The bear cartel's activity borders on bravado because of the consequences that the slump in prices resulting from its actions have had. First, to the extent that bulls like Parekh suffered losses, they needed to settle their dues with additional resources. In Parekh's case the dues where ostensibly the wherewithal needed to ensure that Madhavpura Mercantile Cooperative Bank (MCCB) could honour the pay-orders it had issued to him without any downpayment either in the form of cash or deposit collateral. In other cases, brokers had expected to settle dues either through sales of shares they held or borrowing against those shares. “Settlement” requires a pay-in by those who accept deliveries of scrips that they have agreed to buy, and a pay-out to those who have submitted the shares for delivery as agreed. Delayed settlement possibilities, permissible under the modified carry-forward scheme (MCFS) operating in India's stock markets can lead to settlement problems because they encourage excessively high speculative positions on the part of brokers expecting to be able to realize the required funds when settlement day arrives. But, in many cases the collapse in the interim of the value of the shares they hold make the settlement impossible to ensure, leading to payments problems, which were particularly acute in the Calcutta Stock Exchange, located faraway from the centre of Parekh's activities.
 
Second, the effects of the speculative collapse soon spread to the banking system. To start with, banks like MCCB which had accommodated the loser and others that had invested in MCCB or had made large deposits with it for services such as clearing services, which includes a number of other cooperative banks in Gujarat, found themselves saddled with worthless real or intangible assets, resulting in weakness of a kind that triggered a run on these banks. Further, even regular commercial banks which had lent against shares as collateral found that the value of that collateral had fallen substantially relative to the sums lent, forcing them to demand an increase in collateral to protect loans which were made in many cases to brokers who had suffered losses in the wake of the bear hammering. The full effects of the scam on the banks, and the distribution of loss provisions amongst them would be revealed only after some time. What needs to be noted is that once the process of divesting public equity in banks proceeds further this can have larger implications. Even now, the shares of a number of public sector banks that have diluted their equity are ruling below par. If the same occurs in the wake of large scale dilution, they would be ideal candidates for take-over as part of process of financial consolidation that would put control of large volumes of household savings in a few hands.
 
Third, small investors holding safe securities either directly or indirectly through agencies like mutual funds find the value of their investments eroded for reasons that are neither legally valid or within their control or even ken. This would legitimately undermine their faith in stock investments. But this occurs precisely at a time when a liberalization-driven effort to cut interest rates on long term deposits and small savings schemes is forcing them to participate in the markets.
 
Finally, this loss of faith in stock markets is only being aggravated by the fact that the viability of these markets is being challenged by the consequences of speculative losses. Faced with settlement problems, and unable to indefinitely postpone settlement, the Calcutta Stock Exchange has found even its Settlement Guarantee Fund (SGF) inadequate to cover the short fall. The management of the exchange has managed to save face only by getting some 'friendly' financial institutions to pick up large volumes of stock at a discount to provide brokers the funds needed to meet their settlement obligations.
 
All of this reveals the fragility of the financial system that is being provided greater room for maneuverability by the financial liberalization that seeks to attract foreign investors into India's shallow markets.  What is more, by increasing maneuverability and by allowing banks to indirectly support trading activity, and by privileging stock market buoyancy as an indicator of economic success, liberalization is increasing speculative activity and aggravating the fragility of the system. In the effort to shift the focus away from the folly of liberalizing markets so prone to speculation, the government is now pointing its fingers at the inadequacies of the regulatory authority. What is missed is that the ethos of liberalization which gives financial markets pride of place in assessments of the success of economic policy forces the regulatory authority to be flexible and even formulate rules providing room for maneuver to private operators in order to keep markets buoyant even when the real economy slows. The point to note is that the only players who need these markets are the speculators, a few large corporates and, of course, the FIIs who in the wake of the collapse are busy picking up shares at huge discounts.