How Zee Entertainment’s 37% Plunge Played Out
The immediate trigger was said to be a report in news website The Wire that its controlling shareholder Essel Group’s name emerged in a probe linked to large deposits made after demonetisation—the company denied that. But there had been an overhang on the stock because of promoter debt.
The Essel Group after November 13, 2018 (Diwali) announced its intention to sell half its stake in the flagship Zee Entertainment. While the company then said it was to bring in a strategic tech partner, it has now admitted that the group wanted to pare debt.
The promoter group has at least Rs 17,000-core debt, a BloombergQuint investigation revealed. According to exchange filings by Zee Entertainment, shares pledged by the promoters with lenders increased as they struggled to maintain collateral.
All that played a part in the Jan. 25 crash when the stock closed 27 percent lower. Three trends explain what went wrong and how:
Build-Up In Futures
There has been a gradual increase in the open interest, or the number of outstanding positions, in Zee Entertainment’s one-month futures since Diwali.
While the average level of open interest remained under 8,000 contracts prior to Diwali, it increased to more than 8,000 contracts in November and over 9,000 contracts in December, according to Bloomberg data. It rose to 11,000 contracts in January in the run-up to the big crash.
Volumes of Zee Entertainment’s January futures were more than seven times the December average on Jan. 25—the day of the crash. But the increase in open interest didn’t spike as much, rising by just 1,122 contracts that day.
What that means is that high volumes were driven by speculative trading. Traders took short positions when the stock started falling and covered up by the end of the session.
The trading of Zee Entertainment’s shares on the BSE and NSE wasn’t volatile till the beginning of January. But then volatility started building up and the stock fell close to 10 percent till Jan. 24.
On Jan. 25, the daily trading volume spiked 14 times the month’s average to 59 lakh shares. But only 24.35 percent of the shares traded were delivered, lower than the monthly average of 30 percent.
That shows that the stock fell primarily because of speculative trading and short positions in the futures market.
The Zee Group management disclosed that one of the lenders sold 0.6 percent or 57.6 lakh shares as the stock plunge triggered sale of pledged shares. The sale contributed nearly 30 percent of the total delivered shares—the company is yet to disclose name of the lender to exchanges.
The following day, after the management tried to allay investor fears, the shares spiked more than 17 percent.
- As many as 13.29 crore shares were traded, nearly twice the previous day—30.89 percent of these were delivered.
- The value of shares traded stood at Rs 4,963.8 crore, again nearly twice the previous day. That compares with the average traded value of less than Rs 270 crore in the previous 60 days.
Which means even the rebound was driven by speculative trading.
Momentum And Volatility
A build-up in futures and an increase in volatility imply that risk was building up in the run-up to the crash. Bloomberg’s momentum indicator was flashing red even before the stock tumbled.
The volatility for Zee Entertainment remained under 30 for a few months before it rose above 40 in December and remained around that level for more than a month. On Jan. 25, it spiked from 36.9 to 98.3 and has since remained above 100.