The Journalist

Sebi transfers officers probing IPO scam

2011-12-22T23:15:00.000+05:30

Mehul Shah & Ashish Rukhaiyar
Mumbai, 15 December 2011

The Securities and Exchange Board of India (Sebi) has transferred quite a few officials who were probing irregularities done during initial public offers (IPOs).

The move has surprised many in the markets, as the regulator is in the midst of looking into subscription details and trading patterns of several recent issues. Sebi is probing the role of merchant bankers, brokers and companies after questions were raised over the way some recent public issues were subscribed, amid talk of a tacit understanding between merchant bankers and promoters, as well as post-listing fluctuations in stock prices.

“Sebi has transferred quite a few officials involved in IPO investigations. It’s a surprising decision,” said a source familiar with the developments.

When contacted, a Sebi spokesperson said the regulator “undertakes transfer of officers from time to time, according to the laid-down policies. A few officials who have completed their tenure in a particular department were transferred to another department. This exercise involved officials in various departments, including the investigations department”.

The subscription details would help Sebi get clues about the names of investors who subscribed to these issues. If the same people had applied in most issues, there could be a trend.

Similarly, looking into the trading pattern would indicate if there was a concentration of volumes from a particular segment of brokers. The trading volumes in newly listed companies were several times higher than the number of shares issued by companies in IPOs, indicating there could also have been some circular trading in these.

Shares of half the companies that came out with IPOs this year had fallen 30 per cent from their issue prices till on Wednesday, data compiled by the BS Research Bureau showed. Not just that, some of these stocks like RDB Rasayans, Taksheel Solutions, Bharatiya Global, Indo Thai Securities, Shilpi Cable, Paramount Printpackaging, Acropetal Technologies Brooks Laboratories and Servalakshmi Paper have slumped 84 per cent from their issue prices.

There are allegations that some of the promoters pre-sold their issues at a 30-50 per cent discount to operators to get subscriptions. And, once the stock was listed, operators scrambled to exit, leading to wild fluctuations in prices of these stocks.

Mobile trading picks up speed

2011-12-22T23:13:00.001+05:30

Ashish Rukhaiyar
Mumbai, 17 November 2011

Mobile trading, approved by the capital market regulator late last year, has seen a nearly fourfold jump in turnover in the past few months.

Market players say an increasing number of retail investors are embracing the new platform to deal in equities. The availability of trading applications across mobile platforms has acted as a catalyst, they say.

Mobile trading, in simple terms, refers to investors placing buy/sell orders using their mobile phones. The Securities and Exchange Board of India (Sebi) gave its go-ahead to mobile trading in August last year. The regulator allowed brokerages to introduce applications for mobile phones, which clients could download and trade through. Stock exchanges provide their own versions of trading applications.

According to the National Stock Exchange (NSE), the total monthly turnover of mobile trading has risen to Rs 2,606 crore in October from Rs 715 crore in April — a 264 per cent rise in just six months. Initially, when mobile trading was launched, the monthly turnover was in the range of Rs 10-12 crore on NSE. In fact, the monthly turnover has registered a steady rise since April as more investors have started to adopt the new platform. Meanwhile, in the current year, the Bombay Stock Exchange has seen its monthly mobile trading volume more than double from Rs 6 crore to Rs 14 crore.

An NSE spokesperson said the exchange had launched applications for all smartphones and tablets along with “reasonable phones with GPRS connections”. “Volumes from mobile trading have been growing and we are confident the trend will pick up further,” said the spokesperson.

Market players, meanwhile, say the availability of trading applications across platforms — Android, BlackBerry, Windows, etc — has led to investors warming up to mobile trading. “Mobile trading is much simpler than internet trading as a simple handheld device does the trick. So, clients who are on the move use it extensively. While the percentage of investors opting for mobile trading is still minuscule, the trend is encouraging,” says Vinay Agrawal, executive director, Angel Broking.

Prior to the regulatory approval, most of the large brokerages were already providing mobile platforms through which their clients could access live quotes and portfolio details. These applications were tweaked to meet regulatory norms and buy/sell functionalities were added.

Q&A: Abhay Laijawala, Deutsche Equities India

2011-12-22T23:09:00.000+05:30

'There is still a lot of investor goodwill for India'
Ashish Rukhaiyar & Mehul Shah
Mumbai, 15 November 2011

India’s economy is slowing but that will not lead foreign investors to capitulate, unless there is an event of significant risk, says Abhay Laijawala, head of research, Deutsche Equities India. In an interview with Ashish Rukhaiyar and Mehul Shah, he said India was still attractive for fundamental investors with a long-term horizon and that foreign flows would remain steady. Edited excerpts:

You talked about a slowdown in gross domestic product (GDP) trend growth to seven per cent in your latest report. How strong is the probability and what is the view among the investor community?
The general belief (among investors) is it’s still too early to say that. However, the risks of a slowing GDP growth trend are rising. Our report is a what-if analysis. Our economists are still maintaining an eight per cent GDP growth rate. But, clearly, with some headwinds on policy inaction, compulsions of a popular democracy and a slowing global economy, many investors are convinced GDP growth will slow down for a year. There is still a lot of investor goodwill for India and its structural drivers are very much intact. We believe the government recognises the need for reforms. What we are not certain is the timing, and timing is everything.

But does the timing of the report indicate there is a higher probability of going down to seven per cent, rather than staying above that?
That is anyone’s guess whether GDP will go down to seven per cent on a trend basis. But, as I said earlier, the risks of this happening are rising. I do think at least for the next couple of quarters, there is a possibility GDP growth might slip. I guess we have to wait and watch. However, we are increasingly being asked as to what would be the impact of a seven per cent GDP growth trajectory on earnings, market multiples and different sectors.

What impact will a slowing GDP have on the market?
If GDP slows only for 2012-13, then we think the markets have discounted it. That is because we have seen a 260-basis points compression in valuation multiples for the Sensex. If one believes the slowdown will be on a trend basis, there is potential for a further de-rating of the markets.

Your last report predicted a Sensex target of 21,000 for this year-end. It looks highly unlikely...
It’s difficult to answer this question with a high degree of certainty, given volatile global markets, rising risk aversion and a challenging macro economic situation in India. However, with most funds underweight on India, any return of risk appetite could lead to a short-term rally in the markets in the run-up to the next year.

The investor community has been talking a lot about policy inertia.
India is not the only country seeing policy inertia, which has become a phenomenon in all democracies. But we believe there are certain policies the government is working on. For example, we are already hearing the ‘no go’ criterion in coal mining has been dropped and the ministry of environment and forests is taking up projects on a case-by-case basis. So, it’s a question of timing. We believe the government’s inclination to move ahead on long pending reforms remains high, but compulsions of a popular democracy, coalition politics and a busy state election may delay its ability to move ahead.

How do you see the European crisis impacting the Indian market?
As far as Europe is concerned, it is anyone’s guess. We remain confident the governments in Europe will be responsible and try and prevent a systemic collapse akin to the Lehman moment. But it is difficult to say what would be the contours of a European package because it is a dynamic process. Markets will remain volatile until a more concrete solution comes out. We all thought the announcement that came some days before would assuage sentiments until Greece said it would be holding a referendum. Such situations will continue and, therefore, we will see markets being swayed between bouts of risk aversion and risk appetite.

Q&A: Bharat Iyer, JPMorgan

2011-12-22T23:06:00.000+05:30

'Indian markets unlikely to slip below Oct lows'
Mehul Shah & Ashish Rukhaiyar
Mumbai, 4 November 2011

A meaningful correction in global oil prices and/or progress on key reforms would be important re-rating triggers for the Indian stock market, says Bharat Iyer, executive director and the head of India equity research at JPMorgan. He says interest in Indian equities among foreign investors remains keen. Edited excerpts from an interview with Mehul Shah and Ashish Rukhaiyar:

We have seen a rebound in global markets after leaders announced a deal to contain the euro zone debt crisis. In the US, Q3 GDP numbers have reduced fears of a double-dip recession. Is the rally sustainable?
There was extreme pessimism regarding US and Chinese growth, and the European debt crisis. All it took were modest improvements in the US and China economic outlook and ambiguous plans out of Europe to drive markets higher. Where do we go from here? Sideways, most likely, with more volatility to come. Considerable work remains to achieve a resolution on the credit crises in Europe and the outlook for global growth remains patchy.

Do you expect Indian markets to hold their October lows in the near future? What are the major risks for the market in the next three to six months?
It would take a lot of bad news for the Indian markets to go below the October lows. This would, in all probability, have to be due to a global shock. From a local perspective, the Reserve Bank signalling a pause to monetary tightening should put a floor to market valuations. A meaningful correction in global oil prices and/or progress on key reforms would be key re-rating triggers to look forward to.

FII (foreign institutional investor) flows have been moderate so far this year. How are they viewing the Indian market?
We believe FIIs have gradually raised their India stance from Underweight early in the year to Neutral at present. Interest levels in Indian equities remain keen, particularly given the uncertain global growth outlook and the correction in commodity prices.

What’s your view on the corporate results for the quarter ended September 30? Could we expect further earnings’ downgrades for the Sensex/Nifty in 2011-12?
Halfway into the Q2 reporting season, it has been a so-far-so-good case. On aggregate, corporate earnings show about 12 per cent year-over-year (yoy) growth, versus our expectations of a 10 per cent yoy growth for the universe. Companies with better performance typically report early in the season and we could see signs of stress from those announcing later.
On balance, current consensus expectations of a 16 per cent earnings growth for FY12 do appear optimistic. Growth of 10-12 per cent would be a reasonably good outcome in the backdrop of the stresses the corporate sector is subject to.

RBI has indicated a pause in its monetary tightening cycle. Has there been any change in your sectoral preferences after RBI’s announcement?
Going into the policy review, we were recommending an overweight stance on financials. The slowdown in growth has become meaningful in the recent past and with inflation showing signs of peaking, we anticipated RBI was nearing the end of the tightening cycle.

Which sectors are you overweight and underweight at present?
We prefer local sectors to global cyclicals at this stage. The outlook for local growth is much better and policy makers in India have more ammunition as compared to counterparts in the developed world.
Within local sectors, early stage cyclicals – particularly financials — appear appealing. Valuations are appealing and inflation rolling over or an end to monetary tightening is a trigger for outperformance. Near-term data points on discretionary spending could be weak and valuations are not cheap, so we await a better entry point in this space. Industrials are cheap, but lack catalysts to outperform, unless we see signs of policy action.
We are underweight on global sectors. Bottom-up, there are interesting opportunities in IT services, healthcare and metals.

Management rejig likely at united stock exchange

2011-12-22T23:05:00.000+05:30

Palak Shah & Ashish Rukhaiyar
Mumbai, 2 November 2011

With the exit of T S Narayanaswami and Saurav Arora, the exchange is scouting for currency specialists.

Just a year after launching operations, the United Stock Exchange (USE) is looking at a makeover of its management team. The exchange has lost significant market share in the recent past and two of its key officials have also quit. People familiar with the development say the exchange is considering getting persons with proven expertise in the currency derivatives segment.

While chairman and managing director T S Narayanaswami resigned from the exchange in early October, Saurav Arora — designated as president in-charge of business development & marketing — has also moved out of the currency bourse, which marked its entry with record volumes in September last year.

USE was launched on September 20, 2010, with an opening-day volume of 9.88 million contracts, a world record for first-day trading at any new exchange.

The resignations have come as a body blow to the exchange, known to leverage on the expertise and reach of both the officials. Saurav Arora is the son of Gaurav Arora, owner of Jaypee Capital, one of the founder promoters and the largest volume generator at USE. After the de-mutualisation of the exchange, Jaypee currently holds five per cent stake in USE.

When contacted, both T S Narayanaswami and Saurav Arora declined comment. Meanwhile, a source close to Jaypee Capital said the entity would not be selling its stake in USE and further elaborated that Saurav’s appointment at USE was for a “limited period”. Arora, an alumni of Harvard and Delhi University, was “looking for other opportunities”, it added.

Meanwhile, USE has seen its fortunes dwindle in the recent past, especially after reports of it coming under the regulatory scanner for concentration of volumes. Further, the exchange, that pitched itself as ‘India’s newest stock exchange’, saw the volumes fall at a time when its rivals — MCX Stock Exchange (MCX-SX) and National Stock Exchange (NSE) — managed to hold on to their respective market shares.

According to data compiled by the BS Research Bureau, in October, USE’s share in the total currency futures segment fell to under 13 per cent, which, at its peak, hovered around 30 per cent. The daily average volume in the month shrunk to Rs 3,541 crore, from Rs 7,994 crore the previous month.

The month of August saw USE commanding an average daily turnover of Rs 15,597 crore, marginally lower than those of MCX-SX and NSE. Incidentally, in May, USE’s share in the currency segment was nearly 30 per cent, with an average daily volume of nearly Rs 14,000 crore. The exchange currently operates in the currency derivatives space and offers currency futures in all the four currency pairs permitted by the Securities and Exchange Board of India. Also, it is only one of the two stock exchanges in the country to offer currency options in the dollar-rupee pair.

USE was in the news recently on account of a regulatory probe for alleged concentration of trades by a single member. Reportedly, only a few brokers accounted for the majority of volumes registered on the exchange. More importantly, Gaurav Arora-owned Jaypee Capital, also a shareholder in USE, accounted for nearly 80 per cent of the entire turnover.

I-bankers' track record disclosure: Investors to gain little

2011-12-22T23:02:00.000+05:30

Mehul Shah, Ashish Rukhaiyar & Ronak Shah
Mumbai, 14 October 2011

Which is a better merchant banking entity? Enam or JM Financial? Or, those owned by institutions, such as ICICI Securities, IDFC Capital or SBI Capital Markets?

Come November 1, investors will get a chance to judge the track record of investment bankers, based on how the issues managed by them fared. However, the short duration mandated by the Securities and Exchange Board of India (Sebi) means long-term investors will not get much insight, experts say.

Based on the parameters laid out by Sebi in its circular last month, Business Standard analysed the performance of India’s top 10 investment bankers in terms of the number of initial public offers (IPOs) managed by them over the last three financial years.

According to Sebi, from November 1, while filing documents for new issues, merchant bankers will have to disclose data for all the issues managed over the last three financial years. The disclosures would include the issue price, performance on the day of listing and the price movement on the 10th, 20th and the 30th day. The same has to be compared with the movement of the benchmark index.

A closer look at the data compiled by the BS Research Bureau shows that most issues managed to close above their respective issue prices on the listing day. Over the previous three financial years, a total of 132 issues were managed by the top 10 bankers, of which 77 offerings stayed above the issue price on the day of listing. However, the picture changed over a one-month period, when the number of issues trading at a discount rose to 71 and those trading at a premium declined to 61. (See table)

For instance, of the 12 offerings managed by ICICI Securities, eight stayed above the issue price on the first day. Over a month, however, only two traded above the issue price.

Officials at investors’ associations favour the move to include the track record of investment bankers in the prospectus, but believe the time period to judge the issue should be longer.

“This will be an additional tool for investors. If a merchant banker has consistently done bad, investors will be cautious while selecting an issue,” said A K Narayan, president of the Tamil Nadu Investors’ Association. “The listing day or 30 days after listing is too short a period to judge the issue. They should definitely include one-year performance, too,” he added.

“The listing day performance is not a good indication. Performance should be judged after at least a 3-6 month period,” said G S Sood, president of the New Delhi-based Society for Consumers’ and Investors’ Protection. “The entire exercise should be conducted with a view to take corrective action against the erring investment bankers and curb the nexus between promoters and investment bankers indulging in manipulative practices,” he added.

Merchant bankers, meanwhile, are not fully convinced that disclosures in the proposed form would help investors take a better-informed decision, as envisaged by the regulator.

“If I am managing a Rs 1,000-crore IPO, the investor needs to know if I am capable enough of handling such a large offering,” says the director of a domestic merchant banking entity featuring in the top ten list.

"Industry players have conducted surveys which say nearly 90 per cent of the applicants invest only for listing gains and sell the shares on the day of listing. So, why will the investor be interested in knowing what happens to my issue on 20th or 30th day,” he asked.

“Once the company is listed, we don’t have any control over its performance. If the issue is subscribed multiple times, it shows enough appetite among investors at the issue price,” said a Mumbai-based investment banker, requesting anonymity.

BS People: Bhuvnesh Singh & Neel Shahani

2011-12-22T23:00:00.001+05:30

Barclays hires duo with institutional clout
Ashish Rukhaiyar
Mumbai, 13 October 2011

When Barclays Capital announced the appointment of Bhuvnesh Singh and Neel Shahani as part of the institutional desk, the business strategy of the London-headquartered entity was clearly evident.

The institutional desk of Barclays Bank Plc, which has been a late-starter in India, was looking at people who could bring ready business and big-ticket clientele along with them.

Bhuvnesh SinghSingh, who heads the equity research team in India, is known for his analytical capabilities. He has been ranked highly for his research in various sectors, including telecom, technology and industrials.

Singh will be responsible for developing Barclays Capital’s Indian equity research business and will report to Stephen O’Sullivan, head of Asia Ex-Japan equity research. Interestingly, the appointment comes close on the heels of Bhavtosh Vajpayee who joined as managing director and head of equities of the India unit.

Shahani, on the other hand, brings to the table nearly two decades of experience in sales and trading. Prior to joining Barclays, Shahani was managing the sales trading team tracking global markets at India Infoline. Shahani has handled large funds during his earlier stints with CLSA, HSBC, JM Financial.

Neel ShahaniShahani may well be a part of an industry that is looked upon as a symbol of capitalism, but there is also a social side to him. He is a part of the board of trustees of Akanksha, a non-profit organisation involved in education of less privileged children from Mumbai's slum areas. The Lancaster-based Franklin and Marshall College alumnus is also on the board of GiveIndia, which is a donation platform for around 200 NGOs.

The new-look team - which is not yet fully staffed has its goals clearly laid out. Barclays Capital is known for its non-equity capabilities (bond, primary debt offerings and fixed income research) and is aggressively eyeing a slice in the equity segment that is currently in the doldrums.

The hirings also come at a time when many of the global majors are increasing their strength in India. So, it does not come as a surprise that the British major is vying for people that already share a good rapport and relation with some of the biggest and most influential clients looking at India.

Sebi hints curbs on fund manager compensation

2011-12-22T22:57:00.000+05:30

Ashish Rukhaiyar
Mumbai, 6 October 2011

Even as regulators in the developed markets deliberate on the sensitive matter of fees earned by bankers and brokers, the Indian capital market watchdog has hinted its intentions of regulating the commissions of private equity and venture capital f und managers. While the final norms are yet to be announced, various industry bodies are already opposing any such move.

In August, the Securities and Exchange Board of India (Sebi) released a concept paper on proposed alternate investment funds (AIF) regulations. Those were essentially meant to regulate venture capital funds, private equity funds, debt funds, real estate funds and PIPE (private investment in public equity) funds, among others. Further, the regulator said it “may” lay down the fee criteria as well.

“The Board (Sebi) may specify criteria for charging performance fee of the managers of AIF,” says regulation 13(1)(d) of the proposed norms. In other words, Sebi may decide the quantum of fees/commissions that a fund manager can charge from the investors.

Market participants say that any such move by the regulator would prove to be restrictive and impact the overall growth of the fund industry. They feel that since these funds deal with high net-worth individuals and other well-informed investors, negotiations on the fee count should be left to the parties involved.

The industry’s initial reaction, says Gautam Mehra, executive director (tax and regulatory services) of PwC India, has been that given that fund managers in AIFs would deal with sophisticated investors who understand the performance fee criteria. Since this is based on accepted and prevalent market practices, this may continue to be left to individual negotiations.

“This would depend on how the regulations around this are ultimately framed. If they lay down criteria that make the fee charging more restrictive than at present, it would impact the industry players,” he adds.

Interestingly, the Confederation of Indian Industry, while welcoming the proposed AIF norms, has suggested some changes. One of them is on the issue of the regulator retaining the powers to specify criteria for charging performance fees by the fund managers.

The industry body is of the view that the payment of performance fees should be market driven and based on the performance and record of the fund manager. On the other hand, the CFA Institute has suggested that part of the performance fees can be locked in for the duration of the fund.

“The popular industry view seems to be that any form of regulatory control may interfere with the commercials of the fund,” says Ashish Bhakta, partner, Advaya Legal.

“The proposed provision would empower Sebi to specify criteria for charging performance fee of the fund managers in such manner that the performance fee does not encourage excessive risk or highly speculative activities. This would negatively impact the growth of the fund management industry in India. Also the proposed provisions would restrict the ability of parties to come to a mutual understanding under a private contract between them,” he explains.

This is, however, not the first time that the 1992-formed Sebi is regulating the fee structure for the fund industry. In October last year, the regulator specified that portfolio managers should charge a performance-based fee only on the high water mark principle, that is, based on the increase in portfolio value in excess of the previously achieved high water mark.

Sebi member selection hits CVC hurdle

2011-12-22T22:56:00.000+05:30

Ashish Rukhaiyar
Mumbai, 4 October 2011

The Securities and Exchange Board of India (Sebi) will have to wait a little more to get two new whole-time members on board. According to people familiar with the development, the selection of at least one candidate has hit the Central Vigilance Commission (CVC) hurdle. This could delay the whole process.

According to reports, former Central Bank of India chairman and managing director, S Sridhar, and Rajeev Agrawal, a 1983-batch Indian Revenue Services (IRS) officer, have been selected for the members’ post. Industry sources, however, say Sridhar’s selection has been stuck at CVC, as the bank and the former chairman have been named in the V K Shunglu Committee report over alleged irregularities in the Commonwealth Games (CWG).

“Central Bank (of India) was the official banker for the Commonwealth Games and has been named in the report, along with Sridhar, who was at the helm when the games were organised,” said a person privy to the development. “This has led to his selection getting stuck at CVC, though he has said in the past that the allegations are baseless,” he added on the conditions of anonymity.

The Shunglu Committee has alleged in its report that Sridhar was “personally interested” in CWG contracts as a relative was posted in London and was part of the CWG Organising Committee. Sridhar, when contacted, declined to comment on the issue.

Meanwhile, the probe committee has also alleged some irregularities on the bank’s part on matters like accounting treatment of certain expenditures, purchase & distribution of free tickets and entering into sponsorship agreements without prior approval of the finance ministry. Reports, incidentally, suggest that Sridhar has refuted all these allegations, calling it “baseless” that his relative influenced any of his decisions.

The developments would come as a severe blow to Sebi, which has been functioning with only one whole-time member (WTM) since July, when M S Sahoo and K M Abraham retired. At present, Prashant Saran is the lone WTM at Sebi.

Interestingly, Agrawal’s selection has also got delayed due to these developments because, industry sources say, the government wants to notify both the names together and, therefore, is waiting for all the necessary approvals. Once the CVC clearance is received, the names will be sent to the Cabinet’s Appointments Committee, headed by Prime Minister Manmohan Singh.

MFs to benefit from proposed AIF regulations

2011-12-19T15:56:00.000+05:30

Ashish Rukhaiyar & Chandan Kishore Kant
Mumbai, 30 September 2011

Sebi proposal of minimum Rs 1-crore investment to channelise HNI money towards fund houses.

The proposed regulations for alternative investment funds (AIFs) would come as a blessing in disguise for mutual funds. Market participants say the increase in the minimum investment size is bound to channelise a lot of high net worth money towards the fund industry.

Last month, the Securities and Exchange Board of India (Sebi) released a concept paper on proposed AIF norms. These would cover venture capital funds, private equity funds, debt funds, real estate funds and PIPE (private investment in public equity) funds, among others. It has proposed a minimum investment size of Rs 1 crore. The current norms allow a high net worth individual (HNI) to participate in a portfolio management scheme with as little as Rs 5 lakh.

Market participants say MFs would be the biggest beneficiary of the proposed norms, as a lot of HNIs with an investment corpus of less than Rs 1 crore would not be able to invest in PMS or other funds that come under the purview of AIF regulations. This would make MFs their preferred investment vehicle.

Gautam Mehra, executive director, tax and regulatory services, PwC India, feels the listed companies’ universe would benefit from the proposed norms, as MFs typically invest in companies listed on the stock exchanges.

“Investors in the sub-Rs 1 crore segment may explore redeploying the capital in the listed space through the MF route,” says Mehra. “Second, the investments pooled in by portfolio managers offering standardised strategies with a ticket size in the range of Rs 5 lakh to Rs 25 lakh could also get channelised to MFs, given that the offerings of such schemes are also proposed to be covered by AIF Regulations.”

MF companies have welcomed the proposed regulations. They come at a time when the sector has not been successful in attracting significant inflows from investors. Fund managers are hopeful that with the increase in investment size from Rs 5 lakh per individual to Rs 1 crore, considerable funds will get channelised.

“Earlier, an amount of Rs 5 lakh was a reasonably big sum but now it is no more a big investment. I do expect that some of these funds could come to the fund industry,” said G Pradeepkumar, chief executive officer, Union KBC Mutual Fund.

Mehra says venture capital funds invest largely in unlisted companies and in listed companies only by way of preferential allotment. So, investors who may not have an appetite for the listed space may consider increasing their commitments and continue to invest in AIFs.

The fund industry has been trying to source inflows from tier-I and tier-II cities but have failed at a time when stock markets have falen by close to 20 per cent this year. It has been losing folios continuously.

There are currently 45 players in the domestic MF sector, with overall assets under management (AUM) of Rs 6.96 lakh crore as on August 31. In 2010-11, the industry witnessed a net outflow of Rs 49,406 crore, compared with a net inflow of Rs 83,081 crore in the previous year. The highest outflow, of Rs 13,000 crore, was in equity schemes.

India Inc's fund-raising seen below 2008 level

2011-12-19T15:54:00.000+05:30

Somasroy Chakraborty & Ashish Rukhaiyar
Mumbai, 28 September 2011

Volatility in local share markets have hit India Inc's equity fund-raising plans, with the total deal value this year set to fall below the level seen in 2008. This has squeezed the fee income of investment banks in the country and triggered job losses in many of these firms.

“This year has been challenging for the primary market. Around $9 billion has been raised so far, and we don't expect much in the last (October-December) quarter,” said Sanjay Sharma, head (equity capital markets), Deutsche Bank Group, India.

In the first eight months this calendar year, Indian companies raised $9.2 billion, compared with $29.9 billion raised in 2010, according to Dealogic data. In 2008, Indian companies raised $13.8 billion through equity issuances.

The fee earned by investment banks so far this year is estimated at around euro 52 million, compared with euro 238 million last year. In 2008, investment banks earned euro98 million by managing equity issuances of domestic firms. The shrinking fee pool has also taken its toll on headcounts, with many banks shrinking their investment banking teams in the last few weeks.

“This would be the most difficult year for equity capital markets in a long time. With PE (price earnings) multiples contracting, promoters are also weary of selling equity. Foreign institutional investors have backed out from emerging markets, including India,” said Tarun Kataria, chief executive, Religare Capital Markets, India.

Bombay Stock Exchange's benchmark index, Sensex, has plunged 17.46 per cent since the beginning of this financial year, making it difficult for corporate entities to raise funds through equity issuances.

While investment banks claimed their bill rates were not affected despite a slowdown in deal flows, they plan to maximise their share in the declining fee pool by offering value-added services.

“For investment banks, the fees, as a percentage of amount raised, has not really come down over the last few years, and we see the differentiation between banks is more in terms of the quality of service offered,” Sharma said.

Deutsche Bank has the largest share of fee income from equity issuances in India so far this year. It earned euro 3.7 million, managing three deals between January and August.

“Market conditions this year have been pretty tough. The ability of Indian companies to raise equity capital in this environment has been limited. The fund flow from foreign institutional investors has remained muted and hence, primary issuances would continue to struggle,” said a senior official in charge of equity capital markets of a British bank in India.

Industry players expect companies in financial services and infrastructure sectors to lead the recovery, once the market volatility subsides.

“Today, rate-sensitive sectors like infrastructure, real estate and banking are not doing well in the secondary market and hence, these would find it difficult to raise money. However, once the market improves, these sectors would pick up first. In terms of products, I expect QIPs (qualified institutional placement) and follow-on offers to take the lead, before IPOs (initial public offers) pick up,” Sharma said.

Sebi questions USE on trade concentration

2011-12-19T15:49:00.000+05:30

Ashish Rukhaiyar & Palak Shah
Mumbai, 27 September 2011

Allegations on Jaypee Capital alone accounting for bulk of turnover, something not permitted under the rules.

The United Stock Exchange (USE) has come under the regulatory scanner for alleged concentration of trades by a single member. The regulator has questioned the effectiveness of the exchange’s surveillance and risk mechanism measures that allowed such an occurrence.

According to reports, only a few brokers account for a majority of the volume registered on USE. More important, Gurgaon-based Jaypee Capital, also a shareholder in USE, accounts for nearly 80 per cent of the turnover. USE currently operates in the currency derivatives space and offers currency futures in all the four currency pairs permitted by the Securities and Exchange Board of India (Sebi). It is also one of the only two stock exchanges in the country to offer currency options in the dollar-rupee pair.

“This puts a big question mark on the surveillance mechanism, as there should have been alerts thrown up by the system and the exchange should have taken note of it," said an official familiar with the development. "Questions have been raised as this is something the regulator is not comfortable with. It is against the spirit of the law."

Sebi has clearly said on numerous occasions that concentration of positions with a single member will not be entertained and exchanges should have robust surveillance and risk mechanism measures to monitor such developments.

The regulator has also directed exchanges to put in place systems to monitor "position concentration, open interest across trading members... alerts on large traded quantity." Further, "exchanges were also advised to suitably warn their members against self trades," in a surveillance meet held in December 2008.

Jaypee Capital is a direct shareholder in USE. Gaurav Arora, managing director and founder of the brokerage entity, and his son, Saurav Arora, hold another one per cent each. USE chief executive officer and managing director, T S Nayaranaswami, could not be reached for comments, despite repeated attempts.

"Concentration of positions with one single entity is a clear breach of FUTP (Fraudulent and Unfair Trade Practices)," says Ameet Naik of Naik, Naik & Co. "One cannot have brokers with trading rights, as that was the whole idea behind pushing for demutualisation. Then, there are also codes and ethics followed by brokers, violation of which could have serious impact," says Naik, who specialises in securities regulations.

Data shows that while Jaypee Capital accounted for nearly 80 per cent of the turnover, some of the banks (Andhra Bank, Union Bank of India, Indian Bank, Bank of India and Bank of Baroda) were responsible for a marginal share in the volume. USE’s stakeholders include the Bombay Stock Exchange, which owns 15 per cent, along with 28 banks and three corporate houses.

Last Friday, the volume on USE dropped significantly to Rs 6,514 crore after clocking a little over Rs 12,000 crore the previous day. Interestingly, MCX Stock Exchange (MCX-SX) and the National Stock Exchange registered volumes of Rs 29,992 crore and Rs 35,393 crore, respectively.

On Monday, USE registered a turnover of Rs 8,038 crore, while MCX-SX and NSE clocked volumes of Rs 26,616 crore and Rs 19,067 crore. USE’s first-day turnover had surpassed the combined currency segment of NSE and MCX-SX. The exchange had made a big-bang debut last year, cornering a near 52 per cent market share in the currency derivatives segment. Jaypee and Union Bank, incidentally, conducted the first trade on the exchange.

REGULATOR TALK
Sebi says such practices are against the spirit of law
Surveillance, risk mechanisms should throw such alerts, the regulator asserts
Jaypee Capital accounted for nearly 80% volume on USE
Jaypee is a shareholder in USE; public sector stakeholder banks account for only a marginal share in volumes

Sebi sees slowdown in decision-making

2011-12-19T15:43:00.000+05:30

Ashish Rukhaiyar
Mumbai, 21 September 2011

The Securities and Exchange Board of India (Sebi) is short of senior management. Besides, recent controversies surrounding former whole-time member K M Abraham’s letter to the finance ministry had slowed down the decision-making process significantly, said market participants.

This was reflected in some of the recent meetings that the finance ministry has had with market participants, including stock exchanges. Participants in the meeting said queries from the finance ministry on progress on the separate platform for small and medium enterprises could not be addressed because Sebi was represented by a northern zone official. Similarly, the takeover code has not been notified though it had been cleared by both the finance ministry and the Sebi over a month before.

The vacancies created by the exit of two whole-time directors, M S Sahoo and K M Abraham, who completed their terms, haven’t been filled for two months. At present, there is only one whole-time director – Prashant Saran – with the market regulator.

“The working of Sebi has certainly been affected, as the work that was divided among three members is now being looked after by just one,” a Sebi official said. “The Sebi mandate encompasses a lot of segments and it is difficult for one person to look after so many verticals simultaneously,” he added, wishing not to be named.

Some reports suggest that former Central Bank of India chairman and managing director S Sridhar, along with Rajeev Agrawal, a 1983-batch Indian Revenue Services (IRS) officer, have been selected as members. A formal notification is still awaited.

Also, while three of the four executive directors (ED) — K N Vaidyanathan, J N Gupta and Pradnya Sarvade — have completed their terms, only one ED, J Ranganayakulu, was granted an extension. According to Sebi sources, the three EDs have been replaced by S Ravindran, S Raman and R K Padmanabhan.

