Foreign Broking Houses Target
Funds With Direct Market Access
Jul 31, 2008
Gaurav Pai & Ashish Rukhaiyar
MUMBAI
LEADING foreign brokerages along with stock exchanges are preparing the ground for operationalising Direct Market Access (DMA), a facility that will allow funds to buy and sell stocks without the intermediation of a broker.
In the past few weeks, brokerages such as Citi, Merrill Lynch, Morgan Stanley, JP Morgan, Goldman Sachs, CLSA and Deutsche Equities have been holding test runs of their DMA software, in an attempt to synchronise it with the systems at the stock exchange. These players are hoping that hedge funds entering India would find the product attractive. But it could be a while before the process is fully operational as exchanges may roll out the facility in a phased manner.
The DMA facility enables institutional investors like funds to access the exchange trading system through brokers’ infrastructure but without the manual intervention of a broker. Popular abroad, DMA allows certain funds, especially those using algorithmic or programme trading, to have direct control over their orders. However, there have been doubts from certain quarters on its business sense in the Indian context.
“Since there is no human intervention involved, broking houses would have to initially make some investments on the technology front,” says Jayesh Mehta, head of institutional coverage group at Merrill Lynch. “But as the facility becomes popular, volumes will pick up and profitability will not be an issue,” he adds.
But things are easiest for MNC broking houses, since they already service many international hedge funds through the DMA route in their offices outside India. Houses like Citi and Merrill have their proprietary software while Indian brokerages will have to procure it from agencies abroad.
But Girish Dev, CEO of Networth Stock Broking, which has also applied for this facility, says this is no reason why Indian brokerages should be left behind foreign ones on the DMA front. Networth, like many other domestic entities, have decided to use a platform called FTNet that has been developed by Financial Technologies.
Broking officials say bulk of the domestic entities would be using such a third-party platform to avoid the huge costs involved in developing a platform from scratch. Quite a few other domestic entities, including India Infoline, Reliance Equities International and Motilal Oswal are also believed to have shown an interest in offering DMA facility to their clients.
Thursday 31 July 2008
Gold funds scorch returns charts
Jul 24, 2008
Gaurav Pai & Ashish Rukhaiyar
MUMBAI
INDIAN stocks may have rebounded in what may be a stellar show, but the showstealer in terms of delivering maximum returns to investors in mutual funds over the past year has been one of the most unlikely class of funds. Mutual fund schemes that invest in gold and companies associated with the precious metal have been topping the returns chart, performing better than any of the equity or debt funds.
Rising crude oil prices, weakening dollar and growing geo-political concerns have fuelled a tremendous rise in gold prices. However, the jury is still not out on whether this momentum can be sustained over the next few months.
Picture this. If you had invested Rs 10,000 in Sensex or Nifty one year back, your investment would have shrunk to about Rs 8,800. However a similar amount invested in gold (or gold ETF) would have grown to over Rs 15,000.
There are six gold exchange-traded funds from as many fund houses in the country that simply track the prices of gold, while two from DSP Merrill Lynch and AIG that invest in stocks of companies associated with gold mining. While these two funds delivered comparatively modest returns, since stocks globally have been caught in the bear grip, ETFs have posted a return of more than 50% in the past year.
“It’s the uncertainty in the financial markets that is propelling gold upwards,” says Devendra Nevgi, CEO and CIO, Quantum AMC, which also offers a gold ETF. He says that depreciation in the dollar against other currencies; rising inflation and crude oil prices have attracted investors to this asset class.
As for gold ETFs, Mr Nevgi says that the younger generation is slowly coming to accept them as an easy route to more effective asset allocation, considering that gold ETF as a concept is just about four years old. The first gold ETF was launched in the US in 2004.
However, returns form the gold fund by DSP Merrill Lynch MF, a super performer at the beginning a few months ago have cooled down. Thanks to the mediocre performance of gold stocks in relation to gold itself, especially big-league stocks such as Barrick or Goldcorp, it is just delivering a return of 10% Although, this is far superior to equity funds that have seen their portfolios erode during the same period.
Most analysts say that the long-term trend for gold remains bullish, as the overall strength of the dollar remains a key question. “On the physical side, worldwide fabrication (jewellery) demand has slowed down, but to a certain extent has been compensated by investment demand. Fears of financial and geopolitical risk also continue to weigh on price,” says Mandar Pote of Angel Commodities in a report to clients. Mr Nevgi also is bullish on gold prices saying that all the factors that led to its rise are still at work.
But, gold fell its highest in four weeks on Wednesday, as crude oil prices fell after US treasury secretary Henry Paulson voiced support for the currency and after the president of the Federal Reserve Bank of Philadelphia said that interest rates should be raised.
Gaurav Pai & Ashish Rukhaiyar
MUMBAI
INDIAN stocks may have rebounded in what may be a stellar show, but the showstealer in terms of delivering maximum returns to investors in mutual funds over the past year has been one of the most unlikely class of funds. Mutual fund schemes that invest in gold and companies associated with the precious metal have been topping the returns chart, performing better than any of the equity or debt funds.
Rising crude oil prices, weakening dollar and growing geo-political concerns have fuelled a tremendous rise in gold prices. However, the jury is still not out on whether this momentum can be sustained over the next few months.
Picture this. If you had invested Rs 10,000 in Sensex or Nifty one year back, your investment would have shrunk to about Rs 8,800. However a similar amount invested in gold (or gold ETF) would have grown to over Rs 15,000.
There are six gold exchange-traded funds from as many fund houses in the country that simply track the prices of gold, while two from DSP Merrill Lynch and AIG that invest in stocks of companies associated with gold mining. While these two funds delivered comparatively modest returns, since stocks globally have been caught in the bear grip, ETFs have posted a return of more than 50% in the past year.
