We want to bring derivatives back on BSE: Dy CEO

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

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

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

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

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

Brokers to create database to share info on defaulters

Ashish Rukhaiyar
ET NOW
Sept 12, 2009

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

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

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

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

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

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

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

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

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

Ashish Rukhaiyar
ET NOW
Aug 28, 2009

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

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

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

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

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

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

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

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

Mumbai Takes Stock

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Nishanth Vasudevan & Ashish Rukhaiyar
ET NOW
July 1, 2009

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

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

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

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

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

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

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

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

Face Value - Madhu Kannan

Taking on the matrix challenge
Ashish Rukhaiyar

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

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

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

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

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

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

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

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

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

Rising off-market deals come under Sebi scanner

Ashish Rukhaiyar
ET NOW
June 8, 2009

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

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

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

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

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

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

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

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

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

SEBI pulls plug on hollow buybacks

Tough Times Call For Tough Measures
Ashish Rukhaiyar

ET NOW
May 7, 2009

MARKET regulator Sebi is clamping down on the practice of ‘hollow’ buyback offers, which see companies make buyback announcements and lift share prices, but buy little or no shares. Sebi has issued informal guidelines to investment banks that manage buyback issues. These norms could soon be made part of the buyback rules, a person familiar with the matter said.

Companies will now have to mention the minimum number of shares that will be bought back while making announcements, said an official with an investment bank. The buyback offer cannot be closed before the minimum number of shares have been bought back. Companies will also have to buy back a certain number of shares every week when the market price is below the maximum buyback price.

Buybacks are meant to enhance shareholder value by reducing the equity base, which in turn boosts the earnings ratios (like return on equity, price earnings) and subsequently the share price. But Sebi has observed that some promoters have managed to bolster the stock price without spending a single rupee on buying back the shares.

In the past, several companies have announced large-sized buyback offers via open market purchases, apparently without intending to honour them. The mere announcement of a buyback offer is often good enough to bolster the company’s stock price. This is because short-sellers back off, thinking company purchases will avert any steep slide in the stock price, and thus limit profits from short sales. Many undecided sellers will hold on to their shares, preferring to sell when prices rise later, and fresh investors too will step in to buy, expecting the stock to be re-rated because of the improvement in earnings ratios.

Once the share price stabilises or firms up, promoters may choose not to buy any shares at all, or may just spend a fraction of the money mentioned in the original announcement.

In July last year, DLF announced a Rs 1,100-crore buyback for a maximum of 1.83-crore shares. Last week, it announced the closure of the issue, after buying back just 76.39-lakh shares for an aggregate amount of Rs 140.69 crore.

In another case, Bosch, which announced a buyback issue totalling Rs 639 crore in December last year, bought back a little over 4-lakh shares as against the maximum limit of over 14-lakh shares.

Cos not buying back shares despite low price

SIMILARLY, Alembic has bought back 15-lakh shares after announcing a buyback for 60-lakh shares.

“Sebi started this practice a few months ago with the intention of bringing in more seriousness to buyback offers,” says ICICI Securities’ head (capital market) Anil Ladha. “The trigger was obviously a slew of large buyback announcements, followed by insignificant actual buyback (of shares). Companies now also have to buy back shares every week, when the share price falls below the maximum buyback price,” adds Mr Ladha.

The regulator’s directive comes on the heels of a number of buyback announcements in recent times. Data collated by Prime Database reveal that around 30 buyback offers are currently on. In most instances, companies have not been buying back shares, despite the current market price being much below the maximum buyback price.

Some of the ongoing buyback offers with a clause regarding minimum quantum of buyback include Gitanjali Gems, Sandesh, Mangalam Cement, Apollo Tyres, Austin Engineering Company and Bosch. In most cases, the quantum of minimum buyback ranges from 15% to 25%. For instance, if a company intends to buy back 10-lakh shares, and Sebi insists on a minimum of 20%, the issue cannot be closed before the company buys back at least 2-lakh shares.

