The downward journey of stock markets, repurchase of shares and the story of fictitious capital

12 May by Sankha Subhra Biswas


Image by Ahmad Ardity from Pixabay

A severe crisis has gripped the world financial markets since early March 2020 and needless to say, India has not escaped this onslaught. The Indian stock markets are unable to halt this deep slide. On certain days the markets shows some strength but it keeps falling once again in the next trading sessions. In spite of great efforts, the governments or the central banks are in a dilemma about the mechanisms to stabilise the stock market.

Earlier, Raghuram Rajan, the ex- governor of the Reserve India (RBI), warned about the looming economic crisis. According to him, “Economically speaking, India is faced today with perhaps its greatest emergency since independence [1].” Making a distinction between the current and the previous crisis (2008) he added, “The global financial crisis in 2008-09 was a massive demand shock, but our workers could still go to work, our firms were coming off years of strong growth, our financial system was largely sound, and our government finances were healthy. None of this is true today as we fight the coronavirus pandemic.” [2] Although the movements in the stock market are independent of the real economy, in the end, the stock market collapses with the collapse of the real economy. People considered close to the political establishment like Arvind Subramanian and Josh Felman is of the opinion that “following the Covid-19 shock, red ink will be blotting balance Balance End of year statement of a company’s assets (what the company possesses) and liabilities (what it owes). In other words, the assets provide information about how the funds collected by the company have been used; and the liabilities, about the origins of those funds. sheets across the economy. For more than a month, firms of all sizes and sectors have been unable to sell their goods; many households have been unable to earn; financial institutions have been unable to collect on their loans; and the government has been unable to collect much tax revenue. The damage to all their financial positions has been severe, and will take a long time to repair [3].”

Many economists lower forecasts for 2020-21 as they feel that the extension of the lockdown, even with some relaxations, will adversely impact manufacturing and services. The lockdown has brought manufacturing and services to a grinding halt, prompting many to predict that the Indian economy will either remain stagnant or may contract by more than 2 per cent in 2020-21. Both these sectors contribute over 80 per cent of India’s Gross Domestic Product GDP
Gross Domestic Product
Gross Domestic Product is an aggregate measure of total production within a given territory equal to the sum of the gross values added. The measure is notoriously incomplete; for example it does not take into account any activity that does not enter into a commercial exchange. The GDP takes into account both the production of goods and the production of services. Economic growth is defined as the variation of the GDP from one period to another.
(GDP). [4]

 The downward journey of capital markets

The stock market has been in a secular bear run with mild attempts to correct in intermittent phases. This sporadic rise, according to several economists, is absolutely temporary and there is no reason to see this as a positive development.

Despite the euphoria around the stock market in the beginning of 2020s, the market started collapsing after February 17th 2020. The following tables show declines of various sectors stocks on a year-to-date (YTD) basis. The data records the fall till May 5, 2020 since the beginning of this year.

Fall of sectoral indices of Bombay Stock Exchange

Also in the case of NIFTY the fall in share Share A unit of ownership interest in a corporation or financial asset, representing one part of the total capital stock. Its owner (a shareholder) is entitled to receive an equal distribution of any profits distributed (a dividend) and to attend shareholder meetings. price was significant.

Fall of sectoral indices in the National Stock Exchange, India.

From mid-February 2020, banking share prices began to fall around the world. Various large and institutional shareholders began selling their shares. In India, too, the same pattern followed, and by the end of March 2020, the share price was falling heavily. The drop in share price, in a single day, i.e. April 30 2020 according to The Economic Times is given below:

PUBLIC SECTOR BANKS
Name of the bank Drop in share price (%)
Indian Bank 4.86
Bank of Baroda 3.86
Canara Bank 3.72
Indian Overseas Bank 3.42
State Bank of India 3.34
Union Bank of India 2.24
Central Bank Central Bank The establishment which in a given State is in charge of issuing bank notes and controlling the volume of currency and credit. In France, it is the Banque de France which assumes this role under the auspices of the European Central Bank (see ECB) while in the UK it is the Bank of England.

ECB : http://www.bankofengland.co.uk/Pages/home.aspx
of India
2.02
Punjab National Bank 1.79
UCO Bank 1.1

Looking at these figures one can argue about the precarious state of affairs of public sector banks. However, private banks are also no better. A report published in Money Control on May 5 2020 clearly shows that the private banks could not escape this crisis and suffered a huge loss over a day.