“It’s the uncertainty in the financial markets that is propelling gold upwards,” says Devendra Nevgi, CEO and CIO, Quantum AMC, which also offers a gold ETF. He says that depreciation in the dollar against other currencies; rising inflation and crude oil prices have attracted investors to this asset class.
As for gold ETFs, Mr Nevgi says that the younger generation is slowly coming to accept them as an easy route to more effective asset allocation, considering that gold ETF as a concept is just about four years old. The first gold ETF was launched in the US in 2004.
However, returns form the gold fund by DSP Merrill Lynch MF, a super performer at the beginning a few months ago have cooled down. Thanks to the mediocre performance of gold stocks in relation to gold itself, especially big-league stocks such as Barrick or Goldcorp, it is just delivering a return of 10% Although, this is far superior to equity funds that have seen their portfolios erode during the same period.
Most analysts say that the long-term trend for gold remains bullish, as the overall strength of the dollar remains a key question. “On the physical side, worldwide fabrication (jewellery) demand has slowed down, but to a certain extent has been compensated by investment demand. Fears of financial and geopolitical risk also continue to weigh on price,” says Mandar Pote of Angel Commodities in a report to clients. Mr Nevgi also is bullish on gold prices saying that all the factors that led to its rise are still at work.
But, gold fell its highest in four weeks on Wednesday, as crude oil prices fell after US treasury secretary Henry Paulson voiced support for the currency and after the president of the Federal Reserve Bank of Philadelphia said that interest rates should be raised.
Market players may have to hike capital
Jul 11, 2008
Gaurav Pai & Ashish Rukhaiyar
MUMBAI
THE operating rules for stock brokers and other capital market intermediaries may soon be redrawn, a move which could force all these players to bolster their capital. Stock market regulator Sebi is reviewing the capital requirements of brokers and other market intermediaries, said people familiar with the development.
Sebi is reportedly vetting a proposal, under which the net worth norms for intermediaries will be redefined according to the risk each of its arms is incurring in its operations. The risk-based capital model being considered, on the lines of the banking industry, could cover all intermediaries such as brokers, custodians, depository participants, investment banks, depositories, registrars and perhaps rating agencies too, they said.
The aim is to ensure more well-capitalised entities in the market, which have the underlying strength to assume risks without causing undue disruption to the financial markets in the event of any failure.
Old-time brokers to feel the heat of changes
THIS is a far cry from the current scenario. Market intermediaries now need to adhere only to a flat net worth norm, even if their activities span broking, investment banking, asset management and depository services through separate arms. One of the steps under consideration is assigning specific values to each of these activities, based on risk profile and then computing the total capital required for the intermediary.
Besides, separate net worth norms may have to be assigned for each of the myriad activities that the intermediary undertakes, such as trading on the BSE, NSE, custodial services and so on. As of now, there is no relation between the brokers’ net worth and the margins they have to deposit while taking a exposure in any of the exchanges. This too is under review. For instance, going by the current norms, a small stock broking house which has a net worth of Rs 10 crore is on par with a larger outfit which boasts of a net worth of Rs 500 crore. Sebi’s review seeks to address this discrepancy.
According to the current norms, stock brokers have to deposit Rs 1.25 crore as base capital with the stock exchanges in order to start trading. For merchant bankers, the minimum net worth requirement is Rs 5 crore, while for registrars it is Rs 1.25 crore.
The regulator is learnt to be working on the concept of permanent registration for market intermediaries. Currently, merchant bankers have to shell out Rs 10 lakh as licence fees for three years, after which the renewal fee has been fixed at Rs 5 lakh. For credit rating agencies and depositories, the net worth requirement is as high as Rs 100 crore.
If the proposal is finally approved, stock brokers would have to beef up their capital, squeezing out some of the smaller broking outfits. Market watchers say that the move could well be a trigger for consolidation in the market.
Indian broking houses are reckoned to be highly under-capitalised. Across the world, it is banks who control the biggies among brokerages, since it is a capital-intensive business. The rationale offered is that banks can offer the capital needed for better financial risk management. But since this is not the case in India, the alternative is to increase the net worth of brokers.
Besides, the markets regulator is also believed to hold the view that there has been a sea change since the norms were last notified. Given the seismic changes in the Indian stock markets, there is a strong case for reviewing the net worth requirements of brokers and other intermediaries, some market participants said.
Market participants say that oldtime brokers would feel the heat if the proposed regulations take effect, as many of them have managed to trade on the BSE without any capital requirements. Before the demutualisation of BSE, brokers paid only a few lakhs to get the BSE membership card, that made them eligible for trading on the exchange. After demutualisation, these members automatically became trading members of the exchange, thus saving on the base capital requirements. According to industry sources, there are more than 700 such BSE card holders. Incidentally, the last such lot of BSE cards was issued in 1994, when entities had to dole out Rs 55 lakh for each card.
“This is the first step of reforms for enabling consolidation in the broking industry,” said the compliance officer with a domestic brokerage. “Oldtimers, especially BSE members, would be worst-hit as they are used to trading without any base capital requirements. They would be forced to shell out more than a crore rupees to continue their business,” he added.
Sebi has formed a core group of prominent experts including top Sebi officials, securities lawyers and heads of leading brokerages. This core group has several sub-committees dedicated to specific intermediaries like brokerages, depository participants, asset management companies and have had meetings over the last few weeks to provide suggestions.
The large dips in the stock indices this January and the subsequent inability of many brokers to provide adequate margins once again brought to the fore the risk in the financial markets due to the minuscule net worth norm that applies to brokers.
Gaurav Pai & Ashish Rukhaiyar
MUMBAI
THE operating rules for stock brokers and other capital market intermediaries may soon be redrawn, a move which could force all these players to bolster their capital. Stock market regulator Sebi is reviewing the capital requirements of brokers and other market intermediaries, said people familiar with the development.
