Mumbai's First Realty Bust
Investors, who were punting in real estate stocks in the last few
months and had chosen to hang on to them, would have been badly hit
over the past month. Some real estate stocks fell by as much as 42%
during the period. Simple mathematics tells us that a 42% loss would
have wiped out a 75% gain. Losing that kind of money in a month can be
marauding.
A direct impact of this would be a slowdown in
expensive real estate initial public offerings hitting the street.
Also, real estate stocks won’t find favour with the street anytime soon.
But,
this is not the first time real estate stocks have gone from boom to
bust. As Dwijendra Tripathi points out in his book, The Oxford History
of Indian Business, “It is nothing but an irony of history that with
one of the schemes of beautification and development of the city
started a process that eventually led the Bombay business into an
unprecedented chaos. The scheme aimed at reclaiming land from the
foreshore. The population of the city as well as its trade and commerce
had been expanding for the last few decades, rendering grossly
insufficient the available space in the islands. Reclaiming land from
the sea was the only solution to the growing problem of congestion”.
On
this premise, one Premchand Roychand, in 1864, promoted the first land
reclamation company in Mumbai, the Back Bay Reclamation Company.
Roychand was essentially a broker of bank shares.
As Tripathi
writes “Premchand must have done very well in this field, for he was
among the few brokers, barely about half a dozen, in Bombay during the
1840s whom the banks and the merchants recognised. Very soon, however,
he left his competitors far behind and established a near monopoly on
brokering of bank shares. By the end of 1850s, he was counted among the
lakhpatis (possessor of Rs 100,000) of the city.”
Soon, the
government recognised his importance and governor Frere appointed him a
director of the Bank of Bombay. “Frere also encouraged Premchand to
launch the Back Bay Reclamation Company, and even proposed to buy 400
shares to make sure that his government had a voice in the management
of the new enterprise. However, the Government of India rejected
Frere’s proposal, as this ran counter to the free trade principle.”
The
shares of Rs 5,000 face value each, were then put on an auction and
sold for Rs 26,500 per share, a premium of Rs 21,500 per share. The 400
shares sold yielded an amount of Rs 1.06 crore in total, a huge amount
in those days.
This money was then deposited with the Asiatic
Banking Corporation, who were appointed as bankers to the Back Bay
Company. Asiatic Banking Corporation was founded by Roychand himself,
and he had total control over its management.
Cotton traders at
that point of time were flush with money they had made through the
unprecedented rise in the price of cotton and were looking for an
opportunity to park their surplus money and make more money on it. As
Tripathi writes, “The reaction to the Back Bay shares showed an easy
way to fortune and triggered off the worst kind of speculation.
Premchand himself, in association with others, floated a number of
companies, the shares of which were sold at a high premium. In many
cases, the prospective investors received advances on Premchand’s
recommendation, from Bank of Bombay and Asiatic Banking Corporation in
order to acquire shares in companies promoted by him. Like the
proverbial Midas touch, his association with a firm was sufficient to
turn a scrip into instant wealth.”
Taking lead from here, a
large number of joint stock financial companies also joined the party
floating land reclamation companies and adding to the speculation.
As
Tripathi writes, “To quote a competent observer, “it practically became
the fashion among the prominent financers of the day that the most
influential bank should have at its elbow an equally influential
financial company and that as a corollary or appendix to both, there
should be a powerful reclamation company.” The shares fetching very
high premiums, served to perpetuate the process to no end.”
The
game went on for sometime. “Ridiculously high premium for the shares of
formidable as well as of more modest concerns was only distinguishing
feature of the speculation of 1860s. ‘Time bargain’ was another.
Convinced that the share price would continue to escalate, many, ‘for
the most part, hitherto nameless’ persons entered into agreements to
effect the sale or purchases of shares, at prices fixed far above their
current value, after an agreed upon interval of three or even six
months”, writes Tripathi.
But all good things come to an end.
Any market works on cues that keep coming in. And the cue this time
came from the end of the civil war in America. Cotton prices had been
rising as Britain was sourcing cotton from India for its Lancashire
mills due to the civil war in America.
The civil war ended and
the news reached Mumbai on May 1, 1865. Traders realised that Britain
would go back to sourcing cotton from America. This created a panic in
the market and investors rushed to sell off the shares of reclamation
companies, only to find that there were no buyers. This news was the
needle that burst this bubble.
All this while, there were enough
cues warning traders that the party won’t go on forever. But they
refused to listen. “Even though the price of cotton in the Bombay
market fell whenever prospects of peace in America appeared bright, the
speculators refused to heed the implicit warning, and merrily went on
with their share gambling mania as if the good times would last
forever,” writes Tripathi.
At its peak, the share price of
Backbay was quoted at Rs 55,000 - a record that probably still stands.
Investors saw this as an opportunity to get rich quick and kept buying
these highly overvalued shares.
Some of the speculators would
have understood that the overvalued shares of land reclamation
companies couldn’t keep going up. But they still bought on the pretext
that some greater fools could be depended on to enter these stocks
after they had and this would give them handsome returns on their
investments.
Guess something similar happened to some
speculators holding onto real estate stocks in the last one month.
History, as they say, repeats itself, but by the time we figure out,
it’s too late.
http://aiiireports.blogspot.com/2007/03/mumbais-first-realty-bust.html
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