Antique Stock Broking director Premal Doshi welcomed the Sebi directive. “Companies announce mega buyback issues, but the ground reality is different. The quantum of minimum buyback, however, differs, as it is only an informal guidance as of now,” says Mr Doshi.

Blame it on cross margining, BSE's cash market share takes a dip

Jigar Pathak & Ashish Rukhaiyar
MUMBAI
April 24, 2009

IT CONTINUES to be a downhill ride for the Bombay Stock Exchange. Its market share in the cash segment has fallen to 25% now, and market watchers say this is likely to shrink further as brokers increasingly use cross-margining facility between the cash and derivatives market.

Cross margining allows a market participant to reduce his margin payment obligation for offsetting positions in cash and the derivatives market. For instance, if a trader is long 2000 shares of ACC in the cash segment, and short 1000 shares of ACC in the derivatives segment, he is liable to pay a margin on only 1000 shares (2000 minus 1000).

According to a release by the National Stock Exchange recently, around 20% of the brokers in the cash market segment and around 30% of the brokers in the derivatives segment have registered for using the cross-margining facility, thus saving around Rs 700 crore by way of margin payment.

“It is very unlikely for any market participant to incur additional margin cost by trading only on the cash segment of BSE as its derivatives segment is not picking up. Slowly, but surely, the implications would be visible for BSE,” said Manoj Vaish, President & CEO-India, Dun & Bradstreet.

Why cross margining hurts BSE is because trading volumes in its derivative segment is negligible. So a trader, who transacts in both the cash and derivatives segment, would find it cheaper to trade on NSE as he could save on margin obligations.

“I feel this (cross margining) is bad for BSE, but it makes the Indian equity market more efficient even though it goes against BSE’s interests. India’s interests should matter more than BSE’s interest,” said Ajay Shah, senior fellow at National Institute of Public Finance and Policy.

Some experts opine that for better price efficiency, there has to be arbitrage opportunities between the two exchanges. “Arbitrage opportunities would add to the volumes on BSE, but there are not likely to be too many such deals,” says KR Choksey Securities MD Deven Choksey.

“Also, some dedicated institutional investors, who prefer BSE over NSE for bulk and block deals would keep the volumes ticking for the bourse. However, in the longerterm, due to higher impact cost, the other institutional investors would opt out of BSE,” he adds.

Geogit financial services MD CJ George believes that in the longer run, when algorithm trading picks up, orders in the cash segment would automatically flow to the exchange, which provides the competitive price.

“However, investors having an offsetting position would prefer NSE over BSE till the time derivative segment of BSE picks up,” he says.

BSE, Nasdaq OMX battle takes a legal twist

Exchange Learnt To Have Send Legal Notice To OMX,
Seeks $137-Million Compensation For Lost Business
Ashish Rukhaiyar & Reena Zachariah
MUMBAI
April 4, 2009

A BITTER battle seems to be brewing between Asia’s oldest equity bourse and one of the world’s largest exchange technology providers.

While it is already known that an agreement signed between the Bombay Stock Exchange (BSE) and OMX — now known as Nasdaq OMX — in January 2008 has gone sour, an arbitration process is being explored now. ET has learnt that BSE has already sent a legal notice to OMX.

According to people familiar with the development, BSE has sent a legal notice to OMX recently, asking for a compensation of around $137 million by way of lost business opportunity. It has also charged the technology provider with not honouring its commitments.

It is believed that both parties, accompanied by their legal advisors, met in Mumbai about two weeks ago, but couldn’t reach any settlement. “The board has taken a call to get out of the contract with OMX as they have not kept their commitments,” said a BSE board member.

In January 2008, BSE and OMX signed an agreement, under which OMX was to provide trading and clearing systems to strengthen BSE’s derivatives and securities trading capabilities. The new platform would also have allowed BSE to clear a wider range of products, as well as offer a new set of clearing services to its members. Further, the first phase of the system rollout was scheduled for launch by mid-2008.