Sebi is reportedly vetting a proposal, under which the net worth norms for intermediaries will be redefined according to the risk each of its arms is incurring in its operations. The risk-based capital model being considered, on the lines of the banking industry, could cover all intermediaries such as brokers, custodians, depository participants, investment banks, depositories, registrars and perhaps rating agencies too, they said.
The aim is to ensure more well-capitalised entities in the market, which have the underlying strength to assume risks without causing undue disruption to the financial markets in the event of any failure.
Old-time brokers to feel the heat of changes
THIS is a far cry from the current scenario. Market intermediaries now need to adhere only to a flat net worth norm, even if their activities span broking, investment banking, asset management and depository services through separate arms. One of the steps under consideration is assigning specific values to each of these activities, based on risk profile and then computing the total capital required for the intermediary.
Besides, separate net worth norms may have to be assigned for each of the myriad activities that the intermediary undertakes, such as trading on the BSE, NSE, custodial services and so on. As of now, there is no relation between the brokers’ net worth and the margins they have to deposit while taking a exposure in any of the exchanges. This too is under review. For instance, going by the current norms, a small stock broking house which has a net worth of Rs 10 crore is on par with a larger outfit which boasts of a net worth of Rs 500 crore. Sebi’s review seeks to address this discrepancy.
According to the current norms, stock brokers have to deposit Rs 1.25 crore as base capital with the stock exchanges in order to start trading. For merchant bankers, the minimum net worth requirement is Rs 5 crore, while for registrars it is Rs 1.25 crore.
The regulator is learnt to be working on the concept of permanent registration for market intermediaries. Currently, merchant bankers have to shell out Rs 10 lakh as licence fees for three years, after which the renewal fee has been fixed at Rs 5 lakh. For credit rating agencies and depositories, the net worth requirement is as high as Rs 100 crore.
If the proposal is finally approved, stock brokers would have to beef up their capital, squeezing out some of the smaller broking outfits. Market watchers say that the move could well be a trigger for consolidation in the market.
Indian broking houses are reckoned to be highly under-capitalised. Across the world, it is banks who control the biggies among brokerages, since it is a capital-intensive business. The rationale offered is that banks can offer the capital needed for better financial risk management. But since this is not the case in India, the alternative is to increase the net worth of brokers.
Besides, the markets regulator is also believed to hold the view that there has been a sea change since the norms were last notified. Given the seismic changes in the Indian stock markets, there is a strong case for reviewing the net worth requirements of brokers and other intermediaries, some market participants said.
Market participants say that oldtime brokers would feel the heat if the proposed regulations take effect, as many of them have managed to trade on the BSE without any capital requirements. Before the demutualisation of BSE, brokers paid only a few lakhs to get the BSE membership card, that made them eligible for trading on the exchange. After demutualisation, these members automatically became trading members of the exchange, thus saving on the base capital requirements. According to industry sources, there are more than 700 such BSE card holders. Incidentally, the last such lot of BSE cards was issued in 1994, when entities had to dole out Rs 55 lakh for each card.
“This is the first step of reforms for enabling consolidation in the broking industry,” said the compliance officer with a domestic brokerage. “Oldtimers, especially BSE members, would be worst-hit as they are used to trading without any base capital requirements. They would be forced to shell out more than a crore rupees to continue their business,” he added.
Sebi has formed a core group of prominent experts including top Sebi officials, securities lawyers and heads of leading brokerages. This core group has several sub-committees dedicated to specific intermediaries like brokerages, depository participants, asset management companies and have had meetings over the last few weeks to provide suggestions.
The large dips in the stock indices this January and the subsequent inability of many brokers to provide adequate margins once again brought to the fore the risk in the financial markets due to the minuscule net worth norm that applies to brokers.
SBI may pocket Rs 300 cr from NSE stake cut
Jul 04, 2008
Ashish Rukhaiyar
MUMBAI
INDIA’S largest bank State Bank of India (SBI) has decided to sell a part of its holding in the National Stock Exchange (NSE), a move which is expected to fetch over Rs 300 crore for the bank.
SBI, which helped promote the exchange over 15 years ago along with a clutch of Indian financial institutions and banks, has an equity holding of 8.5%. The decision to reduce the holding has been prompted by rules on ownership of exchanges framed by the government. According to these rules, the equity holding of a single entity has been capped at 5%. Shareholders, who control more than 5%, will need to shed a part of their holdings to conform to these norms.
Senior bank officials said that they were hoping to rake in at least Rs 315 crore from the stake sale, which implies a valuation of close to $4 billion for the exchange. The bank has appointed its broking subsidiary SBICAP Securities to scout for potential buyers for shares it is putting on the block.
An official, who is privy to the development, said that SBI’s reserve price of Rs 315 crore is benchmarked to an earlier transaction in which the Life Insurance Corporation (LIC) had sold a part of its NSE stake at Rs 3,501 per share in March 2008. Considering that SBI is looking at selling nine lakh NSE shares, the reserve price has been pegged at Rs 315 crore. Meanwhile, in recent months, SBI’s merchant banking wing SBI Capital Markets, too, has reduced its stake in NSE from 5.6% to 4.3%.
The stake sale comes at a time when banks are struggling to boost their profits. Most banks will have to provide for their huge depreciation on the treasury portfolio due to rising yields in government bonds and a slump in the equity market. Analyst say that the sale of NSE shares will help them offset a part of provisions on treasury books.
“If the bank does not receive bids at attractive price, we may be forced to postpone plans to sell the stake right now. As such, the Securities and Exchange Board of India (Sebi) has not set any deadline to lower the stake,” said senior bank officials. Further, SBI will be able to offload its shares in NSE only to domestic institutions as the foreign holding in the exchange has already touched the maximum permissible limit of 26%.
