears a lesson. He used his network and found out who had shorted his shares and by how much quantity. He also founded who were the bulk investors holding his shares like LIC, UTI, DII, FII etc. Suddenly huge buying began to take place in Reliance, no one knew who was doing it ( the reason for this huge buying was never disclosed in the public domain until the 1990’s financial year budget when the then finance minister disclosed it in the parliament). Everyone thought that it was FII’s doing but it was not clear why and how they were doing it because at that time the FDI norms were a lot stricter than today.
An upward rally started in Reliance and it bounced back from 110 levels and crossed 150 which was a shock for everyone and from this day onwards Mr. Ambani emerged as a cult hero for the retail investors. But Mr. Ambani didn’t just stop here he had something else going through his mind. On the other side the bears went into panic, since they had shorted the 14 day limit was coming close. They were in desperate need of a seller who was willing to deliver Reliance shares so that they can deliver it on time. But Mr. Ambani had already thought of this and told everyone not to deliver them. Bears came with a solution for this and decided to hold their short position. At that time it was possible to hold a short position after 14 days settlement cycle if the sellers were willing to pay some premium to the buyers (the price will be quoted by the buyers here). Since Mr. Ambani was the one holding the strings he played his second and final masterstroke, as per his instructions the premium price was decided as 25 Rs/share. Now the sellers were squeezed in this trap set by Mr. Ambani, in all they incurred a loss of more than 5Cr. Rs.( 5Cr of 1970’s are similar to thousands of crores of today).
The battle ended on a positive note for Mr. Ambani. In Fact it was a double win for Mr. Ambani, he not only gained the trust of the Retail investors but also taught the bears to never come in his way. After this incident the bears got a good taste of defeat and learned a lesson to never target a fundamentally strong company. Even today, the bears fear to target Reliance. It can be said the Ambani’s do know how to give a befitting reply to their enemies.