A margin call is a demand from a broker or a financial institution that an investor deposit more money or securities into their margin account in order to bring the account back up to the minimum required level. This happens when the value of the securities in the margin account drops below a certain level.
For example, if an investor buys Rs100,000 worth of stock on margin for investment and the broker’s maintenance margin requirement is 25%, the investor must maintain at least Rs25,000 in their account. If the value of the stock drops let’s say 20%, and the investor’s account falls by 80% as in this case the investor is 4 times leveraged and the investing account goes below Rs25,000, the broker will issue a margin call, demanding that the investor deposit more money to bring the account back up to the minimum required level.
The impact of a margin call is that it can force the investor to sell their securities at a loss in order to meet the demand from the broker. If the investor is unable or unwilling to deposit more money into their account, the broker may sell the securities in the account to bring the account back up to the minimum required level, which can result in significant losses for the investor.
Margin Call in Adani Group of Stocks
On Friday 27th Jan 2023, the stock prices of Adani Group companies saw a significant drop of up to 20% due to increased selling pressure, following a loss of around Rs 1 lakh crore in investor wealth the previous Wednesday. This was in response to claims made in a short-seller Hindenburg report. Most Adani stocks were unable to trade due to the lower circuit. Adani Ports experienced a near 20% drop, reaching a two-year low of Rs 572.25. Adani Transmission, Adani Green, and Adani Total Gas also saw a 20% decrease. Adani’s recent acquisitions, ACC and Ambuja Cements, also saw a drop of 15% and 25% respectively.
There have been several instances in the Indian stock market when margin calls have triggered significant market corrections or crashes. One example is the stock market crash of 1992, where the then Finance Minister, Manmohan Singh, had to step in to bail out the market from a massive margin call crisis. In this case, the margin call was triggered by a combination of high interest rates, economic instability, and a lack of foreign investment.
Another example is the Indian stock market crash of 2000, where the market witnessed a massive sell-off due to the margin call triggered by the then dominant Harshad Mehta Scam. This resulted in the market losing about 50% of its value within a month.
Additionally, during the global financial crisis of 2008, the Indian stock market also witnessed a significant correction due to margin calls triggered by the crisis. This led to a decline in the value of the market by over 50% within a year.
In recent years, in 2020, the Indian Stock Market also witnessed a huge sell-off due to the COVID-19 pandemic, which resulted in a margin call situation in the market.
It’s worth noting that margin calls can trigger market corrections or crashes, however, it’s not the only reason for such market crashes. It’s usually a combination of various factors like economic instability, high interest rates, lack of foreign investment, and other similar factors that can lead to such market crashes.