People familiar with the development say that the bank is also open to divesting small chunk of shares to different entities. This, in effect, would lead to another round of sale where various entities would end up with marginal stake in the stock exchange.
Rules governing the ownership of stock exchanges stipulate that any single entity buying more than 1% in any of the stock exchanges, would have to obtain a “fit and proper” certificate from Sebi.
In March 2007, Morgan Stanley (3%), Citigroup (2%) and Actis (1%) collectively bought 6% stake in NSE, when various stakeholders like IDBI, SBI, SBI Capital Markets, Corporation Bank, Union Bank of India and Bank of Baroda sold their share. The first round of stake sale took place in January 2007, when global majors like NYSE, Goldman Sachs, General Atlantic and Softbank Asian Infrastructure Fund (SAIF) bought 5% each.
Ashish Rukhaiyar
MUMBAI
INDIA’S largest bank State Bank of India (SBI) has decided to sell a part of its holding in the National Stock Exchange (NSE), a move which is expected to fetch over Rs 300 crore for the bank.
SBI, which helped promote the exchange over 15 years ago along with a clutch of Indian financial institutions and banks, has an equity holding of 8.5%. The decision to reduce the holding has been prompted by rules on ownership of exchanges framed by the government. According to these rules, the equity holding of a single entity has been capped at 5%. Shareholders, who control more than 5%, will need to shed a part of their holdings to conform to these norms.
Senior bank officials said that they were hoping to rake in at least Rs 315 crore from the stake sale, which implies a valuation of close to $4 billion for the exchange. The bank has appointed its broking subsidiary SBICAP Securities to scout for potential buyers for shares it is putting on the block.
An official, who is privy to the development, said that SBI’s reserve price of Rs 315 crore is benchmarked to an earlier transaction in which the Life Insurance Corporation (LIC) had sold a part of its NSE stake at Rs 3,501 per share in March 2008. Considering that SBI is looking at selling nine lakh NSE shares, the reserve price has been pegged at Rs 315 crore. Meanwhile, in recent months, SBI’s merchant banking wing SBI Capital Markets, too, has reduced its stake in NSE from 5.6% to 4.3%.
The stake sale comes at a time when banks are struggling to boost their profits. Most banks will have to provide for their huge depreciation on the treasury portfolio due to rising yields in government bonds and a slump in the equity market. Analyst say that the sale of NSE shares will help them offset a part of provisions on treasury books.
“If the bank does not receive bids at attractive price, we may be forced to postpone plans to sell the stake right now. As such, the Securities and Exchange Board of India (Sebi) has not set any deadline to lower the stake,” said senior bank officials. Further, SBI will be able to offload its shares in NSE only to domestic institutions as the foreign holding in the exchange has already touched the maximum permissible limit of 26%.
People familiar with the development say that the bank is also open to divesting small chunk of shares to different entities. This, in effect, would lead to another round of sale where various entities would end up with marginal stake in the stock exchange.
Rules governing the ownership of stock exchanges stipulate that any single entity buying more than 1% in any of the stock exchanges, would have to obtain a “fit and proper” certificate from Sebi.
In March 2007, Morgan Stanley (3%), Citigroup (2%) and Actis (1%) collectively bought 6% stake in NSE, when various stakeholders like IDBI, SBI, SBI Capital Markets, Corporation Bank, Union Bank of India and Bank of Baroda sold their share. The first round of stake sale took place in January 2007, when global majors like NYSE, Goldman Sachs, General Atlantic and Softbank Asian Infrastructure Fund (SAIF) bought 5% each.
BSE board to meet next week amidst rumours of more exits
Questions Seem To Have Been Raised About
Some Of The Strategic Moves Of The Exchange
Jul 03, 2008
Ashish Rukhaiyar
MUMBAI
JULY 12 could turn out to be an important day for the Bombay Stock Exchange, when its board meets in the backdrop of abrupt resignations and rumours of more exits. Already, there are talks of strategic partners demanding board seats and Sebi being unhappy with BSE’s performance, having lost ground to the National Stock Exchange (NSE).
BSE’s newly-elected chairman Jagdish Capoor has already met Sebi chairman CB Bhave on more than a couple of occasions after assuming office for the second time. Mr Bhave had earlier expressed his displeasure over the way BSE has conducted its business.
“I met Mr Bhave after assuming office and we discussed various issues,” said Mr Capoor without going into the specifics. For Singapore Stock Exchange and Deutsche Boerse asking for a board seat, Mr Capoor said: “The decision would be taken by the board at the appropriate time.” He also declined to comment on rumours related to fresh resignations.
The buzz is that BSE managing director and CEO Rajnikant Patel may quit. While Mr Patel was unavailable for comment, sources said such rumours could be linked to the fact that Mr Patel was close to Mr Shekhar Datta. Mr Datta had certain differences with some of the board members who had earlier opposed Mr Patel joining the board of the Calcutta Stock Exchange where BSE has a stake. Incidentally, Mr Datta’s resignation, sources said, may be connected to the way Sebi chief felt about BSE.
In June 10, 2008, when Mr Bhave met the BSE board, many members, including the then non-executive chairman Mr Datta and shareholder director Jamshyd Godrej, were not present. Few days later, the duo emailed their resignations to the Sebi chief.
Sources said some of the strategic initiatives of BSE had come under question. These include taking a stake in the Calcutta Stock Exchange, buying into the Ahmedabad-based commodity exchange NMCE and BSE’s technology agreement with OMX.
“The BSE-OMX deal was signed in a very hasty manner without any RFP (request for proposal) or business requirement plan,” said a person familiar with the developments. Now we have been told that OMX would take another 18 months to deliver the platform, added the source. BSE is believed to have shelled out $37.50 million for the platform. According to sections in BSE, Mr Datta’s huge travel bills had also attracted the regulator’s attention.
