Occupy Dalal Street? Why you can't pull off a GameStop in India

A bunch of Redditors have taken the Wall Street by storm. They first attacked video game retailer GameStop's stock taking it sky high in a matter of days, then others such as AMC Entertainment and commodities silver and gold. The 6.6-million members of Reddit forum r/wallstreetbets are unapologetic and determined about what they are doing. They are pulling off a David versus Goliath, where David is wallstreetbets members and Goliath hedge funds such as Melvin Capital and Maplelane Capital, Point72 and Citadel.

As discussions are on if what Redditors are doing is justified, Indian retail investors are getting fascinated by the fiasco. They too have taken positions in GameStop shares. They have their own forums and trading communities where they discuss stock ideas. They want a GameStop in India, but can they?

At least not to the extent that wallstreetbets did. And this is where it gets interesting. We often look West to denounce things wrong in our country. But it is time for the West to look East. The Securities and Exchange Board of India (SEBI) has regulated the Indian stock market so well that there are multiple reasons why you cannot pull off a GameStop-like rally in the country. We explain a few:

Market-wide position limits

SEBI keeps a close eye at extreme price movements and concentrated positions in stocks. It routinely sends out notices if it observes discrepancies.

"The investor protection mechanisms that the Indian stock market has have been quite helpful in avoiding GameStop like scenarios in India. The short interest in the US markets can be more than the total number of shares held publicly, which can create short squeezes like the one we are witnessing. In India, the net position in any stock cannot exceed 20 per cent of the free float," says Swastik Nigam, CEO & Founder, Winvesta. Such market-wide position limits ensure that price manipulations do not happen.

Intraday filters

Secondly, we have intraday filters. A stock cannot move beyond 20 per cent in a day. Once a stock keeps hitting upper circuits, the regulator reduces the intra-day limit to 10 per cent, 5 per cent and 2 per cent. Although the intraday filers are not allowed in stocks in which futures and options take place, the SEBI can exclude those from the F&O segment.

Stock lending not popular

Stock lending market, the core in the GameStop fiasco, is not much active in India. Stock Lending and Borrowing Mechanism (SLBM) was launched in India in 2008, but it hasn't picked pace. "Although there are a few benefits of trading on the SLB platform, there have been few deterrents. Firstly, the lender's income is qualified as "income from other sources", so people lending will have to file using ITR3 and may need audits. Whenever there is a corporate action like rights and bonus issues, there is a forced closeout of the position. Finally, the product is complex in terms of back-end operations compared to F&O, and brokerage firms still don't have systems to scale this," explains Nithin Kamath, CEO, Zerodha in a post.

"In the US your stock holdings are held by the brokers (held in book or street name, also the reason for the large stock lending market). If a broker goes down, your securities is at risk as well. In India, they sit in your Demat with NSDL/CDSL, ring-fenced from any broker risk," he adds.

Hedge funds not powerful

Unlike the US where hedge funds can take unlimited leveraged positions bringing in systemic risk, the regulations in India are stringent. "In India, no one can hold overnight positions more than nearly five times leverage (SPAN+Exposure for F&O, VAR+ELM for stocks)," says Kamath in a tweet.

"As we see the madness in US hedge funds, let's be happy with the way SEBI has let our hedge fund industry - CAT III AIF - develop gradually. Limitations on leverage and tight disclosure, will build this space without a blow up happening, slowly before the industry has taken off," says Radhika Gupta, CEO, Edelweiss Asset Management Company in a tweet.

The adrenaline rush is high. How things are panning out in the US is keeping retail investors engaged and glued to Reddit-like discussion forums. But, be cautious.

"Indian stock market investors should continue to invest based on a stock's fundamentals or technicals and avoid getting lured into the possibility of creating a similar squeeze in Indian stocks," suggests Nigam of Winvesta.

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