We want to bring derivatives back on BSE: Dy CEO

ASIA'S oldest bourse - the Bombay Stock Exchange - enjoyed a monopoly and leadership status for many decades, before losing out to the much younger National Stock Exchange. The latest entrant in the business MCX-SX is also giving BSE a run for its money in the currency derivatives segment. But it now appears that the BSE is readying itself for another bout to regain its market share. A new team is at the helm with the latest to join the BSE being Ashishkumar Chauhan who has joined as Deputy Chief Executive Officer — a post specially created for Mr Chauhan. Incidentally, Mr Chauhan was instrumental in setting up the capital market and equity derivatives segment of NSE, among other things. ET NOW's Ashish Rukhaiyar caught up with Mr Chauhan for a quick chat.

Q) BSE has been losing ground in most of the segments. While it still enjoys a decent share in the equity segment, it is nowhere on the scene when it comes to the non-equity arena. How do you plan to address this issue?
A) Our strategy would be unveiled over the next couple of years. And you will see we will work towards getting derivatives market back on BSE. There would be many more instruments that would come for trading on BSE over that period.

Q) But how exactly does BSE plan to attract trading in non-equity instruments? Would the tie-up with United Stock Exchange play a key role here as it is more focussed on derivatives?
A) We believe it would. It would help us gain market share in that non-equity segment.

Q) Exchange-traded funds seem to be the new buzzword with all exchanges vying to attract more and more ETFs on their platform. Only two weeks ago, the BSE arranged an awareness seminar on ETFs. Are these products high on BSE’s radar?
A) We launched trading for a few ETFs last week. We have got excellent support from the investors in trading of those ETFs. We would like to believe that over a period of time, ETFs would become a significant part of BSE’s total offering to investors.

Q) Finally, is BSE open to the idea of inorganic growth as part of its attempts to garner higher market share? Or, would you completely rule it out?
A) It is an interesting question. Each and every opportunity would be weighed on its own merit. Only then, an appropriate decision would be taken.

Brokers to create database to share info on defaulters

Ashish Rukhaiyar
ET NOW
Sept 12, 2009

CLIENTS defaulting on payments is a major headache for most broking firms. This is partly because brokers have no resource to find the antecedents of a new client. Often, a client defaults at one of the broking firms and then moves on to another broker. This could soon change if the Association of National Exchange Members of India (ANMI) has its way.

ANMI, which is an umbrella body consisting of brokers from the National Stock Exchange (NSE) and the Bombay Stock Exchange (BSE), is working on a database project called ABCD — ANMI Bureau of Client Defaults — that will enable the broking fraternity to share a database of all clients that have defaulted at any of the broking firms. It is widely believed that the availability of such a database would go a long way in bringing down the number of client defaults, as brokers would be able to take preventive actions.

According to people involved in the project, the software has already been developed and tested, and can be launched anytime. ANMI representatives have also made a presentation to the Securities and Exchange Board of India (Sebi) and have now been waiting for the final green signal from the regulator.

ANMI president EMC Palaniappan told ET NOW, “The software is ready and all that is required now is the Sebi approval.” It is believed that if the system gets any legal or statutory backing from the market regulator then its implementation and acceptability would be much easier. ANMI has already made a presentation to NSE.

According to ANMI, the objective of launching such a system is to deter clients from habitually cheating or committing fraud upon brokers and to stop habitual offenders from freely switching from one broker to another.

In fact, ANMI is also mulling to include defaulting sub-brokers in the database. Going ahead, it feels that it should be possible to recover the unpaid dues of one broker (at arbitration or court or exchange) from the funds of the same client-lying with any other broker.

The ABCD system would be on the lines of CIBIL that provides banks with the credit history of all clients, based on which banks are able to decide on extending fresh loans or credit cards.

In ABCD, the onus of updating the database will be on brokers who will have an obligation to upload details as and when a new case of default is reported. Interestingly, the responsibility of editing or revoking the details, post-receipt of the payment, will also rest with brokers. The Permanent Account Number (PAN) will be used to index all records.

Brokers' 'cash' offers pep up retail interest in IPOs

Ashish Rukhaiyar
ET NOW
Aug 28, 2009

THE primary market may be showing signs of recovery, with some recent big-ticket issues garnering decent subscriptions. But ask any market player worth his salt, and it is clear that confidence levels, especially among retail investors, is still low. So the question is: how did most of the issues attract retail interest?