However, defending Mr Datta on some of the strategic investments, sources said all decisions were taken by the board and not by the chairman unilaterally. “There are sub-committees looking into such investment decisions and choice of technology. The board took its decisions after considering the recommendations of these committees,” said an insider.
BSE had bought 5% in CSE for Rs 6 crore and 26% in NMCE for around Rs 40 crore. Sections of the broking community felt that these investments made no sense since there is little trading on the CSE, while NMCE does a fraction of the business done by leading commodity exchanges like MCX and NCDEX.
The Central Warehousing Corporation, which has a stake of 26% in NMCE, is believed to be against BSE’s representation on the board of NMCE. Incidentally, CWC and BSE have not yet signed the shareholder’s agreement. Last heard, BSE was said to be reconsidering its decision related to NMCE.
Some Of The Strategic Moves Of The Exchange
Jul 03, 2008
Ashish Rukhaiyar
MUMBAI
JULY 12 could turn out to be an important day for the Bombay Stock Exchange, when its board meets in the backdrop of abrupt resignations and rumours of more exits. Already, there are talks of strategic partners demanding board seats and Sebi being unhappy with BSE’s performance, having lost ground to the National Stock Exchange (NSE).
BSE’s newly-elected chairman Jagdish Capoor has already met Sebi chairman CB Bhave on more than a couple of occasions after assuming office for the second time. Mr Bhave had earlier expressed his displeasure over the way BSE has conducted its business.
“I met Mr Bhave after assuming office and we discussed various issues,” said Mr Capoor without going into the specifics. For Singapore Stock Exchange and Deutsche Boerse asking for a board seat, Mr Capoor said: “The decision would be taken by the board at the appropriate time.” He also declined to comment on rumours related to fresh resignations.
The buzz is that BSE managing director and CEO Rajnikant Patel may quit. While Mr Patel was unavailable for comment, sources said such rumours could be linked to the fact that Mr Patel was close to Mr Shekhar Datta. Mr Datta had certain differences with some of the board members who had earlier opposed Mr Patel joining the board of the Calcutta Stock Exchange where BSE has a stake. Incidentally, Mr Datta’s resignation, sources said, may be connected to the way Sebi chief felt about BSE.
In June 10, 2008, when Mr Bhave met the BSE board, many members, including the then non-executive chairman Mr Datta and shareholder director Jamshyd Godrej, were not present. Few days later, the duo emailed their resignations to the Sebi chief.
Sources said some of the strategic initiatives of BSE had come under question. These include taking a stake in the Calcutta Stock Exchange, buying into the Ahmedabad-based commodity exchange NMCE and BSE’s technology agreement with OMX.
“The BSE-OMX deal was signed in a very hasty manner without any RFP (request for proposal) or business requirement plan,” said a person familiar with the developments. Now we have been told that OMX would take another 18 months to deliver the platform, added the source. BSE is believed to have shelled out $37.50 million for the platform. According to sections in BSE, Mr Datta’s huge travel bills had also attracted the regulator’s attention.
However, defending Mr Datta on some of the strategic investments, sources said all decisions were taken by the board and not by the chairman unilaterally. “There are sub-committees looking into such investment decisions and choice of technology. The board took its decisions after considering the recommendations of these committees,” said an insider.
BSE had bought 5% in CSE for Rs 6 crore and 26% in NMCE for around Rs 40 crore. Sections of the broking community felt that these investments made no sense since there is little trading on the CSE, while NMCE does a fraction of the business done by leading commodity exchanges like MCX and NCDEX.
The Central Warehousing Corporation, which has a stake of 26% in NMCE, is believed to be against BSE’s representation on the board of NMCE. Incidentally, CWC and BSE have not yet signed the shareholder’s agreement. Last heard, BSE was said to be reconsidering its decision related to NMCE.
Leveraged promoters to face the margin call
Jul 02, 2008
Sugata Ghosh & Ashish Rukhaiyar
MUMBAI
AFTER retail investors and high net worth individuals (HNIs), it could now be the turn of big boys to face margin calls. Given the intensity of correction in the stock market, promoters of some of the companies may find themselves at the mercy of their financiers. These are players who have pledged their stocks to borrow from large non-banking finance companies (NBFCs).
The money raised is used to step up their shareholdings in group companies through creeping acquisition, subscribing to preference shares and participating in a rights offering to avert a stake dilution. According to market circles, some of the NBFCs have started sending feelers to these promoter-borrowers to pledge more shares following a sharp decline in the stock value. Alternatively, they have to prepay a slice of the loan.
Interestingly, the borrower club comprises small promoters as well as not-so-small ones, cutting across all sectors from manufacturing to retail to properties. In the course of a stunning bull market they played a leveraged game, not just to consolidate their ownership in group firms but to also grow their businesses. For instance, the equity they chip in for floating a new company could actually be with money borrowed from a finance company. This would make the actual debt-equity ratio of the new company much more than what looks like.
However, these borrowers get more breathing space than a regular stock market investor who may find that the brokerage has sold his pledged stocks and squared off the position due to a delay in replenishing the margin. “Here, finance companies have a long standing relationship with many promoters, and may take much longer in pulling the trigger,” said a senior official of a finance house. However, if the market continues to be as brutal as it looks, it’s a matter of time that these borrowers will feel the crunch.
The margin requirement for such borrowings is normally high. An NBFC may ask for stocks worth Rs 200 crore to Rs 300 crore, depending on how volatile the share is, for a Rs 100-crore loan. The interest charge varies between 12% and 18%. There are cases where some of these promoter-borrowers have raised funds from a string of finance companies. Often finance companies extend such loans in the garb of working capital.