Interestingly, there has been no formal notification about the appointments of Raman and R K Padmanabhan on the market regulator’s website. Padmanabhan, a Maharashtra cadre IPS officer, is yet to join Sebi, while the other three have assumed their new roles.

Saran, the lone whole-time member, is looking after all the verticals till the new members assume charge. According to the Sebi website, Saran is directly in-charge of collective investment schemes, foreign institutional investors and the enquiry & adjudication department. The others are handled by executive directors who report to Saran.

As a whole-time member, Sahoo was in-charge of derivatives & new products, legal affairs, enforcement and regulation & supervision of market intermediaries, while Abraham handled corporate finance, investigations, vigilance and integrated surveillance, among other things.

Even the court recently remarked in a high-profile case that the affected party should go back to Sebi for a dispassionate hearing, as a new regime was in place.

Slump forces MFs to bargain on brokerage

2011-12-19T15:42:00.000+05:30

Ashish Rukhaiyar & Chandan Kishore Kant
Mumbai, 20 September 2011

Mutual fund houses are looking at all possible ways to reduce costs. As the latest measure, they have started negotiating with their empanelled brokers on the quantum of brokerage to be paid for every trade. Larger fund houses have already slashed the brokerage to rein in overhead costs and falling margins in a weak market.

According to institutional traders, some top fund houses reduced the brokerage by up to 25 per cent in the recent past. A large domestic fund entity backed by a leading corporate house is believed to have slashed the same from 15 basis points (bps) to 10 bps for its largest broker. Another fund house — a joint venture between an Indian and a foreign entity — has brought it from 20 bps to 15 bps.

While market participants say the trend is a direct outcome of weak market sentiment and falling volumes, which have pushed up the cost of trading, technology advancement in the form of direct market access (DMA) has also acted as a catalyst.

“Currently, the trend is limited to some large fund houses, but it can become an industry phenomena,” said an institutional dealer who trades on behalf of some domestic fund houses. “While a 25 per cent cut in brokerage has become common, some fund houses have also started giving single-digit commission to the smaller brokerages on their panel,” he added.

Meanwhile, fund house officials say they regularly negotiate the brokerage with their panel, depending on the quantum of trades routed through various brokerages. Incidentally, the move comes close on the heels of many fund houses cutting down on the number of empanelled brokerages.

“We keep negotiating and try to keep the brokerages at a minimum,” said Ajit Menon, executive vice-president & head of sales, DSP BlackRock. In a similar context, an official from Religare Mutual Fund said “it is an ongoing process of negotiating on brokerages as a part of prudent management.”

An official from one of the largest domestic fund houses said the increased acceptance of DMA among MFs had contributed to the fall in brokerage, as that involved minimal or no efforts at the broker’s end. “The broker has absolutely no role to play when orders are routed through DMA, so the question of high brokerage does not emerge,” said the sales head of a domestic fund house.

“Many fund houses have adopted it, as it lowers the impact cost. So, the average brokerage is witnessing a fall,” he added.

DMA is a facility which allows brokers to offer clients direct access to the exchange trading system through the broker’s infrastructure, without manual intervention by the broker. The Securities and Exchange Board of India also encourages DMA, as it reduces the probability of front-running activities.

Mutual fund houses trim broker panel to cut costs

2011-12-19T15:37:00.000+05:30

Ashish Rukhaiyar
Mumbai, 15 September 2011

The prevailing pessimism in the equity arena has compelled even the biggest capital market participants to rework strategies. With volumes down to a trickle compared to earlier months, revenue has taken a hit and every conceivable way to cut costs is being implemented across the board.

Mutual fund houses, which have been battling distribution-related issues for some time now, have come up with a new method to reduce overhead costs. Some of the top fund houses have started cutting the number of brokers through which they place trades in the stock market. Institutional dealers say some are even hinting at a 50 per cent cut.

Market buzz is that one of top five fund houses, with around 100 brokers on its panel, is looking to bring it down to 60 in the first phase and to 40, finally. Another is looking at trimming it to 25 from the existing 40.
Financial institutions, including mutual funds, execute their buy and sell orders through a number of ‘empanelled’ brokers, who, at times, also offer discounted brokerage rates, depending on the quantum of trade routed through them. Top fund houses are known to have 80-100 brokers on their panel.

“Market conditions are such that fund houses do not see any reason in continuing with a large panel of brokers,” says an institutional dealer with a domestic brokerage. “The bigger fund houses are concentrating on the top 20-30 brokers on their panel and routing most of the trading through them. The smaller ones on the panel have been left out,” he adds.

The move would come as a body blow to many institutional brokerages that have been reeling under heavy losses due to the fall in equity market turnover. Many are heavily dependant on a few institutional clients, which account for the bulk of their business volume. The recent past saw entities like Tower Capital and Alchemy Capital close their institutional business.

BS People: Praveen Chakravarty

2011-12-19T15:35:00.000+05:30

Public policy enthusiast joins Anand Rathi
Ashish Rukhaiyar
Mumbai, 8 September 2011

Ever since Anand Rathi Financial Services lost its senior high-profile equities team last year, a search for a person with prior experience in a foreign firm was on. The search ended early this month when it announced the appointment of Praveen Chakravarty to head its investment banking and equities segments.

Chakravarty had earlier helped BNP Paribas set up its India equities business. He had joined the bank in 2007 as the chief operating officer (COO) and head of research.

People who know Chakravarty say that he is not the usual market expert who relishes doling out numbers and projections. While spreadsheets are his forte, he is more known for his passion for public policy matters, said a managing director of a rival foreign brokerage.

After staying with BNP Paribas for three years, he quit in 2010 to be a part of the government's ambitious Unique Identification Authority of India (UIDAI) project as a volunteer for its financial inclusion initiative.

His stint with Anand Rathi will help the domestic brokerage in not only getting some big institutional clients on board, but also in the venture capital (VC) and private equity (PE) space. Chakravarty is the co-founder of Mumbai Angels, which focuses on start-ups and early stage companies in need of VC/PE funding.

Chakravarty, who is an alumni of BITS Pilani, also sits on the boards of many start-ups. In 2007, he was a founding board member and investor in Inmobi (earlier known as mKhoj) and has also invested in movie rental firm MadHouse that was acquired by Seventymm.

The MBA from Wharton School has earlier worked with technology majors Microsoft and IBM. He was also a part of the India team of Thomas Wiesel, a US-based investment banking entity. Interestingly, when he moved out of Thomas Wiesel to join BNP Paribas, Paribas was sued for around Rs 100 crore in damages for the defection of 20 other co-workers. The two firms eventually reached an agreement.

Chakravarty is joining Anand Rathi at a time when even the bigger players are finding it tough to sustain themselves in the market. So it remains to be seen if he will be able to work his magic. The stakes will be higher this time around since he also owns a piece of his new employer.

It's raining AGMs in September

2011-12-19T15:34:00.001+05:30

Ashish Rukhaiyar
Mumbai, 7 September 2011

For an investor who holds shares in the top-listed companies, September is going to be a busy month. Especially if attending annual general meetings (AGMs) is high on the radar. There are some days when more than 10 companies have scheduled their AGMs.

According to a recent report by Ingovern Research Services, many large companies that feature among the top 500 listed entities have scheduled AGMs this month. This has made it difficult for investors to attend the meetings, increasing the likelihood of proxy voting, it says.

“Of the companies in the S&P CNX 500 index, 154 have their AGMs in September,” says the research entity that claims to be India’s first independent proxy analysis firm. The existing regulatory framework allows a listed company to hold its AGM within six months from the financial year-end.

Of these 154 companies, 18 are part of the benchmark S&P CNX Nifty of the National Stock Exchange (NSE). While another 13 belong to the Nifty Junior, 123 are part of the CNX 500 index. Interestingly, a majority of the meetings are to be held in the last week of September.

The list of these companies include Maruti, Wockhardt, IFCI, TVS Motor, BPCL, Grasim, REC, NHPC, NTPC, BHEL, Coal India, Educomp, Parsvnath Developers, Provogue, Jai Corp, Mastek, Suzlon and Gitanjali Gems, among others.

According to the research house, such bunching of AGMs "poses challenges" to investors who hold shares in many companies. There is not enough time to do proper due diligence and attending AGMs itself turns out to be an ardous task. The inability to attend AGMs leads to the “need for proxy voting services/solutions”, it says.

At least 10 companies have scheduled AGMs on each of four days of the current month (September 23, 24, 28, 30). On September 27 and September 29, as many as 14 companies would be doing so.

People tracking this development say such bunching also puts a question mark on the corporate governance norms in many of these companies. Representatives of investor associations allege such a situation helps the company make adjustments in the balance sheet to appease stock market players.

"If a company has nothing to hide, it can conduct its AGM earlierm too," says Hinesh Doshi , vice-president, Investors' Grievances Forum (IGF). “Such companies may also have corporate governance issues. There could be some adjustments in the cash flow or the profit as per bank loans or maybe something that could help push the stock price.”

According to Doshi, law makers could look at some of the global practices followed for giving time to companies for AGMs. In many countries, three to four months is the maximum time stipulated for a company to hold its AGM after the financial year comes to an end.

Foreign investors paint gloomy India picture

2011-12-19T15:32:00.000+05:30

Ashish Rukhaiyar
Mumbai, 26 August 2011

If the latest strategy reports of some leading foreign institutional investors (FIIs) are anything to go by, then the outlook for the Indian equity market appears bleak. This, in spite of a section of experts pitching for the current attractive valuations.

While Credit Suisse is of the view that India’s global linkages are now higher than what it was in 2008, CLSA has cut its year-end Sensex target by nearly seven per cent to 18,200. Morgan Stanley is also overweight on all BRIC (Brazil, Russia, India and China) nations, except India.

“While the sharp correction in the market may suggest attractive valuations, we note the pace of corporate earnings downgrades has intensified in the recent results season,” said CLSA in its report released on Wednesday. “We lower 12-m Sensex target to 18,200 as we lower the target multiple to 13x to factor in the earnings downgrade risk,” it said.

India’s benchmark 30-share Sensex of the Bombay Stock Exchange (BSE) has declined more than 20 per cent from its peak in November last year, which technically means the index is in bear territory. It is also one of the worst performers among all leading equity indices this calendar year. On Thursday, the Sensex lost 139 points to close at 16,146.

This time around, analysts are even skeptical in betting on the “decoupling” theory that would help India in tiding over the global uncertainty in a relatively better manner. In 2008, when the sub-prime crisis was at its peak, a section of market analysts were of the view that Indian domestic consumption would help the economy in “decoupling” from the then global crisis.

“India’s global linkages are now higher than in 2008. Against the market consensus, we believe slowing global growth will expand the trade deficit and hurt GDP growth,” said Credit Suisse. It said corporate leverage has not improved, with companies with high leverage now more than in FY08. According to the Swiss major, around 50 per cent of the globally-linked Nifty EPS, which was largely uncut so far, is likely to see downward revisions.

Credit Suisse is also worried over the fact that Indian companies are highly leveraged at a time when globally companies are trying to reduce the extent of leverage. “While the world over the balance sheets of companies seems to have improved since the last crisis, the same has not happened in India. In fact, the number of companies with high leverage is now higher than it was in FY08.”

Last week, when the Indian indices lost ground, they registered their fourth straight weekly loss — the longest losing streak since the collapse of Lehman Brothers in 2008. According to Bloomberg, earnings for 46 per cent of Sensex companies missed analyst estimates in the June quarter. That compared with 33 per cent which lagged behind forecasts in the previous quarter.

This comes on the back of Morgan Stanley downgrading India in its latest report on the emerging markets. The report has maintained its underweight call on India and further reduced India’s ranking from 15 to 16. “India may not be able to respond given the starting point of a high fiscal deficit. In India, the government may focus more on boosting private sector confidence through policy reforms,” said the report.

Sebi may go slow on consent orders

2011-12-19T15:31:00.000+05:30

Palak Shah & Ashish Rukhaiyar
Mumbai, 24 August 2011

Chairman reviewing process after indicating it seems arbitrary.

The consent order mechanism adopted by the Securities and Exchange Board of India (Sebi) in 2007 to settle cases with wrongdoers in the equity market would now take a back seat.

Sebi's new chairman, U K Sinha, has expressed disapproval of the ‘arbitrary’ way in which some serious cases were settled by the regulator in the past, said top officials. He is reviewing the process and it would take some time before consent orders are passed, say officials.

Under such orders, those charged with specific violations were let off by paying a settlement charge, without admitting or denying guilt. This helped Sebi rake in close to Rs 200 crore in just over four years. Even some of the serious market manipulation cases and those related to the Initial Public Offer scam were let off under consent terms.

Sinha believes many such orders “gave an impression to the outside world about arbitrariness and subjectivity”. Early in January this year, in one of the highest-ever consent charges imposed by Sebi, it directed the brass of Reliance Infrastructure and Reliance Natural Resources to pay Rs 50 crore as settlement charges.

Among others, SMC Global Securities and Action Financial Services had filed for consent application seven times. Mumbai-based Systematix Shares & Stocks had filed for the same six times. Chennai-based Shriram group had six group entities, including Pioneer Overseas and SR Real Estate Finance, and its chairman filed 14 consent applications for violating the takeover regulations.

Sebi officials say that in a 13-page letter dated July 8 to the union finance secretary, Sinha has said there is a "prevailing perception" that Sebi’s consent orders were "subjective" and “provide an escape route to offenders and the quality of orders is not high and is not transparent”.

The chairman came to this conclusion after conducting an internal study, not done earlier, on the way in which consent orders were passed by Sebi. According to reports, the study shows the orders had varied widely from member to issuing member. In quantum, it varied from 50 per cent to a third to a sixth, when the period of debarment of two to five years was calculated. In the cases of companies making misleading announcements, debarment has varied from six months to two years to five years. For non-compliance of summons cases, the amount has varied from Rs 1 lakh to Rs 20 lakh.

A wide variation, unaccompanied by sufficient reason, gives an impression to the outside world about arbitrariness and subjectivity. Sinha feels good enforcement action must have some element of predictability with regard to similar cases, based on quantum and degree of offence.

"While it is easier to frame broader guidelines, the authorities (Sebi) need to look if there has been any inconsistency in imposing penalties for a similar kind of offence," says R S Loona, managing partner of Alliance Corporate Lawyers. "There are instances wherein the penalty has been substantially different for similar offences. Some kind of formula or guidelines are required to be framed for uniformity," adds Loona, who had earlier served Sebi as executive director in the legal division.

The consent order system, under debate, is copied from the US. The logic being that the regulator avoids long-drawn litigation and monetary penalties were the biggest deterrents to financial crimes. Also, when coupled with the embarrassment of the charges being published on the regulator’s website, it would be a sufficient check.

The system, however, was subverted, as there was no attempt to link seriousness of charges to the amount paid and some wrongdoers were let off. Consent applications are cleared by Sebi’s internal panel and put before a high powered advisory committee (HPAC), headed by a retired HC judge. The orders are passed by a two-member bench of whole-time Sebi directors.

Legal experts say, the process of arriving at the consent amount is non-transparent and final orders are sketchy. Until December 31, 2010, Sebi received 2,220 applications, of which 1,023 were approved by HPAC. Of these, 982 were settled. These include 74 applications in respect of which consent orders were passed by the Securities Appellate Tribunal and the Supreme Court, where cases were pending.

Sebi has also rejected 743 applications and declined to pass orders for reasons like the terms of settlement proposed by the applicants were not commensurate with the acts of violation.

BS People: Rahul Gupta

2011-12-19T15:30:00.001+05:30

Saviour of Shinsei joins Ambit
Ashish Rukhaiyar
Mumbai, 23 August 2011

There are hardly any domestic broking entities that are building up an arsenal at a time when the markets are in the doldrums. So it came as a surprise to many when Ambit Holdings announced the high profile appointment of 51-year old Rahul Gupta as deputy group chief executive officer.

Gupta has worked in almost all the leading Asian economies and should help give insight to the private wealth and institutional equities businesses here. Gupta is also expected to bring international best practices into areas like risk, operations and technology, amongst others.

Gupta’s achievements in the financial services industry are well known. When he moved out of Shinsei Bank, Wall Street Journal, Asia wrote that without the initiative led by him to buyback capital at distressed levels Shinsei Bank could have lost an additional 95 billion yen (over $1 billion) in fiscal years 2008 and 2009.

Interestingly, when Gupta joined the board of Shinsei Bank, he earned the distinction of being the first Indian ever to be appointed to the board of directors of a Japanese bank. At Shinsei, he was handling a balance sheet in excess of $120 billion.

An alumni of Mumbai's Jamnalal Bajaj Institute of Management Studies, Gupta has also held senior positions at DBS Bank, Singapore, Deutsche Bank, India, HSBC, India and Societe Generale, India. He is also a senior advisor with the global consulting firm Oliver Wyman and a board member of SICOM, India representing J C Flowers & Co.

Gupta joins Ambit a time when domestic entities have been cutting costs and diversifying into new verticals in an attempt to stay afloat. While Ambit does boast of a notable institutional and private client business, the recent past has shown that the undercurrent has the potential to disturb the biggest of players. Certainly, Gupta will have his plate full.

Transaction charges may hit currency volumes

2011-12-19T15:28:00.000+05:30

Palak Shah & Ashish Rukhaiyar
Mumbai, 17 August 2011

The exchange-traded currency derivatives market, which boasts of daily volumes in excess of Rs 50,000 crore, is expected to see a dip in the turnover. Market players said arbitrageurs who operate on wafer-thin margins will be affected once exchanges start levying transaction charges.

The National Stock Exchange (NSE), post a directive from the Competition Commission of India (CCI), has already announced that trades in the currency derivatives segment will attract transaction charges from August 22. United Stock Exchange (USE) and MCX Stock Exchange (MCX-SX) is expected to decide on the quantum of charges soon.

“Arbitrageurs were attracted to this segment because of zero charges, which is set to go now,” said a dealer with a domestic entity active in the currency derivatives segment. “Though STT (securities transaction tax) is still not applicable to currency trades, the transaction charges will greatly impact the thin margins. So volumes will obviously take a hit.”

According to market players, entities like SMC Global and Jaypee Capital are among the biggest players in the currency derivatives segment, which offers futures contract in rupee-dollar, rupee-yen, rupee-pound and rupee-euro along with options contracts in rupee-dollar. They further said arbitrageurs in the equity derivatives have almost been forced to shut shop due to high trading costs.

Data compiled by the BS Research Bureau showed the average daily turnover in the currency derivatives segment is in excess of Rs 72,000 crore in August. In July, the daily average was around Rs 50,000 crore.

The segment, which was launched in 2009, saw a gradual increase in volumes as exchanges did not impose any kind of charges in their attempt to attract more players. A bitter fight between NSE and MCX-SX, however, saw the issue being challenged at CCI, which ruled that NSE should impose transaction charges.

“In deference to the order of Competition Commission of India against NSE and without prejudice to the rights and contentions of the exchange in the matter, it has been decided to levy transaction charges in the currency derivatives segment,” the exchange said in a circular last week.

NSE said the members will have to pay between Rs 1 and Rs 1.15 for every Rs 1,00,000 turnover in the currency futures segment. In addition, five paise per lakh will be charged towards NSE investor protection fund trust. On currency option contracts, members will pay a transaction fee between Rs 30 and Rs 40 on every Rs 1,00,000 of premium payable. A premium of Rs 2 per Rs 1,00,000 will go towards investor protection fund.

A senior official from USE said “exchange officials will meet soon to decide on the quantum of transaction charges” for the currency derivatives segment. MCX-SX, which forced NSE to levy charges, has welcomed the move terming it “positive” for the “development of the currency derivatives market”.

A fall in volumes, however, will be bad news for market players who are already bearing the brunt of a growing rupee market in Dubai. The rupee-dollar futures contracts generate daily average trades of around Rs 1,500 crore on DGCX.

Volumes are hitting new records every month and rupee-dollar contracts have become the fastest growing derivative instruments on DGCX with a rise of over 16 times in 2011, compared to last year. The Indian currency contracts account for 60 per cent of the total trading volumes on DGCX and 90 per cent of the overall currency futures segment.

Investors stay away from 91-day t-bill derivatives

2011-12-19T15:27:00.001+05:30

Ashish Rukhaiyar & Abhijit Lele
Mumbai, 4 August 2011

The 91-day treasury bill (t-bill) futures contract, launched a month before, appears to be losing favour with investors. The volumes are down to a pittance as major institutional entities, including banks, are still shying away from the segment. The current market condition is also not conducive for taking a directional call on the interest rates, say experts.

The National Stock Exchange (NSE) launched 91-day t-bill futures contracts on July 4 and the first day saw turnover in excess of Rs 730 crore. The next couple of days also saw the volumes staying above the Rs 300-crore mark. The past few days, however, have seen the volume dropping to one-tenth of the initial days.

On August 1, the volume was a paltry Rs 14.70 crore — the lowest since launch. On most days in the recent past, the volumes have been in the range of Rs 20-40 crore. The underlying market, meanwhile, saw a volume of Rs 740 crore and Rs 175 crore on August 2 and August 3, respectively, according to data available with Clearing Corporation of India.

Corporate houses, which deal in floating rate bonds, are expected to use this instrument to hedge against interest rate volatility. Even the mutual fund industry, which has a lot of debt funds, can use futures on 91-day t-bill for hedging purposes.

Banks, however, are expected to be the biggest user as they invest significantly in t-bill as part of their treasury operations. Experts, interestingly, say while the product does not suffer from any inherent flaw, the market condition currently is not ripe for taking a directional call on interest rates.

“Trading has not picked up in the current interest rate environment as the yields have only moved up and players are unable to take call on future. For trading momentum two way quotes are necessary,” says T S Srinivasan, general manager and head of treasury, Indian Overseas Bank. Another head of treasury with a medium-sized private bank said future contracts offer hedge against rate risk.

“Players will be inclined take a cover only when there is substantial upheaval in the interest rate. At present, the expectation is of steady upward rise in yields so less reason to buy future on 91-day bill. Also, if one takes cover, the upside gain is limited.” he explained.

The stock exchange, meanwhile, is firing all cylinders to convince more and more players to trade in the instrument, which was seen as a probable game-changer for the interest-rate futures (IRF) segment. NSE has plans to organise awareness seminars across the country in the near future.

“The product will become liquid only when the members are told how to use this product or how to trade in it,” said a senior NSE official. “What is lacking is market development and knowledge. We will conduct seminars to educate our members,” he added.

The IRF segment was launched in 2009 with futures on 10-year government bonds. The contracts were allowed to be settled with delivery of government securities with a tenor between nine and 12 years. The segment, however, failed to enthuse market participants with the biggest fear being that of dumping of illiquid bonds. Market players want the entire segment to be moved to cash-settlement basis, a demand that the Securities and Exchange Board of India is looking into.

Q&A: Ratnesh Kumar, Standard Chartered Securities (India)

2011-12-19T15:25:00.000+05:30

'Market unlikely to come out of range before year-end'
Ashish Rukhaiyar & Mehul Shah
Mumbai, 4 August 2011

Given the inflationary pressures and growth cooling off, there are some earning downgrades still left in the system, says Ratnesh Kumar,managing director and chief executive officer of Standard Chartered Securities (India). In an interview with Ashish Rukhaiyar and Mehul Shah, he says investors are waiting for the downgrades to happen so that the bad news is out of the way and long-term focus can return. Edited excerpts:

Not many companies are keen to come out with their IPOs. Why?
The beauty of equities is that the market determines everything. The issuances never drive the market down, it is the other way round. The pool of global investors looking at India is now deep enough and very large issuances can be done, provided the pricing is right and there is conviction in the minds of the investors. The reality is that India is one of the worst performing markets in the world in the current year. Also, rates have been going up, inflation is high and there has been bad press regarding scandals.

When do you expect the market to come out of the woods?
There are some global factors that are pretty big and unpredictable. It is not just about India and Indian inflation or growth. The best strategy is to first believe we will be a high growth economy and then look at specific opportunities. The year 2011 is unlikely to see the market move out of a range before the fag end. By November or December, it is possible to look at how exactly we have shaped up in terms of our own performance. We will be in the 5-10 per cent range of where we are.

Are foreign investors still wary of investing in Indian shares?
Generally, people are underweight. They want to see the roll-over happening in inflation, rates and some bottoming of the growth forecasts. There is a feeling among analysts that earnings projections are still too high. For this year, the consensus market earnings growth is 18 per cent. Given the inflationary pressures and growth cool off, there are some earning downgrades still left in the system. Investors, I think, are waiting for these things to happen, so that the bad news is out of the way and long-term focus can return.

Investors appear to be bullish on the consumption story and defensive stocks. Why?
When you have a lot of fundamental and performance headwinds, attention shifts to the so-called defensive sectors such as consumer and pharmaceutical. There is nothing called a place to hide. If one is negative on the market, the only place to hide is cash in the bank. Historically, whenever there is a correction, it is not that defensive sectors do not go down. Recently, we downgraded Nestle, which is an absolute fantastic consumer story, but the valuations are rich now due to the relative performance of the stock.

Which sectors and stocks do you like at present?
We still like consumer and pharma sectors as a whole, since we believe they will deliver growth and valuations are still attractive. Our focus has been HUL and Titan in that sector. Another sector we have liked for some time is telecom, which many have found odd. We think some of the irrational competition in telecom has subsided. Bharti and Idea are the two stocks that we have liked. Chances are that gradually, without touching headline tariffs, realisations will stabilise or even start inching up. I think the street could be positively surprised by the telecom sector. These are the kind of stories that we are urging investors to focus on. Select auto stocks like Bajaj and Maruti also look attractive. Within the IT space, we like HCL Technologies. We are also positive on niche sectors like ports.

Pvt, foreign banks ramp up equity mkts teams

2011-12-19T15:23:00.000+05:30

Somasroy Chakraborty, Mehul Shah & Ashish Rukhaiyar
Mumbai, 3 August 2011

See long-term opportunity in the Indian markets, hire at the top level for future requirements.

Foreign and private sector banks in India are strengthening their equity capital markets teams, with top level hires, at a time when the equity issuances by domestic companies are fading due to volatility in local stock markets.

Bankers and industry analysts say the hiring spree is based on future needs, as these lenders see an opportunity in the Indian equities markets in the long run.

“You need to have a basic conviction that India is going to be a long-term growth story and, in the short term, it may have some blips. You also need to ascertain whether you have an equities business set-up, which can compete with the best. Once you have these two convictions, this is clearly the best time to build your business,” Standard Chartered Securities’ India MD & CEO Ratnesh Kumar said.

Standard Chartered roped in A Rajagopal, former head of equity capital markets in India, towards the end of last year to set up the equity capital markets business of the bank here. Rajagopal is currently the managing director and head of equity capital markets for the bank’s South and Southeast Asia operations.

Standard Chartered Securities has also reinforced its equities team in the past 12 months, recruiting senior officials in institutional research and sales. The headcount in its research team has been now increased to 20 people.

Royal Bank of Scotland (RBS), which has decided to exit from its retail and commercial banking businesses in India, is also in the hiring mode and is expanding its equity markets’ team.

“We are fully focused with our debt and equity capital markets teams by way of advisory, capital markets and financing. These will be integral part of that service and we will look at engaging with clients,” RBS CEO for Singapore and Southeast Asia and head of global banking and markets in India, Madan Menon, told Business Standard in an interview earlier this month.

The bank has hired 10 people across its research and trading desks, including a new head for its equities business. "To the extent we need, we will make appropriate investments in this market. There will certainly be more hiring,” Menon says.

Even private sector banks are not far behind, with the country’s second-largest private bank, HDFC Bank, appointing Rakesh Singh as the head of its investment banking division earlier this year. Before this appointment, Singh was the managing director and co-head of financing advisory at Rothschild.

Following this appointment, HDFC Bank managed its first-ever equity issuance, when it got the mandate as the co-book running lead manager for Muthoot Finance’s initial public offer (IPO).

These recruitments are happening at a time when volatile share markets have hit India Inc’s share sale plans, estimated to be over Rs 30,000 crore for this year. Several big-ticket IPOs, like those of Jindal Power, Lodha Developers, Reliance Infratel and Sterlite Energy, have been deferred as investors’ appetite remains low and promoters are unwilling to pare stake at low valuations.

In the first seven months of this calendar year, the number of first-time public offers by Indian companies stood at 24, compared to 64 in the 2010 calendar year, data compiled from Prime Database by BS Research Bureau shows. Companies raised Rs 4,738.45 crore from IPOs till July this year, compared to Rs 37,534 crore mopped up in the period last year.

“Most of these banks have deep pockets and they are betting big on India for the long term. Hence, it is not surprising to see hiring for equity capital markets teams in these banks rising,” a banking analyst with a domestic brokerage says.

Hawkish RBI makes FIIs nervous

2011-12-19T15:21:00.000+05:30

Ashish Rukhaiyar
Mumbai, 28 July 2011

Remain bullish, though, on India’s long-term prospects.

Foreign institutional investors (FIIs), which have invested around $2 billion in Indian equities this year, seem to have taken serious note of the sharp increase in policy rates by the Reserve Bank of India (RBI) yesterday. While they remain bullish on India’s long-term prospects, they feel the recent rate increases by RBI have put the markets at an additional risk in the near term and delayed the break out from the current range.

On Tuesday, when RBI increased repo and reverse repo rates by 50 basis points (bps), the Sensex fell more than 350 points. This was primarily attributed to the surprise element as the markets were expecting a 25 bps increase. The 30-share index lost another 86 points on Wednesday and closed at 18,432.

“Today’s action in equity and rates markets following RBI’s hawkish stance suggests to us that the market will likely be extra sensitive to inflation readings in the coming months,” Nomura said in a note to clients on Tuesday. To this extent, we think the markets are at a risk for the next two-three months, it added.

Interestingly, while Nomura is worried about the market reaction to inflation numbers, finance minister Pranab Mukherjee has warned that inflation may not be less than 6-7 per cent at the end of the year even as the government and RBI are making efforts to fight the rise in prices.

According to Nomura, the “potential worst-case downside scenario” is in the range of “8-10 per cent” from the current levels. It says it will start buying aggressively if the market corrects 5 per cent. Market experts believe that 5,200 will be a good support level for the Nifty, which closed at 5,547 on Wednesday.

Nomura is not the only global institution which has taken a cautious stand after yesterday’s RBI action. Morgan Stanley went a step ahead and said the RBI move had “stymied” any probable breakout of the Nifty from its trading range.

“The case that may have been building for the Nifty to break out of its trading range since the fourth quarter of 2010 has probably been stymied by this move,” it said.

Morgan Stanley, however, remains a “buyer” of Indian equity with a 12- to 18-month investment horizon, adding that small- and mid-cap stocks are looking “more attractive” than the large caps. The global financial major is bullish on domestic cyclicals such as consumer discretionary and industrials.

Goldman Sachs, meanwhile, is of the view that the equity market is still amid “choppy waters” and that stocks are “not yet ready for an upturn.” It, however, adds that the repo rate has “likely peaked for now” and “would remain stable before falling marginally by December 2012 to around 7.5 per cent”.

“While we do not expect inflation/rates to collapse, we believe stocks may start outperforming as rates/inflation decline, even though the bottom is at higher levels vis-à-vis the past cycles,” said Goldman Sachs. It expects inflation to bottom out at 4.9-5.1 per cent in the third quarter of 2012-13.

Brokerages cut a sorry figure with Q1 numbers

2011-12-19T15:20:00.000+05:30

Ashish Rukhaiyar
Mumbai, 26 July 2011

The initial set of quarterly numbers announced by some of the listed broking companies have shown that the industry is going through a rough phase. More important, the entities are sounding bearish on the near-term outlook, with the wait for positive triggers getting longer.

Today, Edelweiss Capital – one of the largest domestic brokerage entities – announced its first quarter numbers for the current financial year. The net profit at Rs 33 crore is down 23 per cent, compared to Rs 43 crore for the previous quarter ended March 31. The total income showed only a marginal increase of two per cent at Rs 396 crore. For the previous quarter, the income was pegged at Rs 386 crore.

The past few months have seen the equity markets trade in extreme volatile conditions. Indian indices have been one of the worst performers among most benchmark indices this calendar year. Though foreign institutional investors (FIIs) have been net buyers at a little over $2 billion in CY11, negative factors, both on the domestic and global front, have been affecting the market sentiments.

“The industry is facing the pain of a slowdown. Q1 was one of the worst quarters for the industry,” said Himanshu Kaji, chief operating officer (COO), Edelweiss Capital.

Edelweiss is not a stand-alone case. Early this month, Geojit BNP Paribas Financial Services – a significant player in southern India and West Asia – saw its income dip by 3.54 per cent, even as its profit rising 47 per cent. The net profit, however, saw a 30 per cent fall to Rs 4.3 crore for the quarter ended June 30, compared to the corresponding quarter of the previous financial year. The consolidated revenues also declined by four per cent on a year-on-year basis.

BNP managing director C J George attributed the fall in profitability to the adverse stock market conditions caused by the high inflation and high interest environment. The volatile and uncertain environment has also forced India Inc postpone its capital raising plans.