PRIVATE SECTOR BANKS
Name of the bankDrop in share price (%)
Axis Bank 3.38
ICICI Bank 2.19
JK Bank 4.10
Federal Bank 2.38
HDFC Bank 1.24

There are only a handful of companies that control the stock markets around the world. They sell shares after the stock prices reach a certain level and pocket huge profits. I have already detailed this in a previous article (https://cadtm.org/Coronavirus-fictitious-capital-and-financial-crisis). After February 18th, they started selling a large number of shares due to the risk they faced. The mainstream press refrained from speaking about or emphasising this. Already, the signs of an impending banking crisis was boldly written on the walls. Huge amounts of unpaid corporate debt has been increasing in the last few years. This amount increased by 2000% between 2005 and 2019. Although there were media reports about the ballooning corporate debt before the Covid-19 outbreak, the same media is conspicuous in its silence since the onset of the pandemic. Rather, the media is full of stories about the huge losses faced by Capital as a result of this pandemic. The bourgeoisie is cunningly spelling out stories of huge losses in order to extract huge tax exemptions, borrow at low interest rates Interest rates When A lends money to B, B repays the amount lent by A (the capital) as well as a supplementary sum known as interest, so that A has an interest in agreeing to this financial operation. The interest is determined by the interest rate, which may be high or low. To take a very simple example: if A borrows 100 million dollars for 10 years at a fixed interest rate of 5%, the first year he will repay a tenth of the capital initially borrowed (10 million dollars) plus 5% of the capital owed, i.e. 5 million dollars, that is a total of 15 million dollars. In the second year, he will again repay 10% of the capital borrowed, but the 5% now only applies to the remaining 90 million dollars still due, i.e. 4.5 million dollars, or a total of 14.5 million dollars. And so on, until the tenth year when he will repay the last 10 million dollars, plus 5% of that remaining 10 million dollars, i.e. 0.5 million dollars, giving a total of 10.5 million dollars. Over 10 years, the total amount repaid will come to 127.5 million dollars. The repayment of the capital is not usually made in equal instalments. In the initial years, the repayment concerns mainly the interest, and the proportion of capital repaid increases over the years. In this case, if repayments are stopped, the capital still due is higher…

The nominal interest rate is the rate at which the loan is contracted. The real interest rate is the nominal rate reduced by the rate of inflation.
, retrench workers without any hindrance and deprive workers of their due wages.

 Re-purchase of shares, and increase of fictitious capital

Banks and other large institutions continuously repurchase their shares from the market to make their shareholders richer and to boost the stock markets during crisis. The stock market frenzy continued in January 2020, although various sectors faced a real crisis. The corporates borrowed at low interest Interest An amount paid in remuneration of an investment or received by a lender. Interest is calculated on the amount of the capital invested or borrowed, the duration of the operation and the rate that has been set. rates using this amount to buy back their shares. As a result, the share prices skyrocketed. Nevertheless, as the gap between real prices and speculative capital grew, the stock markets started plunging since February 2020, and the crisis was clear by mid-March.

The RBI, in an attempt to stem the rot, took several decisions to stabilise the stock markets. The most important one was to make the repurchase of shares tax-free. As a result, banks and large corporations are repurchasing their own shares one after another. Earlier, in the first half of 2019, 70 companies completed repurchases of shares worth INR 354.60 billion or $5.2 billion, although the repurchases were hindered since the March 5, 2019 budget presentation as the Indian government put a whopping 22.5% tax on share buyback. But from whom are they buying their shares? Of course from their big shareholders.

For example, let’s say a big shareholder has a block of INR 60 per share in his own bank. If the share price rises to INR 100 and the shareholder sells his shares to the bank or the institution, then his profit Profit The positive gain yielded from a company’s activity. Net profit is profit after tax. Distributable profit is the part of the net profit which can be distributed to the shareholders. per share is 40%. When corporations announce the repurchase of shares, shareholders are encouraged because they can expect more value in the form of “bonuses” than the final price of the shares. As a result they are encouraged to hold their shares and accept offers to repurchase. This way the share price is higher.

When a company repurchases its shares, it resells them. It has one more advantage. As a result, the share price/earnings ratio increases (the price-earnings ratio, also known as P/E ratio, P/E, or PER, is the ratio of a company’s share price to the company’s earnings per share. The ratio is used for valuing companies and to find out whether they are overvalued or undervalued) and it increases the demand for shares in the market resulting in further increase in the value of the company.

As a result, the demand for shares is maintained and the share price goes up. Consequently, the amount of fictitious capital increases and the bubble of imaginary wealth begins. When the difference between real capital and fictitious capital becomes so huge that it is no further possible to inflate the imaginary values in the market, the big shareholders start selling their shares so that they initially make huge profits and the huge sell causes the stock market to collapse. In this way, the Mumbai stock market in India lost about 25. 5% of the assets, i.e. INR 54 trillion vanished into the complex web of the speculative economy in between February 16th and March 16th 2020. Which is about 40% of India’s GDP in equivalent terms! In order to protect capitalists from losses, the RBI announced low-interest lending so that the demand for shares is maintained again and as a result of this demand, share prices start rising again and capital bubbles begin to inflate.