In these cases, the primary collateral could be current assets of the company while the pledged stocks serve as additional collateral. Since deposit accepting finance companies have certain restrictions against loan against shares, the financing is structured in a way to make it appear as a standard working capital loan. Some market participants, in light of the prevailing uncertainty, have already started towing a cautious line when it comes to funding promoters.
“We have consciously decided to go slow in funding promoters since the market conditions are bad and the business is a high risk one,” said the CEO of a brokerage arm which runs a finance house. “The market has not been kind in the recent past and having large single stock portfolio carries a huge risk. Around 4-5 months ago, we took a decision to go slow in this arena,” he said. He feels the risk rises exponentially as the promoters in most cases use the funds to further acquire their own shares.
Market players feel that the coming days will witness quite a few promoters getting margin calls as the markets have lost heavy ground. In the past one month, the benchmark Sensex has shed more than 21% or 3,454 points. More importantly, the midcap index that houses almost 280 stocks has seen nearly one-fourth or 23.94% of its value getting eroded. Promoters of many midcap companies resort to such funding from finance companies as they have few other avenues.
Sugata Ghosh & Ashish Rukhaiyar
MUMBAI
AFTER retail investors and high net worth individuals (HNIs), it could now be the turn of big boys to face margin calls. Given the intensity of correction in the stock market, promoters of some of the companies may find themselves at the mercy of their financiers. These are players who have pledged their stocks to borrow from large non-banking finance companies (NBFCs).
The money raised is used to step up their shareholdings in group companies through creeping acquisition, subscribing to preference shares and participating in a rights offering to avert a stake dilution. According to market circles, some of the NBFCs have started sending feelers to these promoter-borrowers to pledge more shares following a sharp decline in the stock value. Alternatively, they have to prepay a slice of the loan.
Interestingly, the borrower club comprises small promoters as well as not-so-small ones, cutting across all sectors from manufacturing to retail to properties. In the course of a stunning bull market they played a leveraged game, not just to consolidate their ownership in group firms but to also grow their businesses. For instance, the equity they chip in for floating a new company could actually be with money borrowed from a finance company. This would make the actual debt-equity ratio of the new company much more than what looks like.
However, these borrowers get more breathing space than a regular stock market investor who may find that the brokerage has sold his pledged stocks and squared off the position due to a delay in replenishing the margin. “Here, finance companies have a long standing relationship with many promoters, and may take much longer in pulling the trigger,” said a senior official of a finance house. However, if the market continues to be as brutal as it looks, it’s a matter of time that these borrowers will feel the crunch.
The margin requirement for such borrowings is normally high. An NBFC may ask for stocks worth Rs 200 crore to Rs 300 crore, depending on how volatile the share is, for a Rs 100-crore loan. The interest charge varies between 12% and 18%. There are cases where some of these promoter-borrowers have raised funds from a string of finance companies. Often finance companies extend such loans in the garb of working capital.
In these cases, the primary collateral could be current assets of the company while the pledged stocks serve as additional collateral. Since deposit accepting finance companies have certain restrictions against loan against shares, the financing is structured in a way to make it appear as a standard working capital loan. Some market participants, in light of the prevailing uncertainty, have already started towing a cautious line when it comes to funding promoters.
“We have consciously decided to go slow in funding promoters since the market conditions are bad and the business is a high risk one,” said the CEO of a brokerage arm which runs a finance house. “The market has not been kind in the recent past and having large single stock portfolio carries a huge risk. Around 4-5 months ago, we took a decision to go slow in this arena,” he said. He feels the risk rises exponentially as the promoters in most cases use the funds to further acquire their own shares.
Market players feel that the coming days will witness quite a few promoters getting margin calls as the markets have lost heavy ground. In the past one month, the benchmark Sensex has shed more than 21% or 3,454 points. More importantly, the midcap index that houses almost 280 stocks has seen nearly one-fourth or 23.94% of its value getting eroded. Promoters of many midcap companies resort to such funding from finance companies as they have few other avenues.
Arbitrageurs Smell Good Money In Ranbaxy
Even if the scrip trades above Rs 500 after the
open offer, you stand to profit, say analysts
Jun 13, 2008
Ashish Rukhaiyar
MUMBAI
THE impending open offer price of Rs 737 per Ranbaxy share does not seem to have arbitrageurs excited. This is evident from the lacklustre trend in the stock price since the deal with Daiichi was announced pre-market hours on Wednesday.
On Thursday, Ranbaxy fell 3.1% to close at Rs 543.50. But market watchers feel there could be decent — if not lavish — money to be made from the open offer after factoring in various assumptions like company fundamentals, valuations, number of shares tendered in the open offer, future prospects and post offer price of the stock.
Interestingly, many brokerages were peddling their analysis of the “money making proposition” on Thursday in their attempt to please their clientele for whom the recent past has been tough. According to one such study, even if Ranbaxy shares trade in a price upward of Rs 500 post the open offer, investors stand a chance to make a decent profit.
The explanation goes like this. Since minority investors hold a little over 65% in Ranbaxy, only one-third of the shares submitted in the open offer will be accepted, assuming all minority investors participate. An investor, who buys 100 shares from the market for Rs 543.50 and tenders them in the open offer, will receive Rs 737 per share for only 31 shares, while the remaining 69 will be returned to him. The average price for these 69 shares would come to Rs 456. For the investor to make a meaningful profit on his remaining shares, any price above Rs 480 would suffice.
CLSA, on Thursday, termed the offer “attractive from minority shareholders perspective”. “With a minimum 30.7% of shares being likely to be accepted in the open offer (Rs 737 per share) and our fair price estimate of Rs 525 per share (for residual 69.3% shares), we arrive at target price of Rs 590,” said the foreign brokerage.