Edelweiss saw income from broking, investment banking, asset management and distribution businesses fall 24 per cent quarter-on-quarter. The brokerage attributed the fall to “considerable slowdown in the capital markets activity in the recent past”.

For Motilal Oswal Financial Services, investment banking fees was down 60 per cent in Q1FY12, compared to the previous quarter. Broking and related revenues were lower by 12 per cent. On the outlook front, Rashesh Shah, chairman and chief operating officer, Edelweiss Capital, expects “the challenging environment to persist in the next two or three quarters”.

Q&A: Joe Zidle, Bank of America Merrill Lynch

2011-12-19T15:19:00.000+05:30

'Weak US economy providing India liquidity'

Ashish Rukhaiyar
Mumbai, 20 July 2011

A weak global economy cannot be as bad for India or China as it is generally perceived, says Joe Zidle, director and global wealth management investment strategist at Bank of America Merrill Lynch. Zidle, who has also served in the US Army reserves’ Military Intelligence Unit, tells Ashish Rukhaiyar that Indian markets will peak in 2011. Edited Excerpts:

Given the current equity market scenario, do you think emerging market economies have an upper edge over developed nations?
Global equities are in the midst of a correction and our view is that this correction is happening in an environment where equities will rebound. We will finish the year higher, with equities being the number one performing asset class, followed by commodities, bonds and cash. We are overweight on emerging markets (Brazil, Russia, India, China) compared to developed markets, because the strongest economic growth is coming from here. We think the global economy will grow this year by 4.1 per cent, with the driver being emerging markets at over six per cent. Developed markets like the US, Europe and Japan will grow, may be, at two per cent.

During the 2008 crisis, analysts spoke about decoupling factors that would benefit countries like India. Do you think decoupling actually works?
India, China and some of the other emerging markets never even had a recession. The US and Europe have to keep their rates low as they have to revive the economy. What this means for a country like India is that it will provide liquidity. US companies are using this liquidity by investing in India. So, the problem with US policymakers is that they can stimulate growth but cannot control where that growth happens. This is not exactly decoupling but a weaker US and European economy will continue providing liquidity to the Indian economy.

India has been one of the worst performing markets in the current year. What are global investors, who have access to markets worldover, talking about India?
One of the primary concerns would be high oil prices, followed by high commodity prices. So, global investors are looking at the role higher oil prices will play and, in turn, how they drive inflation. Fifteen of 21 central banks of emerging markets have raised interest rates in the last six months. Our view is that India does have a better grip on inflation, as the central bank (RBI) moved early and fast by hiking rates. So our view is that the India and China story will be peaking in 2011 and then begin to come down.

Are global investors looking at India in a significant manner while deciding on their emerging market allocation?
First, investors need to get the economic outlook right. According to our estimates, in 2011, 55 cents of every new dollar of growth would come from the BRIC countries. The share of the US would be only 14 cents. Now, there are two ways in which global investors can take exposure to India. One is direct exposure and the other is US multinationals investing in India. Our view is that such entities would continue to be attracted towards India till the time the rate hike cycle is complete.

Brokerages: forced to adapt

2011-12-19T15:16:00.000+05:30

Current economic scene forcing tough changes in biz

Palak Shah, Ashish Rukhaiyar & Mehul Shah
Mumbai, 19 July 2011

Declining commissions, stagnant markets and increased foreign competition have forced brokerages to enter into marriages as well as new businesses.

For a quick insight into fundamental changes roiling the brokerage industry, consider Edelweiss, a stalwart of the broking arena, with 70% of its business originating in bread-and-butter equities.

“At least fifty per cent of our business now will come through the retail segment in many asset classes," says Shah. “We are diversifying from a capital markets company to a full-scale financial services firm,” said Rashesh Shah, chairman of Mumbai based Edelweiss.

Edelweiss’s revenues will now come from commodity, bond, housing, finance and life insurance businesses. “We are infusing around Rs 550 crore in the insurance business and our partner Tokio Marine will invest around Rs 1,200 crore,” says Shah. Edelweiss is planning to build a Rs 4,000 crore to Rs 5,000 crore asset book in the next three to four years in the housing finance business alone.

What is happening with Edelweiss is an indication of a major change of seismic proportions that is rocking the brokerage business in India. Pushed into a corner, with their backs to the walls because of a recent bear market, dwindling commission pools, abysmal trading volumes and foreign competition , leading brokerages are trying to morph into all-service animals while standalone mid- and small-size brokerages are being forced to consolidate, thereby fundamentally altering the brokerage landscape.

TROUBLED WATERS
One of the big drivers of this change is a decline in the broking industry’s commission pool. Broking commission is divided amongst 15,000 brokers and over 76,000 Sebi registered sub-brokers in the country. Amongst these, there are over 1,200 active brokers on NSE and over 600 on BSE alone.

Problem is, over the past three years, the size of the commission pool for stockbrokers has not grown at all, although operational costs and competition have gone up. From Rs 15,000 crore in 2008, commissions went down to around Rs 9,000 crore a year later and now hovers in the Rs 10,000 to Rs 12,000 crore range.

Ditto for the investment banking business. During 2007-08, the commission pool in investment banking was around Rs 4,000 crore but in 2010—which was a good year for the business—the commission pool was not more than Rs 3,500 crore.

Not surprisingly, there is a mad rush to grow broking revenues from the retail segment, as unlike the wholesale business, the retail business is more sustainable. However, there is a larger underlying problem dragging the industry down—which is that the entire capital market sector in the country is struggling for growth. It grew 70 per cent annually from 2004 to 2008 but has been stagnant since. Brokers say that a similar period of high growth will only take place in three or four years.

CONSOLIDATION FEVER
“It is mainly the mid level and stand-alone broking firms, which need cash flow,” says Shashi Bhushan, chief executive officer of Way2Wealth. “Otherwise, while large brokers are surviving on strong balance-sheets, business for extremely small brokers comes from very strong personal relations,” he adds.

Emblematic of the trend of consolidation is the 50% acquisition of Mumbai-based Techno Shares and Stock by Way2Wealth, the financial services arm of Coffee Day Holding. “It is an effective cost management strategy as equity broking commissions are under pressure. It is our third such deal to scale the retail segment. However, Techno also has a strong institutional desk, where we see synergy,” says Bhushan. “This kind of partnerships will be the way forward for many brokers,” said Jaideep Mehta, chief executive officer of Techno Shares.

Another south Mumbai-based outfit, Networth Stock Broking, announced its decision to merge with Ahmedabad’s Monarch Projects. Networth was started by old market player S P Jain. It had Kolkata-based Ajay Kayan as its shareholder, who pitched himself against big bull Harshad Mehta in the late 1990s.

Others are joining the stampede to ally with the best partners they can find. Capital and Kishore Biyani’s Future Group, too, are in the process adding more clients. Health care major Piramal Group is eying a large Mumbai-based financial services firm, say sources.

High profile deals that the sector has witnessed in the past couple of years include HSBC buying IL&FS Investsmart, Standard Chartered Bank acquiring UTI Securities, Aditya Birla taking over Chennai-based Apollo Sindhoori and Edelweiss Securities buying Anagram Securities.

Like Edelweiss, Aditya Birla group too has an insurance business and they may look to cross sell products through their various broking branches. Axis Bank, which took over Enam Securities recently, is also expected to unveil its strategy soon. It has already launched Axis Direct, an internet broking platform.

PROSPECTING FOR BUSINESS
Anxious to add new business lines in a bleak business climate, a number of Indian stock brokerages have also forayed into real estate broking. Mumbai's India Infoline and Anand Rathi Financial have got in to commercial and residential real estate broking.

Hyderabad-based Karvy Group has revamped its real estate broking division, Geojit BNP Paribas Property Services, a division of Kochi-based Geojit BNP Paribas Financial Services, is providing commercial and real estate broking in Kochi at present and plans to expand to other major South Indian cities by the year-end.

“We think a large part of our economic advantage will come when we will be able to sell housing loans and insurance products to our capital market customers and vice-versa. This is cost advantage. So, in India, people will have to learn to cross-sell. Why shouldn’t your broker end up being your advisor?” asks Shah.

THE OVERSEAS SQUEEZE
If the business climate today weren’t tough enough, foreign players are expanding their operations in India, snapping up clients and putting more pressure on the equities business. Some of the global majors like Daiwa, Jefferies, Barclays, RBS, Espirito Santo and Newedge have made many key appointments in the recent past.

“As the market matures in any country, we have seen international brokerages taking a major share of the equities business, while local firms become more specialised players,” says Nick Paulson-Ellis, country head – India, Espirito Santo Securities.

Daiwa Securities has hired a number of people in the last few months for its equities team in India and is in the process of adding more specialists in verticals like sales, trading and research. Last month, Jefferies set up its full-service equity broking business in India.

Espirito Santo Securities is planning to hire 15-20 people across research, sales and trading. Barclays Capital expects to set up equities sales, trading and research businesses in India by the end of 2011 and plans to hire more staff. British bank RBS has also been aggressively expanding its Indian equity team.

All of this is hardly good news for any already embattled sector.

Initial volumes show acceptance of 91-day T-bill contracts

2011-12-19T15:15:00.000+05:30

Ashish Rukhaiyar
Mumbai, 19 July 2011

From the initial volume in exchange-traded derivative contracts on 91-day treasury bills, industry seems to have accepted the new instrument. It has been two weeks since these were launched and the average daily turnover has been Rs 270 crore.

According to industry participants, the new instrument is being primarily used by entities wishing to hedge interest rate exposure and by arbitragers looking to make some gains based on the yield curve spread. Interest rate futures, as the name suggests, are derivative contracts with government bonds as the underlying product. Depending on one’s view on the interest rate movement, an entity can go short or long to hedge against volatility.

On July 4, when futures on 91-day T-bills were launched, the National Stock Exchange reported a volume of Rs 731.2 crore, with nearly 40,000 contracts traded. The volume nearly halved on the following days. It touched a low of Rs 63.35 crore on day, after staying over Rs 200 crore on most days last week. The average, however, has been Rs 272 crore (see table).

“Those who want to hedge their interest rate exposure will be attracted to this segment, which will also help in creating a transparent yield curve,” says J Moses Harding, executive vice president & head (global market), IndusInd Bank. “It will provide good support when the yields are going down and resistance when the yields are on the rise. Arbitragers will also be active when the yield spreads between (exchange-traded) the futures and OTC (over the counter) market is wide.”

A section of market players attributes the initial success to the product design, that incorporates a cash-settlement feature. This is in sharp contrast to futures on 10-year government bonds, that are settled with delivery of government securities with a tenor between nine and 12 years. Derivative contracts on the 10-year paper was launched in 2009 but has hardly witnessed any volume, as the entities are concerned about dumping of illiquid bonds.

Corporate houses which deal in floating rate bonds are expected to use this instrument to hedge against interest rate volatility. Even the mutual fund industry, which has a lot of debt funds, can use futures on the 91-day T-bill for hedging.

Banks, however, are expected to be the biggest user, as they invest significantly in T-bills as part of their treasury operations. Banks can go short on the contracts if they feel rates would move northwards.

With long-only funds away, SLB fails to take off

2011-12-19T15:14:00.000+05:30

Ashish Rukhaiyar & Mehul Shah
Mumbai, 16 July 2011

More than three years have passed since the Indian equity market saw the introduction of a stock lending and borrowing (SLB) mechanism. However, the segment has hardly seen any activity till now. While a few hundred trade exchanges have been recorded in the recent months, the turnover remains abysmally low. Long-only players like insurance firms and pension funds are not allowed to participate in the segment.

SLB, as the name suggests, refers to a mechanism through which a market player can temporarily borrow shares to cover his delivery obligations. The shares are typically borrowed for a fixed fee, decided by the stock exchanges. The borrower has to return the shares at the end of the agreed term.

According to industry players, the physical settlement in equity derivatives, recently approved by the regulator, has provided a much-needed boost to SLB. However, it would take some time before the results were visible. An active SLB mechanism would require a fresh outlook by regulators, along with large institutional players, especially long-only funds.

Globally, insurance and pension funds are active in the SLB segment, providing the much-needed supply of shares. Such long-only funds are typically passive on a large corpus of shares and are, therefore keen to earn interest by lending these shares. However, in India, regulatory ambiguities have kept such players away from participating in SLB.

“Existing long-only players like insurance and mutual funds need to find this segment relevant. If there are any ambiguities, clarification should be provided,” says Vineet Bhatnagar, managing director and chief executive, MF Global Sify Securities.

Chief investment officers (CIOs) of insurance companies are not sure whether they are allowed to participate in SLB. “Ideally, we should participate in this segment, as it is a cash market product. However, we are not sure about the rules,” said the CIO of a private insurance company.

A senior Insurance Regulatory and Development Authority official said the Insurance Act did not allow insurance firms to participate in the SLB mechanism. “The Insurance Act needs to be amended for insurance firms to take part in stock lending and borrowing activity,” he said. According to data available with the National Stock Exchange, the SLB segment registered around 100 trade exchanges in July so far, with the turnover pegged at only Rs 5 lakh. In May, nearly 400 such exchanges, accounting for Rs 19 lakh, were recorded.

“The premise is that SLB means derivatives and so, insurance players should not be allowed,” says an industry source involved in enhancing the acceptance of SLB. “But that's a wrong approach, since SLB requires two kinds of participants, borrowers and suppliers. The latter is in no way involved in derivatives. They use their idle portfolio to earn interest. This is the practice followed globally,” he says.

Sebi had, early this year, given its approval to physical settlements in equity derivatives, through which the contracts have to be settled in underlying shares, instead of the current system of cash. Some feel the SLB system would take off once physical settlements gain the acceptance of investors. The Bombay Stock Exchange has already moved to the new system. It would soon introduce a market-making scheme to enhance its popularity.

NSE, BSE to become SME facilitators

2011-12-19T15:13:00.000+05:30

Ashish Rukhaiyar & Reghu Balakrishnan
Mumbai, 13 July 2011

Both the main stock exchanges have set in motion a separate platform to generate more interest and more liquidity for the small and medium enterprises (SME) segment.

The Bombay Stock Exchange (BSE) and the National Stock Exchange (NSE) have both got a final go-ahead in this regard from the Securities and Exchange Board of India (Sebi), which has also relaxed some norms for the smaller companies. Both initiatives are at an advanced stage.

“The idea is to generate enough interest in the (SME) space, so that it attracts more and more good-quality companies," said a person privy to the developments. "The most common issue is lack of information and the exchanges are trying to plug that gap by acting as facilitators. The platform will be a one-stop source for SMEs, merchant bankers, private equity (PE) & venture capital (VC) funds and even law firms that would like to advise such companies.”

Essentially, the exchanges would help bring together investors and companies on the same table, along with merchant bankers, who have been assigned the task of market making for three years after managing the Initial Public Offer of those which list.

NSE, incidentally, sponsored an event recently which was attended by representatives of merchant banking entities, law firms, PE/VC players and Sebi officials, including chairman U K Sinha. A directory with listings of PE/VC firms, along with merchant bankers and law firms, was also issued.

BSE has already said it will go live with its SME segment in September. Lakshman Gugulothu, chief executive officer of the proposed exchange, has said the listing and other fees would be about half of what the main exchange charged. Potential investor groups are waiting with interest for the segment’s launch.

“Finding a better exit route will always be difficult for VC players who support SMEs, as most of them (SMEs) remain too immature to hit the market,” says Mahendra Swarup, president, Indian Venture Capital Association. “But through the newly proposed platform, VC firms can make an exit through listing. Also, it will bring valuation in line with market reality.”

K Srinivas, managing partner, BTS Investment Advisors, an SME-focused VC fund, has the same view. “The new initiative will help us to get out of investments quickly,” he says. However, he is not sure if such initiatives would bring more VC investments into the SME space. “We will have to wait for two-three years to find how successful the initiative could be,” he said.

New market idiom: Question mark is a full stop!

2011-12-19T15:12:00.000+05:30

Ashish Rukhaiyar & Mehul Shah
Mumbai, 8 July 2011

Stock market analysts and dealers are experts in deciphering excel spreadsheets and predicting market movements. Of late, they have also been learning the complexity of English grammar to bypass a recent regulatory fiat.

And, most have discovered how a single punctuation mark, or the lack of it, can make all the difference.

In March, the Securities and Exchange Board of India (Sebi) issued a simple two-page circular, directing all market intermediaries to ensure their employees do not spread unverified information or rumours through emails, SMSes, blogs or chat messengers without checking their authenticity.

The circular has changed the way stock market participants interact with each other and also the media, based on some indigenously developed solutions.

“The tacit understanding between people now is that a question should be looked upon as a statement,” says an institutional dealer, who did not want to be named for obvious reasons. "Say, one has got some unverified information and needs to pass it on. He will forward the email or SMS and append it with a question mark, or may be the words “is it true?” The implied meaning is that “it is true”, he explains. One is just trying to check the veracity of the information and not spreading it, he quips.

According to the Sebi circular, intermediaries need to ensure that “employees/temporary staff/voluntary workers, etc employed/working in the offices of market intermediaries do not encourage or circulate rumours or unverified information obtained from clients, industry, any trade or other sources without verification.” Further, “access to blogs/chat forums/messenger sites, etc should either be restricted under supervision or access should not be allowed,” added the circular.

While grammar has come to the rescue of many, there are others who have just given in. Online groups and message boards of financial websites, once buzzing with market talk, have seen a drastic fall in the number of posts (read rumours). The media, interestingly, have found the going difficult after the change in norms, as many of the fund managers once famous for their “off the record” chats have become extremely circumspect.

“I won’t discuss stock-specific things over the phone. I am afraid my calls are getting recorded,” has become the standard statement of many fund managers, who are also reluctant to talk about their stance as minority shareholders in the Cairn-Vedanta deal.

Compliance officers, who have been assigned the onerous task of monitoring their employees for such acts, cite difficulties. “Sebi norms are impractical. We can monitor official email IDs. How can we track what our employees are doing through their personal email, blog or phone?” they ask.

While rumours related to many companies have decreased, the recent past saw the tide turning and a brokerage finding itself the target of rumour-mongers. India Infoline, through a stock exchange announcement, denied rumours that a US-based financial conglomerate is picking up a stake in the brokerage. Everyone wondered... is it true?

Vaswani listing to go ahead amid probe

2011-12-19T15:10:00.000+05:30

Ashish Rukhaiyar & Palak Shah
Mumbai, 7 July 2011

This would come as good news to investors who put money in the initial public offer (IPO) of Vaswani Industries. The capital markets regulator is expected to give its go-ahead for the listing of shares during this month.

The IPO got stuck after a large number of investors withdrew their applications and the regulator launched a probe.

According to sources, while the listing will be allowed, the investigation into the matter by the Securities and Exchange Board of India (Sebi) will continue.
The listing is being allowed so that genuine investors are not made to suffer due to the regulatory probe that is in its final stages. Also, the Ahmedabad-based All Gujarat Investors Protection Trust (AGIPT), which had approached Sebi alleging irregularities in the Vaswani Industries IPO, has gone back on its stand, for unknown reasons.

However, sources say the investigation will go on, as dummy subscriptions were suspected in the IPO. Around 3,000 retail applicants withdrew their applications and several others were disqualified due to stop-payment of cheques after subscription closed for the Vaswani Industries IPO.

Sources say Sebi’s concerns emerge from fears that a majority of the applicants could be acting on behalf of a few big operators. In the recent past, the market regulator had initiated probes in the dealings of several IPOs as all the new listings of the current financial year and 70 per cent of those in 2010-11 are trading below their issue price. Experts believe the situation of dummy investors is similar to the IPO scam involving Rupalben Panchal, who operated multiple demat accounts and put in several applications.

“Allowing listing is fine. But the matter needs to be investigated and results declared to the public. Operators in the IPO market are running a racket with impunity, which has been proved by the recent sharp fluctuations in share prices post-listing,” said the head of a Mumbai-based stock broking firm.

It has been well over a month since the IPO of Vaswani Industries closed for subscription. The company planned to raise Rs 50 crore through its IPO by offering 10 million shares in a price band of Rs 45-49.

On the day the issue closed, the stock exchange website showed the institutional portion was subscribed 0.16 times, while that reserved for high net worth individuals and retail investors was subscribed 11.29 times and 6.82 times, respectively. While the issue price was fixed at the upper end of the band at Rs 49, shares were allotted to investors on May 10.

Meanwhile, Sebi received complaints alleging large-scale withdrawals by investors. Sebi investigations showed that the issue, which was earlier subscribed a total of 4.16 times, was subscribed only 1.28 times after the withdrawals. The subscription in the HNI category dropped to 0.84 times from the earlier 11.29 times. In all, 3,813 applications were withdrawn while two terminals contributed to around 60 per cent of the total withdrawals.

NSE in talks to launch Dow Jones options now

2011-12-19T15:09:00.000+05:30

Ashish Rukhaiyar
Mumbai, 5 July 2011

The National Stock Exchange (NSE) is set to enhance its current tie-up with the CME Group that owns the Dow Jones Industrial Average (DJIA) Index. The two entities are in talks for launching option contracts based on the US index at the Indian exchange.

According to persons familiar with the development, the discussions are currently on and a decision on the option contracts can be expected soon. Thereafter, NSE would be free to launch futures and options on both S&P500 and DJIA. Incidentally, the current tie-up between NSE and CME Group allow the former to launch only futures contracts on DJIA.

“The partnership between NSE and CME (Group) is relatively new and hence the discussions (for options) are taking time,” said a person familiar with the development. “On the other hand, NSE has a long association with S&P and so the approvals for both futures and options based on S&P500 were received at the same time,” he explained.

While NSE has already got all the regulatory approvals for launching futures based on S&P500 and DJIA, it has sought the capital market regulator’s approval for options only on S&P500.

The Securities and Exchange Board of India (Sebi), in January this year, came out with guidelines based on which derivatives on foreign indices could be introduced by the Indian exchanges.

According to the market regulator, derivatives contracts can be launched only on those global indices that have a minimum market capitalisation of $100 billion and are broad-based.

According to Bloomberg data, the market capitalisation of S&P 500 is a more than $11 trillion while that of DJIA is over $3 trillion. The DJIA index includes the 30 most liquid large companies in the US. According to recent estimates, it represents nearly 30 per cent of the free float market capitalisation of the whole US market. Meanwhile, this will be the first time that futures based on the S&P500 will be introduced on an exchange outside the US.

Once futures and options based on S&P500 and DJIA are launched, NSE will also look at launching derivative contracts based on FTSE100. The Indian exchange has already signed a letter of intent with the London Stock Exchange (LSE) for getting the index on its platform.

“As part of the letter (of intent), both exchanges declared their intent to explore the feasibility of an agreement whereby FTSE Group may licence the FTSE 100 Index to the NSE, and whereby the NSE may licence the S&P CNX Nifty to London Stock Exchange Group for the purpose of issuing and trading options and other index contracts,” says the NSE release.

Boost for interest rate futures, with 91-day contracts

2011-12-19T15:08:00.000+05:30

Ashish Rukhaiyar
Mumbai, 4 July 2011

The interest rate futures (IRFs) segment, operational for nearly two years, could finally see some volume pouring in. Futures on the 91-day treasury bill (t-bill) are to be launched tomorrow and, more importantly, would be settled in cash. Industry players feel banks, mutual funds and even corporate houses could develop a liking for the product, to hedge against interest rate fluctuations.

Interest rate futures, as the name suggests, are derivative contracts, with government bonds the underlying product. Depending on one’s view on interest rate movements, an entity can go short or long to hedge against volatility in these. The instrument will be available for trading on the National Stock Exchange (NSE).

Market players say the 91-day t-bill contracts would offer a lot of advantages, with a high probability of gaining wide acceptance. The biggest advantage is that the contract will be settled in cash, an industry demand for the whole IRF segment, said a dealer in debt instruments.

The other advantages are an absence of Securities Transaction Tax and lower margins compared to other asset classes. And, since the contracts are cash-settled, there are no concerns among market participants related to dumping of illiquid bonds, he explained.

Corporate houses dealing in floating rate bonds are expected to use this instrument to hedge against interest rate volatility. So could the mutual fund industry, which has a lot of debt funds. Banks, though, are expected to be the biggest user, since they invest significantly in t-bills as part of their treasury operations. Banks can go short on the contracts if they feel rates would move northwards.

In the case of 91-day t-bills, there would be three serial monthly contracts, followed by three quarterly contracts. Each contract will have a face value of Rs 2 lakh. It will be cash-settled, based on the weighted average discount price, obtained from the Reserve Bank’s weekly auction of the 91-day t-bill.

The IRF segment was launched in 2009 with futures on 10-year government bonds. The contracts were allowed to be settled with delivery of government securities, the tenor between nine and 12 years. The tenor of deliverable grade securities was fixed between 7.5 years and 15 years at the time of the launch.

The segment, however, failed to enthuse market participants with the biggest fear being that of dumping of illiquid bonds.

Data available on the NSE website clearly shows the segment has not been registering any volumes in the recent past. Market players want the entire segment to be moved to a cash-settlement basis, a demand the Securities and Exchange Board of India is looking into.

Sebi scans companies' share buyback record

2011-12-19T15:07:00.000+05:30

Ashish Rukhaiyar
Mumbai, 30 June 2011

Regulator against repeated buyback offers, given the potential for misuse

The Securities and Exchange Board of India (Sebi) is taking a serious note of companies that have made buyback offers a habit. It has indicated that companies that had made such offers and not bought back a significant amount of shares won’t get approval for a fresh buyback.

According to persons familiar with the development, the capital markets’ regulator is perturbed by the trend of companies making buyback announcements to push the stock price. They then close the offer without buying back a significant number, even when the shares trade at a price lower than the buyback offer. Sebi made its views clear in a recent order, too.

"Repeated buyback offers is not something that Sebi, as a regulator, would like to encourage, given that it could be misused by entities to consolidate their holding at the expense of the company," it said in the matter of Deccan Chronicle Holdings. In a buyback, funds from the company reserve are used, to buy and extinguish the shares, thereby reducing the entity’s equity base.

Companies use buyback as an attractive tool to manage the stock price, as any such announcement sends a positive signal to investors. Even short sellers stay away from such counters, since any fall beyond a certain level can be stopped by buying back shares. Such announcements have been a favourite resort during a bearish phase.

According to data on the website of the Bombay Stock Exchange, buyback offers of Allied Digital, Balrampur Chini, FDC, Infinite Computer Solutions, SRF and FDC are currently on. In the past, Balrampur Chini, Reliance Industries, Prime Securities, Reliance Infrastructure, Hindustan Unilever and SRF have come out with more than one buyback offer. “Many companies make buyback announcements just to create a positive sentiment around its counter,” said an investment banker who has managed these.

“Till a few years earlier, there were even instances of companies allocating a certain amount of money for buyback and hardly using any of it,” he said, wishing not to be named.

This is not the first time the regulator is tightening these norms. A couple of years before, it had come down heavily against companies making ‘hollow’ buyback offers. In an informal warning to investment bankers, it directed them to disclose the minimum number of shares a company intended to buy. A buyback offer was not allowed to be closed till this was done.

Sebi rules say a company can buy back its shares without a shareholders’ resolution if the total amount allocated for doing so is less than 10 per cent of its paid-up equity capital and reserves. Buyback can only be up to 25 per cent of the paid-up capital and reserves and anything in between has to be approved by shareholders.

SEEKING FULL DISCLOSURE
* Sebi against companies making repeated buyback offers
* Such buyback offers can be misused at the company’s expense, says Sebi
* Companies use buyback as a tool to create positive newsflow
* Companies announce buyback, but few shares are actually bought back
* Sebi has tightened buyback norms in the past, too
* Companies directed to disclose the minimum number of shares to be bought back

Bankers' fee strategy under Sebi scanner

2011-12-19T15:06:00.000+05:30

Ashish Rukhaiyar
Mumbai, 22 June 2011

At a time when fee income from managing primary market issuances is down to a trickle, it is not surprising that investment bankers are coming up with innovative marketing and pitching strategies. One such strategy, however, has attracted the attention of the capital markets regulator.

Persons privy to the strategy, on condition of anonymity, say domestic and foreign bankers have been convincing promoters to raise more than the intended amount of money by charging ‘slab-based fee’, which has not gone down well with the Securities and Exchange Board of India (Sebi). It is, however, not clear if the regulator has formally initiated any enquiry in this issue.

“Bankers know that a particular company needs Rs 200 crore but will tempt the promoters by saying they can help raise Rs 250 crore,” a senior official of a mid-sized investment banking firm said. “But the catch is, for the extra Rs 50 crore, the fee will be higher than what is being charged for the first tranche of Rs 200 crore,” he added. In simple words, if the banker is charging two per cent for helping raise Rs 200 crore, the ‘top-up’ of Rs 50 crore will cost the company three per cent (of Rs 50 crore).

The fee quotient will further go up if the promoters agree for Rs 300 crore. While there is no compulsion on the part of the promoters to agree, many of them fall prey to the offer. It is no secret that capital raising has been a challenge in the recent past and an extra amount of money is more often than not welcome in such market conditions.

“Most of the leading banking entities have their loyal set of investors who would chip in even if the pricing can be termed ‘aggressive’,” said a person involved in the initial public offer (IPO) distribution process. “This gives the banker the much-needed flexibility in pricing the issue. He knows there are takers,” he added.
This, according to industry sources, has made Sebi uncomfortable. The regulator, incidentally, had pulled up investment bankers in the past for ‘maximising’ profits for promoters and ignoring investor interest. Industry sources say that while such practices were prevalent even during the bull period, it has gained significance now given the paucity of companies looking to launch a public issue.

“If you look at maximising the price for promoters then obviously you are not looking at the interest of the investors,” former Sebi Chairman C B Bhave had said at an event organised last year by the Association of Merchant Bankers of India.

In a similar context, Sebi Executive Director Usha Narayanan, who handles the corporate finance portfolio, had questioned the role of the investment bankers. “What the investment banker is there for? He needs to advise promoters to leave something on the table. Some thoughts need to come out from within (the industry). This is more like self-regulation,” she had said at the same event.

Sebi's Abraham emerges front-runner for FMC top job

2011-12-19T15:05:00.000+05:30

Ashish Rukhaiyar & Sanjeeb Mukherjee
Mumbai/New Delhi, 18 June 2011

K M Abraham, who is currently a whole-time member (WTM) of the Securities and Exchange Board of India (Sebi) is tipped to be the front-runner to head the Forward Markets Commission (FMC), the commodity markets regulator. While Abraham’s term at Sebi ends next month, the current FMC chairman B C Khatua’s one-year extension will also expire in July.

According to highly placed sources, consumer affairs minister is in favour of Abraham taking up the top job at FMC after he completes his three-year term with the capital market regulator. Ministry of Consumer Affairs, Food and Public Distribution, oversees the functioning of FMC.

Abraham, a 1982 Kerala cadre IAS — Indian Administrative Services — officer, has made a name for himself in the three years that he has spent with Sebi, passing quite a few high-profile orders including that against MCX Stock Exchange (MCX-SX), Anil Dhirubhai Ambani Group, Sahara India Real Estate, Pyramid Saimira and Societe Generale. As a whole-time member, he is overall in-charge of key portfolios including, corporate finance, investigations, vigilance and integrated surveillance among other things.

Abraham, incidentally, has been subject of a recent controversy, too. According to media reports, Abraham, along with fellow Sebi whole-time member M S Sahoo, has been under the Income Tax (I-T) scanner for purchasing residential flats in a Mumbai suburb at a discount to the then prevailing market price. Reports further suggest that while an internal enquiry done by Sebi gave a clean chit to the members, the I-T department continued its probe.

Interestingly, another report has suggested that Abraham has written to the Sebi board, saying that the regulator should ask the Ministry of Finance to follow the guidelines set by the Central Vigilance Commission before probing any of its members.

Persons familiar with the matter, however, add that there are some issues that need to be factored in before Abraham can be appointed FMC chairman. The FMC chief's post has traditionally been occupied by a person of additional secretary rank, while Abraham is currently joint secretary. This also assumes significance as the Forward Contracts Regulations Amendment (FCRA) Bill that is expected to be tabled in the monsoon session pegs the FMC chairman’s status on par with that of Sebi chief that is a secretary rank post. The current FMC Chairman Khatua holds the rank of a secretary.

There is also a belief that Khatua should be given another extension as continuity could play an important role when the new sets of rules are notified. Thereafter FMC would be a busy regulator and an experienced hand should be preferred. As such, Abraham has no experience of regulating commodity derivatives.