The answer lies in a practice, although illegal, that has been prevalent in the market for long, and has once again picked up with the revival in the primary market. A cash incentive for every application submitted in the retail category.

Brokers and sub-brokers, involved in the marketing of public issues, say this is a very common practice when there is a huge demand from institutions and high net worth individuals. Investment bankers then approach brokers with a good retail client base. The broker asks his clients to apply for the IPO, with an understanding that they will be given a cash incentive per application form, and also that their bids will be financed by the broker himself. On allotment, the shares are transferred to the broker’s account. The retail investor will not get any share of the profits, if any, on listing. All he gets is the cash incentive for ‘renting out’ his demat account.

“It is a fact that retail interest is not very encouraging and convincing them for applying in IPOs has become difficult,” says an IPO marketing head of a Mumbai-based broking house. “So, we have to give them some incentive to come to the market,” he adds.

According to market watchers, the recently-concluded public issue of NHPC saw retail applicants getting anywhere between Rs 200 and Rs 250 per application. The amount differs across broking houses, with the larger ones doling out higher incentives. NHPC’s retail portion was subscribed 3.6 times.

Incidentally, during NHPC’s IPO, a leading broking house sent e-mails to its subbroker network promising a special per application incentive of Rs 60 while clearly mentioning that “as per Sebi guidelines and the prospectus, incentives cannot be paid to investors”.

“Technically, the broker has not violated any regulation,” says a sub-broker. “The broking house is only incentivising its sub-brokers. It is not soliciting investors directly,” he added. Sebi guidelines are clearly against the practice of brokers soliciting investors on the basis of cash incentives. But what has surprised many market players is the fact that perhaps for the first time in many years, a broker actually mentioned these things in black & white.

In the case of Adani Power, it is said that retail entities gained in the range of Rs 125 to Rs 200 for every application made. The retail portion of Adani Power was subscribed nearly three times. In the case of Mahindra Holidays & Resorts, the retail segment was subscribed 3.2 times. According to brokers, retail investors got anywhere between Rs 75 and Rs 100 per application.

Mumbai Takes Stock

With the country’s premier stock exchanges and heightened activity in the corporate world, Mumbai is set to don the mantle of Asia’s financial hub
Ashish Rukhaiyar
Aug 4, 2009

MAHARASHTRA’S CAPITAL Mumbai is India’s financial hub and is poised to don the mantle of an international financial nerve-centre. It houses the country’s two premier stock exchanges, National Stock Exchange (NSE) and Bombay Stock Exchange (BSE), which have promoted the equity cult in India. Not to forget, a third exchange—Multi Commodity Exchange (MCX)—has already established its footprint and is all set to expand it.

The BSE is known for its strong cash market while NSE has both cash and derivatives segments. But the beauty of the whole game is that it is not limited to equity. Currency derivatives, which were launched last year in August, have given India Inc a way to hedge against currency fluctuations in a more transparent manner. MCX and NSE, incidentally, have been fighting a close battle in terms of market share in the currency futures segment.

And while it is not even a year since currency derivates marked their entry, the exchanges are all set to foray into interest rate futures or IRFs. This move may come across as the introduction of yet another financial instrument but it indeed underlines Mumbai's aspiration to become an international financial hub.

Finance experts, interestingly, feel that the strengths of the three exchanges need to be synergised if India has to usher in its next set of reforms. In fact, there are many instances of exchanges being merged domestically or crossborder globally. It has only given rise to a bigger and more efficient stock exchange.

In Indonesia, the Jakarta Stock Exchange and Surabaya Stock Exchange were merged to form a consolidated Indonesia Stock Exchange. Australia merged the Australian Stock Exchange and SFE Corporation in 2006 to form the ninth largest listed exchange in the world. Even the Korea Exchange was established in January 2005 through the merger of Korea Stock Exchange, KOSDAQ and Korea Futures Exchange.

Established in 1875, the BSE is Asia’s oldest stock exchange but is trying hard to usher in a range of innovative solutions for India Inc. Its newlyappointed MD & CEO Madhu Kannan has worked with NYSE and also with Merrill Lynch. Kannan has already started building a team of experts to prepare BSE for the next level. He recently hired Sayee Srinivisan of Chicago Mercantile Exchange to head and develop BSE’s languishing derivatives segment.