 RBI and the government’s love for capitalists

As one country after another enters the economic crisis, banks have come up with one way after another to appease the capitalists in various ways. For example, in 2006-07, they bought $1.3 trillion worth of toxic asset Asset Something belonging to an individual or a business that has value or the power to earn money (FT). The opposite of assets are liabilities, that is the part of the balance sheet reflecting a company’s resources (the capital contributed by the partners, provisions for contingencies and charges, as well as the outstanding debts). structures from American banks. The same thing is happening all over the world now. The US Federal Reserve FED
Federal Reserve
Officially, Federal Reserve System, is the United States’ central bank created in 1913 by the ’Federal Reserve Act’, also called the ’Owen-Glass Act’, after a series of banking crises, particularly the ’Bank Panic’ of 1907.

FED – decentralized central bank : http://www.federalreserve.gov/
has already cut interest rates and announced a 0% interest rate on repurchase of shares. In the case of India, the repo rate has already been slashed by 75 basis points from 5.15% to 4.4% in one fell swoop to reduce the huge losses in the stock market.

On the one hand, the RBI promised to purchase corporate bonds Corporate bonds Securities issued by corporations in order to raise funds on the Money Markets. These bonds resemble government bonds but are considered to be more risky than government bonds and other guaranteed securities such as Mortgage Backed Securities, and therefore pay higher interest rates. worth Rs 100 billion and, on the other hand, it promised to infuse Rs 17 trillion-worth liquidity Liquidity The facility with which a financial instrument can be bought or sold without a significant change in price. . This will increase the amount of low interest borrowing as well as the tendency to repurchase the share with the borrowed money. As there is no duty on repurchase of shares around the world, in the case of India, there was no duty on repurchase of shares in India till 2019. As a result, multiple companies and banks have made their large shareholders and managers richer by repurchasing shares.

In the financial year (FY) 2016-17, Tata Consultancy Services alone repurchased shares worth Rs 160 billion. In addition, a total of INR 1.8 billion worth of shares have been repurchased from the Bombay Stock Exchange in FY 2017-18 and shares worth a total of INR 4.8 billion have been repurchased in FY 2018-19. The Budget 2019 put a 22.5% tax on the repurchase of shares. It was clear that even if 22.5% tax was imposed, it would not last long. The RBI has decided on March 16th to reduce the interest rate on the repurchase of shares to 0% due to the bursting of fictitious assets due to the Covid-19 outbreak. So that the companies can repurchase their shares and keep the share price high. As a result, on the one hand, just as a small number of people will be rich, on the other hand, there will be a huge increase in the capital on paper.

Since repurchase of shares has been madetax-free due to Covid-19, there has been a craze to repurchase shares. According to the SEBI, from March to April 30th, Thomas Cook India Limited, Granules India Limited, Asthaar DM Health Care Limited, Supreme Petrochem Limited, Aditya Vision Limited, Tipu Industries Limited, Ekartech Limited and Coal India have expressed a desire to buy their own shares. Also, on April 23rd and 24th, India’s stock market rebounded slightly as Reliance bought a large number of its own shares spending billions.

 Attempts to redevelop fictitious capital bubbles and capitalise on the possibility of a subsequent economic crisis

Due to repurchase of shares, fictitious capital bubbles have started to inflate again. However, even if the share price rises again in a few days, it can be seen falling again in the next few days. It’s clear from the whooping profit of INR 2.53 trillion that capitalists, with support of RBI, have already started gambling to increase their profit. However, this bubble will not last for eternity as lenders, including banks, reduce their interest rates to maintain the rush for buying shares in the stock market but due to the slump in demand in the real economy, huge differences will pop up between real capital and fictitious capital. So it will certainly disappear in the complex circuit of the economy. Although the RBI has already promised to buy corporate bond Bond A bond is a stake in a debt issued by a company or governmental body. The holder of the bond, the creditor, is entitled to interest and reimbursement of the principal. If the company is listed, the holder can also sell the bond on a stock-exchange. worth INR 100 billion, but the major part of that will disappear in upcoming crisis which will lead to bankruptcy.

 Conclusion

Repeated attempts are being made to prove that the economy is recovering by showing the growth of the stock market. This euphoria will be temporary and will benefit only a handful of people of the society but if the banks go bankrupt due to the economic crisis, common people will suffer.

As a result of prolonged lockdowns due to Covid-19, the effective market demand is abysmally low and there is hardly any prospect of an increased demand even after the lockdown. As a result, the economic crisis will shroud us very soon. We should demand an immediate closure of the stock markets to stop accumulation through speculative means with low-interest loans. Also, the assets that the big capitalists have created in various fields through shares should be appropriated immediately without any compensation. There is no other way to stop the rise of fictitious capital and the economic crisis that reappears in regular interval.



Sankha Subhra Biswas

The author is a political activist and member of Collective for Economic Justice (CEJ)

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