Q&A: Sanjay Sharma, Deutsche Equities, India

2011-12-19T15:02:00.001+05:30

'I don't agree with Sebi's point on pricing of issues'
Ashish Rukhaiyar
Mumbai, 15 June 2011

While the government is looking at tapping the primary market in the near future, private sector activity will be very selective, says Sanjay Sharma, managing director and head of equity capital markets, Deutsche Equities, India. Sharma, who earlier worked with Merrill Lynch, tells Ashish Rukhaiyar disclosures in the offer document are not helpful to investors, as future projections are prohibited. Edited excerpts:

How do you view the current market scenario for primary issuances? The past few months have not been too good.
If you look at the secondary markets, people are talking about FII (foreign institutional investor) flows. Though there were some inflows at the beginning of the year, net FII flows are negligible so far. One needs to consider that any offering takes time to execute. If one is looking at an IPO, it takes around six months. Even if Sebi approval is in place, it takes around a month to get things done. So, one looks for stability in the market while reviewing the trends.
I, however, think that after the 2008 crisis, investors prefer investing in deals rather than secondary markets. Earlier, very few investors wanted to wait for 15-20 days for the allocation and, so, preferred the secondary market route. Now people feel they are better off looking at deals, since it allows them to take large positions and also get management access and more time to do a detailed study of the company.
From a pipeline perspective, I don’t see too many companies coming into the market, apart from the public sector deals. The private sector will see very selective activity, partly because of the market and partly because of the Indian political and economic situation.

Sebi has prohibited fungibility of IDRs (India Deposit Receipts). Will that be a dampener for companies that could have looked at IDRs?
My personal view is that IDRs don't necessarily offer a new investor base for issuers. Only for issuers who have a large presence in India does it help in increasing the business profile for employees, customers and regulators. I am not aware of any companies considering IDR issuance.

Some of the recent listings have been unimpressive, to say the least. Even the regulator has questioned the pricing of issues. Since you head the Association of Merchant Bankers of India, do you think the regulator's concerns hold ground?
I don't think so. At the end of the day, it is the investors who are buying the paper at a particular price, and the buyers and sellers are agreeing to transact at the time of the deal.
After the listing, what happens to the stock price depends on the level of demand at the time of deal, what the performance of the issuing company is and the prevailing market sentiments. And, there should be no difference in price performance of that stock versus a similar stock in the secondary market.
Sebi has been working on streamlining disclosures and making it more relevant and easy to understand for investors to make an investment decision. There is also some talk about the fact that the ‘justification of issue price’ in the document is not relevant. I agree with this point but, while pricing of a stock depends on the future performance of the company and not necessarily past performance, given the constraint that you can’t give any future projections in the offer document, this disclosure is not very helpful to investors.

You talked about disclosures. Sebi wants the bankers’ record to be disclosed in draft documents.
I am aware that this was brought up by some investor associations. Our view as a merchant banking entity and my personal view is that the kind of disclosures being talked about are really not going to be of any help to the investor. Details about the share price performance of deals done by the lead managers may not help an investor. It would be a lot of information — typically, you have multiple lead managers in a deal and each would have some deals which have done well and some which have not — but it would really not be very helpful. Also, the share price performance does not necessarily reflect the company’s performance. Further, not all data requested would be publicly available/verifiable.

So, what are your suggestions?
We have suggested that you can give some data in terms of the amount, size and type of deals the merchant banker has done. You can give out the amount of funds a bank has helped raise over a three-year period, along with the deals and the kind of instruments and if any issue has devolved. This would give a sense to investors if the lead managers have experience of handling similar deals. The issue is still under consideration and I am not aware of any decision taken by Sebi on this.

Sebi board set for nod to Takeover Code

2011-12-19T14:59:00.000+05:30

Ashish Rukhaiyar
Mumbai, 14 June 2011

The brass of the Securities and Exchange Board of India (Sebi) has its plate full. At the next meeting of its board, scheduled later this month, the capital markets’ regulator is expected to finally give a go-ahead to the proposed Takeover Code, pending for a long while.

Also on the agenda are new norms for mutual fund distribution and the sensitive matter of the National Securities Depository Ltd, involving Sebi’s former head. The Bimal Jalan report (on the ownership and functioning of market infrastructure institutions) is, however, unlikely to make it to the agenda.

According to sources, the board meet, scheduled for June 27, has been postponed to June 30. The new Takeover Code is the most important matter, as the finance ministry is through with its deliberations, that saw some of the biggest names from India Inc giving suggestions. Sebi is expected to lower the level of mandatory open offer from the proposed 100 per cent.

“It is almost one year since the report was submitted to Sebi but building a consensus proved to be a difficult task,” said a person privy to the matter. “Most industry representatives wanted the open offer size to be reduced from 100 per cent, as they felt it would give foreign acquirers an advantage over their domestic counterparts.”

The Achuthan committee had proposed that the open offer trigger limit be increased from the current 15 per cent to 25 per cent and the acquirer make an open offer for all the remaining shares, i.e. 100 per cent. While industry players go along with the increase in trigger, they want the size of open offer to be reduced to at least 75 per cent.

“It is going to be a significant agenda, as the first board meet of the new chairman (U K Sinha) went unnoticed,” said another person, wishing not to be named. “The roadmap for the current financial year was the only notable matter decided in the March meet. The market is still waiting for some strong signals from the new regime.”

OTHER ISSUES
Apart from the Takeover Code, the levy of transaction costs in mutual funds is expected to generate a lot of debate. Sinha was one of the most vocal critics when former Sebi chairman C B Bhave banned entry loads in August 2009.

Sinha, who earlier headed UTI Mutual Fund, formed a seven-member panel in May to examine the MF sector’s grievances on abolition of entry loads. The panel is believed to feel a levy of Rs 100-150 per transaction, along with some other changes, could again make distribution of MF products lucrative.

NSDL is another matter high on the agenda. The regulator has time till August to present its final decision on the matter to the Supreme Court. The board, following a petition filed in the apex court, had met in April on the matter but did not take a final decision. Sebi has to decide if it is ready to restore the Mohan Gopal committee order, which it decided to keep aside in 2009.

The board might also take up a few issues related to the primary market, such as simplification of application forms for Initial Public Offers (IPOs) and a common format for Asba — Application Supported by Blocked Amount — and non-ASBA forms, a long-standing demand.

The Jalan committee report, however, has failed again to make it to the agenda. It is believed the regulator needs more time to deliberate on the recommendations of the committee, formed in January 2010 to review the ownership and governance of institutions like stock exchanges, depositories and clearing corporations.

FIIs to petition Sebi on new IDR norm

2011-12-19T14:57:00.001+05:30

Ashish Rukhaiyar & Mehul Shah
Mumbai, 10 June 2011

Say it’s an abrupt U-turn, RBI’s Dec clarification said no prior approval needed after a year for conversion into shares

The capital market regulator's recent decision of not allowing fungibility of frequently traded Indian Depository Receipts (IDRs) is set to become a major issue.

Some leading foreign institutional investors (FIIs) and hedge funds that hold Standard Chartered’s IDRs in their portfolio intend to take up this matter with the regulator. They allege the regulators have done an abrupt U-turn after "indicating" for months that fungibility would be allowed after one year of listing.

The root of the matter is a Sebi circular issued last week. It said after the completion of a year from the date of issuance, redemption of IDRs shall be permitted only if these are infrequently traded on the stock exchange(s) in India. This means StandardChart’s IDR holders will not get a chance to convert their holdings into underlying shares after the completion of a year after listing, as these instruments are liquid by Sebi’s criterion.

Currently, StanChart is the only entity that has listed its IDR on the Indian bourses. The impact of Sebi’s direction was clearly visible on Monday, the first trading session after the Sebi circular. The IDRs tanked 20 per cent during the day, to touch an all-time low of Rs 91.75. StanChart IDRs, issued at Rs 104, closed at Rs 95.25 today on the Bombay Stock Exchange.

According to persons with direct knowledge of the matter, some high-profile law firms are currently working on representations likely to be made to the Securities and Exchange Board of India (Sebi) by early next week. One demand is to implement the new norms for companies that list their IDRs in future. Some foreign investors are believed to have already made representations to Sebi.

“We will tell the regulator not to impose the new norms on companies that have already listed their IDRs in India. It should not be with retrospective effect,” said a person familiar with the matter.

RBI impression
The institutional investors are also miffed due to the fact that a Reserve Bank of India (RBI) clarification (in response to a query by some investors) in December 2010 had said that no prior approval would be required to convert IDRs into underlying shares after one year of listing. RBI had not said there would be a “liquidity criterion” applied.

After the clarification, many FIIs and hedge funds structured their deals so as to convert the IDRs into StanChart equity shares after one year of listing, which would be June 10. The IDRs typically traded at an eight to 12 per cent discount to the StanChart shares listed on stock exchanges in London and Hong Kong.

“The clarification was sought in December from the central bank as the one-year period was approaching in some months and institutional investors wanted to place a bet based on the regulatory stand,” said a person privy to the matter. “The RBI did not even indicate that fungibility will not be allowed. In fact the clarification clearly stated that IDRs could be converted into equity shares after one year without RBI approval. This is a complete U-turn.”

In May 2010, when the country's first IDR issue was launched, it was clarified in the prospectus that Sebi and RBI norms state that “automatic fungibility of IDRs is not permitted” though “fungibility of IDRs into the underlying shares would be permitted only after the expiry of the one year period from the date of issue of the IDRs and subsequent to obtaining RBI approval on a case-by-case basis”.

A section of market players say the Sebi stand on non-fungibility of IDRs could stem from the fact that the foreign holding in the instrument was around 70 per cent and allowing such investors to convert IDRs into equity shares would have led to a conversion spree. Incidentally, US and European regulations allow fungibility of American Depository Receipts and Global Depository Receipts, respectively.

Hedge funds, FIIs dump StanChart's IDRs

2011-12-19T14:55:00.001+05:30

Ashish Rukhaiyar & Mehul Shah
Mumbai, 7 June 2011

New Sebi norms prevent conversion of the bank’s Indian Depository Receipts into its shares.

Hedge funds and foreign institutional investors (FIIs), which were eyeing arbitrage gains by building large positions in Standard Chartered Plc’s Indian Depository Receipts (IDRs), sold them in huge quantities on Monday. The selling spree was triggered by a Securities and Exchange Board of India (Sebi) clarification that the IDRs could not be converted into shares of the foreign company even after one year of listing.

On Monday — the first trading session since the Sebi circular was made public — the IDRs lost nearly 20 per cent, falling to a new all-time low. On the National Stock Exchange (NSE), the IDRs fell to a low of Rs 91.90, before recovering some ground to close at Rs 97 — 15.54 per cent lower than Friday’s close of Rs 114.85. On the Bombay Stock Exchange (BSE), more than 18 million IDRs changed hands, which is exponentially higher than its two-week average quantity of less than one million.

According to market players tracking the IDR, hedge funds were quite active in the counter in the recent past as the Indian instrument typically traded at a discount to the shares of the bank listed on stock exchanges in London and Hong Kong. These investors were pinning their hopes on expectations the regulator would approve the fungibility of IDRs after one year of listing, which would allow them to get the shares cheaper.

“Investors including FIIs have bought Standard Chartered IDRs with an understanding they will be allowed to convert these receipts into underlying shares after one year without any approvals or conditions, a position also confirmed by the RBI. However, Sebi’s new guidelines have made such redemption possible only in case of infrequently traded IDRs, which Standard Chartered IDRs are not. It is like the regulator suddenly changing the rules of the game, which the FIIs are finding unfair,” said Siddharth Shah, head of corporate and securities practice at Nishith Desai Associates.

“The new rules potentially resulting in diminished interest from FIIs could potentially sound the death knell for IDRs as a product, which has seen some success after much pain. Such a move could also raise questions over the stability of the regulatory environment in India,” he added.

According to bulk deal data on stock exchanges, Credit Suisse (Singapore) sold 5.5 million Standard Chartered IDRs on Monday. Others such as Deutsche Securities Mauritius (1.3 million IDRs) and Swiss Finance Corporation (10.8 million IDRs) also sold Standard Chartered IDRs, data showed. On the other hand, ICICI Prudential MF bought 2.98 million Standard Chartered IDRs on Monday.

The interest of hedge funds and other overseas investors in the Indian instrument can also be gauged from the fact that the total foreign holding in the IDR, which was around 38 per cent at the time of issue, has increased to approximately 70 per cent.

When the Standard Chartered IDR issue was launched in May 2010, the draft document clearly mentioned the IDRs could not be redeemed before one year of issue and fungibility into the underlying shares would be allowed only after RBI approval on a case-by-case basis.

Interestingly, many market players are of the view the regulator’s move will kill the IDR market, which has till now seen only one foreign company taking the initiative. IDRs are shares issued by foreign companies and are listed on Indian exchanges. That gives Indian investors an opportunity to own an indirect share in a foreign company.

“From the large picture point of view, considering this set of guidelines of convertibility, global companies may shy away from issuing IDRs in India. If that is the case, the StanChart IDR issue may be the first as well as the last IDR issue from India,” said a note by Jagannadham Thunuguntla, strategist & head of research, SMC Global Securities. “If India is keen on the IDR market, it is very critical to look into this matter and create an environment wherein there is an incentive for liquidity,” it added.

Standard Chartered officials, however, reiterated their stance that IDRs have a good future in the Indian market. “We note that the guidelines for IDR fungibility have been clarified by Sebi. We have been very pleased with the investor interest in our IDR, both at the launch and subsequently, and we believe IDRs have a good future as fund-raising and investment vehicles in India,” said Neeraj Swaroop, regional CEO - India & South Asia, Standard Chartered Bank, in an email response.

“Standard Chartered continues to present a strong investment case -- recently announcing an eighth straight year of record income growth -- and the IDRs listed here represent an ideal access point for Indian investors,” he added.

Every 10 IDRs of Standard Chartered Plc represent one equity share of the bank whose shares are trading at nearly 16 pounds or a little over Rs 1,200 on the London Stock Exchange (LSE). At Friday’s close, 10 IDRs would have cost investors Rs 1,148.50, implying a discount of nearly five per cent to the LSE price.

REGULATORY SHOCK
StanChart IDR tanks 20% after Sebi clarifies it cannot be converted into equity shares
Many hedge funds trim positions after fresh norms put a plug on arbitrage opportunities
Marketmen slam regulator for taking a U-turn on IDR fungibility
The new norms will kill the IDR market, they say
IDR segment needs regulatory incentive for liquidity, say experts

Sebi may tell NSDL to probe IPO scam

2011-12-19T14:54:00.001+05:30

Ashish Rukhaiyar
Mumbai, 31 May 2011

Decks being cleared to ensure that the Mohan Gopal report is restored in the June 27 board meeting

The Securities and Exchange Board of India’s (Sebi’s) coming board meeting is expected to restore the controversial G Mohan Gopal report on the initial public offer (IPO) scam, according to sources close to the development.

Once this is done, Sebi can ask National Securities Depository Limited (NSDL) to initiate a probe to establish individual responsibilities, according to a person familiar with the matter. The scam involved opening of thousands of fake demat accounts to corner shares in IPOs.

An independent audit of a number of NSDL processes and systems will also have to be done.

“Since the Supreme Court has directed Sebi to submit its decision by August, the NSDL issue will come up for discussion at the June 27 meeting. If the order is accepted, NSDL will have to comply with the directions issued under Section 11(B) of the Sebi Act. The monetary penalty has already been challenged by the depository and the appellate (Securities Appellate Tribunal) has set it aside,” said an official in the know.

It will be the second time the Sebi board will discuss the matter. If it doesn’t challenge the order, NSDL will have to conduct the inquiry.

The G Mohan Gopal report was declared non-est in 2009. It said NSDL failed to follow norms. It was rejected by the board when C B Bhave was heading Sebi. Bhave recused himself from the proceedings as he was the chairman and managing director of NSDL during the period in question.

“We direct the NSDL board to conduct an independent inquiry... to establish individual responsibility for failure of NSDL to meet its legal duties and responsibilities... and to take necessary action to ensure individual accountability,” said the report.

The report also asked NSDL to conduct an “independent audit” of systems related to selection of depository participants, opening & operation of depository accounts, including the KYC system, audit, supervision, inspection and penalties & sanctions.

The report also passed remarks against Sebi that did not go down well with the regulator.

“Under the law, a regulator cannot merely be a passive observer. The regulator must be proactive in protecting the market and preventing the type of scam that occurred,” the report said. Sebi Chairman U K Sinha recently said the portions of the report that criticised the regulator should be expunged.

The matter goes back to 2008 when Sebi formed a two-member committee comprising G Mohan Gopal — at present the director of the National Judicial Academy — and V Leeladhar, former deputy governor, Reserve Bank of India, to take over and dispose of the then ongoing quasi-judicial proceedings against NSDL.

Earlier, Sebi said it did not have the power to review its own order and asked the Supreme Court for a direction. The court told Sebi to come back with the final decision. The court will pass an order if it is not satisfied with the action taken.

“The two-member committee was formed to pass the final order and not just give recommendations. It was not in Sebi’s authority to set it aside,” said a lawyer specialising in securities regulation.

TIMELINE
2006 Sebi conducts probe into public issues launched during 2003-05
2006 Finds C B Bhave-headed NSDL guilty, initiates proceedings
2006 Monetary penalty imposed. NSDL also told to conduct an independent audit of systems
2007 Securities appellate tribunal sets aside monetary penalty
2008 Bhave becomes Sebi chairman; recuses himself from proceedings
2008 Sebi forms a committee, headed by G Mohan Gopal, to dispose of the pending proceedings against NSDL
2008 The committee indicts NSDL for failure to follow norms
2009 Sebi board declares the committee’s report as non-est
2011 Bhave retires on February 17
2011 SC tells Sebi to reconsider decision to set aside the report on February 21
2011 Sebi board meets on April 26 to discuss the issue
2011 Sebi to discuss matter on June 27

JLR to source more parts from India

2011-12-19T14:53:00.001+05:30

Ashish Rukhaiyar
Pune, 28 May 2011

Mulls using India assembly plants for manufacturing cars for exports

Tata Motors-owned Jaguar Land Rover (JLR) is increasingly looking at India for sourcing a large number of components for its iconic brands. It intends to invest a significant amount in research and development (R&D) centres in the country. The UK-based subsidiary of the Tatas is also keeping its options open for using its India assembly plants for manufacturing cars that can be exported to other countries.

“We are going to invest in an research and development (R&D) department to source more components from India,” said JLR Chief Executive Officer Ralph Speth, while officially inaugurating the company’s first assembly plant here today. It is also the company’s first full-fledged facility outside the UK. India could be a sourcing base not just for local products but also global ones, he added.

According to a company statement, the Pune plant will assemble Land Rover Freelander 2 vehicles supplied in completely knocked down (CKD) form from JLR’s Halewood manufacturing plant in Liverpool, UK. The Freelander 2 will be available in India in two variants — TD4 SE Automatic and SD4 HSE Automatic — with prices starting from Rs 33.89 lakh (ex-showroom and pre-octroi price, Mumbai).

While reiterating its India plans on the occasion, JLR said currently around 500 employees were working for the company and the number would be ramped up. “We will create hundreds of jobs in India. We will look at leveraging opportunities in communications, interface, human resources, information technology and many others,” said Speth. For the financial year ended March 31, JLR reported a net revenue of 9.9 billion pound and profit after tax of 1.04 billion pound.

Incidentally, the engine for the JLR brands will be delivered from the UK in a part configuration form. Company officials clarified that manufacturing the car in India would remain more expensive than other countries “until critical numbers are achieved”. The officials also refused to divulge details related to the installed capacity of the plant. “We will start carefully and then ramp up carefully. Depending on the success, we can look at manufacturing products that are sold outside India,” said Speth when asked about the capacity of the plant which is situated next to that of Indica, a small car from the Tata Motors stable.

Speth, however, said he expected the Indian market to “explode”. The company has also moved two managers from its UK plants to India to keep an eye on quality control.

JLR sold 891 units in 2010-11 and plans to increase its presence in the main metropolitan cities. “By September, we will be present in 12 major metropolitan cities with 14 dealer outlets,” said Rohit Suri, head (premier car division), Tata Motors.

Sebi members 'going slow' as their terms near end

2011-12-19T14:52:00.001+05:30

Ashish Rukhaiyar
Mumbai, 27 May 2011

The next couple of months are expected to witness a fall in the number of orders passed by the Securities and Exchange Board of India (Sebi). Two of its key whole-time members have been hearing very selective matters, as less than two months remain before their respective terms end.

Sebi whole-time members M S Sahoo and K M Abraham will both retire in July. While Sahoo’s three-year tenure will end on July 13, Abraham will retire on July 21.

According to a person familiar with the developments, they are ‘going slow’ in hearing most ongoing matters as they will not be in a position to pass the final orders before they retire in July.
“They have practically stopped hearing fresh matters unless unavoidable,” he said. “Even if they hear the matter now, it will be difficult for them to pass an order, which would look unprofessional. The affected party will have to come again and present the case before the new members who join office in July.”

Sahoo and Abraham, also share between them the departments critical to any regulatory probe. Sahoo, who resigned from the Indian Administrative Service (IAS) before joining Sebi as a whole-time member in 2008, is in-charge of departments such as legal affairs, enforcement and market intermediaries’ supervision and regulation. Abraham, a 1982 Kerala cadre IAS, handles investigations, integrated surveillance and market regulation.

The third whole-time member, Prashant Saran, looks after mutual funds, foreign institutional investors and collective investment schemes, among other things.

Some high-profile orders passed either by Sahoo or Abraham including those on Pyramid Saimira, Societe Generale, Sahara India Real Estate and MCX Stock Exchange. Also, consent orders on entities such as Merrill Lynch, Reliance Natural Resources and Reliance Infrastructure, Nirmal Bang Securities, Religare Asset Management, erstwhile UTI Securities and RBS Asia.

50 in race for 2 Sebi member posts

2011-12-19T14:50:00.000+05:30

Ashish Rukhaiyar & Rajesh Bhayani
Mumbai, 24 May 2011

Wide range of hopefuls, with processing yet to begin, even as both whole-time charges become vacant in 2 months. The Union ministry of finance has got around 50 applications for the two vacancies of whole-time members at the Securities and Exchange Board of India (Sebi).

While quite a few government officials have applied, so have three Sebi employees. The initial screening, however, is yet to begin, even as less than two months remain before the two members, M S Sahoo and K M Abraham, retire. Both are to do so in July, within a week. While Sahoo’s three-year tenure will end on July 13, Abraham will retire on July 21.

Early this year, the MoF had invited applications for the vacancies and had also once extended the deadline, to allow more to do so. “The list has a large number of applicants from the private sector, too, but traditionally the member’s chair has been occupied by people from the banking arena and the services (government officials),” said a person familiar with the selection process. An applicant needs to have a total experience of at least 25 years to be eligible.

Among the applicants, the name of Central Bank of India chairman and managing director S Sridhar is doing the rounds. In the past, career bankers such as T C Nair, V K Chopra, Madhukar, A K Batra and T M Nagarajan have all served Sebi as whole-time members. Academician J R Verma and G Anantharaman from the income tax department were other whole-time members.

Among the current whole time members, Sahoo is a former IAS officer (he resigned before taking up the charge) bureaucrat. Abraham is still in service, being from the 1982 batch of the IAS’ Kerala cadre. The third member, Prashant Saran, is from the Reserve Bank of India.

Among the government officials who have shown an interest (all the names mentioned here are based on sources), the names of Shashank Saxena and Rajiv Nabar have been heard in bureaucratic circles. Saxena is currently director (banking operations & pensions) at the MoF and has worked with the current Sebi chairman, U K Sinha, when the latter was part of the ministry's capital markets division. Nabar is income tax commissioner at Surat and earlier served as commissioner of the Mumbai division. He has also worked with Sebi, as a division chief between 1992 and 1997.

The list of external candidates is also said to feature K L Dhingra, current chairman and managing director of ITI Ltd, a public sector undertaking. He was earlier with Housing and Urban Development Corporation, Mumbai Railway Vikas Corporation and Indian Rare Earths Ltd.

Among Sebi insiders, two current executive directors, Usha Narayanan and P K Nagpal, are also believed to have evinced an interest in the job. Chief general manager Anil Kumar Sharma is also said to have applied. Narayanan, who reports to Abraham, currently handles the corporation finance division that looks after listing and corporate restructuring. Nagpal, among other divisions, handles the market intermediaries regulation and supervision department. Sharma is in charge of public information.

Pay for I-banking at pre-crisis level

2011-12-19T14:48:00.000+05:30

Ashish Rukhaiyar
Mumbai, 17 May 2011

Indian bankers cash in on difficult market conditions for domestic offerings, still cheapest among leading economies.

It is often said that there is a price for everything. Investment bankers, it seems, know it better than anyone else. With domestic equity markets in a state of flux and most public issuances getting a tepid response, bankers will still take a company public but at a higher cost.

Data shows the share of investment banking fees in domestic equity offerings is at its highest level since 2007. If one considers only the Initial Public Offers (IPOs), the fees have never been higher in the past six years.

According to data with Bloomberg, the current year has seen a total of Rs 19,700 crore raised through 25 domestic equity offerings. The fee component has been pegged at 1.49 per cent, the highest since 2007, when bankers cornered 1.73 per cent of the money raised as fees. In 2010, the fee share was less than one per cent. In 2008 and 2009, it was 1.16 per cent.

According to investment bankers, the fee is a direct factor of the market scenario and tends to go up when the conditions are quite volatile, with no definite trend emerging. Also, the recent past has shown that investors are still jittery about investing in the primary market.

“It is quite evident that it difficult to sell an issue in the current market,” says a head of a foreign investment banking firm. “Completing the deal in such a scenario is a herculean task and calls for much more effort in terms of roadshows, broker and sub-broker network, etc. So, the costs shoot up,” he said, while wishing not to be named due to the sensitive subject.

The share of investment banking fees is still higher in IPOs. In 2011, as many as 15 new companies have gone public, raising Rs 3,200 crore, with the fee component at 2.47 per cent. Not since 2005 have the fees been so high in the IPO space. The past three years saw the IPO fee share only a tad higher than the one per cent mark.

Investment bankers, on conditions of anonymity, say the IPO space had seen a lot of smaller and little-known companies getting listed in the recent past. The bankers' job was made all the more difficult with institutions staying away, which shook the confidence of retail investors. This forced bankers and the broker fraternity to bring on board a large number of high net worth individuals (HNIs).

While the fees have increased in the current calendar year, the services of Indian bankers are still among the cheapest when compared to some of the other leading economies of the world. According to Bloomberg, US bankers charged 3.7 per cent as fees in 2011, while their counterparts in China and Japan cornered 4.63 per cent and 4.21 per cent, respectively. Bankers in the Asia (ex-Japan) region charged 3.65 per cent fees in 2011.

Bankers also add the last year saw a dip in the fee even while a significant amount of money was raised, as there were some mega-sized offerings from the government stable. It is a fact that the banker fee is next to nothing while managing these issues.

BS People: G Mohan Gopal

2011-12-19T14:47:00.000+05:30

Ashish Rukhaiyar
Mumbai, 17 May 2011

It is ironical that G Mohan Gopal did not draw much attention when he was part of the Securities and Exchange Board of India (Sebi), say board insiders. This was surprising because Gopal was known to be a no-nonsense and straight-forward person, who could not be manipulated.

The man instrumental in making Sebi disclose and upload its agenda papers on its website is now in news for his letter to the Prime Minister’s Office on the NSDL issue alleging abuse of power to favour the then chairman.

Gopal is the director of the National Judicial Academy and is highly regarded in the legal circles, especially among judges regular at the institute.

Gopal became a member of Sebi when M Damoradan was the chairman. Those who know him say he sticks to his points and expresses those in a way that clearly shows he stands to lose nothing. If you cannot convince him about something, it is difficult to get it through, they say.

This is corroborated by the fact that he, as a member of the board, went on to question the role of the regulator itself. Not many would question their chairman and the organisation they work for. Many feel he was the internal watchdog, or the whistle-blower, at Sebi.

In a way, his stand has been vindicated nearly two years after Sebi set aside his orders related to NSDL, earlier headed by former Sebi chairman C B Bhave. The Supreme Court has asked Sebi to reconsider the orders of the two-member committee comprising Gopal and former RBI deputy governor V Leeladhar.

Gopal, who hails from Kerala, holds a masters degree and doctorate in law from Harvard Law School, USA, and a bachelors degree in law from the Delhi University. He has earlier worked with the World Bank, Asian Development Bank and has taught law at the National University of Singapore and Georgetown University Law School, Washington, DC.

He was also responsible for designing the code on conflict of interests for Sebi members. According to someone who has tracked him closely, the code was followed in letter but not in spirit when the NSDL case was being handled. This explains why his profile on the National Judicial Academy website does not mention anything about his stint at Sebi.

I-bankers ready to share their past with you, but not as Sebi sees it

2011-12-19T14:45:00.000+05:30

Ashish Rukhaiyar
Mumbai, 13 May 2011

Oppose track-record disclosure format prescribed by the regulator; committee formed to resolve differences.

The Securities and Exchange Board of India (Sebi) has formed a committee to try and resolve differences with investment bankers on the format of disclosure of the latter’s track record. It is pushing this to enable better-informed decisions by retail investors.

It was last November when Sebi said it wanted such disclosures. The idea is that investment bankers record their past performance in the draft document of the issues they manage. It took four-odd months for Sebi to propose a format, one focusing on the stock performance of companies. Bankers opposed this and a committee was formed last month. It has representation from investor associations, bankers and the regulator. It has met since.

“The Sebi move is more driven by the investor associations and the kind of disclosures that are being talked about will not really be relevant,” said an investment banker who has been part of the deliberations. “A lot of information is not in our control or we don’t know. Once the stock is listed, the market conditions play an important role.”

Bankers, however, are not fundamentally against disclosure; they dispute the proposed format and contents. Sebi wants the bankers to list the share price movement of all issues they had managed in a specified period, say the past three years. They need to disclose the issue price and the price as on a particular date to ascertain the returns generated.

Another banker, an office-bearer of the Association of Merchant Bankers of India (Ambi), their umbrella body, says the disclosures should be more about the type of deals the banker managed in the past and whether any of the issues were either withdrawn or devolved.

“What we have suggested is that you can give data related to what type of deal that one has done and not necessarily how it has performed,” said this banker. “For instance, say the bank helped raise X amount of money in the past few years through IPOs, FPOs, rights, equity, debt, etc. Whether any of those have been devolved. How many deals of a similar size or larger has the bank done in the last two years. Whether they have decent amount of expertise or not.”

The issue gains significance when seen in the light of the performance of most recently-listed companies. The share price has been falling below the issue price on the first day itself and the role of investment bankers has come under the scanner. This probably also explains why Sebi wants banks to disclose the share price-related information in the document.

Bankers maintain that share movement data may not be helpful, as the price as on a particular date does not give the correct picture. Share price need not really reflect the company’s performance, they say.

SC scanner on Sebi's rejection of NSDL report

2011-12-19T14:41:00.001+05:30

Ashish Rukhaiyar
Mumbai, 12 May 2011

With the Supreme court calling for explanations, the Securities and Exchange Board of India (Sebi) may come to regret its decision on the National Securities Depository Ltd (NSDL) matter. In 2009, the Sebi board had rejected a report by a two-member committee indicting NSDL in the Initial Public Offer scam.

C B Bhave was Sebi chairman and head of NSDL at the time of the IPO decisions. He had recused from the proceedings when Sebi took the decision, but there was considerable controversy when the report was rejected.

On Monday, replying to a notice from the apex court, Attorney-General Goolam E Vahanvati said the market regulator’s board had, in an April 26 meeting, decided to reconsider the special committee’s report, that had indeed found NSDL to be at fault. With the matter gathering steam, a letter written by G Mohan Gopal to the Prime Minister’s Office in December last year has also come into focus. The letter surfaced after a Right to Information (RTI) application was filed in March. It has some damning allegations about the way the NSDL investigation was conducted.

Gopal was part of the committee formed by Sebi to oversee the conduct of proceedings against NSDL. He has mentioned four structural issues in the letter — inadequate transparency, public accountability and parliamentary oversight, lack of protection against conflict of interest, ineffective framework for law enforcement and outdated governance structure — which led to this “abuse of power”.

GRAVE CHARGES
He further alleged he was “threatened” when he objected to the “illegal and unethical actions” of the board. “An informal clique of current and serving bureaucrats, Sebi officials, lawyers and corporate interests orchestrated this subversion of the due process of law. They illegally interfered with an independent Sebi adjudication, manipulated legal opinion, suppressed and misrepresented facts and misled the Sebi board and government officials about the legality of the orders,” says the five-page letter.

In 2008, Sebi formed a two-member committee comprising Gopal and V Leeladhar, former RBI deputy governor, to take over and dispose the then, ongoing quasi-judicial proceedings against NSDL. The committee was formed after Bhave recused himself from the proceedings against NSDL as he was its former chairman and managing director.

According to Gopal, currently director of the National Judicial Academy, Sebi’s stance on the NSDL matter took a U-turn after Bhave became the chairman. “...Every single investigation prior to Bhave joining Sebi had found failures in NSDL’s role under his (Bhave) leadership during the IPO scam. After Bhave took over, however, there has been a stunning reversal of Sebi enforcement actions against NSDL — all Sebi actions against NSDL in relation to the IPO scam have been stopped, dropped or reversed,” it says, adding that “Sebi-under-Bhave” exonerated “NSDL-under-Bhave”. “The court can direct Sebi to set aside the earlier order,” said a securities lawyer.