Unlike the BSE, the NSE made its entry only 14 years ago. Despite its newness, the NSE has marched ahead of BSE in volume terms and business initiatives. This has prompted industry experts to question the rationale of two separate exchanges, especially when global bourses are experiencing consolidation.

While SEBI and exchange officials remain tightlipped on merger issues, instances of exchange mergers from around the world prove how consolidation ultimately helps the financial market weed out monopoly and create efficiencies.

The market regulator in India could even look at exchanges as two separate entities for listing different instruments, like in the US. It could also do well to merge the two clearing houses—CDSL and NSDL—to streamline the depository functions.

Since brokerages now have to register with both the depositories, it gives rise to undue friction. Not long back, there were reports about how the two depositories were at crosshairs over discounts given by one of them to draw in more brokers.

Interestingly, not very long ago, there were reports that at least two exchanges have started talking to each other to reach some kind of arrangement. While a stake sale could be a distant possibility, market players say that the entities have at least started looking at sharing stock feed and technology at some level.

The deliberations for interest rate futures, say industry players, have also brought BSE and MCX to the same table. The two exchanges have been jointly interacting with a lot of industry players to come out with the best possible product.

While one can safely say that the foundation for making Mumbai the country’s financial hub has been laid well in place, what is required is the next set of reforms to make the island city a truly international financial hub.

Plan to let FIIs use US paper as security may have to wait

Nishanth Vasudevan & Ashish Rukhaiyar
ET NOW
July 1, 2009

THE Securities and Exchange Board of India’s (Sebi) initial plan to allow foreign institutions to use ‘AAA’-rated foreign sovereign securities, mainly US Treasury, as collateral towards margin payments in equity derivatives may not take off, at least immediately. This is because existing US regulations do not allow the method of using America’s treasury paper as collateral, as required by Indian authorities.

As part of this arrangement, foreign institutions, which wanted to take exposure to India’s futures and options segment with US treasury bills as collateral, were required to tender these securities to Sebi-registered clearing members, which handle trades on behalf of foreign institutions.

This was part of the agreement between the clearing member and foreign institution, where the clearing member had the authority to liquidate pledged securities in the event of the institution going belly up. The sovereign paper were to be treated as cash. The clearing member, in turn, would pledge securities with the clearing corporation — an entity that works with exchanges to handle confirmation, delivery and settlement of transactions — of domestic stock exchanges.

People familiar with the matter said this method of using US treasury paper as collateral amounted to ‘double pledging’. “The existing US regulatory regime does not allow their treasury papers to be double pledged, which has hindered the process from kicking off,” said a Sebi official.

The move to permit foreign institutions to use top-rated foreign government securities, as collateral to fund margin requirements, was aimed at enabling them to increase their activity in the domestic futures and options segment. Now, they are required to make their margin payments in cash. The step would have allowed these institutions to put to use their idle holdings in any of the top-rated government securities.

Top officials at global custody service providers said this move would have allowed foreign institutions, which are yet to recover from the cash crunch after the US credit crisis, use their treasury holdings to bet on Indian market.

It is felt that the arrangement can take off only if there is more rationalisation in the Indian and US norms. “Maybe, the clearing corporation can become direct members of the public debt office (PDO) of the US,” said a top official at a global custody service provider. PDO borrows money needed for the US government and accounts for the resulting debt. It borrows by selling treasury bills, notes and bonds as well as US savings bonds.

As of now, the Reserve Bank of India has allowed clearing corporations and members to maintain demat accounts only with foreign depositories to pledge or transfer such securities as collateral.

Face Value - Madhu Kannan

Taking on the matrix challenge
Ashish Rukhaiyar

IN THE world of finance, there are not many 36-year old professionals, who get to head large 134-year old institutions. So in a sense, Madhu Kannan, MD & CEO, the Bombay Stock Exchange (BSE) has already got a feather in his cap.

But getting the next feather would be a challenge. BSE is fighting a battle with its arch-rival National Stock Exchange (NSE) and Multi Commodity Exchange (MCX). If getting BSE ahead in this battle was not enough, Mr Kannan also faces the onerous job of convincing BSE board members on reform measures.

