Private placements to remain favourite route

Feb 29, 2008
Gaurav Pai & Ashish Rukhaiyar
Even as the market regulator is laying the ground for reviving the corporate debt market in India, private placement of bonds remains the most popular option for companies looking to raise funds in India, says the Economic Survey. Markets experts say that this trend is likely to continue, considering the comfort that this route brings along with it, namely opacity. The regulator is hoping that the proposed platform for electronic issuance and trading of corporate bonds will soon make the private placement route redundant.

Over the last few years, private placements — as in selling bonds to a select group of large, bulge bracket investors — has emerged as the preferred way, as the issuance can be closed in just a couple of days that too with investors one is familiar with. However, the regulator has always objected to the process due to its lack of transparency.

“The current system is opaque with the issuer dependant on few arrangers and going ahead one might see e-issuance gaining popularity due to its more transparent mechanism,” says Srinivasa Raghavan, head (treasury) at IDBI Gilts. He does not feel there will be any change in the number of issues and the quantum of mobilisation through this method, though. “It is mandatory for pension funds and insurance companies that are flush with funds to subscribe to such issuances,” he reasons.

Deepak Koyane, director at SPA Capital, a financial advisory firm says that an electronic issuance is always desirable as there is always a chance that a few investors “corner all the bonds issued” and then keep the prices “protected” in the future.

The total amount of the capital raised through different instruments in the primary market was 31.5% higher in 2007 as compared to 2006, says the survey. Component-wise, private placement at Rs 1, 11,838 crore (up to November 2007) accounted for the major share during the calendar year 2007.

According to a recent release by PRIME database, the major reason for this substantial increase was the continuing large mobilisation by all-India financial institutions and banks besides the private sector. On an industrywise basis, the financial services sector continued to dominate the market, raising almost 90% of the total amount. Power ranked second with a 7% share, followed by roads & highways.

Nationalised banks (who take this route to for raise Tier 2 capital for meeting capital adequacy requirements) and other financial institutions like PFC and Nabard are the usual suspects in the game.

Standard Chartered Bank’s managing director & regional head (South Asia Capital Markets) Prakash Subramanian KV says irrespective of the route taken by companies to sell their bonds (ie to raise money) - the number will only go up in the coming years. “The market will only grow bigger in size especially since RBI has blocked the external commercial borrowings route for raising funds,” he says.

RBI has not allowed companies to raise funds through the ECB route since a year, the incoming dollar was sending the rupee higher.

Sebi to tweak F&O rules to check swings

Meets Brokers, Exchange Delegations
Feb 13, 2008
Ashish Rukhaiyar & Gaurav Pai

IN A move to check wild stock swings, markets regulator Securities and Exchange Board of India (Sebi) is planning to overhaul the derivatives segment. The proposals under consideration include circuit filters on stocks traded in the futures and options (F&O) segment, possible changes in the marketwide position limits and review of the margining system, a person familiar with the development said.

It is believed that the swift and massive fall on January 22 shook Sebi into action. Trading was halted within minutes of opening, as indices hit the downward limits on very low volumes. Sebi has also received several suggestions from market intermediaries on how the loopholes in the current system can be plugged.

Apart from the margining system, the large number of stocks in the F&O segment was also said to have contributed to the indices going into a free fall. “Sebi officials had a long discussion with many market players, including BSE and NSE representatives,” says the source. “There were suggestions to overhaul the derivatives segment to counter speculative activity. One of the proposals was introduction of circuit filters on stocks available in the F&O segment,” he added. Currently, stocks in which futures are available have no circuit filters on the cash side.

Circuit filter for stocks in F&O segment to be a first

The logic is that a person who has an opposite view to the ongoing trend in the cash segment, could simply exercise his opinion in the F&O market. Simply put, if a trader felt that a share was zooming without any reason behind it, he could just short-sell its futures. However, market players pointed out to Sebi that in recently, speculative activity had zoomed, causing many shares (Essar Steel and Ispat, for instance) to rise 40-45% in one session.

Interestingly, such a system, if introduced, will be the first of its kind in the world. “The idea is not to disturb the trading habits of investors and speculators,” says the source. He added that the circuit filter, if implemented, will be high enough to be hit only on days of extreme movement like on January 22. “It is unlikely that a 20% filter (positive or negative) will be hit on normal days,” he adds.

Many delegations from the broking community are learned to have made presentations to NSE and Sebi officials. The majority has been rooting for introduction of physical settlement (delivery of shares against contracts). But a section warns this delivery should be delayed by a day, enabling both players who want to take delivery and those who do not, without disrupting the operations of the market. “This will also curb the ramping (up or down) of shares on the last day of expiry,” says a broker.

Some brokers have called for providing an easier margining system to those trades which are in opposite directions, and therefore reduces risk: for instance, buying Nifty futures and selling stock futures against it. There is a feeling that high gross exposure margins (a second line of defence unique to India) are distorting the market. There is a also a debate among players whether market makers — big players who give quotes both ways — should be introduced.

IPO investors could be in for a bumpy ride

With Change In Sentiment, Borrowing Money To Invest In IPOs May Not Pay Off

Feb 02, 2008
Gaurav Pai & Ashish Rukhaiyar

TILL a few days ago, it appeared that people with little or no understanding of equities could more than double their money in two weeks by investing in IPOs, thanks to the exorbitant prices at which these issues got listed on bourses. Some investors even decided to get ‘upgrade’ by borrowing money and investing through the non-institutional investors category in public issues, rather than through the retail portion.

But if the listing price of Future Capital Holdings is anything to go by, there is not much good news in the short term for leveraged investors, as several issues prepare listing. Brokers say that people who are planning to invest or have invested in the forthcoming issues should brace themselves for a bumpy ride ahead.

Future Capital Holding shares on Friday closed at Rs 909.80 on NSE, a premium of Rs 144.80 or 19% to the issue price of Rs 765 per share. The stock listed at Rs 1,081 and touched Rs 1,100 briefly. Based on the number of times the issue was subscribed, the funding cost works out to roughly Rs 291 per share. All those investors who had borrowed money to subscribe, and sold on listing, would have incurred a loss unless they managed to exit above Rs 1,056. Financiers charge roughly 15% for lending money towards IPO transactions. This rate is even higher if the issue is expected to do well, and there is more demand for funds.

Future Capital Holdings issue received applications for shares more than 76 times that was being offered by the company. The IPO is backed by the promoters of Pantaloon Retail, a stock that has delivered eye-popping returns to investors in the last few years.

“When the secondary market has corrected more than 20% since the issue opened three weeks back, a dip of similar proportions in the premium in the IPO market is natural,” says a fund manager with Birla Sun Life Mutual Fund. His fund house invested in the issue only for listing gains. The other big issue to get listed in the coming days is Reliance Power. Brokers say Reliance Power shares are currently quoting at a premium of Rs 150 in the grey market, about a third of what they were quoting at about a month ago.

Here too, leveraged investors are likely to be in for a disappointment. The non-institutional investor segment — reserved for high net worth individuals and corporates — has been subscribed nearly 160 times. In short, it means that these investors will get only one share for every 160 that they have applied for. However, they will have to bear an interest cost on the entire 160 shares they had bid for.

“Reliance Power IPO may well see a repeat of what happened with the Future Capital IPO,” says Rahul Rege of Centrum Broking. “With tide having turned for equities, everybody is expecting panic selling on the first day of listing,” he added. Investors seemed to have realised the price of being complacent.