The main problem, according to experts, was the setting aside of the final order given by the two committee members. “The two-member committee was not formed to give recommendations but pass the final orders. It was illegal on Sebi’s part to set it aside, as it is not bestowed with such powers. So the Supreme Court can say that what you did was illegal and set it aside,” he explained.

Tata Tech defends preferential allotment to group entities

2011-12-19T14:39:00.001+05:30

Ashish Rukhaiyar
Mumbai, 4 May 2011

The board of Tata Technologies has approved preferential allotment of shares to two entities promoted by Tata Sons, the holding company for the group. This comes amid objections from some minority shareholders that the placement was being done at a low price to benefit group entities. The board says the Tata Group companies were chosen after evaluating many private equity entities.

"The two entities were chosen after a long-drawn procedure that included a beauty parade before various private equity players," said S Ramadorai, chairman, Tata Technologies, in a telephonic conversation with Business Standard. "The whole process was subject to intense scrutiny and the final selection was based on various parameters. I can assure that all the prescribed norms were followed.”

"Tata Technologies... announced it has completed a round of equity funding for Rs 141.06 crore ($30 million) from Alpha TC Holdings Pte Ltd and Tata Capital Growth Fund I. The investment represents a 13.04 per cent equity stake on a fully diluted basis," said a company statement.

Tata Technologies is an unlisted company of the Tata Group. So are the two companies to which it has allotted preferential shares. The board decided to do the preferential allotment at Rs 251 per share, opposed by minority shareholders.

The dissenters allege the placement was done at a very low price only to benefit the group entities, which will be allotted around 5.62 million equity shares. The company says there is no such motive, as the price was based on a detailed valuation report prepared by Karvy Investor Services.

“An enormous amount of analysis went into the report and the price was arrived on the basis of the DCF (discounted cash flow) method," says Ramadorai. "The first report was prepared in December 2009 and the fair value was Rs 212. Thereafter, another analysis was done in December 2010, wherein the fair value was pegged at Rs 236. We are still offering the shares at a premium. I think we have protected the interest of the shareholders."

The company also defended the decision of a preferential allotment instead of a rights issue as demanded by some minority shareholders. Tata Motors holds 85 per cent in Tata Technologies and the balance 15 per cent is held by employees and a few outsiders who bought the shares from staffers.

"Tata Motors is already highly leveraged and was not in a position to subscribe to the rights issue," says C Ramakrishnan, director, Tata Technologies. "If we had gone for a rights issue, then Tata Motors would have renounced their rights and raising the intended amount would have been difficult. So, we discussed this issue with nine private equity players and then shortlisted three. The negotiations took many months, before the two entities were selected," said Ramakrishnan, who is also the chief financial officer of Tata Motors.

Tata Tech shareholders oppose preferential allotment to group entities

2011-12-19T14:38:00.000+05:30

Ashish Rukhaiyar
Mumbai, 29 April 2011

It is always said that the biggest virtue of an unlisted company is the absence of a large number of shareholders to deal with. However, an unlisted company of the Tata Group is realising that it is not always the case, and even a company that is not listed on the stock exchanges has to face shareholder resistance.

Tata Technologies, an unlisted company from the Tata stable, intends to raise around Rs 141 crore through a preferential allotment of shares to Alpha TC Holdings Pte and Tata Trustee Company, both parts of Tata Capital group. The board of the company has decided to do the preferential allotment at Rs 251 per share.

While minority shareholders, who bought the shares from the company employees, have no issue with the placement, it is the price that they are opposing.

Shareholders allege that the shares are being offered at such a low price only to benefit the two Tata group entities. It is also much below the price at which the shares are traded in off-market transactions, they add. One of the shareholders has even written a letter to Ratan Tata early this month.

"The company's shares are being traded in the range of Rs 450 to Rs 500 and the board wants to place the shares at half that price," said a shareholder who did not wish to be named. "The company says it has got the valuation done from a merchant banker, but if one looks at the growth trajectory of the company, then it does not look convincing," he said.

According to the company's annual report for 2009-10, the earnings per share have increased eight times from Rs 3.07 in 2005-06 to Rs 24.33 in 2009-10. The net profit in the same period has grown from Rs 11 crore to Rs 91 crore. The revenues have also more than doubled from Rs 545 crore to Rs 1,098 crore. “We do not wish to comment. The company has formally responded to the shareholder,” said the company spokesperson in response to an email query sent on Wednesday."

The placement at Rs 251 per share pegs the enterprise value of the company at Rs 940.37 crore," said another shareholder. "To put things in perspective, Tata Technologies acquired INCAT International Plc in 2005 in an all-cash deal of Rs 411 crore. So, should we believe that the current value of the company is not even twice the acquisition cost of INCAT six years back," he said.

An extraordinary general meeting (EGM) of the company is scheduled on April 30 to pass the resolution related to preferential allotment of 5.62 million equity shares to the two Tata Capital-managed entities. The board had put forth the same proposal in their previous EGM last March and then in its annual general meeting (AGM) in July 2010.

Interestingly, the company has said the two entities have been identified and selected after discussing and negotiating with various investors.

"Based on such discussions, the directors have identified Alpha TC Holdings Pte Ltd and Tata Capital Growth Fund – I, part of Tata Capital Group, as the optimal investors in the company in terms of price, level of governance rights and contribution to the management of the company," said the company EGM notice.

It is also believed that during one of the shareholders' meetings, chairman S Ramadorai had assured minority shareholders that he would consider their demands. In the AGM, minority shareholders demanded a rights issue instead of a preferential allotment to select entities. They even said that a rights issue at Rs 251 per share would be acceptable to them.

Sebi wants IPOs priced realistically

2011-12-19T14:36:00.002+05:30

Palak Shah & Ashish Rukhaiyar
Mumbai, 28 April 2011

Investors lost Rs 3,600 cr last yr, excluding Coal India gains.

The heavy losses suffered by investors because of the poor performance of initial public offers (IPOs) during the last financial year have the Securities and Exchange Board of India (Sebi) worried.

Financial year 2010-2011 saw high wealth erosion for investors in the IPO market. Nearly 70 per cent of the 51 IPOs fell below their offer price. The estimated wealth erosion for investors in these IPOs was in the excess of Rs 3,600 crore, excluding the gains from the Coal India issue.

The regulator has raised concerns with merchant bankers involved in the past several issues and yet again asked them to be extra cautious and "more realistic" while arriving at the price band for a company, say officials.
The concerns were raised by Sebi in a recent meeting with a few bankers. Sebi's executive director Usha Narayanan, who handles the primary market portfolio, has time and again raised this issue at public forums too.

"What is the investment banker there for? He needs to advise promoters to leave something on the table... Some thoughts need to come out from within (the industry)... This is more like self-regulation," Narayanan had said at a public function a few months ago.

Even if one looks at the number of IPOs that delivered positive returns versus negative returns, investors seem to have lost. In fact, these stocks have performed worse than the broader markets as well.

The 35 losing IPOs, most of which are small companies and saw little participation from institutions, fell substantially below their issue prices and lost 38 per cent on average. In absolute terms, the loss to investors is Rs 4,700 crore.

Gujarat-based operators nicknamed ‘Rangeela’ and ‘Barter’, and Mumbai’s ‘NS’ are known as distributors of shares for promoters. They strike a pre-IPO deal with promoters and put in large dummy subscriptions. Once the stock is listed, they exit in large chunks by selling shares above their cost of purchase.

These operators have come under the Sebi scanner after an Intelligence Bureau report mentioned their names. In some small IPOs, subscription was put in only by a few retail and high net worth investors whereas institutions stayed away.

The leaders among the losers in absolute terms include Jaypee Infratech, SKS Microfinance and Orient Green Power. The three IPOs have collectively destroyed investor wealth of nearly Rs 2,100 crore.

Two public sector companies — SJVN and Punjab & Sind Bank — have lost nearly Rs 185 crore and Rs 46 crore, respectively. Prestige Estates, Bajaj Corp, Ramky Infra, Nitesh Estates and Eros International Media are among other known companies that figure on the losing side.

In percentage terms, Gyscoal Alloys, Sea TV Networks, Tirupati Inks, Aster Silicate, Cantabil Retail, Commercial Engineers & Body, Tarapur Transformers, Microsec Financial, BS Transcomm and Midfield Industries are among the top losers.

These are down between 50-80 per cent from their respective offer price. All these issues were below the size of Rs 200 crore and were rated 1-2 by rating agencies. Grade 1 suggests poor fundamentals and grade 2 suggests below-average fundamentals.

Sebi has already proposed that all merchant bankers should disclose the track record of their past issues in the draft red-herring prospectus and the lead managers’ website. The rule is yet to be implemented.

Pilani Investment to soon trade on national bourses

2011-12-19T14:35:00.000+05:30

Mehul Shah & Ashish Rukhaiyar
Mumbai, 27 April 2011

Shares of Pilani Investment and Industries, the investment arm of the Birla family, will soon be available for trading on the National Stock Exchange (NSE) and the Bombay Stock Exchange (BSE).

The Madhya Pradesh Stock Exchange (MPSE) is planning to include Pilani Investment among the first list of companies whose shares will be available for trading on the two national-level stock exchanges.

Last week, the Indore-based bourse signed an agreement with NSE and BSE, whereby companies listed on MPSE would be available for trading on India’s two premier stock exchanges under the permitted category. The agreement, under Section 13 of the Securities Contract Regulation Act, will also allow members of MPSE to trade in shares of companies listed on NSE and BSE. MPSE is the first regional exchange to have such an arrangement with both exchanges.

Apart from MPSE, Pilani Investment’s shares are also listed on the Delhi Stock Exchange. However, there has been no trading in shares of companies listed on these exchanges.

“Shares of Pilani Investment are currently trading at Rs 1,750 in off-market transactions,” said a person who has been trading in its shares for long. “Historically, trading in Pilani Investment has been low compared to some other companies listed on regional exchanges. It is very unlikely that Pilani Investment will sell the shares of the Birla firms in which it holds a stake,” he added.

Pilani Investment owns stakes in companies belonging to the BK Birla and Aditya Birla groups. Its major holdings include Century Textiles (36.78 per cent), Grasim Industries (4.69 per cent), Hindalco Industries (1.52 per cent), Kesoram Industries (5.28 per cent) and Zuari Industries (1.47 per cent). At Tuesday’s closing price on BSE, the total value of Pilani Investment’s stake in 14 listed companies comes to around Rs 3,138 crore, according to the BS Research Bureau.

Apart from Pilani Investment, MPSE also plans to include Kriti Industries, Signet Industries, Choksi Laboratories, Star Delta Transformers and Neo Corp International in the first list of about 25 companies to be traded on the national bourses.

There are 303 companies listed on MPSE. Of these, 145 scrips are exclusively listed on its platform. The partnership with the two national-level stock exchanges is aimed at reviving the trading at MPSE after a gap of 10 years. “The objective is to spread equity culture in the smaller towns of India,” said Ashish Goyal, director, MPSE.

MPSE plans to go live with its arrangement with the two national bourses in May. It has already started a membership drive. As of now, the exchange has 75 active members. It charges a one-time admission fee of Rs 2 lakh for membership.

(With inputs from Ashok Divase)

Q&A: Nikhil Vora, MD, IDFC Securities

2011-12-19T14:32:00.002+05:30

'Markets will see a broad rally'

Mehul Shah & Ashish Rukhaiyar
Mumbai, 22 April 2011

IDFC Securities is of the view that factors that drive up the markets currently appear positive, even as the indices behave in a volatile manner. Nikhil Vora, managing director (institutional equities research), spoke to Mehul Shah and Ashish Rukhaiyar. Edited excerpts:

IDFC has revised upwards its Sensex target. Are we out of the woods?
This is the first time in the Indian context that we are looking at all the variables that can impact a country, be it internal or external happenings. Such as the four ‘I’s – inflows, interest rates, inflation or international reasons and, lastly in the Indian context, the inaction from the government side. These variables in entirety are so large that any one can disrupt any market flow.
So, in an extremely uncertain and vulnerable environment, we actually changed our stance and became positive during that period. We had called for a 17,000-index earlier from a 22,000-index and (now) we have reversed our call, becoming extremely positive on the 18,000-index, which was just about the end of February, and now we are playing for a 22,000-index, by the year-end.

Is there enough rationale for such a positive stance?
The rationale to become positive is the biggest change in all the five variables I talked about. I think we are possibly at 75-85 per cent of the top-end of that variable. So, in terms of uncertainties of any businesses or any environment or any factor, we are possibly at more than three-fourths of that uncertainty being close to over.

What about inflation and crude (oil)? Everyone seems worried on those counts.
In crude, very interestingly, today the underlying asset trade of financial trade in crude, which is speculative, is at a 20-times multiple to the consumption of crude, against a historic three-four times. This means there is huge speculative trade getting spun into this. Any speculative trade which remains in a narrow band for a period of time tends to unwind by itself. This unwinding takes three-four weeks before it gets into a normative demand-supply pricing. My sense is, in crude you will get into that zone. So, there is lot more to see positive, that it will get shielded or remain in a narrow zone so to speak.
So, if any, crude will actually come off by possibly 10-15 per cent. It will still be higher than what we have seen last year, (but) significantly lower than what you are at today. So, if crude is at $120 today, we are literally calling for sub-$100 crude. That, I think, will happen in the next six months odd. I don’t think the demand growth has been so disproportionate. Even if you look at the revival of the US economy and so on, it is not of such a sharp magnitude for calling crude at $120. So, I think crude inflation will drop off.

What about food inflation? The opposition has upped the ante, which could lead to huge political uncertainty.
For the last two years, if you look at food inflation, it actually has been very sharply up. My sense is that it is on its way down and the rationale is whenever food inflation tends to correct, that never happens in a linear manner. It never happens like it will correct three per cent, five per cent, 10 per cent and so on. It corrects by 25-30 per cent immediately, because the supply side starts to shore up significantly, for as food inflation grows, the propensity to produce more is higher and, thereby, it tends to retrace prices.
I think that has started to happen. In the past month, top-end food prices for a lot of the food commodities which are delinked from crude have actually fallen 25-30 per cent. A very good sign that food inflation is coming back to normative levels. So, the biggest component of inflation is starting to look at least topped out. If inflation is at 8.3 per cent now, my sense is it will settle at seven-eight per cent for the next one year. The interest rate is a function of what inflations are in various economies and so on. My sense, again, is that given the higher rate of deposit growth and the fairly calibrated RBI stance one has seen, you have also seen the peaking of interest rates. It is starting to show in the near-term rates; it actually has gone down by 50 basis points already.

What is your take on the quantum of foreign flows this year?
Look at inflows and it is extremely interesting on this part. Never, ever, in history - in the last 15-16 years at least - have emerging markets underperformed developed markets. It has happened twice but by a very low margin and when there was a global crisis. In the past six months, India has underperformed global markets by 17-18 per cent. There is no rationale for this over a period of time and so a bounce-back will happen.
On the inflows part, we saw net outflows of around $1.6 billion in the first two months of the current calendar year. In March, we have already seen inflows of around $700 million. So, inflows are starting to happen. Second, one tends to sell out-performance and buy into under-performance. That is how one should look at investments. Developed markets have given that sort of outperformance, while emerging markets are still at ‘under-performance’.

Action in the primary market hots up again

2011-12-19T14:29:00.001+05:30

Ashish Rukhaiyar & Mehul Shah
Mumbai, 20 April 2011

After a lull of nearly a month, the primary market is witnessing some action. While gold loan provider Muthoot Finance opened its Rs 900-crore initial public offer (IPO) yesterday, the near future will see quite a few large and mid-sized issues hitting the market. The government is also expected to start its divestment programme within the next couple of months.

According to investment bankers, many companies are now expediting the process of getting regulatory approvals in place to be ready to launch their IPOs as soon as possible. Data from the Securities and Exchange Board of India (Sebi) clearly shows a marked increase in the number of companies filing draft documents for public issues. In March, 14 companies did so, the highest in a single month since October. In February, only seven unlisted entities filed papers with the capital market regulator.

The coming weeks would see a number of IPOs. Kishore Biyani’s Future Ventures plans to raise up to Rs 750 crore from a share sale offer on April 25-28. Smaller ones — Paramount Print Packaging, Innoventive Industries, Servalakshmi Paper, Vaswani Industries and Galaxy Surfactants — are coming out with issues in the next few days. Navin Jindal’s Jindal Power is likely to come out with a Rs 7,000-crore IPO in May, according to bankers familiar with the matter.

TIMING SEEMS RIGHT
"Markets have been stable for a couple of weeks and that has made companies confident of launching their IPOs," says Sanjay Sharma, head (equity capital market), Deutsche Equities India. "The performance of companies that have opened their issues will be closely watched. There is enough appetite for issues that come at the right price and at the right time. Many companies have filed their draft document with Sebi to prepare themselves for public issues."

The current calendar year has not seen many large-sized IPOs, as companies and bankers were wary on the fate of the issues. Nine companies completed their IPOs and six of those raised less than Rs 100 crore each. The largest IPO this year has been that of PTC India Financial Services, that raised around Rs 440 crore. While Tata Steel raised Rs 3,477 crore in January, it was a follow-on public offer (FPO).

"Since March, we have started seeing positive flows in the market, and with completion of state-level elections by mid-May, the timing for IPOs should be right," says Indraneil Borkakoty, head (equity capital market), Nomura India.

A section of investment bankers, however, feel it cannot be said that all issues would sail through, even if the investor sentiment looks promising. In 2008, the high-profile issues of Emaar MGF Land and Wockhardt Hospitals had to be withdrawn, though the markets had just about started to fall on account of the initial signs of a sub-prime crisis.

“The IPO market will remain challenging,” said Atul Mehra, managing director and co-CEO, investment banking, JM Financial. “However, issues from quality companies at reasonable pricing and valuation will go through. Others will have to wait.”

The next two months would also see the government launching some of the much-awaited divestment offerings, including Power Finance Corporation, ONGC, SAIL and Hindustan Copper. Government approval is already in place for these four issuances.

While PFC is expected to raise around Rs 7,000 crore, SAIL's issue size is pegged at Rs 8,000 crore. State-run Oil & Natural Gas Corporation’s Rs 11,000-plus crore FPO is slated to hit the market in June.

UID number could be used for market transactions

2011-12-19T14:28:00.000+05:30

Ashish Rukhaiyar
Mumbai, 12 April 2011

Market intermediaries, who are constantly on the lookout for avenues to reduce overhead and compliance costs, have found a new tool. The Unique Identification number or UID can be used to cut down processes and costs involved in completing the Know Your Customer (KYC) formalities, they say.

A suggestion to this effect has already been made to the Securities and Exchange Board of India (Sebi) through brokerage representative bodies. It is believed the suggestion also has the backing of other market participants, including depositories and stock exchanges.

UID or Aadhaar is a 12-digit unique number that will be allotted to Indian residents. It will eliminate all possibilities of a duplicate number as it will be linked to the individual’s biometrics. Currently, PAN (Permanent Account Number) serves as the identification number in stock market transactions.

Market players are of the view that since the UID process involves basic due diligence while registering the applicant’s details, including identity and address proof, some of the overlapping requirements in the KYC norms can be done away with.

Currently, brokers have to get details such as name, father’s name and date of birth from the individual apart from the prescribed documents for address and identity proof. They also have to conduct in-person verification as part of the KYC norms.

“The regulator has for long been talking about revisiting the KYC norms and the UID could just be the right platform,” said a person privy to the development.

“The suggestions have been made, though it would be a too early to decide on anything as UID allotments are still on,” he added.

This is, however, not the first time that the capital market regulator will evaluate the practical implementation of UID in the securities market. In December last year, Nandan Nilekani, who is heading the UID project, along with other officials had met the entire Sebi brass, including then chairman C B Bhave, and made a presentation on how UID could be incorporated in all market transactions.

Another person who was part of the deliberations said there was a view among market players that overlapping features of the KYC process could be done away with. “The broker can validate the information provided by the client from the UID database,” he said.

As the government has clarified that the UID numbers will be stored in a central database, market players feel it will help the regulator, too, in tracing the audit trails of transactions they find suspicious.

The government, incidentally, has already notified the Aadhaar number can be used as the “officially valid document” to satisfy the KYC norms for opening small bank accounts.

PSU stocks set to yield more amid divestment

2011-12-19T14:26:00.001+05:30

Ashish Rukhaiyar
Mumbai, 6 April 2011

New IPOs and FPOs likely to rub off on already listed PSUs; rally underway.

With the new financial year kicking in and the equity markets showing signs of stability, the government is expected to soon initiate its divestment programme with renewed vigour. Finance Minister Pranab Mukherjee has already pegged the divestment target at Rs 40,000 crore for the current financial year.

Market experts say this could be the right time for investors to look at stocks of public sector undertakings (PSUs) which would rally on the back of the government’s ambitious pipeline. With both initial public offers (IPOs) and follow-on public offers (FPOs) lined up, a positive rub-off effect on already listed PSUs cannot be ruled out, they say.

Interestingly, if the recent data is anything to go by, then the rally in PSU stocks has already begun. In the last one month, when the Sensex gained a little over 6 per cent, there have been many PSU stocks that have outperformed the benchmark index by a wide margin.

Stocks like BPCL, Oil India, Chennai Petroleum, Coal India, BEML, GMDC, HPCL, MTNL, Mangalore Refinery & Petroleum, Neyveli Lignite Corporation, NHPC, NMDC and ONGC all outpaced the benchmark 30-share Sensex. Most of the public sector banks also fared better than the Sensex in the last one month.

The coming months would see the government diluting its stake in big companies including Power Finance Corporation, ONGC, SAIL and Hindustan Copper. The government approval is already in place for these four issuances. Apart from these, reports suggest the government would also off-load a part of its equity in entities such as IOC, National Buildings Construction Corporation, MMTC and Rashtriya Ispat Nigam.

“The pricing is important as investors look at the post-listing gains,” says Mayank Shah, business head, Edelweiss Financial Advisors. “We had a couple of instances last year when the pricing was not good and stocks did not react. There is enough liquidity this time and we are seeing value buying in stocks with the right valuation,” he says.

The performance of the BSE PSU index, however, is almost on a par with that of the benchmark Sensex if one compares the 1-month or 3-month movement. A longer time horizon, however, changes the picture completely with the Sensex outperforming the PSU index by a wide margin. Experts, however, say the index comparison is not the best way to judge the returns of the state-owned companies as the PSU index comprises more than 60 constituents.

A section of analysts also feels that while the new financial year has kicked in, the government will wait for some time before hitting the market with divestment issues.

“It will happen when the markets attain a fair amount of stability, so my sense is the first three months will see some issuances from the private sector space and maybe in the second half of the current calendar year, divestments will start to happen. It (divestment) is positive in terms of direction and speed at which it happens. It is just that the onus is a lot more on the government this time around since it will be really driven by the value at which the issue opens,” says Nikhil Vora, managing director, IDFC Institutional Equities. A lot of divestment that happens from here on will depend on policy decisions, which have been at a standstill, he added.

The recent past has also seen foreign institutional investors (FIIs) taking an aggressively bullish stance on the Indian markets. After remaining net sellers in January and February, FIIs have bought Indian shares worth nearly Rs 6,900 crore.

2011-12-19T14:23:00.001+05:30

Q&A: Pratik Gupta, Deutsche Equities (India)

'Inflation, oil biggest worries for India'
Ashish Rukhaiyar
Mumbai, 5 April 2011

Pratik Gupta, head of equities at Deutsche Equities (India) — ranked second in sales and research in the December 2010 Greeenwich Asia Survey — talks to Ashish Rukhaiyar about the recent trends in equity markets and the outlook. Edited excerpts:

The Reserve Bank of India (RBI) is trying to fight inflation by raising interest rates. What will be the impact on growth and equity markets?
We believe RBI will continue with its gradual approach. We expect increase of another 75 basis points in policy rates. However, with domestic liquidity easing, the impact on lending and deposit rates may not be as much. We expect a modest slowdown in GDP growth to 8.5 per cent in FY12. However, this is when we assume that crude oil prices stay under control, we have a normal monsoon and there are no major external shocks. In such a scenario, we expect the market to do better in the second half, with the May state assembly elections a potential catalyst for further progress in economic reforms and market sentiment.

Global markets have been hit by the crisis in Japan and India has been no different. Are the markets through with the repercussions?
India has not been affected much by the crisis in Japan. However, if the radiation leak leads to a bigger disaster, it will once again affect the risk appetite and emerging-market equities, including India.

Are institutional investors worried about the recent political developments, including the spate of corruption-related issues that hit the market in quick succession?
On the domestic front, the biggest worry concerns inflation (mainly, energy and food) and political developments. Some investors are worried if these would lead to political unstability and affect decision-making. In general, the biggest worry has been the uncertainty over oil and the impact it will have on inflation and therefore, on interest rates and the overall growth of the economy.

What is the range of crude price India will be comfortable with?
In our view, we can just about manage with the current level of crude price, which is around $100-$110/bbl. Anything beyond that will start hurting the economy badly — both in terms of inflation and subsidy burden — and hence, interest rates and growth rates.

In your strategy report, you talk about a lot of short-term headwinds apart from crude.
Crude is clearly the biggest one, the second being the policy inertia which has been going on for the last few months. Another concern we are beginning to hear from investors — though a bit premature — is the risk of a poor monsoon, especially as it would exacerbate the problem of inflation if we were to face crop failure this year. The third is regarding the flows from emerging markets to the developed ones — “is the market rally of the last few days a short-term blip or would we see FII flows going out again?” In our view, April/May will prove to be an inflection point for the equity market as these concerns get digested and/or are addressed. Investors need to get ready for a potential 2H rally in that case.

How have the macro factors changed over the last year? Your latest India strategy report is quite similar to last year’s, which talked of short-term headwinds and strong long-term prospects.
With no India-specific negative factors, last year was perfect. Global flows were supportive towards emerging markets, India, in particular. This year, we do have some India-specific factors. While high oil prices affect everybody, India is disproportionately impacted. Countries like Korea, Japan or China will not be as badly impacted as India. We import 70 per cent of our oil requirements. Thus, oil is something that wasn’t there last year. Second, we saw a reversal of foreign flows from emerging markets to developed ones this year. In contrast, India was the biggest recipient of foreign inflows last year. Also, the earnings growth seemed quite good last year, as against the relatively weaker outlook for FY12.

MFs expect more sympathy from new Sebi chairman

2011-12-19T14:20:00.001+05:30

Ashish Rukhaiyar & Chandan Kishore Kant,
Mumbai, 5 April 2011

The mutual fund industry has reason to hope for some relief soon from the various strict guidelines of the Securities and Exchange Board of India (Sebi).

U K Sinha, the new Sebi chairman had, in an interaction with its MF division, made his view clear on the need for some moves to spur overall development for the sector, persons familiar with the development said.

Relaxations related to caps on the usage of funds or even a reduction in regulatory or compliance costs could be announced soon. Officials have been told to look at areas where the costs of asset management companies (AMCs) can be lowered, without diluting prudency norms for safeguarding the interest of investors.

This would be welcomed by the MF industry. It has been keeping its fingers crossed since Sinha assumed office in mid-February. He is aware of the nuances in operating an AMC, having managed Rs 65,000 crore worth of assets under management (AUM) of UTI Mutual Fund as its chairman and managing director. He was also chairman of the Association of Mutual Funds in India (Amfi), the umbrella body of 40-odd fund houses.

“Increasingly, we are getting a hint that whatever regulation had to be done has been done. Now, Sebi is focusing on development of the mutual fund industry,” said the chief marketing officer of a domestic AMC with assets of well over Rs 40,000 crore.

WHAT TO DO
Amfi has also planned to take up this issue with the regulator. “We will go and meet the Sebi chairman in the first week of April,” says H N Sinor, chief executive officer. “At the moment, he (Sinha) is reviewing what things are there internally. We cannot expect a series of measures from his side, as he is settling down. How to grow the market is the key focus now. By and large, the regulation part has been taken care of.”

Industry players, interestingly, feel the regulator should reward performance. They feel if the fund management fee could be linked to performance of the fund, then it would make managers work harder.

“Internationally, it is an established practice but in India, the industry cannot charge such fees from investors. Fund houses have internally thought about this but the regulator has some issues with it. If the regulator comes up with this kind of change, it would help industry grow and will also be good for the investors,” said Sinor.

Another fund manager, speaking on condition of anonymity, said the regulator should look at doing away with caps or limits that, at times, hamper the growth of innovative products. “For instance, the regulator has put caps on derivatives-based products. If these caps are removed, I believe industry can function aggressively, which will help us grow and develop the industry further,” he says.

It is believed that Sebi is also revisiting the KYC (Know Your Customer) regulatory norms that must be met before a person can start trading in MFs. Industry players feel there is still a lot of room to rationalise the costs involved in following the KYC norms.

Early this month, the regulator clarified on how AMCs could utilise the money in the load account. The balance can now be used by the fund houses for marketing and selling expenses, including distributor and agent commissions. There is a catch, however. “Not more than one-third of load balance as on July 31, 2009, shall be used in any financial year, including the current financial year,” said the Sebi note.

FIIs fancy India again

2011-12-19T14:16:00.002+05:30

Mehul Shah & Ashish Rukhaiyar
Mumbai, 23 March

After huge net Jan-Feb outflows, this month has seen second-highest flows into India among Asian markets. Foreign institutional investors (FIIs), bearish till recently on the Indian equity market, seem to be having a change of heart.

After selling Indian shares in the first two months of the current calendar year, the post-Budget period has seen them turn positive. Till date this month, India has seen the second-highest FII inflow among leading Asian markets for which data is available, after Japan.

Attractive valuations after the recent correction, impressive domestic growth potential, enhanced policy clarity and a robust long-term story seem to have turned the tide in India’s favour, say market players. Data available with the Securities and Exchange Board of India (Sebi) show that post-Budget, the direction of FII flows shifted.

Foreign investors put in $304.6 million (Rs 1,370 crore) in March. This comes after net outflows of more than $2 billion (Rs 9,000 crore) in January and February. Some of the biggest participants from abroad on the street — Deutsche, Morgan Stanley, Citi — have all sounded optimistic in their recent India strategy reports.

“While we remain cognizant of the escalating tensions in the MENA (Middle East and North Africa) region, inflating oil prices and a potential worsening of the post-earthquake nuclear crisis in Japan, we believe that many of the India-specific macro risks (slowing industrial momentum, sharp rise in current account deficit, worries of escalated FII outflows and policy inertia) which drove the first bout of sharp underperformance since January are now either well discounted or abating,” said Abhay Laijawala and Abhishek Saraf, strategists at Deutsche Bank, in a note to clients.

According to Bloomberg data, only Japan has been able to attract higher FII flows ($2.2 bn) in March when compared to India. South Korea has registered a net outflow of $1.33 bn. Taiwan and Indonesia have seen $1.9 bn and $561 million, respectively, being taken out in March. The data for China was not available.

“We see upsides on the market from here and a more aggressive portfolio/market mix, moderately better macro, slightly higher valuations and a largecap over midcap bias,” said Aditya Narain of Citi, in a client note of March 18. Citi has a December 2011 Sensex target of 22,000.

Similarly, on March 15, Ridham Desai of Morgan Stanley, said: “From a pure India perspective (not taking into account relative dynamics), Indian equities look attractive and seem to be priced and positioned for a lot of the negatives on the horizon.”

With the exception of oil prices and a potential runaway increase in already elevated commodity prices, Deutsche Bank strategists expect to see a slow but certain recovering in the domestic macro situation heading into the second half of calendar year 2011. “Our view is that investors must begin to position portfolios for a steady market recovery,” they say.

Performance may get Sebi retirees an extension

2011-12-19T14:14:00.001+05:30

Ashish Rukhaiyar
Mumbai, 11 March

Bureaucrats and capital market veterans wanting to become whole-time members of the Securities and Exchange Board of India (Sebi) might have to wait longer than expected. While there are still some months left before two of the three members retire, the industry is already abuzz with talk that they might get an extension.

The three-year term of two whole-time members, M S Sahoo and K M Abraham, will end this July. Both were appointed by the Central government in 2008. While the appointment is for three years, the government can give an extension.

According to sources, the ministry of finance is satisfied with Sebi’s functioning in the past two years, and is not in a mood to revamp the brass in one go. U K Sinha was appointed chairman only last month and it is believed two new members in such a situation isn’t desirable.

Things will be cleared by the end of this month, as the selection process, if initiated, has to be begin three to four months before a term ends. The selection process of a whole-time member is similar to that of a chairman, with the final nod coming from a Cabinet committee.

“If one looks at the last few years, Sebi has come out with some of the biggest orders against high-flying corporate entities,” said a person on condition of anonymity. “It is widely said that the quality of Sebi orders and investigations has improved after Sahoo and Abraham came on board. Also, some of the initiatives taken to improve market efficiency have not gone unnoticed.”

Sahoo is in overall charge of derivatives and new products, legal affairs, enforcement and regulation, and supervision of market intermediaries. He shares a rapport with Sinha, having worked together at the finance ministry. Abraham handles corporate finance, investigations, vigilance and integrated surveillance, among other things. The third member, Prashant Saran, assumed office in May 2009.