However, therein also lies the catch. For, analysts who feel that there is not much on the table for investors, say there is no guarantee that price would remain above Rs 500 post-open offer. They are of the view that the stock would come under heavy selling pressure after the open offer as investors who bought with the sole aim of arbitrage gains would sell in the open market. There are many who differ as institutional investors who hold more than 40% are long-term investors and typically do not resort to selling in the open market after the open offer. This would take care of the stock price after the open offer, they add.
Valuations also suggest that investors stand a chance to profit from the sale of residual shares in the open market. Currently, the stock is trading at a PE of 33.87. Historically, Ranbaxy has been trading at higher PEs compared to its peers like Cipla and Dr Reddy’s Labs. At a price of Rs 500, the PE would come to around 31, which is only slightly higher than its 2007 average PE of 28.62.
KRIS director Arun Kejriwal said the deal is a sure way of generating “risk-free return”. “In uncertain times, when people are not confident whether the bottom has been made, Ranbaxy offers a good opportunity to park money,” says Mr Kejriwal.
However, the preferential issue would also play an important role as it would change the acceptance ratio. If the preferential issue is made before the open offer then the capital base would be enhanced, affecting the acceptance ratio.
open offer, you stand to profit, say analysts
Jun 13, 2008
Ashish Rukhaiyar
MUMBAI
THE impending open offer price of Rs 737 per Ranbaxy share does not seem to have arbitrageurs excited. This is evident from the lacklustre trend in the stock price since the deal with Daiichi was announced pre-market hours on Wednesday.
On Thursday, Ranbaxy fell 3.1% to close at Rs 543.50. But market watchers feel there could be decent — if not lavish — money to be made from the open offer after factoring in various assumptions like company fundamentals, valuations, number of shares tendered in the open offer, future prospects and post offer price of the stock.
Interestingly, many brokerages were peddling their analysis of the “money making proposition” on Thursday in their attempt to please their clientele for whom the recent past has been tough. According to one such study, even if Ranbaxy shares trade in a price upward of Rs 500 post the open offer, investors stand a chance to make a decent profit.
The explanation goes like this. Since minority investors hold a little over 65% in Ranbaxy, only one-third of the shares submitted in the open offer will be accepted, assuming all minority investors participate. An investor, who buys 100 shares from the market for Rs 543.50 and tenders them in the open offer, will receive Rs 737 per share for only 31 shares, while the remaining 69 will be returned to him. The average price for these 69 shares would come to Rs 456. For the investor to make a meaningful profit on his remaining shares, any price above Rs 480 would suffice.
CLSA, on Thursday, termed the offer “attractive from minority shareholders perspective”. “With a minimum 30.7% of shares being likely to be accepted in the open offer (Rs 737 per share) and our fair price estimate of Rs 525 per share (for residual 69.3% shares), we arrive at target price of Rs 590,” said the foreign brokerage.
However, therein also lies the catch. For, analysts who feel that there is not much on the table for investors, say there is no guarantee that price would remain above Rs 500 post-open offer. They are of the view that the stock would come under heavy selling pressure after the open offer as investors who bought with the sole aim of arbitrage gains would sell in the open market. There are many who differ as institutional investors who hold more than 40% are long-term investors and typically do not resort to selling in the open market after the open offer. This would take care of the stock price after the open offer, they add.
Valuations also suggest that investors stand a chance to profit from the sale of residual shares in the open market. Currently, the stock is trading at a PE of 33.87. Historically, Ranbaxy has been trading at higher PEs compared to its peers like Cipla and Dr Reddy’s Labs. At a price of Rs 500, the PE would come to around 31, which is only slightly higher than its 2007 average PE of 28.62.
KRIS director Arun Kejriwal said the deal is a sure way of generating “risk-free return”. “In uncertain times, when people are not confident whether the bottom has been made, Ranbaxy offers a good opportunity to park money,” says Mr Kejriwal.
However, the preferential issue would also play an important role as it would change the acceptance ratio. If the preferential issue is made before the open offer then the capital base would be enhanced, affecting the acceptance ratio.
IPO scam: Sebi may now issue consent orders to Vora family
Jun 09, 2008
Ashish Rukhaiyar
MUMBAI
THE first set of consent orders in the IPO scam is just the tip of the iceberg. According to sources, there are likely to be 75-80 consent orders with various entities. And given the fact that the market regulator’s investigation is almost through, there is a high probability that the remaining orders would be served within quick time.
Persons familiar with the development add that the next set of consent orders is also expected to be with entities alleged to be the financiers in the whole scam. Just last week, the Securities and Exchange Board of India (Sebi) signed the first set of consent orders with members of the Dadia family, who were identified as errant financiers in the IPO scam. The regulator also managed to collect Rs 71.75 lakh as penalty.
“If all the alleged entities agree for consent orders then the number will be in the range of 75-80,” said a person familiar with the development. “Just like the members of the Dadia family, there are some other financiers, too, in the whole deal that would be targeted through the next set of consent orders,” he added.
It is believed that the next set of consent orders is expected to be against members of the Vora family and the entities that they control. Hasmukhlal Vora, Dhiren Vora and Sonal Vora have been identified as financiers to Roopalben Panchal, the prime accused and against whom even a CBI enquiry is pending.
Interestingly, sources add that the market regulator has been finding it difficult to find the entities that the Voras own. “There are a few entities that we believe are owned by members of the Vora family, but there are still some grey areas,” said sources.
Entities like Zenet Software, Seer Finlease, Excel Multitech and Tauras Infosys are believed to be loosely owned by different members of the Vora family. Even Sugandh Investments, which cornered the retail portion of NTPC’s IPO, is alleged to be linked to the Voras. Zenet Software was one of the financiers to Sugandh.
