The Seoul Stock Exchange was unable to miss its circuit breakers during July, the month it suffered from them for the first time consecutively in trading days. The Kospi, which had climbed as much as 116 percent through mid-June in the wake of a global memory-chip boom, sank from a record close of almost 9,385 to a level of around 5,263 within weeks, a decline exceeding 40 percent. It was the two companies that between them dominate the wildly distorted index Samsung Electronics and SK Hynix that bear the brunt of it. It was the best quarter SK Hynix has had, but the number was still below the number the market had priced in based on the number of leverages that had been put in place, and its shares dropped nearly 10 percent on the day. It's the micro-picture of a stellar earning announcement that we don't see much of anymore, and the brutal market reaction.

Leverage, not fundamentals was the reason that made a correction into a rout. Single-stock leveraged ETFs focusing on Samsung and SK Hynix had been attracting retail money, resetting their exposure every day and thus intensifying the rally and fall. Just before the peak, outstanding leveraged bets in Korea hit a record of nearly 29 trillion won, or approximately 20 billion dollars. Well, when prices reversed, the mechanics were reversed; when share prices fell, margin calls were sent, margin calls forced investors to sell, and forced selling by the leveraged ETFs further depressed prices and set off a new cycle of calls. Since then, regulators in Seoul have publicly apologised, and are considering withdrawal of the single-stock leveraged products from the market entirely, while lawmakers and investor groups have called for the same outside the National Assembly.

No such kind of machinery are available in India in such a form there are no single-stock leveraged ETFs with retail investors, which is a true structural difference; it's worth stating outright. However, a more subdued version of the same tale has been simmering in the Indian market for a while, and it deserves greater attention than it's currently receiving. The instrument it is that is the one thing called Margin trading facility or MTF, where a broker loans a part of the investor's assets for the purchase of stocks and the stock is put up as security. It was only last September that it clocked up the one-trillion-rupee milestone for the first time after a year-long increase of about 200 per cent. In near June this year, exchange data pegged it at nearly 1.3 trillion rupees, or around 13.8 billion dollars, some 50 percent higher than a year ago. The latest daily disclosures from both exchanges (NSE and BSE) as of the end of July list the total book at approximately 1.44 lakh crore rupees, with about 50% of this volume being for derivative-eligible stocks and the remaining 50% across the board being for non-cash stocks.The latest daily disclosure data from both exchanges (NSE and BSE) available late July indicate that the total book is about 1.44 lakh crore rupees, with roughly 50% being for stocks eligible for derivatives and 50% being over the board, with a small slice of ETFs.

It's the same feedback loop that was responsible for undoing Korea, but it's happening slowly. The higher the price, the more valuable the shares lent, the more money a client can borrow, the more shares the client can buy and the higher the price will go and so on. This is one of the reasons why the impetus to buy more stock, and then the credit to get it, has faded over the past few years, since it's all been done via the phone apps. A few taps enable margin funding of a customer who has opened a demat account, and in many cases, a few taps is all it takes. Brokers have all the business reasons to extend it longer because the interest on the funded amount, which varies from about 9 to 15 percent per annum, depending on the platform, has become an important stream of their revenue.

There is also a rate-arithmetic problem encouraging savers to engage in this behaviour and not dissuade them. A money saver who leaves their money in a bank account will definitely lose purchasing power as near-term inflation expectations are above 9 percent while fixed deposit rates are around 6 percent in real terms. The backdrop, plus the fact that that benchmark index has been one of the worst in the world this year, without even taking into account the effects of all this leverage, makes for a strange asymmetry: retail investors are borrowing to buy into a market that has not experienced the exuberance Korea has, which makes the underlying risk-taking appear less justified on fundamentals.

There's been no lack of awareness by regulators of any of this. In its annual report, the Securities and Exchange Board of India (SEBI) had earlier called for a comprehensive review of the framework of margining while also releasing a consultation paper in June proposing a more stringent timeline to settle any breach at the client end, increased disclosures for the amount of exposure a broker can give beyond its net worth, and, crucially, an expansion of the definition of acceptable funding sources for a broker to raise money, such as the introduction of non-convertible debentures (NCDs) as an alternative to balance sheets. Senior voices from the discount broking industry – who have been unusually candid about things say that this exposure is the biggest one the industry has had, which is exactly why MTF has never been tested by a true sharp downturn, and will only truly become mainstream once the pandemic era retail boom period is over.

The reassuring difference is size: India's margin book is relatively small when put against market capitalisation, and comparatively speaking, nowhere near as close as in Seoul where two stocks effectively held a whole national index hostage. The uncomfortable similarity is behaviour, with the same collateral-based borrowing cycle, an ease of access to digital platforms and no stress test. A bad economy was not necessary for Korea to have a historic crash, it just needed a good rally, cheap leverage, and time. Out of these 3, India has two.