The work done by the two members has definitely caught the attention of bureaucratic circles of Delhi. According to a person privy to the developments, at a recent conclave of bureaucrats, some actions of the Sebi members were discussed with great appreciation.

“The conclave was attended by over 20 IAS (Indian Administrative Services) officers of joint secretary and director level. Everyone kept talking about Sebi’s good work in the last couple of years. The sense that one got was that the two members would get an extension, though there are many eyeing that position,” said this person, who attended the conclave.

Interestingly, G Anantharaman is the only former whole-time member who has the distinction of spending more than three years at Sebi, having worked with the regulator from December 2004 to March 2008. He was appreciated for his investigations and orders related to disgorgement and the IPO irregularities scam.

Sebi's stricture stumps broking community

2011-03-09T19:25:00.000+05:30

Joydeep Ghosh & Ashish Rukhaiyar
Mumbai March 09, 2011

The Securities and Exchange Board of India’s (Sebi) letter to lead managers to stop enlisting 10 broking houses for future public issues has stumped the broking community.

Sebi’s February letter to six lead managers said the broking houses — referred as sub-syndicate members — which were unable to compensate investors who had not received Coal India shares despite legitimate bidding should not be enlisted for forthcoming public issues, till the matter is resolved.

The Rs 15,200-crore initial public offering (IPO) of Coal India (CIL) was managed by six investment bankers — Citigroup, Deutsche Equities, DSP Merrill Lynch, Enam Securities, Kotak Mahindra Capital and Morgan Stanley India.

Yesterday, the lead managers met Sebi officials to raise important issues on how to resolve this deadlock. With just about a month to go before ONGC’s IPOs of around Rs 14,000 crore is supposed to hit the market, top brokers obviously want things to be resolved fast.

Over 10,000 investors were unable to participate in the CIL issue in spite of submitting legitimate forms. Brokers blamed it on technical glitches, but Sebi has asked them to compensate the investors. According to industry officials, average amount per investor could be Rs 12,000 to 15,000, depending on the application size. That is, 10 top brokers have to pay a compensation of Rs 10-15 crore.

The amount per se is not an issue. But paying all consumers is. “We have been working on this for the last two months and paid 50 per cent of the investors. But there are some issues that we are trying to resolve through the lead managers with the market regulators,” said the president of a leading broking house.

One of the main problem is that though applications might be from one broker, the investor might have submitted with another. “According to Sebi mandate, I need to compensate such investors as well. I am willing to pay customers where I have defaulted, but how can I pay others who have my form but have deposited it with another broker,” said another head of a broking house. Consequently, many have approached the investors but making payment, according to an acknowledgement slip.

Another issue causing worry is that this compensation for default does not have a precedent. Sebi’s order comes despite a disclaimer in the offer document which says “neither our company, the selling shareholder nor any member of the syndicate is liable to the bidders for any failure in downloading the bids due to faults in any software/hardware system or otherwise.”

Investment banks and broking houses feel such compensation policies will hurt the industry in future. Most retail investors come in with applications at the last moment after taking into account the institutional investor’s response to the issue.

“When applications are being uploaded till 12-1 in the night, there could be genuine mistakes,” said IPO head of an investment bank. Some investment bankers felt this issue could be resolved in 10-15 days. “We have been working on a war footing for sometime. But it is difficult to achieve 100 per cent success,” said the president of a broking house.

Tech solution
Sebi is in the process of modifying the online bidding mechanism that would reduce instances of brokers unable to upload bid details. Stock exchanges will soon provide stock brokers with an access to the online ASBA (Application Supported by Blocked Amount) mechanism wherein brokers will be able to key in the important details of the applicant including, demat account number, bank account number (where money will remain blocked) and the bid details.

Thereafter, banks that have access to the system will verify the account details and block the amount. This, according to market players, will drastically reduce the workload on syndicate members. Currently, all that a broker can do is collect ASBA form from the investor and deposit it physically at the bank where the investor has his account.

Sebi to review SME norms

2011-03-09T19:24:00.000+05:30

Ashish Rukhaiyar
Mumbai March 2, 2011
Investment bankers express concern over market making, trading lot size.

In a clear indication that the Securities and Exchange Board of India (Sebi) wants to launch a separate trading platform for small and medium enterprises (SMEs) as early as possible, the regulator has decided to meet investment bankers to address some of the areas of concern.

It is believed Sebi will tweak some of the guidelines notified for the SME platform to make the segment attractive, especially in the initial period. The regulator is also looking at introducing 15-minute call auction windows at regular intervals through the trading session.

According to persons familiar with the development, the bankers have expressed apprehensions over two key features of regulatory guidelines — compulsory market making for three years and a minimum trading lot size of Rs 100,000. Investment bankers want the regulator to bring down both.

Incidentally, bankers have already discussed these issues with stock exchange representatives in a series of recent meetings.

“We discussed our issues with exchange officials, who have forwarded them to the regulator,” said an investment banker who was part of the discussions. “While there are practical difficulties in three years of market making, a minimum trading lot size of Rs 100,000 will put most of the retail investors out of this segment. This will impact liquidity,” he explained on condition of anonymity.

Representatives of the umbrella body of investment bankers — Association of Merchant Bankers of India (AMBI) — were also part of the discussions.

Another person privy to the developments said while there are some other minor concern areas too, market making has emerged as the key issue.

“There are various views on the role of stock exchanges to popularise this whole new segment,” said a person who wished not to be named. “Enough information needs to be disseminated through their respective websites. Everything else, however, has been dwarfed by the discussions related to market making and (trading) lot size,” he added.

A separate trading platform for SMEs has been on the radar for long, with the initial draft regulations announced in November 2009. The norms were later notified by the regulator in May 2010. The regulator has fixed an after-issue upper limit of Rs 25 crore capital at face value for a company that intends to list in the segment. If a company’s after-issue face value capital is less than Rs 25 crore, a further issue of shares will be allowed, provided the new capital does not exceed Rs 25 crore.

Further, companies listed in the segment will be compulsorily shifted to the main board of the exchange after exceeding the Rs 25-crore after-issue paid-up capital limit. While the issue also needs to be 100 per cent underwritten, investment bankers will have to underwrite 15 per cent of the issue in their own account. Bankers who have the responsibility of market making may be represented on the board of the company, subject to an agreement with the issuer.

I-bankers fret as Sebi tells them to reveal track record

2011-03-09T19:21:00.000+05:30

Ashish Rukhaiyar
Mumbai February 25, 2011

Investment bankers are disturbed at a discussion paper circulated by the capital markets regulator last year, requiring them to disclose their past track record when they set about a fresh offer document.

Track record in this context is traditionally understood to mean not only the company and its issue size handled in the past by a banking entity, but also the movement of its shares. Investment bankers see no good reason why they should be held responsible for the share price movement after listing. They intend to meet the Securities and Exchange Board of India (Sebi) to discuss this.

“It is proposed that all merchant bankers be directed to disclose the track record,” Sebi said in a discussion paper circulated around November. Sebi feels the record of the investment banker managing the issue would be a good barometer for making investment decisions. The regulator said the disclosure should be made available in the offer document and also on the website of the investment banker. In recent weeks, investment bankers have had a series of meetings on this issue and voiced concern among themselves.

The Association of Merchant Bankers of India (Ambi), their umbrella body, has decided to take up this matter with the regulator.

Indicating what?
Bankers, on condition of anonymity, say while their record would typically be judged in terms of returns generated by the companies that they had taken public, this is not such a simple matter. “One cannot get the correct picture by looking at the issue price and the current market price in isolation,” says the director of an investment banking entity. “How will one judge the returns if the stock doubled after listing and then dropped below the issue price? If one looks at the high, then the issue can be termed good. But the fall thereafter makes it a bad one,” says this banker, also an active member of Ambi.

They note that companies, once listed, are not required to discuss business decisions with their investment bankers. In such a scenario, the performance of the bankers should not be correlated to the stock price.

“I do not agree with this concept, as investment bankers cannot be held responsible for share price movement post-listing,” says Prithvi Haldea of Prime Database. “There are a lot of external factors like decisions taken by the promoters or management, market conditions, sector outlook. A company is under no obligation to consult bankers on decisions that can impact the share price. But, yes, the bankers should be pulled up for wrong disclosures,” says this former member of Sebi’s Primary Market Advisory Committee.

“There is nothing inherently wrong with the company but still the stock could be in doldrums on account of overall negative sentiment in the market. How does one judge performance in such a scenario?” asks another investment banker specialising in mid-sized issues. Investors take a decision based on the company and its outlook and not on the basis of the investment banker, he adds.

Concerns such as these have made bankers apprehensive about this disclosure. They feel if the regulator still wishes to proceed, other checks and balances are needed. Stock returns cannot be the only barometer, they say.

Sebi looks at cash settlement in IRF

2011-03-09T19:20:00.001+05:30

Ashish Rukhaiyar
Mumbai February 18, 2011

Sebi-RBI committee looking at ways to boost dwindling volume.

As part of efforts to boost volumes in exchange-traded interest rate futures (IRF), the Securities and Exchange Board of India (Sebi) is evaluating the option of introducing cash settlement in the segment. If approved, it could come as a shot in the arm for the niche market that has been witnessing almost nil volumes for months.

IRF is an exchange-traded derivatives product for hedging interest rate risks. Only the National Stock Exchange (NSE) offers IRFs, which were launched for the first time in 2003.

According to people familiar with the development, the joint technical committee reviewing the guidelines and contract specifications for IRFs is looking at cash settlement as one of the ways to attract more market participants. The committee comprises representatives of Sebi and the Reserve Bank of India (RBI).

“It is believed that the uncertainty over liquidity of the underlying bond is acting as the biggest deterrent for the growth of the IRF market,” said a person privy to the developments. “If cash settlement is allowed, concerns related to dumping of illiquid bonds can be addressed,” he added.

He, however, clarified that nothing had been finalised yet and the technical committee could look at tweaking other features of the segment without switching to cash settlement.

At present, participants can settle contracts with delivery of government (GoI) securities with a tenor between nine and 12 years. The tenor of deliverable grade securities has been fixed between 7.5 years and 15 years.

IRFs are based on a notional 10-year GoI bond, bearing a notional seven per cent interest rate, payable half-yearly. They were launched for the second time in September 2009. But volumes are still negligible. On most days in the recent past, only a single token trade has been executed on NSE.

Incidentally, the regulator has been trying hard to make the IRF segment more market friendly. Another idea that is being discussed is the concept of banks performing the role of market makers to enhance liquidity. Banks are the biggest players in the IRF market and any initiative taken by them is expected to lead to an exponential rise in volumes. Globally, IRF is a huge market with volumes running into trillions of dollars.

With U K Sinha, the new chairman of Sebi assuming office from Friday (February 18), it is expected that the revised guidelines for IRFs will be unveiled soon.

Take 2: Impartiality will be C B Bhave's legacy

2011-03-09T19:18:00.000+05:30

Ashish Rukhaiyar
Mumbai February 15, 2011

Chandrasekhar Bhaskar Bhave has always tried to avoid controversy, but that’s something that has followed him like a shadow in the last three years of his professional career. So, as he hangs up his boots as chairman of the Securities & Exchange Board of India (Sebi) on Thursday, he will see ‘controversy’ as a common thread running through his tenure.

Eyebrows were raised when he was moved from the National Securities Depository Ltd (NSDL) to head Sebi. Reason: NSDL was involved in a legal battle with Sebi itself. Although he recused himself from the proceedings, there was a fair amount of flak when Sebi decided to quash the NSDL committee report.

In the last few of months of his tenure, he took on powerful corporate houses – served a second showcause notice on Mukesh Ambani’s Reliance Industries; investigated the Anil Ambani group and gave it a consent order at Rs 50 crore; refused to give permission to Jignesh Shah’s MCX-SX to operate (the matter is in the Bombay High Court). Besides, he consistently made fund raising difficult for Subroto Roy’s Sahara Group.

He courted controversy also when he banned entry load on mutual funds, and took on the Insurance Regulatory and Development Authority (Irda) over unit-linked insurance plans (Ulips). The result: Ulips have become much cheaper. Also, crores of investor money has been saved by the ban on entry load.(Click for table & graph)

Sebi also had a run-in with the Forward Markets Commission (FMC) when it allowed the national Stock Exchange (NSE) to launch futures on gold exchange traded funds (ETFs). FMC managed to stay the launch of the gold-linked product.

Interestingly, during his tenure, the stock market went through an entire cycle. That is, when he took over in February 2008, the Bombay Stock Exchange’s benchmark Sensitive Index, or Sensex, was hovering around 18,000. It is at the same level now. There was a sharp dip to 8,000 and spike to 21,000 over the period.

Given the high volatility, the share of retail investors has fallen sharply during his tenure. In the last three years, their share in total market capitalisation has declined. Even the mid-cap segment, where retail investors’ participation has been traditionally higher, is down 14 per cent. (See table on market performance during his tenure).

But, it was not due to lack of effort from Sebi. The investment limit for retail investors was doubled – from Rs 1 lakh to Rs 2 lakh, application supported by blocked amounts (Asba) was introduced, listing time of initial public offers (IPOs) was reduced, and 100 per cent payment for institutional investors at the time of investing in an IPO was allowed. Despite these measures, investors shied away from the market because of heavy losses incurred in the IPOs after listing.

Among other measures, he extended the validity of the Sebi observation letter to one year, from the three months earlier, thereby giving companies more time to launch IPOs. He also gave companies the flexibility to announce the price band two days before the opening of an issue.

The concept of anchor investors was introduced for public issues. He also fulfilled a long-standing demand of the market by approving physical settlement in the equity derivatives segment. The agenda papers of Sebi board meetings were also made available on the website.

At a time when over-the-counter currency derivatives market commanded a volume in excess of $15 billion, Sebi decided to launch those on the exchange platform, providing transparent pricing and zero counter-party risk. Market participants instantly embraced the new instrument.

Sebi then moved a step forward by allowing futures contracts in euro, yen and pound sterling. The regulator finally topped it by allowing rupee-dollar options. Bhave also tried to infuse fresh life into exchange-traded interest rate futures (IRFs), but failed.

Unfinished agenda
The MCX-SX matter is still pending in the Bombay High Court. It will be interesting to see if there will be any change in the regulator’s stand after the new chairman takes over. The ongoing legal tussle has been marked with allegations against Bhave and some other Sebi officials for favouring NSE.

While Bhave did constitute a panel under former presiding officer of Securities Appellate Tribunal, C Achuthan, to overhaul the country’s takeover regulations, the final decision is yet to be taken. The panel, formed in September 2009, submitted its report in July 2010. The Sebi board has deliberated on the issue in the last two meetings, but chose not to take a decision. Apparently, the government is yet to decide on some of the recommendations proposed by the Achuthan Committee.

Newsmaker: U K Sinha

2011-03-09T19:16:00.002+05:30

Ashish Rukhaiyar
February 4, 2011

The market regulator's new asset

A few months ago at a glittering mutual fund awards night, the chief executive of an asset management company was asked where he likes to go on vacation. The compere expected an exotic destination like Montreux or Tuscany. Pat came the reply: “My hometown in Bihar”. The answer was classic Upendra Kumar Sinha — simple and forthright. And, yes, he was on the dais to accept one of the many awards on behalf of UTI Mutual Fund.

Sinha is set to don a new hat. Come February 18, he will succeed C B Bhave as the new chairman of the Securities & Exchange Board of India (Sebi). His new office will be only a block away from his current one in Mumbai’s Bandra-Kurla Complex, but the added powers will bring more responsibilities, too.

Even before the 59-year-old industry veteran occupies the spacious eighth-floor room in Sebi’s headquarters, which offers a commanding view of the commercial hub, there is enough speculation about the stance he will take on sensitive matters like an entry-load ban on mutual funds, overhauling of regulations governing corporate takeovers and foreign institutional investors (FIIs), and ownership issues related to stock exchanges.

The disciplined Sinha, however, is not one to be swayed by biased opinions. The 1976-batch IAS officer has seen it all during his stints with the finance ministry, first as joint secretary in the banking division and later with the economic affairs division. People who know Sinha are not surprised when the government entrusts him with vital jobs related to financial markets.

“He has many qualities that will make him an asset to any institution,” says an industry veteran, who has worked with Sinha on a committee on securitisation of bonds. “He is a good listener, thinks logically and does his homework before entering any meeting. As a result, one finds it almost impossible to negate his views. And the biggest plus point is that even the government has faith in him,” he says, requesting not to be named.

The Bihar cadre bureaucrat, who has a degree in law and a master’s degree in physics, may well be a part of the mutual fund industry that has been in perpetual cribbing mode ever since entry loads were banned in 2009. But he is definitely not one among the CEOs sticking their necks out to enhance assets under management. Sinha, however, was one of the most vocal critics when Sebi barred fund houses from charging an entry load.

At a time when most fund houses found innovative ways to attract corporate money to top the monthly charts, Sinha’s UTI MF joined hands with the Bihar government to launch Mukhyamantri Kanya Suraksha Yojana to ensure education for girls. The scheme envisages developing 250 schools exclusively for them. It did not lead to a quantum jump in the assets of UTI MF, but it did work towards the aim for which mutual funds were created in the first place.

Sinha is also credited with the launch of a micro-pension scheme, targeted at low-income groups, which is believed to have attracted more than 2 lakh investors. The scheme has people from the lowest strata of society, including railway porters and dairy farm workers.

At Sebi, Sinha’s working style is not expected to be drastically different from that of Bhave, as both are known to be well versed in the workings of the market and are open to new ideas. While investors will not complain, television journalists tracking Sebi may find the going a bit difficult. Unlike his predecessor, Sinha — he is interested in Urdu poetry, especially the works of Ghalib — is not known to give exciting sound bites that can be played over and over again.

Sebi mulls call auction for SME bourse

2011-03-09T19:14:00.000+05:30

Ashish Rukhaiyar
Mumbai February 3, 2011

After introducing the call auction mechanism in Sensex and Nifty stocks, the Securities and Exchange Board of India (Sebi) is mulling extending this to the proposed platform for small and medium enterprises (SMEs), although with a few changes. The regulator believes the mechanism will help in price discovery of stocks, especially those that are not much in demand.

People familiar with the development say Sebi is toying with the idea of introducing 15-minute call auction windows at regular intervals. It has proposed this in its discussions with exchanges and other market participants.

Under the mechanism, buy and sell orders are collected over a fixed period and then processed in an auction. The price at which the highest number of orders is placed is chosen. In other words, buy/sell orders are not executed immediately.

“It is believed the (call) auction mechanism will help create liquidity in the SME market, as there could be many stocks for which buy/sell orders are not in large numbers,” said a person privy to the discussions. “The SME platform is different from the main market and one auction session will not suffice. Hence, the idea is to have 15-minute windows throughout the trading session,” he added.

Susan Thomas of Indira Gandhi Institute of Development Research, in a research paper titled, “Call auction: A solution to some difficulties in Indian finance”, said, “Call auction can help deal with issues such as market opening, market closing, extreme news events and can be potentially beneficial for illiquid securities, including bonds.”

The concept is not new to India. Stock exchanges introduced a 15-minute pre-opening call auction session for Sensex and Nifty stocks in October 2010. While the first eight minutes are reserved for order entry, modification and cancellation, the next four minutes are for order matching and trade confirmation. The remaining three minutes is the buffer period to facilitate the transition to the normal market.

Sebi announced the draft guidelines for the SME platform in late 2009. The guidelines called for merchant bankers to perform market-making activities for three years. They also did away with the process of vetting offer documents for listing on the SME segment.

Hence, an investment banker would be responsible for due diligence and filing the prospectus with the market regulator and the exchange. An upper limit of Rs 25 crore paid-up capital has been fixed for a company to list on the segment. The companies will be shifted to the main exchange if they cross the limit. SMEs would be required to submit financial numbers on a half-yearly basis. The minimum IPO size has been pegged at Rs 1 lakh.

Sebi collects over Rs 150 cr through consent orders

2011-03-09T19:13:00.000+05:30

Ashish Rukhaiyar
Mumbai February 1, 2011

Nearly 1,000 cases settled; Rs 29 cr recovered as disgorgement fee.

The consent order mechanism has proved to be an effective weapon for the Securities and Exchange Board of India (Sebi), helping the regulator settle nearly 1,000 cases and collect more than Rs 150 crore as settlement charges.

The recent high-profile regulatory action against Anil Ambani-controlled Reliance Infrastructure (R-Infra) and Reliance Natural Resources (RNRL) has, once again, brought to the fore the importance of the mechanism, introduced in 2007.

Consent order means an order that settles administrative or civil proceedings against an entity that may, prima facie, be found to have violated securities laws. This reduces regulatory costs and saves the time and effort spent on pursuing enforcement actions. The US Securities and Exchange Commission settles more than 90 per cent administrative/civil cases through consent orders.

Data with Sebi show that a large number of market entities facing regulatory action, including prosecution and adjudication, opt for the consent route to end the ordeal that, at times, can continue for years. Until December 31, 2010, Sebi had received 2,220 applications, of which 1,023 were approved by the high-powered advisory committee. Of these, 982 cases have been settled.

Consent orders have helped the regulator extract more than Rs 150 crore (including Rs 50 crore from Anil Ambani and five other executives of R-Infra and RNRL) as settlement charges. This money goes directly to the Consolidated Fund of India.

Sebi has also been able to collect nearly Rs 29 crore as disgorgement amount from those named in the IPO (initial public offer) scam. The amount collected has been distributed to the victims of the scam. Sebi has also garnered a little over Rs 1 crore for itself in the form of legal and administrative charges.

Experts say the consent route helps the regulator overcome the long-drawn process involving the regulator, the appellate tribunal and the judiciary.

“The consent mechanism enables Sebi to extract punishment without actual proof of wrongdoing, short-circuiting a decade-long process to a few weeks,” says Sandeep Parekh, founder, Finsec Law Advisors. “Also, as Sebi can (and does) impose a higher quantum of settlement fee and disgorgement, in exchange for a ‘without admitting or denying guilt’ plea, it allows effective payment to the victims of the harm done,” adds Parekh, who has earlier served as executive director (legal) at Sebi.

The acceptance of consent orders can be gauged from the fact that entities file consent applications even after their cases have moved to the Securities Appellate Tribunal or the high courts. The consent terms in such cases, technically known as ‘compounding’, have to be approved by the respective authorities looking into the cases. Nearly 70 such cases have been disposed by Sebi.

Lawyers, however, say the regulator should be more forthcoming with details in the order, which often leaves a lot of questions unanswered. A common criticism is that the accused entities are allowed to escape with a monetary penalty or disciplinary action that does not justify the nature of the offence.

“An area where the process can be reformed is details in the consent order,” said a lawyer specialising in securities law. “Ideally, the order should contain more details of the charges, so that people are not under the impression that a person got away lightly,” he said.

Sebi board to skip Jalan report

2011-03-09T19:12:00.001+05:30

Ashish Rukhaiyar
Mumbai January 31, 2011

Final decision on Takeover Code unlikely at Feb 7 meet.

The Bimal Jalan Committee report will have to wait for some time to get the regulatory nod. The board of the Securities and Exchange Board of India (Sebi), scheduled to meet on February 7, has not included it in the agenda. While the Takeover Code will be the highlight of the board meet, a final decision is unlikely due to the finance ministry’s reservations over certain issues.

According to people familiar with the development, Sebi officials need more time to deliberate on the recommendations of the committee, formed to review the ownership and governance of market infrastructure institutions (MIIs), including stock exchanges, depositories and clearing corporations.

“There are certain issues (in the Jalan report) on which consensus has not been reached and some more time is required for discussions,” said a person privy to the developments. “It will be placed before the board only after the regulator is through with its own share of deliberations,” he added on condition of anonymity. This will also be the last board meeting for chairman C B Bhave if he does not get an extension. His three-year term ends on February 17.

The Jalan report, among other things, has recommended capping profits of MIIs, allowing only banks and public financial institutions as anchor investors and not allowing these institutions to list. Ever since the report has been made public, there has been a lot of diverse feedback from industry participants, with many opposing most of the recommendations.

Meanwhile, the Sebi board will take up the pending Takeover Code, discussions on which remained “inconclusive” during the last board meet held on October 25, 2010. People familiar with the development, however, say a final decision will probably not be taken as the finance ministry is yet to take a final call on issues such as the quantum of the open offer, etc.

The Achuthan committee, which has framed the proposed regulations, has said the acquirer should make an open offer for all the remaining shares, as against the current practice of 20 per cent.

Early this month, Sebi whole-time member K M Abraham had said on the sidelines of a conference that a final decision on the code would take more time. “It will probably take one or two more board meetings to arrive at a decision,” he had said, while refusing to give a specific timeline.

Reports suggest the regulator will also discuss the issue of further reduction in the timeline for initial public offers (IPOs) from the current 12 days to seven days and the framework for the rights issues of Indian depository receipts. Bhave, incidentally, has reiterated his aim of cutting the IPO timeline to one week on several occasions during his tenure.

Sebi to soon release guidelines for trade in foreign indices

2011-03-09T19:09:00.000+05:30

Ashish Rukhaiyar
Mumbai January 11, 2011

The regulator may mandate a minimum market capitalisation of $100 billion.

The Securities and Exchange Board of India (Sebi) will soon come out with a regulatory framework for allowing Indian stock exchanges to launch derivatives based on indices abroad. Sebi will lay down the finer contours related to market capitalisation, number of stocks in the indices and their weights.

According to people familiar with the matter, the regulator wants stock exchanges to introduce derivatives only in indices that have a minimum market capitalisation of $100 billion and are broad-based. In other words, Sebi plans to put in place comprehensive norms that will serve as the base for all future alliances between Indian and foreign exchanges.

“The complete framework has been decided and will be announced soon,” said a person privy to the development, on condition of anonymity. “While it (overseas index) should have a minimum m-cap (market capitalisation) of $100 bn, there should be at least 10 stocks in the index. Further, most of the stocks should have substantial weights in the index.”

This will be important step, as Indian stock exchanges are trying hard to bring home some of the leading overseas indices, to garner higher market share. Globally, some of the biggest bourses like the Chicago Mercantile Exchange (CME) and the Singapore Stock Exchange (SGX) offer trading in a number of foreign indices.

Flurry likely
Industry players believe exchanges will be quick in launching futures contracts based on foreign indices once the norms are notified. It is almost an year since the National Stock Exchange (NSE) entered into cross-listing arrangements with CME and the London Stock Exchange (LSE). The norms will provide investors an opportunity to place bets on markets like the US and the UK.

Under the arrangement with CME, NSE has exclusive rights for trading in the S&P 500 and the Dow Jones Industrial Average rupee-denominated futures contracts for trading in India.

This is being made available to NSE via sub-licences from the CME Group, Standard & Poor’s and Dow Jones, respectively.

NSE has also signed a letter of intent with the LSE for getting the FTSE 100 in India. “As part of the letter (of intent), both exchanges declared their intent to explore the feasibility of an agreement whereby FTSE Group may licence the FTSE 100 Index to the NSE, and whereby the NSE may licence the S&P CNX Nifty to London Stock Exchange Group for the purpose of issuing and trading options and other index contracts,” says the NSE release dated July 28.

Incidentally, the market capitalisation of S&P 500 is a whopping 11.83 trillion, according to data available on Bloomberg. Similarly, DJIA commands a market capitalisation of $3.71 trillion. The London-based FTSE 100 also features among the world’s largest indices, with market capitalisation of $2.58 trillion.

MCX Stock Exchange (MCX-SX) has also entered into a tie-up with FTSE to facilitate creation of international investment products, including international FTSE indices, to be listed and traded on MCX-SX. It is, however, currently in a state of flux, as its equity segment is yet not operational.

Sebi revisits interest rate futures norms to enhance volumes

2011-03-09T19:08:00.000+05:30

Ashish Rukhaiyar
Mumbai January 7, 2011

Wants banks to perform the role of market makers to boost investor participation.

The Securities and Exchange Board of India (Sebi) will soon unveil amendments in guidelines governing interest rate futures (IRF), which have seen close to nil volume. According to people familiar with the development, the regulator wants banks to perform the role of market makers to enhance liquidity and investor participation.

Interest rate futures is an exchange-traded derivative instrument for hedging against interest rate risk. Only the National Stock Exchange (NSE) offers trading in IRFs, launched for the first time in 2003. IRFs are based on a notional 10-year government (GOI) bond, bearing a notional seven per cent interest rate coupon, payable half-yearly.

“The regulator wants banks to act as market makers, as they are the biggest players in the IRF space,” said a person familiar with the development. “Market making is a tried and tested method and is likely to boost IRF volumes. It will, however, be a part of a regulatory overhaul, as the current mechanism has certainly not worked,” he said, on condition of anonymity.

A committee is framing the new IRF guidelines and contract specifications. It has representation from Sebi and the Reserve Bank of India. It is believed the new guidelines will be announced after the new chairman takes over in February.

The IRF market has proved a tough nut to crack for regulators. It was launched for the second time in September 2009, but volumes are still the biggest concern. On most days in the recent past, only a single token trade has been executed on NSE.

Market players feel market making isn’t enough and many issues will have to be revisited. A large section has been demanding cash settlement.

“Market making works in a ‘driven’ market and is not order-driven,” says Jayesh Mehta, MD & country treasurer, global markets group, Bank of America. “Today the underlying bonds itself are not trading enough and in a basket of deliverables, where the price is determined by formula, it is fine when all bonds are trading. Today, the buyer does not know what will get delivered and since these bonds don’t trade, theoretical pricing would be way different from the actual price. The solution is to move to single securities contract.”

It is widely believed the uncertainty over liquidity of the underlying bond is holding back players. There are concerns that one can just dump the illiquid bonds at the time of settlement.

The current regulatory framework allows participants to settle the contracts with delivery of GOI securities with a tenor between nine and 12 years. The tenor of deliverable grade securities was fixed between 7.5 years and 15 years at the time of the launch of the segment.

Sebi ban cleans up FII space

2011-03-09T19:06:00.001+05:30

Ashish Rukhaiyar
Mumbai January 05, 2011

The capital market regulator’s ban on certain foreign institutional investor (FII) structures is helping weed out non-genuine overseas investors. In the recent past, many FIIs have surrendered registration, while a number of sub-accounts have converted themselves into registered institutional investors.

According to the Securities and Exchange Board of India (Sebi), 24 FIIs and 130 sub-accounts have applied for surrendering registration after the new norms. In all, 188 non-compliant FIIs and 336 sub-accounts are barred from taking fresh positions in the Indian market. They, however, can retain positions or sell off/unwind.

According to experts, the list of entities opting for surrender will swell in the coming days, as overseas investors serious about investing in India will restructure and seek direct registration. They say that some entities will use the participatory note (PN) route to invest rather than restructure.

“It’s a combination of three factors. Some entities that have surrendered their memberships would be those that were never active in India. In other words, India did not feature as a large allocation country,” said Siddharth Shah, principal and head (fund formation), Nishith Desai Associates.

“Many others converted their sub-accounts into registered FIIs, thereby surrendering their original sub-accounts, whereas some entities surrendering their registration would opt for the PN route. The Sebi move has led to a clean-up, encouraging dormant players to surrender,” he added.

In April 2010, Sebi asked FIIs to stop using the complex structures of protected cell companies and segregated portfolio companies. In addition, it said the investor base be broadbased in case of multi-class share vehicles (MCVs). The deadline was September 30.

Protected cell companies are entities with several cells within the same vehicle. A cell has its own assets, liabilities, capital, dividends and accounts. Each cell functions as an independent unit within the overall set-up and the debtors and creditors of each cell have no claims against the assets or liabilities of another cell.

An MCV is a structured entity where investors in each class have different contractual agreements with sub-accounts with regards to investment strategies, liabilities and fund manager.

Incidentally, after Sebi’s restrictions on PNs in 2008, MCVs had become popular with hedge funds and a large number of individual investors. The notional value of investments in equities through PNs was as high as 35 per cent in January 2008. This fell to below 15 per cent in December 2008. At present, the number is below 14 per cent.

Focus on higher retail investors' participation

2010-12-31T19:37:00.000+05:30

Ashish Rukhaiyar
Mumbai, December 28, 2010

Sebi ensured a level-playing field between small and institutional investors.

Retail investors in stock markets had reasons to cheer this year, especially due to the investing opportunities available in the form of initial public offerings (IPOs) and follow-on public offers (FPOs). Also, the Securities and Exchange Board of India (Sebi) introduced several measures to ensure a level-playing field between small and institutional investors in the primary market.

For one, retail investors can put a larger amount in IPOs. In October, Sebi doubled the investment limit from Rs 1-2 lakh. The retail entities stand to gain, as it will increase the probability of getting allotted a higher number of shares at a time when the retail portion is subscribed many times, while attracting more investors.

In addition, retail investors (compared to institutions and high net-worth individuals) get more time to apply in IPOs. The IPO bidding window will be open for an extra day for them, after it is closed for other bidders. It implies that they can make investment decisions after factoring in the institutional demand.

And, the impact was immediately visible. MOIL, which was the first government-owned entity to hit the market after the new limits were notified, saw its retail portion subscribed more than 32 times.