Mr Kannan got a taste of the BSE power play when he decided to rope in Galileo Global Advisors as strategic advisors for the exchange. Mr Kannan’s former boss Georges Ugeux heads Galileo and it was said that the board members were divided on hiring the firm.

Prior to joining BSE, Mr Kannan was a managing director in the corporate strategy group with Bank of America-Merrill Lynch (BoA-ML) based in New York. He focused on the development and execution of strategic initiatives for ML in Asia, Middle-East and North Africa.

This, however, is not MrKannan’s first tryst with a stock exchange. He has earlier worked with NYSE Euronext in verticals including international listings (Asia Pacific region), corporate client group and international strategy and business development. Those who know him say that MrKannan was much more aggressive at NYSE, but had mellowed considerably after switching over to BoA-ML, perhaps, because of the global financial crisis.

Mr Kannan completed his BE (Hons) in electrical and electronics and MSc (Hons) in economics from BITS, Pilani, before going to Vanderbilt University in the US for MBA finance. Straight out of BITS Pilani, Mr Kannan joined the Sebi in 1994 as a management trainee, analysing numbers for 5-6 months. He was also nominated as a Young Global Leader in 2007 by the Geneva-based World Economic Forum.

Critics say that Mr Kannan plans for boosting the exchanges earnings might be untested, considering that he never assumed ‘revenue responsibility’ and has always been at the periphery. They, however, do add that he has a good grasp on technology and so could play an important role in reviving at least some of the lost ground.

In a recent media gathering, Mr Kannan said that technology was also one of his focus areas. Some of the issues that will test Mr Kannan’s mettle in the immediate future will include upgradation of the technology platform apart from cross margining and revival of derivatives segment. Part of his strategy has been to bring in more professionals. He has already hired Sayee Srinivisan of Chicago Mercantile Exchange to head and develop BSE’s languishing derivatives segment.

While on paper, Mr Kannan has the credentials to turnaround BSE, industry players say much would depend on the interplay/politics between the bourse, regulator and the finance ministry. They say that he would need around 12-18 months only to understand the equations within.

Rising off-market deals come under Sebi scanner

Ashish Rukhaiyar
ET NOW
June 8, 2009

THE nexus between promoters and socalled market ‘operators’ and a rise in the quantum of off-market transfers have come under the scanner of the Securities and Exchange Board of India (Sebi). Market players say that offmarket transfers have risen after disclosures on shares pledged by promoters were made mandatory.

Interestingly, Sebi’s recent order on 26 entities alleged to be acting as fronts for Ketan Parekh has highlighted this fact. The Sebi order clearly says that off-market transactions were used to transfer shares among the alleged culprits.

The modus operandi is simple. Operators open an account with a broking firm that has a nation-wide presence. Thereafter, through offmarket transactions, promoters transfer a large chunk of shares to the accounts of operators, who, in turn, create artificial liquidity through circular trading. Once the desired price is achieved, the shares are transferred back to the promoter account. While operators get a fee for their ‘services’, promoters are able to attract investors at higher levels.

Market players say that the whole exercise is completed within a single quarter so that there is no change in the shareholding pattern in the next reporting season. Moreover, promoters make sure that they do not trigger the 2% limit that invites mandatory disclosures.

“An off-market transfer changes the ownership and so promoters always transfer less than 2% of the equity,” said a broker familiar with such deals. According to Sebi guidelines, if the promoter holding changes by 2% or more, stock exchanges have to be intimated within two days of the transaction.

Brokers familiar with such deals say that mostly mid-cap and small-cap promoters indulge in such an exercise.

“It is all about finding loopholes,” says a head of a domestic brokerage. “Brokers have no access to off-market transaction data and so have no clue of the entities that transfer shares in beneficiary accounts of our clients. I guess Sebi should include such shares in the definition of encumbered shares,” he adds. In fact, the market regulator has access to offmarket transfers through its integrated market surveillance system (IMSS).

Interestingly, the market is abuzz with the name of a Mumbai-based B group company, where such an ‘operation’ was done. Market players, however, say that the exercise went wrong and the stock started hitting lower circuits on many days. The promoter is believed to have transferred his shares to meet the margin requirements of an operator.

Not surprisingly, in its order last week, Sebi had said, “In certain instances, it is seen that delivery obligations of one connected client was fulfiled by off-market borrowing of shares from another connected client.”