It is also said that the market regulator would be more at ease with consent orders against entities that are not a part of the investigations carried out by other agencies like CBI. The government agency has already filed chargesheets against various entities, including Roopalben Panchal, Dharmesh Mehta, Purshottam Budhwani and Sugandh Investments.
The consent orders would also help the regulator in compensating thousands of retail investors as the entities would have to disgorge the ill-gotten gains apart from the settlement charges. Members of the Dadia family remitted a total sum of Rs 71.75 lakh that included Rs 59.75 lakh as disgorgement and Rs 12 lakh as settlement charges.
Ashish Rukhaiyar
MUMBAI
THE first set of consent orders in the IPO scam is just the tip of the iceberg. According to sources, there are likely to be 75-80 consent orders with various entities. And given the fact that the market regulator’s investigation is almost through, there is a high probability that the remaining orders would be served within quick time.
Persons familiar with the development add that the next set of consent orders is also expected to be with entities alleged to be the financiers in the whole scam. Just last week, the Securities and Exchange Board of India (Sebi) signed the first set of consent orders with members of the Dadia family, who were identified as errant financiers in the IPO scam. The regulator also managed to collect Rs 71.75 lakh as penalty.
“If all the alleged entities agree for consent orders then the number will be in the range of 75-80,” said a person familiar with the development. “Just like the members of the Dadia family, there are some other financiers, too, in the whole deal that would be targeted through the next set of consent orders,” he added.
It is believed that the next set of consent orders is expected to be against members of the Vora family and the entities that they control. Hasmukhlal Vora, Dhiren Vora and Sonal Vora have been identified as financiers to Roopalben Panchal, the prime accused and against whom even a CBI enquiry is pending.
Interestingly, sources add that the market regulator has been finding it difficult to find the entities that the Voras own. “There are a few entities that we believe are owned by members of the Vora family, but there are still some grey areas,” said sources.
Entities like Zenet Software, Seer Finlease, Excel Multitech and Tauras Infosys are believed to be loosely owned by different members of the Vora family. Even Sugandh Investments, which cornered the retail portion of NTPC’s IPO, is alleged to be linked to the Voras. Zenet Software was one of the financiers to Sugandh.
It is also said that the market regulator would be more at ease with consent orders against entities that are not a part of the investigations carried out by other agencies like CBI. The government agency has already filed chargesheets against various entities, including Roopalben Panchal, Dharmesh Mehta, Purshottam Budhwani and Sugandh Investments.
The consent orders would also help the regulator in compensating thousands of retail investors as the entities would have to disgorge the ill-gotten gains apart from the settlement charges. Members of the Dadia family remitted a total sum of Rs 71.75 lakh that included Rs 59.75 lakh as disgorgement and Rs 12 lakh as settlement charges.
Broking cos resort to staggered bonus payout
Jun 04, 2008
Ashish Rukhaiyar
MUMBAI
IT IS that time of the year again when employees at domestic brokerages look forward to receiving their annual bonus. Yet this time round, there were some not so pleasant surprises. For, those lucky to be eligible for a decent bonus were shocked to see their payouts going down by almost 50%. Reason — staggered bonus payout.
Many large-sized brokerages have taken to giving out bonus in tranches in their attempt to address two major issues facing the industry — higher attrition and business slowdown. More importantly, many brokerages are eager to move to the system of staggered bonus payouts in the future.
According to industry sources, some of the biggest domestic brokerages have given bonuses in two tranches in a bid to hold back employees. While most have received one half of their bonus, they have been asked to wait for a couple of months for the remaining half. In some instances, the wait is said to be almost 5-6 months long. Typically, domestic brokerages face a huge exodus in the months of April and May as they dole out their bonuses in March. Dealers and analysts tend to move to greener pastures after collecting their bonuses.
This time round the situation has aggravated on account of their business volume having witnessed a slowdown for the first time in more than four years. The bull run, which started in mid-2005, continued unabated till the start of the current calendar year. During those years, brokerages never faced any such issue as they were aflush with capital. The recent results of most of the listed entities clearly show that their brokerage income has gone down substantially.
In an interesting incident, a recently-listed brokerage with a large clientele is believed to have given out the full bonus but with a caveat. The bonus has been “divided into two notional parts” with one part being called “loan to the employee”. Any employee who quits within a couple of months after receiving the bonus will have to pay back the loan part of the bonus.
Ashish Rukhaiyar
MUMBAI
IT IS that time of the year again when employees at domestic brokerages look forward to receiving their annual bonus. Yet this time round, there were some not so pleasant surprises. For, those lucky to be eligible for a decent bonus were shocked to see their payouts going down by almost 50%. Reason — staggered bonus payout.
Many large-sized brokerages have taken to giving out bonus in tranches in their attempt to address two major issues facing the industry — higher attrition and business slowdown. More importantly, many brokerages are eager to move to the system of staggered bonus payouts in the future.
According to industry sources, some of the biggest domestic brokerages have given bonuses in two tranches in a bid to hold back employees. While most have received one half of their bonus, they have been asked to wait for a couple of months for the remaining half. In some instances, the wait is said to be almost 5-6 months long. Typically, domestic brokerages face a huge exodus in the months of April and May as they dole out their bonuses in March. Dealers and analysts tend to move to greener pastures after collecting their bonuses.
This time round the situation has aggravated on account of their business volume having witnessed a slowdown for the first time in more than four years. The bull run, which started in mid-2005, continued unabated till the start of the current calendar year. During those years, brokerages never faced any such issue as they were aflush with capital. The recent results of most of the listed entities clearly show that their brokerage income has gone down substantially.
In an interesting incident, a recently-listed brokerage with a large clientele is believed to have given out the full bonus but with a caveat. The bonus has been “divided into two notional parts” with one part being called “loan to the employee”. Any employee who quits within a couple of months after receiving the bonus will have to pay back the loan part of the bonus.
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