Similarly, the retail segment of Shipping Corporation of India’s IPO was subscribed more than six times. More recently, government-owned Punjab & Sind Bank saw retail quota being subscribed a massive 44.45 times. To put things in perspective, the much-hyped IPO of Coal India, launched before the rise in limit, had seen the retail segment subscribed only 2.28 times.

“Most Sebi initiatives were taken with the retail investor in focus,” says Motilal Oswal, chairman and managing director, Motilal Oswal Financial Services. “These initiatives, while making the system more efficient, have provided investors many benefits. Investors gain from the money, which now remains blocked in the bank account till the time of allotment. The extra day (in IPO bidding) gives them ample time to make their investment decisions,” he adds.

Retail investors who prefer Asba (application supported by blocked amount) had yet another reason to smile. Their money will be blocked for a lesser time with the overall IPO time frame compressed to 12 days from the earlier 21 days. While Asba allows investors to earn bank interest on the blocked amount, the reduced time frame makes the money available quicker. And, with the Reserve Bank of India asking banks to pay a daily interest from April 1, it will increase the interest earnings for investors.

In an indirect move, the margin requirement for institutional investors while applying in an IPO was raised from 10-100 per cent. Retail investors will rejoice as the disparity between small and large investors have been done away with. A lower margin led to the creation of artificial demand, since the quantum of money to be paid up-front was only 10 per cent. “This would avoid inflated demand in public issues and provide a level-playing field to investors subscribing for securities,” according to Sebi.

Small investors who want to dabble in stocks, but don’t have an access to a computer or a broker throughout the day, can use mobile phones. Earlier, investors could only view their portfolio on cellphones, and not execute any trade.

On a different note, companies taking investors’ complaints lightly were taken to task by the market regulator. In December, more than 10 companies and their directors were barred from accessing the securities market for having failed to address the investors’ grievances. Retail investors will surely feel more empowered after this.

NRIs bet big on Indian stocks

2010-12-31T19:36:00.000+05:30

Ashish Rukhaiyar
Mumbai, December 28, 2010
Net buyers of shares worth nearly Rs 94 crore in the current calendar year.

At a time when retail investors are shying away and institutional investors are in a state of flux, a niche set of investors is slowly increasing exposure to the domestic equity market. Non-resident Indians (NRIs) have been collectively putting in a sizeable amount of money in the secondary market, apart from investing in most initial public offers (IPOs).

According to data with stock exchanges, NRIs have been net buyers of shares worth nearly Rs 94 crore in the current calendar year. While this is small compared to other classes of investors, the data show that NRIs will end 2010 as net buyers for the first time since 2007.

Also, the yearly flows will be the highest since separate data for NRIs are being maintained. NRIs have been net buyers in most of 2010, except January and December.

Market players attribute this to the economy’s impressive growth rate and the returns generated by the stock market in recent years. “Most NRI investors are long-term in nature and prefer largecaps to known names,” says Pankaj Pandey, head (research), ICICI Direct.

“They like to hold on to their shares and do not generally indulge in aggressive churning. They prefer the ‘buy and hold’ strategy while investing in companies that have a good earnings outlook and, at the same time, have a good dividend paying history. While IPOs are also popular among NRIs, they prefer only the well-known names.”

In the primary market, NRIs have invested in most recent issues. Government-owned entities are one of their favourites, say market participants. Rough estimates put the NRI investment in the primary market at Rs 50 crore this year.

According to data collated by Karvy, NRIs have put in a sizeable number of bids in all issues, including Shipping Corporation of India, Power Grid Corporation, Electrosteel, Gujarat Pipavav and Ramky Infrastructure. In Power Grid and SCI, NRIs were allotted 15.6 million shares and 309,000 shares, respectively; in Electrosteel, 780,000 shares.

While the share of NRI bids is less than one per cent of the total portion reserved for retail and high net worth individuals, it is much higher compared to the IPOs of previous years.

“NRIs invest in large numbers in good quality IPOs and have increased their exposure this year,” says Uday Patil, director (investment banking), Keynote Corporate Services. “The returns provided by the Indian stock market are higher than most other markets of the world and this has attracted a lot of NRIs.”

Sebi to link brokers to Asba, reduce IPO time

2010-12-31T19:35:00.000+05:30

Ashish Rukhaiyar
Mumbai, December 15, 2010

Move likely to lead to an exponential rise in Asba use.

The Securities and Exchange Board of India (Sebi) is quickly moving towards its goal of compressing the initial public offering (IPO) period from 12 days to seven days.

The market regulator plans to integrate brokers with online Asba – Application Supported by Blocked Amount – a software provided by stock exchanges. Industry players say modifications are being made to ensure an exponential rise in the reach of Asba, vital to speeding up application and refund processes in IPOs.

According to people involved in the process, once the mechanism is in place, brokers will play a larger role in procuring Asba forms. At present, a broker only collects the Asba form from the investor and deposits it at the bank where the investor has his account.

Sebi introduced Asba in September 2008 to reduce the time taken for primary market issuances. Under Asba, an applicant can bid without his money moving out of the bank account; the money is debited only at the time of allotment of shares. This eliminates delays due to refunds.

“We are ready with the interface and are only waiting for confirmation from various intermediaries, including brokers, registrars and SCSBs (self-certified syndicate banks),” said a stock exchange official. “These entities will have to change their back-office systems to integrate with the new mechanism. There will be an interface between SCSBs and brokers that will help the latter key in the details directly in the online application mechanism,” he said.

The change
In other words, the exchanges would provide stock brokers access to the online Asba mechanism, wherein brokers would be able to key in details like the demat account number, the depository participant ID, the bank account number, the permanent account number and the bid details. Thereafter, banks that have access to the system will verify the account details and block the amount.

“Finally, brokers will become an integral part of Asba, which will increase its reach,” said a compliance officer of a domestic brokerage. “All brokers will push for Asba after the new mechanism is in place. Right now, we end up as courier agents, picking up the form from the investor and depositing it in the bank. Asba helps eliminate a lot of procedural delays in the (IPO application) system,” he said.

The market regulator has already clarified that brokers and sub-brokers will be entitled to a share in the Asba commission.

While initially the facility was available only for retail applicants, it was extended to institutional investors this April. In its attempt to widen the reach of Asba, Sebi asked exchanges to provide the forms on their websites.

After loan scam, LIC becomes cautious on equity investing

2010-12-31T19:31:00.000+05:30

Ashish Rukhaiyar
Mumbai, December 14, 2010

Routes large orders through brokerages of public sector entities.

Life Insurance Corporation of India (LIC), the largest domestic financial institution active in the equity market, appears to be in cautious mode.

Institutional dealers empanelled with LIC say block deals have become rare. Most large transactions are being done through the brokerage arms of institutions partly owned by public sector entities.

The dealers say the insurance major is playing safe after the housing finance scam. On November 24, the Central Bureau of Investigation arrested eight people, including LIC Housing Finance CEO R R Nair and LIC Secretary (investments), Naresh K Chopra, for allegedly giving loans to private builders after taking bribes. There is also a buzz that the equity investments of LIC are under the scanner.

“After the bribe-for-loan scam, we haven’t really got any big trades from LIC,” said an institutional dealer with a domestic brokerage empanelled with LIC. “The information that we have got is that it is placing big orders mostly with the brokerage arms of government entities like IDBI (IDBI Capital) and SBI (SBI Capital Markets). It is relatively safer to trade through those entities, given the current environment,” he said.

According to a section of the dealers, LIC has also become selective in terms of stocks. Apart from the liquid counters, LIC is mostly looking at listed public sector companies, they say, adding that illiquid stocks are now on the “avoid” list.

“LIC was a favourite among promoters looking at placement of shares,” said another institutional dealer, on condition of anonymity. “All that has changed, with the insurance company becoming more selective.” Adding: “In the past, LIC has bought shares directly from many promoters, including that of a shipping company and a couple of Gujarat-based diversified business groups. There is, however, nothing unusual in LIC going slow on investments in the context of some recent news flow. Also, the overall activity in the market has gone down in the last couple of weeks.”

Recent months have seen the insurance major restructuring investment strategy through its empanelled brokers. It is believed that LIC has been trying to streamline operations by bringing down the number of brokers through which it trades in the equity market. The number of empanelled brokerages is estimated around 150.

In August, LIC wrote to its empanelled brokers, seeking data on research recommendations for the past 17 months. LIC wanted to review the recommendations and the relative return from these stocks compared to the benchmark, the Sensex. Some months prior to that, it slashed the brokerage fee from 15 basis points (bps) to 10 bps.

According to brokers, the average transaction size for LIC executed by most empanelled entities is Rs 30-40 lakh. For larger brokerages, the ticket size is around Rs 1 crore; the biggest gets trades worth a little over Rs 5 crore.

Sebi vets UID use for stock market deals

2010-12-31T19:30:00.000+05:30

Ashish Rukhaiyar
Mumbai, December 10, 2010

The Securities and Exchange Board of India (Sebi) has taken the first step towards evaluating the feasibility of using the unique identification (UID) number for all securities market transactions.

Nandan Nilekani, who is heading the UID project, met Sebi brass yesterday and explained how the number could be relevant in capital market transactions. The meeting was attended by stock exchange officials, investment bankers, brokers, fund managers, registrars and depository participants.

According to a person privy to the development, the importance of the meeting can be gauged from the fact that top Sebi officials, including Chairman C B Bhave, besides whole-time members and executive directors, were present. Recent reports suggest that the Ministry of Finance has asked Sebi to see if UID can be made mandatory for all securities market transactions.

“The session aimed at creating awareness about UID among various market participants,” said a person who attended the meeting, adding, “It is too early to comment on the implementation, as the process of issuing UIDs has only begun.”

UID was launched on September 29, when 10 residents of Tembhali village in Nandurbar, Maharashtra, were issued their numbers. According to the website of the Unique Identification Authority of India, over 600 million UIDs will be issued over five years.

“The meeting was a starting point for evaluating UID from the capital market perspective,” said another person who attended the proceedings. “We discussed how it could be applied (in stock market transactions). For instance, regulators wanted to know how it could capture change in the address of the investor, as a lot of corporate actions (dividends, AGM reports) require addresses of shareholders,” he said.

Others who attended the meeting included Sanjay Sharma of Deutsche Bank (also the vice-chairman of the Association of Merchant Bankers of India), Milind Barve of HDFC Mutual Fund and S Subramaniam of Enam. Top officials of the Bombay Stock Exchange, the National Stock Exchange and representatives of depositories and registrars were also present.

According to industry players, a move towards UID will mean a paradigm shift from the current use of the permanent account number (PAN) for all stock market transactions. “Multiple PANs in the name of a single person is a systemic risk, which will be eliminated by migrating to UID. One cannot have multiple UIDs, as the system will also capture fingerprints and iris details,” said the head of a domestic retail brokerage.

Twist in the tale: Bhave likely to get extension

2010-12-31T19:29:00.000+05:30

Ashish Rukhaiyar
Mumbai, December 7, 2010

With just two months left for his tenure to end and three months after the government set up a search committee to find his successor, Securities and Exchange Board of India (Sebi) Chairman C B Bhave may end up getting an extension.

People familiar with the development said this might be necessary taking into account some important ongoing investigations against big companies and market operators. It is believed that an extension will ensure the continuity of the investigations.

The sources, however, added this “school of thought is still in its infancy” and no written communique had been sent either by the Prime Minister’s Office or the Ministry of Finance to the selection panel formed to choose the next chairman.

In what could be just a coincidence, a meeting of the search committee on Friday to interview the shortlisted candidates was cancelled at the last minute.

“One cannot say for sure if he will get an extension, but the idea has definitely been discussed,” said a senior industry official on condition of anonymity. “The factors that strengthen his case are the ongoing investigations and the transparency he has brought in the way some market intermediaries function,” he added.

The recent past has seen the market regulator take a tough stance against entities, including Sahara Group, Murli Industries, Ackruti City, Welspun Corporation and Brushman India. The Mumbai-based high networth individual, Sanjay Dangi, has also been barred on allegations of market manipulation. The regulator is also in the midst of a high-profile legal tussle with the MCX Stock Exchange, currently being fought in the Bombay High Court.

Another theory doing the rounds is that the government will be in no mood to attract fresh controversy by appointing a new chairman when it is already grappling with a number of allegations at the Centre.

“There is always a lobby favouring and opposing each candidate. One cannot predict until the file is signed,” says another veteran who has worked with three Sebi chiefs. “Bhave emerged from nowhere the last time and it cannot be ruled out again. The government can play safe by giving him an extension for two years. Mutual funds may be opposing him, but that is not a neutral view. Also, we keep hearing that candidates are not showing keen interest in the top job this time,” he explains.

While media reports earlier suggested that a total of seven candidates were in the fray for the post, only three-four managed to make it to the final list. While UTI Chairman and MD

U K Sinha is said to be one of the front-runners, others in the fray include Ministry of Company Affairs Secretary R Bandyopadhyay and Reserve Bank of India (RBI) Deputy Governor K C Chakrabarty. According to some media reports, State Bank of India Chairman O P Bhatt has opted out. The selection committee is headed by Cabinet Secretary K M Chandrasekhar and comprises Finance Secretary Ashok Chawla, Financial Services Secretary R Gopalan and Personnel Secretary Shantanu Consul.

Half-a-dozen real estate IPOs face delay

2010-12-31T19:28:00.000+05:30

Raghavendra Kamath & Ashish Rukhaiyar
Mumbai, November 27, 2010

The mega real estate loan scam could delay the initial public offers (IPOs) of over half-a-dozen real estate developers because of poor investor sentiment, said bankers and analysts tracking the sector.

“It will be very difficult for real estate entities to raise money through IPOs at this juncture,” said Gyan Mohan, executive vice-president and head, investment banking, IDBI Capital Markets.

According to Prime Database, which tracks primary capital markets, eight real estate companies have got the final approval from the market regulator to launch IPOs. These include Raheja Universal, Lodha Developers, Lavasa Corporation and Kumar Urban Development. Together, they were looking to raise Rs 9,500 crore.
“Though it has been said that this is not a systemic risk, investor sentiment has been impacted. The sector was anyway facing transparency issues,” said Mohan.

The IPOs are crucial for these developers to repay debt. For instance, New Delhi-based BPTP was planning to use a fourth of the IPO proceeds of Rs 1,500 crore to lower debt.

“I do not think any property developer will bring out a public issue in the current financial year. Those who try IPOs and QIPs (qualified institutional placements) will have to undergo a lot of scrutiny and due diligence in the coming days,” says Amit Goenka, national director, capital transactions, Knight Frank India.

Developers like Lodha agree. “The markets are still volatile and previous issues have not done very well. We may take a view in the new year,” said Abhisheck Lodha, managing director of Lodha Developers.

The benchmark BSE Sensex has fallen 2.3 per cent, or 448 points, since November 19.

To tap elsewhere
Due to delay in raising funds through selling equity and from public sector banks, the cost of borrowing for real estate companies will rise and developers may have to borrow more from private banks, non-banking finance companies and private equity (PE) firms, bankers say.

At present, property developers borrow at between 10.5 per cent and 14 per cent, depending on their credit profile. This may rise by 50-100 basis points.

“Conditions are quite adverse for the real estate sector. In debt, the cost of funds is based on the perceived risk. The riskier the assets, the higher is the price. Even RBI has increased the risk weight for real estate loans,” said a head of fixed-income capital markets at a foreign investment bank.

RBI increased the standard asset provisioning by commercial banks for teaser home loans from 0.4 per cent to two per cent, capped the loan-to-value ratio at 80 per cent and increased the risk weight on loans of more than Rs 75 lakh to above 125 per cent in the November 2 monetary policy.

Goenka says though private lenders will increase rates, private equity firms cannot increase their return expectations from developers, as they’ve already been asking for 25 per cent returns.

“PE firms will get more credible opportunities and put more money in the sector,” he adds.

However, some developers say funding from public banks will resume once the dust raised by the scam settles. “Banks cannot afford to not do business with property developers as they earn a good spread. Once things settle down, funding will continue as usual,” said the chief financial officer of a Mumbai-based listed company.

New Takeover Code likely to be delayed

2010-12-31T19:27:00.000+05:30

Ashish Rukhaiyar
Mumbai, November 26, 2010

The new Takeover Code that proposes sweeping changes in the way mergers and acquisitions are done in India is unlikely to get the final regulatory approval in the next couple of months. It is expected that the new set of regulations will be implemented only around the end of the current financial year.

According to people familiar with the development, the Securities and Exchange Board of India (Sebi) is unlikely to arrive at a decision on the Takeover Code during its next board meet as the Finance Ministry is yet to take a final call on some of the recommendations and wants the market regulator to go slow on it.

“While Sebi has said that it will discuss the Takeover Code in its next board meet, it is highly unlikely that a final decision will be taken,” said a person privy to the development. “There are already talks that the regulator has been told to go slow on the issue and also wait for the new chairman to join in. This will push it to February,” he said.

The capital market regulator, during its board meeting held on October 25, had discussed various issues related to the Takeover Code but decided against taking a final decision. “It was felt that some more time was required to discuss the recommendations of the panel. Our discussions remained inconclusive and we will continue the discussions at the next board level,” chairman C B Bhave had said while addressing the media after the board meet.

Incidentally, it is well over four months since the Takeover Panel, formed under the chairmanship of C Achuthan, submitted its 139-page report to the market regulator. The committee, which was formed in September 2009, has recommended an increase in the open offer trigger limit from the current 15 per cent to 25 per cent. Further, the open offer has to be made for all the shares of the target company and not for a minor part of it.

Interestingly, the recommendations invited a lot of feedback from industry participants when the regulator uploaded the same for public comments. Reports suggest that majority of market participants are not comfortable with the clause that open offer needs to be made for 100 per cent of the shares as against the current practice of 20 per cent.

The industry view is that it will escalate the cost of M&A and would deter many genuine buyers from making an acquisition. The regulator, after factoring in the industry feedback, is believed to be in favour of a reduction in the open offer size even while sticking to the panel’s recommendation of increasing the open offer trigger limit to 25 per cent.

Destination India for global university funds

2010-12-31T19:25:00.000+05:30

Kalpana Pathak & Ashish Rukhaiyar
Mumbai, November 15, 2010

International university endowment funds have stepped up their presence in the Indian stock markets to cash in on the high returns. Data from the Securities and Exchange Board of India (Sebi) show that the number of such funds investing in the Indian market has gone up three-fold to around 20 this year, against six in 2008.

Several of these international university endowment funds have also increased the target asset allocation towards emerging markets in 2010.

President and fellows of Harvard College, for instance, have doubled the target investment in emerging markets to 10 per cent for 2010, against five per cent in 2005. Harvard, the richest US school, has a $27.6 billion endowment, followed by Yale University’s $16.7 billion.

University of Washington’s consolidated endowment fund has increased allocation to emerging equity markets to 17 per cent, from 12 per cent last year. The consolidated endowment fund consists of 3,100 separate endowments, accordin g to the university’s website.

The Board of Regents of the University of Texas System at Austin, as per its general endowment fund investment policy, will allocate a maximum investment target of 25 per cent in emerging markets, against the minimum target of 10 per cent for the financial year 2011.

The universities park their money – locally and internationally – with public and private equity, stocks, real estate, commodities and bonds, among others. University Endowment Funds are registered as Foreign Institutional Investors (FIIs).

Other registered endowment funds include: The Duke Endowment; Cornell University; Emory University; The John Hopkins University; The Ohio State University and Massachusetts Institute of Technology Basic Retirement Plan.

“Many universities have increased investment allocation from their endowment funds to the emerging markets and they are long-term investors in the market. Between India and China, India is a more liquid market,” said Siddharth Shah, head, funds practice, Nishith Desai Associates.

Harvard Management Company (HMC) did not divulge details of what portion of its investment is directed to the Indian market. “The management company does not discuss its investments or investment strategies publicly other than what is reported in their annual reports,” John Longbrake, senior director of communications, HMC told Business Standard in an emailed statement.

Industry insiders said endowment funds have an internal allocation which they either use by making direct investments or engage fund managers to manage funds.

This year so far, FIIs have infused a record Rs 28,562 crore ($6.4 billion) in October, nearly one-fourth of the total inflows in the stock market. The total net investment by FIIs now stands at $24.79 billion — the highest in a single year.

Market experts said overseas funds inflow from these universities will only increase. “We will see many more universities registering with SEBI in days to come. Emerging economies like India and China will provide an opportunity of better rate of returns to these universities,” said a senior manager from a Mumbai-based private equity firm.

For instance, HMC in its annual report said that its emerging market equities and high-yield returns were strong at 17.6 per cent and 19.6 per cent, although they did not beat their benchmarks.

Investors use 'future' strategy to profit from PGCIL FPO

2010-12-31T19:24:00.002+05:30

Ashish Rukhaiyar
Mumbai, November 11, 2010

Short the stock, hope to get shares much cheaper in the follow-on offer

Power Grid Corporation of India (PGCIL) has been one of the top traded derivatives contracts in the last few sessions. This is because investors embarked on a time-tested strategy amid the follow-on offering (FPO) of the government-owned entity. The frenzy has been such that the market-wide position limit in the stock was crossed today. As a result, exchanges barred brokers from creating fresh positions.

According to derivatives experts, many traders are going short on the stock in the derivatives segment in anticipation of allotment in the FPO. With the FPO attractively priced at Rs85-90, investors are locking-in a decent profit, as the derivatives contracts are trading well above the upper end of the price band.

The game-plan is simple. Investors are shorting the stock, with a plan to square off the positions later based on the FPO allotment at Rs90 a share. According to data on the National Stock Exchange website, futures contracts for November expiry are trading around Rs100.

“The strategy was widely used in the past few sessions, but with the market-wide position being crossed, this is the end of it,” said T S Harihar, senior vice-president, ICICI Securities. “There was a lot of demand for the Rs90 put option and the Rs110 call option from traders looking to reduce their risk. There is a feeling the issue will be subscribed 10 to 15 times,” said Harihar.

PGCIL has seen a steady rise in the number of contracts and the quantum of open interest. On October 25, 3,447 contracts were traded, which rose to 35,047 today. The open interest in the period surged from 18.57 million to 103.58 million. The stock closed at Rs102.15 in the cash segment today.

Interestingly, there was a buzz in the market that some brokers tried to trade large blocks even after the market-wide position was breached. Derivatives dealers said there could be instances of such brokers being penalised by the exchange.

Meanwhile, market players are talking about a change of stance towards the FPO from investors, especially high networth individuals (HNIs), after the breach of the position limit.

“The run-up in the price after the announcement of the price band has created interest from all categories of investors, particularly HNIs,” said Arun Kejriwal, director, KRIS. “This led to the market-wide position limit being crossed and could lead to dampening of interest, as locking-in of returns will not be possible now,” he explained.

MCX-SX likely to file appeal on Sebi rejection today

2010-12-31T19:24:00.001+05:30

Ashish Rukhaiyar
Mumbai, November 8, 2010

September order barring it from being a full-fledged exchange is unsound.

The legal battle between MCX Stock Exchange (MCX-SX) and the Securities and Exchange Board of India (Sebi) is set to move to the next level. Tomorrow, the exchange is expected to file an appeal in the Securities Appellate Tribunal (SAT), challenging the Sebi order of September 23 which rejected its request to be allowed to offer various new products.

Tomorrow is also the concluding date for challenging the 68-page Sebi order. It had barred MCX-SX from offering equity and equity derivatives, interest rate futures and a separate platform for small and medium enterprises. Among the reasons given by Sebi was failiure to comply with shareholding norms and illegal buyback agreements by promoters. MCX-SX, which currently offers trading only in currency futures, was given a 45-day window to appeal against the order.

The order can be challenged at either the high court (HC) here or the SAT. Sources say the latter is likely. “Till last week, the lawyers were divided on the appropriate forum for appeal against the Sebi order and meetings were held over the weekend,” said a person familiar with the development. “It, however, appears the exchange will move SAT, that is well equipped to go into the merits of the case.”

MCX-SX’s managing director, Joseph Massey, during a press briefing in September, had said the exchange would “soon” decide on which of the two forums to challenge the Sebi order. Attempts to contact the MCX-SX spokesperson on Sunday proved futile.

The regulator and the exchange have had a tug of wills for some time. In an unprecedented move, MCX-SX had petitioned the HC in July, asking for a direction to Sebi on why it had been sitting on the former’s application for permission to operate as a full-fledged stock exchange. The petition said the regulator had not given any response even three months after MCX-SX had fulfilled the key condition of bringing down the promoters’ stake.

Sebi, while finally rejecting the application, said the exchange was not fully compliant with the ‘Manner of Increasing & Maintaining Public Shareholding’ norms for recognised stock exchanges. The regulator said the substitution of shares with warrants by the bourse’s founding promoters, Financial Technologies and Multi-Commodity Exchange, was an attempt to “work around the requirements” and was not a recognised mode of complying with shareholding norms.

Sebi said MCX-SX had been “dishonest” by withholding material information on the buyback arrangements of its promoters with other shareholders. MCX-SX said this was “character assassination”.

Unlisted firms on investors' radar

2010-12-31T19:22:00.000+05:30

Ashish Rukhaiyar
Mumbai, November 2, 2010

Brokers buy stock options from employees of companies planning IPOs.

With the markets on a high, a few investors and brokers are fancying their chances in the unlisted space. Brokers are scouting for companies likely to go public in the near future and have a large number of employees sitting on stock options.

The modus operandi is simple and legal. Brokers and investors first identify companies that are likely to come out with initial public offerings (IPOs) in the future. Thereafter, they enquire about the small fraction of shareholding available with the employees or may be other investors. The share transfer is done with proper contract notes.

Take the instance of Tata Technologies. The shares of the Pune-based Tata Group company, which is into engineering & information technology services, enterprise technology solutions and product distribution & support, are being traded among a group of investors in the unlisted space. The shares, mostly available in the physical form, are changing hands around Rs 450 per share.

Sunil Chandak, a veteran in this field, has been buying Tata Technologies for himself and his close group of investors for quite some time. “Tata Technologies is a subsidiary of Tata Motors and is into high-end automation and designing. Fundamentally, it is a very sound company, with high growth potential. The IPO is expected next year,” he says.

Sesa Industries, an unlisted subsidiary of Sesa Goa, is also witnessing steady growth in the number of investors eyeing its shares. The company is in the midst of being merged with Sesa Goa. The court verdict on the scheme of amalgamation is expected soon. The swap ratio has been fixed at one share of Sesa Goa for every five shares of Sesa Industries.

Future Ventures, which has already filed the draft prospectus for an IPO to raise Rs 750 crore, has also seen a significant number of its shares being traded in the recent past at an average price of Rs 16-17. In this case, investors have bought shares from some entities that were allotted these at par during the early days of the company.

Such investors, especially high networth individuals, also remain on the lookout for companies which are listed on regional stock exchanges (RSEs) and planning to list either on the Bombay Stock Exchange (BSE) or the National Stock Exchange (NSE). Listing on the two national exchanges increases visibility, attracting investors in larger numbers.

Government-owned Orissa Minerals Development Company (OMDC) is one such example. The share price of the company, which was listed on the Calcutta Stock Exchange, was around Rs 22,000 before it made its entry on NSE and BSE in August. On Thursday, it closed at Rs 71,000 on NSE.

“OMDC has proved to be a multibagger in just around a year,” says Deepak Mehta, an independent investor. “OMDC, trading between Rs 20,000 and Rs 22,000 a share till a few months back, got listed on BSE and NSE and has been steadily rising since. Prior to OMDC, I had invested in Oil India and Tanla Solutions, and that too proved fruitful. The last few picks from the unlisted space have been good,” says Mehta, who has been investing in unlisted shares for the last few years.

Jitendra Agarwal, an independent analyst, has also been in this business for quite some time. He is buying Metals and Scrap Trading Corporation of India (MSTC), a Mini Ratna Category - I entity. “MSTC is a profit-making public sector unit, with an equity of just 22 million and a reserve of over Rs 400 crore. The last year earnings per share was Rs 391.

The government recently announced that all minerals have to be sold through the e-auction route. MSTC is likely to be a big beneficiary,” says Agarwal. According to him, MSTC is trading around Rs 4,000 a share.

In another instance, Hindustan Vidyut, a company listed on the Delhi Stock Exchange (DSE), has seen an increase in the quantum of trading. The shares, available in the range of Rs 1,400 to Rs 1,500, are rising on the back of the government’s thrust on divestment.

Some other notable unlisted companies which have seen hectic trading in the recent past include Metals and Scrap Trading Corporation of India (MSTC), TCS Eserve, Mohan Meakins, Raj Travels, Nandan Biomatrix, Pilani Investments and Sistema Shyam Teleservices. Shares of exchanges like BSE and DSE have also seen significant trading in the recent past, say brokers.

Experts, however, caution against the pitfalls in this space due to absence of research notes and media reports about corporate actions. “The risk in the unlisted space is higher, but we invest only after a detailed research,” says Mehta. “It is a game of patience. The shares are locked in for a year after the IPO, but the profits are generally worth the wait. We look for stocks with deep value.”

Brokers eye FII refund money from Coal India

2010-12-31T19:21:00.000+05:30

Ashish Rukhaiyar
Mumbai, October 25, 2010

After the allotment of shares of Coal India, foreign institutional investors (FIIs) will be sitting on a massive amount of cash, courtesy the huge over-subscription and the mechanism of proportionate allotment. Market participants are wondering if this refund money will be allocated to India in general or flow back into the country of origin.

While a section of the market participants is of the view that a fraction of the money would be allocated to the Indian secondary market, there are others who feel the money would be reserved to subscribe to mega IPOs lined up by the government. While Coal India has been the country’s largest IPO, there are already reports that Indian Oil Corporation will tap the market with an offering of the size of Rs 19,000 crore.

Another theory doing the rounds is that many of the global funds that invest in index stocks across the world have put in huge bids on expectation that the stock will be included in Sensex and Nifty by virtue of its sheer size. There is a likelihood that these funds will buy shares of Coal India from the secondary market, say institutional dealers.
At the upper end of the price band, the market capitalisation of Coal India would be around Rs 1.55 lakh crore, making it the seventh-largest listed entity. This would make it a strong candidate for inclusion in the indices.

The institutional portion of the Coal India IPO has been subscribed nearly 25 times with bids received for 7,019.46 million shares, as against 284.24 million on offer.

Of this, FIIs account for bids for 4,933.87 million shares or a little over 70 per cent of the total institutional demand. In other words, FIIs have put in bids worth nearly Rs 1.21 lakh crore in this issue.

Post allotment of shares worth around Rs 6,966 crore (50 per cent of the net issue) to the institutional investors, FIIs will be left with a whopping cash balance of Rs 1.13 lakh crore or $26 billion. Incidentally, this number is currently the single-most important issue being discussed at the institutional desk across brokerages. Dealers are still not sure if they will get a chunk of the FII money that will be available post the allotment of shares.

"Coal India saw 770 applications in the institutional segment, out of which nearly 600 belong to the FIIs," said an investment banker associated with the issue. "Some of the bidders belong to newer destinations that do not have much exposure to the Indian market. These funds are likely to invest a significant amount of the refund money in the stock markets here," he added.

Sebi study finds IPO grading futile

2010-12-31T19:20:00.002+05:30

Ashish Rukhaiyar
Mumbai, October 20, 2010

No correlation between the grades and performance of shares

Ever since grading for initial public offers (IPO) was introduced, industry participants have been divided over its effectiveness.

Now, perhaps for the first time, an analysis by the capital market regulator has concluded there is no correlation between the grades and the performance of the shares after listing.
People familiar with the development, however, say it is unlikely the regulator will do away with the mechanism.

The Securities and Exchange Board of India (Sebi) introduced optional IPO grading in April 2006. In May 2007, it made grading mandatory for all unlisted companies.

The cost is borne by the issuer. Rating agencies such as Crisil and Care grade companies on a scale of one to five, with five indicating strong fundamentals.

Some months ago, a Sebi department was asked to analyse the efficiency of the mechanism and the correlation, if any, with the performance of the shares. When the initial analysis revealed lack of any correlation, the officials were asked to refer to similar studies done by the rating agencies. The conclusion remained unchanged. Sources say the report has been given to the Sebi board.

Why do it?
“There is no correlation, which clearly proves IPO gradings do not serve any purpose,” said a person privy to the analysis. “If the post-listing price movement is more dependent on the secondary market movement, what is the point of getting IPOs graded? Also, India is perhaps the only country in the world where such a system exists,” he adds.

The study has been circulated to all Sebi board members for comments and, if approved, will be presented to the Primary Market Advisory Committee. However, it is believed the regulator is in no mood to revisit the grading process in the near future.

“IPO grading was introduced on an experimental basis and we need to wait and watch for some more time before arriving at a conclusion,” said a senior Sebi official, on condition of anonymity.

Interestingly, the Sebi analysis is in sharp contrast to that done by Crisil in July. Crisil concluded that companies with higher IPO grades commanded a higher price to earnings multiple.

“Companies with a high IPO grade of four/five (indicating above-average fundamentals) command an average P/E multiple of 28x, compared to 11.2x for companies with an IPO grade of 1/5 (indicating poor fundamentals). Companies with IPO grades of 2/5 and 3/5 have been trading at average P/E multiples of 17.4x and 23.5x, respectively,” said the report.

Interestingly, IPO grading does not consider the price at which the shares are offered in an issue. “Since IPO grading does not consider the issue price, the investor needs to make an independent judgment regarding the price at which to bid for/subscribe to the shares,” says the ‘Frequently Asked Questions’ section of the IPO grading part on Sebi’s website.

I-bankers make 'sensible' bids for shipping corp, Hind Copper

2010-12-31T19:20:00.001+05:30

Ashish Rukhaiyar
Mumbai, October 12, 2010

Quote nearly 50 basis points as against near-zero fee for earlier PSU issues.

Around a fortnight ago, Securities and Exchange Board of India (Sebi) Chairman C B Bhave expressed concern over investment bankers quoting near-zero fee for bagging divestment mandates.

The impact is already visible. Investment bankers say sensible fees have been quoted for the follow-on public offers (FPO) of Shipping Corporation of India (SCI) and Hindustan Copper.
According to people familiar with the development, the selected investment bankers have quoted nearly 50 basis points, or 0.5 per cent, for these issues. While this is still low and the bankers will not be able to make a hefty profit, they will at least break even, they add.

“Both the issues will see the bankers make at least some money,” said a banker, on condition of anonymity. “The fee that has been quoted is 0.48 per cent,” he added. Incidentally, while this may appear negligible, it is much higher than in the earlier issues. For example, bankers quoted as low as 0.00000001 per cent in Power Grid Corporation’s issue.

The lead managers for the SCI issue are SBI Capital Markets, IDFC Capital and ICICI Securities. Hindustan Copper’s five bankers are ICICI Securities, Enam, Kotak Mahindra Capital, SBI Capital Markets and UBS Securities.

“We will be paid more than our costs,” said the head of an investment banking entity that has bagged the mandate. “While the quantum is still below one per cent, the bankers were sensible this time.”

Low bidding
According to a note by SMC Capitals in March, bankers were paid only Rs 10.25 crore for raising Rs 22,300 crore in four divestment offers. “The merchant banking fees of PSU public issues are as low as 0.05 per cent of the issue size,” it noted.

Reports further suggest that six banks together quoted a total fee of just Rs 12,500 last month to manage the IPO of Coal India, which will raise around Rs 15,000 crore.

While the trend of zero fee was being heavily debated within the banking community, the Sebi chairman questioned the rationale of bankers losing Rs 3-4 crore per mandate.

“(Investment bankers) need to introspect whether it is a healthy competition,” Bhave said on September 24 while addressing a gathering of investment bankers. He suggested a “code of conduct or ethics” to avoid such competition.

Checks, incentives
Another banker familiar with the process says it is “unfortunate” that the lead managers quote an “abysmally” low number to bag the mandate, but the government is too big an entity to be neglected and the competition is really tight.

“It is not that the government does not want to pay. Unfortunately, banks make bids in a manner the government can do nothing about it. To be associated with the government has a lot of advantages in terms of secondary market trades, research and getting new institutional clients. It doesn't, however, compensate entirely,” he said.

Global pension funds increase India exposure through IPOs

2010-12-31T19:18:00.000+05:30

Ashish Rukhaiyar
Mumbai, October 8, 2010

Amend charters to invest in companies that don’t have set market capitalisation.

Global pension funds have started investing aggressively in primary market offers. Till recently, they were not looking beyond some of the largest Indian listed companies.

Foreign pension funds usually did not invest in any unlisted company, including initial public offers (IPO), as their investment charters did not allow them to venture outside the largecaps. Pension funds have strict parameters related to market capitalisation, which also put IPOs outside the investment matrix.

“Some pension funds have amended their charters and can now invest directly in IPOs,” says the executive director of a leading foreign investment banking entity. “The amended charter allows them to invest in companies that do not have any set market capitalisation,” he added, while declining to name the funds that had done so in the recent past. Some pension funds from Denmark and Paris are believed to have invested in quite a few IPOs recently.

According to the Securities and Exchange Board of India, over 30 pension funds are registered in India as foreign institutional investors (FIIs). Pension funds of some notable entities, including American Airlines, British Petroleum, Aviva, British Airways, Citigroup, Shell, United Nations, Lloyds, Rolls-Royce, IBM and Unilever, are registered in India.

“Some of the really long pension funds globally which were not quite active in India are now present here,” says Indraneil Borkakoty, executive director and head of equity capital markets, Nomura Securities India. “The increase in the number of FII registrations proves this. Pension funds don’t face the kind of redemption pressure that other hedge or long funds face. So, higher participation from pension funds is good for the market. If ever there is a pull-back, it will not be so drastic,” he explains.

Pension funds, collectively, account for one of the largest investor groups globally, with assets under management (AUM) in trillions of dollars. A report by Morgan Stanley in 2008 pegged the total AUM of pension funds in excess of $20 trillion, more than sovereign wealth funds, insurance companies, hedge funds and even private equity. While the latest numbers are not available, rough estimates peg the AUM at over $30 trillion.

A section of investment bankers, acknowledging that pension funds are investing more in India, say some of the entities also invest through other registered FIIs. This, they say, helps achieve the motive without much changes in the investment charter.

“Pension funds, like other investors across the globe, are increasing exposure to India, but this is not to say that they are increasing their exposure to the IPO market only,” says Munesh Khanna, CEO & MD, Centrum Capital. “Many of them also invest in Indian secondary equity markets through other funds of FIIs. Accordingly, as they increase their exposure to India, the exposure to IPOs also goes up.”

Vinay Menon, managing director – equity capital & derivatives markets, JPMorgan India, says, “Pension funds have been investing in Indian IPOs for a long time” but the recent past “has seen many more long-only funds coming to India from some newer destinations”.

Q&A: Indraneil Borkakoty, Nomura India

2010-12-31T19:16:00.002+05:30

'Low fee is not good for bankers'

Ashish Rukhaiyar
Mumbai, October 5, 2010

The booming primary market does not worry Indraneil Borkakoty, Nomura India’s new executive director and head of equity capital market (ECM, or the investment banking division). Borkakoty, who was heading the ECM vertical at Kotak Mahindra Capital till a month back, says investment in initial public offers (IPOs) will create a wider market for investors and control overheating of the secondary market. In a chat with Ashish Rukhaiyar, he talks on various issues like zero fee, foreign inflows and inflation. Edited excerpts:

There’s a perception that Nomura is not aggressive in the IPO arena. In 2009 and 2010 (till date), you managed just two issues.
We got our merchant banking licence only in December 2008. We have already done nine deals, including qualified institutional placements, American depository receipts and foreign currency convertible bonds. But yes, two IPOs. We have got quite a few mandates now in the capital market segment and are building our ECM franchise across the region.

In research, we have become number two in Asia ex-Japan. With many people coming on board, we are seeing a lot of traction now. We have firm mandates for four-five IPOs that should happen in the current financial year.

Has Nomura been pitching for divestment issues?
Yes, we recently started pitching for these transactions. From both domestic as well as global perspectives, these are important dealings. Public sector undertakings are high-quality companies and transactions in these tend to be large. In addition to attracting funds from the existing players in India, these offerings tend to attract capital from investors that have not yet started investing in the country.

But what will you say about the trend of quoting near-zero fee for bagging government mandates?
In government transactions, it is not just the fee that one considers. Obviously, low fee is not a good thing. But, there are other benefits like visibility on the global platform and league table credits. As mentioned earlier, you also attract a lot of first-time investors for these primary offerings. The sheer size of the deal is also important for the banking business per se, in terms of investor relationships.

India accounted for 16 per cent of the total ECM volume of Asia ex-Japan during the first half of this year. Going forward, do you expect any rise in India’s share?
It will definiitely go up, but it is difficult to put a time-frame. A large part of fund-raising in the region will essentially be driven by China and India. To that extent, India’s share should expand. In terms of the sheer size of the economy, the capital requirement will be much higher than many other countries in the region.

In the secondary market, foreign and domestic investors appear to have taken a contrarian bet on the markets. What explains this trend?
It is based on each one’s perception of valuations. It is always healthy to have certain set of buyers and sellers in the market.

Globally, there are a very few markets witnessing the kind of growth like India. So, from an FII (foreign institutional investor) perspective, it makes sense to be invested in growth markets than in developed markets, which are not providing returns. Meanwhile, domestic institutions are taking this opportunity to book profit.

Do you expect any trend reversal in terms of FII flows?
The flows are only improving. A lot of general funds, which invest a large part of their capital in developed markets, will probably churn their portfolios to increase the weight of emerging markets, thereby directing further flows into India.

The government is talking about spending some trillion dollars on infrastructure in the next four-five years. It will include foreign participation and open another investment avenue. So, whatever gets churned does not necessarily have to go to the secondary market, which may create a bubble.

What are the key concerns for the market?
The most important concern is inflation, since it has a direct bearing on liquidity. Any increase in interest rates will reduce liquidity. There is a soft interest rate regime globally, as governments are focusing on growth. But, it will be important to see how governments in the US and Europe view interest rates.

Most FIIs comply with new norms on structure

2010-12-31T19:15:00.001+05:30

Mehul Shah & Ashish Rukhaiyar
Mumbai, October 1, 2010

Most foreign institutional investors (FIIs) operating as multi-class share vehicles have changed their structure to meet the new regulatory requirements, officials familiar with the matter have said.

Yesterday, the Securities and Exchange Board of India (Sebi) said FIIs and sub-accounts that had not complied with its guidelines specified on April 15 would not be permitted to take fresh positions in the cash and derivatives markets from Friday.

“A large number of FIIs with an MCV (multi-class vehicle) structure have already restructured themselves. So, the number of non-compliant entities would be a small percentage of registered FIIs in India and that too mostly fringe players,” said Siddharth Shah, head, funds practice, Nishith Desai Associates.

“My guess is that there will not be any significant impact on liquidity flows. One may see some increase in the amount of offshore derivative instruments, as the non-compliant entities will now swap their exposure through them.”

FIIs have pumped in $18.37 billion (Rs 82,300 crore) in the Indian stock market so far this year, the highest in any calendar year. Sebi is not comfortable with foreign investors from tax havens having a multi-class structure, as some of these are believed to be used for round-tripping (the same capital returning here in the form of foreign investment) of funds.

On April 15, the regulator asked new applicants as well as existing FIIs and sub-accounts to give more information about their structures. It asked applicants to furnish declarations that they were not a protected cell company (PCC) or a segregated portfolio company (SPC).

The applicants also have to declare they are not a multi-class share vehicle (MCV) under their constitution. If they are, they need to undertake that common portfolios will be allocated across various share classes and will be broad-based. Sebi had set a deadline of September 30 for all FIIs and sub-accounts for complying with the guidelines.

A structure like a PCC or SPC segregates assets and liabilities of investors by providing for distinct assets, either in the form of a separate class of share, or a dedicated sub-fund attributed to each investor. An entity like an MCV has the flexibility to issue multiple classes of shares having differential benefits attached, so that each class has the ability to represent the interest of a particular investor, or for specific investments.

By rough estimates, around 40 per cent of registered FIIs would have to change their structure to meet Sebi norms. As of September 29, there were 1,726 registered FIIs in India, while the number of registered sub-accounts was 5,523, Sebi data showed.

Q&A: Giles Nelson, Strategy Director, Apama

2010-12-31T19:14:00.000+05:30

'Smart order routing will force inefficiency out of the market'

Palak Shah & Ashish Rukhaiyar
Mumbai, September 29, 2010

At the time when regulators around the world are blaming algorithmic trading for all the evil in stock markets, Giles Nelson, co-founder of Apama, the most used algo, says it is becoming a technology. In an interview with Palak Shah & Ashish Rukhaiyar, he talks about the growing influence of algorithmic trading in India. Edited excerpts:

How is algorithmic trading evolving? What is its future in India?
It is becoming a future technology. Nearly 70 per cent of equity trades in the US originate from algorithmic trading in one way or other. It is catching up in Europe, Brazil, Australia and Asia. In India, spending on softwares for algorithmic trading is going to be easily worth $100 million in two years. The market share of algo trade will rise from 15 per cent at present to 50 per cent in the next three years.

The number of trades on the NSE (National Stock Exchange) are 10 times that of the London Stock Exchange. Both NSE and BSE (Bombay Stock Exchange) are offering co-location facility; smart order routing and mobile trading has now been allowed, too. Also, commodity exchanges are catching up on algo trading. It is being put to use in foreign exchange derivatives too.
That’s an enormous reason to do algorithmic trading. Smart order routing will force inefficiency out of the market, reduce price discrepancies between the two main equity exchanges and increase competition. NSE’s process of validating every algo was putting a significant brake on its growth. The process is unsustainable and will be short-lived.

There are concerns that algo trading leads to distortion of price and its discovery, that it encourages excessive speculation.
Criticism has been going on for over a year after the ‘flash crash’ in the US stock market. Nobody has yet understood what caused the flash crash. There were other reasons, including the structure of the market. Algo technology itself is difficult and neutral; it is not right to only blame it for anything that goes wrong in the market. Sometimes, massive control and malicious entries behind it is where difficulties lie.

About 70 per cent of equity trades in the US coming from smaller high-frequency trading firms, using different algo trading models, is a potential issue. There may be circumstances of price distortion. But there is more liquidity in markets which have high algo trading. It reduces spreads between prices, makes it cheaper not only for the algo trader but also the investor.

Algo trading is banned for things that it is not responsible for. There has been controversy about dark pools. First of all, naked access should be banned. All orders that are through electronic means or manually should go through a pre-trading process. It will prevent instances like last year in the UK, where a global oil trader bought seven billion barrels of oil when he was drunk. This impacted the global crude price.

Is there an adequate regulatory framework? Are you offering complex algo patterns in India?
Mandatory pre-trade risk and market surveillance should be there within the regulators and the exchanges. Regulators have the rear-view mirror approach when it comes to understanding market softwares. They do not have the capability to know what is happening on a realtime basis. The technology that SEC, the US stock market regulator, was using was two decades old. Regulators have to catch up here. All parties in the trading cycle should take more responsibility to ensure appropriate risk control and surveillance.

We are offering vanilla algorithms and smart order routing in India through Apama. It is an algorithmic trading software used for multi-exchange markets such as US and Europe. The software is a transparent box and can be looked into. It offers not only a platform but also tools to change algos with a changing market. We have Reliance, HDFC as our clients, but we have started marketing it only this year.

How big is the third-party algo vendor business? What are the profit margins?
It’s difficult to answer. Global business is probably a couple of billion dollars a year, when you look at all the platforms, connectivity, the hardware, and so on. We are a $500-million organisation, with operations in 180 countries. Apama, which is used in risk management and surveillance, apart from trading, earns us a number of million dollars per year. Quite a significant number.

Realty IPOs set to break 6-month Jinx

2010-12-31T19:12:00.002+05:30

Raghavendra Kamath & Ashish Rukhaiyar
Mumbai, September 29, 2010

Property developers need cash to reduce large debts.

Real estate developers are back in the primary markets after a lull of six months, as stock indices have touched new highs and property prices have crossed their earlier peaks in major cities.

Oberoi Realty and Prestige Estates are planning their initial public offers (IPOs) next month. Kalpataru and Lavasa Corporation have filed their draft red herring prospectuses (DHRPs) in the past fortnight. Between the four of them, they are planning to raise over Rs 5,000 crore from the primary market.
Nitesh Estates was the last developer to launch an IPO, in April this year. Though at least a dozen real estate developers filed DRHPs to raise over Rs 12,000 crore and about half of them got the market regulator’s nod, volatility in the markets forced most of them to postpone their plans.

Factors such as poor retail participation in recent issues – Nitesh Estates and DB Realty are two examples – and these stocks trading below their listed price added to the nervousness of IPO aspirants, analysts tracking the sector said.

However, things have changed after the recent exuberance in stock and property markets.

“Equity markets are doing well and the property sector is showing growth. Developers want to use this opportunity to raise capital. This allows developers to improve balance sheets and improve their debt to equity ratio,” says Tarun Bhatia, director, capital markets, Crisil Research.

In the current month itself, the BSE Sensex has gained 12 per cent and crossed the psychological 20,000-mark. On the property front, prices in areas such as South Mumbai have crossed the 2007 peak.

According to central bank estimates, realty developers have piled up Rs 75,000 crore debt and need to pay around Rs 25,000 crore in interest and principal this financial year. Hence, successful IPOs are critical for developers such as Emaar MGF, BPTP and Lodha, among others, who want to use part of the IPO proceeds to pay off their debts.

The IPO aspirants are more than hopeful. “We would like to undertake the journey when the weather is good. We are a zero-debt company and have marquee investors (Morgan Stanley). Hence, we see a successful IPO,” says Vikas Oberoi, managing director, Oberoi Realty, which plans to raise Rs 1,100 crore through an IPO.

How does the market see the prospects of realty IPOs, given that a dozen are in the queue and a similar number of companies from different sectors have hit the market this month?

“The first few (real estate) issues will go through smoothly, before investors again start focusing on valuations,” says Sanjay Sakhuja, chief executive officer, Ambit Corporate Finance. “While domestic investors are a bit cautious, FIIs have a very strong positive view on emerging markets.''

Amit Goenka, national director, capital transactions, Knight Frank, believes only two-three IPOs will hit the markets this year. He feels another half a dozen will join the queue.

“IPOs will happen only if 30-40 per cent of the issue is sold in pre-IPO placements,” says Goenka. “If the project pipeline of a developer is not robust and is highly dependent on future cash flows, the issue may face some problems.”

Valuations
Valuation will be a key issue for the success of real estate IPOs, apart from the track record, cash flows, transparency and management depth of developers, among others, say analysts tracking the sector.

“In the real estate sector, there is still some disconnect between investors and developers in terms of valuations. Investors will look for more clarity on sustainability of sales and the delivery front,” said Rajiv Sahni, partner (real estate practice), Ernst & Young.

Investors will look for more clarity on the sustainability of sales and the delivery front,” said Rajiv Sahni, partner (real estate practice), Ernst & Young.

“A developer whose perception has changed in the mind of the investor will perhaps manage to do a successful IPO.”.

In early 2008, Delhi-based Emaar MGF had to reduce the price band twice and push back the closing date by five days before withdrawing the IPO, due to poor subscriptions to the issue. Though there were reports about Emaar MGF cutting its IPO size by half before hitting the market again, the company has not announced anything so far. So, too, with other IPO aspirants such as Sahara, Neptune and others.

Knight Frank’s Goenka believes that if the IPO valuation is 50-55 times the company’s 12-month trailing earnings, it is acceptable. “But most of them are still at 70-75 times their trailing earnings,’’ he says. “Though developers have learnt their lessons and valuations are much more reasonable than two years ago, the greed has not completely gone out.’’

But developers say valuations are not a problem.”We were planning to raise Rs 1,000 crore when the market was at 14,000; now they are at 20,000,’’ says Oberoi.

Developers such as Lodha say they will watch the performance of the IPOs of Oberoi and Prestige before taking a call on its public issue.

“Healthy internal cash flows give us liberty of time. We want to see if investors make money in two of these issues before deciding our timing,’’ says Abhisheck Lodha, managing director of Lodha Developers.

Sebi to set framework for overseas indices

2010-12-31T19:12:00.001+05:30

Ashish Rukhaiyar
Mumbai, September 27, 2010

Will lay down criteria for market cap and liquidity.

Indian stock exchanges that wish to launch trading facility in overseas indices will have to wait for some more months as the Securities and Exchange Board of India (Sebi) is working on a detailed regulatory framework to govern cross-listing arrangements.

According to a person privy to the development, the regulator aims to get only “good quality” indices in India and so would lay down the criteria for market capitalisation and liquidity. Only those overseas indices that fulfill these criteria would be allowed to trade on the Indian bourses.
Currently, there are no such guidelines and it is believed that the process will take around three to four months. The regulator plans to put in place comprehensive norms that would serve as the base for all such future alliances.

“The work on the regulatory framework is on and the process will take around three to four months,” said a person not wishing to be named. “Having a regulatory structure in place is better than evaluating cross-listing arrangements on a case to case basis. The guidelines will also serve as a base on which future cross-listing tie-ups can be done,” he added.

Currently, the National Stock Exchange (NSE) is the only Indian equity bourse that has entered into cross-listing arrangements. Under the arrangement with the Chicago Mercantile Exchange (CME), NSE has exclusive rights for starting trading in the S&P 500 and the Dow Jones Industrial Average rupee-denominated futures contracts for trading in India. This is being made available to NSE via sub-licences from the CME Group, Standard & Poor’s and Dow Jones, respectively.

“Exchanges cannot just go out and get any index in the Indian market. Some conditions need to be fulfilled,” said the person. “The regulator might also lay down the geographies from where the indices could be brought for trading on the Indian stock exchange platform,” he added.

This issue assumes significance, as the Indian exchanges are looking at increasing their bouquet of offerings to garner more market share and also to enhance their overall valuation. Globally, some of the leading bourses like Chicago Mercantile Exchange and SGX boast of offering trading facilities in a number of overseas indices.

Meanwhile, NSE has also signed a letter of intent with the London Stock Exchange for getting the FTSE 100 in India. “As part of the letter (of intent), both exchanges declared their intent to explore the feasibility of an agreement whereby FTSE Group may licence the FTSE 100 Index to the NSE, and whereby the NSE may licence the S&P CNX Nifty to London Stock Exchange Group for the purpose of issuing and trading options and other index contracts,” says the NSE release dated July 28.

MCX Stock Exchange (MCX-SX) has also entered into a tie-up with FTSE to facilitate creation of international investment products — including international FTSE indices — to be listed and traded on MCX-SX.

I-bankers hit back at Sebi on PSU floats

2010-12-31T19:10:00.002+05:30

Mehul Shah & Ashish Rukhaiyar
Mumbai, September 26, 2010

Say regulator’s criticism of near-zero fee for government issues unfounded

Investment bankers have dismissed the capital market regulator Sebi’s concerns over near-zero fee for managing public sector issues.

Bankers say the fee is a function of competition and, globally, too, government mandates are done at a lower cost compared with private sector issues.
In an event organised by merchant bankers on Friday, Securities and Exchange Board of India (Sebi) Chairman C B Bhave had said investment bankers need to introspect whether it is healthy competition to quote near-zero fees to bag government issues.

For example, reports suggest that six investment bankers have quoted a fee of Rs 12,500 to manage the Coal India issue that aims to mop up over Rs 13,000 crore next month.

However, bankers, who spoke on the condition of anonymity, said near-zero fee for government issues is a function of market dynamics.

“As an investment banker, I would love to charge higher fees for public sector issues. But I have to quote a low fee because of competition,” said managing director of a domestic investment bank, who has worked on many government issues.

Interestingly, investment bankers with an experience of working with governments across the world find nothing wrong in the zero-fee game, which, they say, is a “global practice”.

“For any investment banker, including us, the government is an important constituent. These issues are very large and, therefore, everybody wants to manage them,” said the managing director of a leading foreign investment bank. “If the rule of the game is less money, you make less money. But that is true globally, too. Revenue from government transactions is significantly lower than those from the private sector.”

Another banker who has been part of the lead managers in a few divestment issues said the fee is also a factor of the quantum of sales and marketing activities that need to be done to make the issue a success (story). “Quality public sector issues have ready takers and the bankers do not really need to go out and convince investors to put in large bids.”

“It is true that managing a divestment issue burns a hole in the investment banker's pocket. But the efforts involved in marketing a public sector issue is far less than that for a private entity,” he said.

Among the recent government issues, Engineers India Limited was subscribed 13.35 times, while SJVN was subscribed 6.51 times.

Brokers to get bulk of Asba fee

2010-12-31T19:10:00.001+05:30

Ashish Rukhaiyar
Mumbai, September 24, 2010

Sebi panel gives recommendation, approval expected soon.

The Securities and Exchange Board of India (Sebi) will soon rework the guidelines for Asba (application supported by blocked amount) in public offer applications to make it more acceptable to capital market intermediaries. The new norms will see banks and brokers sharing the commission, a long-standing demand of the latter.

According to two persons familiar with the development, the proposal has been made by a Sebi committee. The regulator’s approval is expected soon.
The committee proposed a 25-75 formula for sharing, said a source on condition of anonymity. Brokers will get 75 per cent commission while the rest will go to the bank. The committee members feel brokers should get more as they market the IPOs.

Asba commissions have been a point of debate since the mechanism was introduced in September 2008. The committee members deliberated on the details reached a consensus, said another person privy to the discussions. “The idea is to have a role-based incentive or compensation system in place. The proposals have been forwarded to Sebi and we expect the final approval pretty soon,” he said, requesting condition anonymity, as the proposals have not been made public.

Meanwhile, Sebi Chairman C B Bhave has publicly acknowledged again that the norms need to be reviewed. “We are talking to merchant bankers to know the glitches in Asba; there is a need to increase the rate of investors applying for shares through Asba,” Bhave said at an event in Kochi on Tuesday.

Under Asba, the applicant can bid even as the money stays in his/her bank account. The amount is debited only at the time of allotment. This process eliminates delays due to refunds, speeding the process. While initially, the Asba facility was only for retail applicants, it was extended to institutional investors in April.

Experts tracking the primary market mechanism say Asba can gain wider acceptance if brokers are given incentives.

Since brokers bring investors, the commission needs to be split between banks and brokers, they say. At present, banks get the commission and that is the biggest reason why Asba has not taken off in a big way, says Prithvi Haldea of PRIME Database.

Merchant bankers say while the current norms give banks the right to commission, brokers also manage to get a share, based on an informal arrangement. The proportion is based on the number of applications the broker routes through a particular bank.

According to a status note prepared by a Sebi committee in 2009, Asba applications in some IPOs accounted for 12 per cent of all retail applications. While latest numbers are not available, market players say there has been an increase in the number of takers.

Sebi may clear MCX-SX stance this week

2010-12-31T19:07:00.001+05:30

Ashish Rukhaiyar
Mumbai, September 21, 2010

The Securities and Exchange Board of India (Sebi) is expected to come out this week with its decision on the application of MCX Stock Exchange (MCX-SX) for launching a full-fledged equity bourse. The High Court here had set a deadline of September 30 for the regulator to decide on the matter.

According to a source, Sebi whole-time member K M Abraham had a number of meetings with MCX-SX officials in the past couple of weeks and is now set to decide. The meetings were held to allow the exchange to reply to the concerns raised by Sebi.

It is believed the exchange was also questioned about the 10 per cent collective holding of Financial Technologies (India) Ltd (FTIL) and Multi Commodity Exchange (MCX). The regulations clearly specify that persons acting in concert should not hold more than five per cent.
"Apart from the warrant and buy-back issue, the exchange officials were asked about the collective holding of FTIL and MCX. Prima facie it appears that both the entities are persons acting in concert," said a person on condition of anonymity.

FTIL owns 30 per cent in MCX, which is also the world's largest exchange for silver trading in terms of the number of futures contracts traded in 2009. Incidentally, Jignesh Shah is the chairman of FTIL and also vice-chairman of MCX.

The respective boards of FTIL and MCX have, however, already passed resolutions that the entities "would at no point of time of violate the MIMPS guidelines of shareholding structures and limit".

Said MCX-SX in an emailed response: "As per the High Court directive of August 10 regarding MCX-SX permission from Sebi to start trading in equities and other segments, MCX-SX has complied with all necessary directives and informed Sebi accordingly."

Meanwhile, Reserve Bank of India Deputy Governor Shyamala Gopinath, while inaugurating the United Stock Exchange (USE), said: “A diversified ownership is very necessary in a market infrastructure company. Ultimately, exchanges are public utilities... (It) is a means of good governance” Endorsing her views, Sebi chairman C B Bhave said: “I am happy that USE is coming with a diversified ownership. We need to see they serve the supposed purpose.”

Legal experts say the highly publicised matter could also move to the Securities Appellate Tribunal (SAT) if MCX-SX wants to challenge the Sebi order, even as the high court would remain an option.

"It's a subtle difference:- both would be open to MCX," says Sandeep Parekh, founder of Finsec Law Advisors and a former executive director (legal) at Sebi. "They could go to the HC, particularly since they have already filed a writ, asking Sebi to take a decision. But the nature of powers of the HC are more limited. It can only look at illegality, bias, etc. In contrast, they can go as a matter of right to SAT, which will not only look at the legality of the order but also the detailed merits of the order and accept, reject or modify the Sebi order," explains Parekh.

Bourses may have to wait more for currency options

2010-12-31T19:05:00.002+05:30

Ashish Rukhaiyar
Mumbai, September 17, 2010

Sebi unlikely to give go-ahead before a decision on MCX-SX tussle.

Stock exchanges in India will have to wait for some more time before getting the final regulatory approval for launching currency options trading. According to people familiar with the development, the Securities and Exchange Board of India (Sebi) is unlikely to give the go-ahead before a final decision on the ongoing legal tussle with MCX-SX. The high court here has set a deadline of September 30 for Sebi to decide on the MCX-SX matter.

Currently, only the National Stock Exchange (NSE) and MCX Stock Exchange (MCX-SX) offer trading in currency futures, the segment on which currency options will be launched. Both have been doing mock trading in currency options for quite some time and are waiting for the final approval. It is well over a month since the regulator released a circular allowing the introduction of options contracts on the rupee-dollar spot rate.

Industry observers say the regulator will give exchanges the permission to go live with currency options only after sorting the legal tussle with MCX-SX. The one-year extension to the latter does not allow it to launch any "new class" of contracts in securities.

"Sebi wants to promote a level playing field between all the exchanges. If Sebi gives approval to one exchange, the other might raise an objection, which is not conducive to the current situation," said a person familiar with the development. It is believed that if NSE is given approval for launching currency options even while a final decision on the court battle with MCX-SX is awaited, then questions might be raised even in the court rooms. Sebi is already facing allegations of "favouritism" towards NSE.

MCX-SX has petitioned the HC for a response from the regulator on its application for permission to operate as a full-fledged stock exchange. The petition says Sebi should either reject or approve its proposal to do trading in equities, equity derivatives, interest rate derivatives, mutual funds and a separate platform for small and medium enterprises. The petition said the regulator gave no response even three months after MCX-SX fulfiled a key condition, of bringing down the promoters' stake.

Margin funding takes centre stage

2010-12-31T19:05:00.001+05:30

Ashish Rukhaiyar
Mumbai, September 7, 2010

NBFCs owned by brokerages do brisk business after recent listing gains.

At a time brokerage income is dwindling and margins for distribution of third-party products are next to nothing, non-banking financial companies (NBFCs) are providing the much-needed relief to brokers. The significant listing gains posted by recent initial public offers (IPOs) have prompted investors to borrow margin money from NBFCs.

Most large- and mid-sized brokerages have NBFCs that are primarily into IPO financing for retail as well as high net worth individuals (HNIs). As there is a limit on the margin a brokerage can directly provide its clients, investors are rushing to NBFCs.

Market players, while acknowledging that NBFC financing is gaining steady ground, say competition is tight and margins wafer-thin. “The last two-three issues saw the revival of the NBFC business,” said Girish Dev, chief executive, Networth Stock Broking, adding, “SKS Microfinance and Gujarat Pipavav Ports are prime examples. The mega issue of Coal India is also expected to see a lot of activity in the NBFC space. There is some confidence among retail investors. But we have to wait and watch to see how the trend pans out over a longer term. The rates, however, have become quite competitive.”

Nandip Vaidya, president (retail broking), India Infoline, said IPO financing was a function of “market conditions and the perception about the issue price”.

“There are a fair number of investors keen on funding IPOs. If the issue is perceived to be well-priced, there is a higher tendency to leverage,” added Vaidya.

Most market entities active in the NBFC space are not quite forthcoming on the rates charged from high net worth individuals and retail investors. But it is widely believed that the rates are lower than those at the height of the bull run in 2007.

“The average rate of interest for HNIs is 11-12 per cent, while that for retail investors is 14-16 per cent,” said the head of a domestic brokerage which has an NBFC. “This is less than in 2007, when the minimum rate for HNIs was 14 per cent while that for retail investors was around 17 per cent. The interest rate is also a factor of the relationship a client has with the brokerage. If he is a regular trader with us, the rate will be a bit lower,” he said.

The revival of the IPO financing business is also evident from the huge subscription numbers of the recent IPOs, especially in the HNI segment. In case of Gujarat Pipavav Ports, the HNI segment was subscribed a massive 86 times. SKS Microfinance’s HNI segment was subscribed more than 18 times. Similarly, Prakash Steelage was subscribed nearly 10 times in the HNI portion. Bajaj Corp, which opened for subscription in early August, saw the HNI portion subscribed nearly 50 times (see table).

In IPO financing, an NBFC lends a major chunk of the application money to the investor at a fixed rate of interest. After listing, the investor sells the shares and repays the money along with the interest cost. The investor profits only if listing gains are higher than his cost of funds. Hence, this activity picks up when a definite trend of stocks listing at a sizeable premium is visible. Typically, NBFCs lends around 80 per cent of the application money.