However, the deal was called off later that year. BSE had already paid $5 million as the first tranche to OMX for the contract valued at $37.5 million. OMX, incidentally, is a technology supplier to more than 70 exchanges globally.

In an emailed reply, the BSE spokesperson said: “The agreement has been terminated and as per the provision of the agreement, there is an arbitration mechanism, which is being explored.”

OMX, on the other hand, refused to comment. “Our policy is to not give detailed comments about our customers. Therefore, we will unfortunately not be able to provide you with any comment,” it said via email. Interestingly, people familiar with the development also say there is a likelihood of OMX filing a counter-suit against BSE in London.

Edserve under Sebi scanner

Ashish Rukhaiyar
MUMBAI
March 17, 2009

THE stupendous rise in Edserv Softsystems share price on listing, and the equally dramatic fall next day onwards have caught the market regulator’s attention. People familiar with the development say the recently-listed stock is under the Sebi scanner, as there are clear signs of price manipulation. ET has learnt that the watchdog is looking into the transactions of two investors, who offloaded a huge chunk of shares on the day of listing.

Edserv Softsystems’ initial public offer, priced at Rs 60 per share, listed on bourses on March 2. After touching a high of Rs 147.90 the following day, the stock has been hurtling downhill, hitting the lower end of the intra-day circuit filter everyday. On Monday, the stock closed at Rs 35.30, down 10% over its previous close.

“The trading pattern throws up a few irregularities that we are analysing,” said a person familiar with the development, who preferred anonymity. “On March 2, the number of shares traded was nearly 10 times the issue size. We are looking at some of the bulk orders that were executed on the day the stock listed,” he added. Around 3.4-crore shares were traded on BSE on March 2 while the issue size was only 39.74-lakh shares.

While details of entities could not be ascertained, the market is abuzz with the name of a high net worth individual whose name also figured in a recent investigation related to a multiplex chain.

According to Prime Database, there were only two successful allotees in the institutional segment of the public issue. Market players feel this makes it a lot easier to manipulate the price as shares are not widely held. In the past, there have been quite a few instances of smallsized issues being subject to post-listing manipulation by a clutch of entities.

On a different note, the timing of the issue has baffled many as this was also the first IPO for which the Sebi approval was vaild for 12 months. Sebi had recently amended its guidelines, enhancing the validity of its approval for an IPO from three months to one year. In other words, once the regulator gives the go-ahead, the company can come out with the IPO anytime within a year.

Daily fx futures limits set to double

Sebi To Raise Small & Large Traders’
Daily Position Limit To $10M & $50M

Ashish Rukhaiyar & Gaurav Pai
MUMBAI
March 17, 2009

INDIVIDUAL traders and brokers may now get much greater exposure to currency futures. Market regulator Sebi is set to double the daily position limit for small traders and larger brokers to $10 million and $50 million, a person familiar with the development said. An announcement on this count is expected in the next few days.

Once operational, the move will help in assuaging the concerns of entities with large foreign currency requirements such as corporations, exporters and importers. For long, they have been complaining that the existing limits come in the way of effectively reducing their foreign currency exposure risks.

NSE, BSE and the Multi Commodity Exchange are the three entities that offer a currency derivatives platform currently. Ahmedabad-based National Multi Commodity Exchange (NMCE) and a group of leading banks are also slated to launch similar platforms for trading of currency futures soon.

“The move should ideally lead to more liquidity and deeper markets, where a player can take increasing exposure without much effect on the prices,” said the head of a debt broking house. “However, not many banks are active in the segment, which has left most of their individual limits unused. So how much improvement doubling limits will lead to, is debatable,” he said.

Present Sebi laws have a restriction on open position at a client level (individual trader) of the greater of 6% of the total open interest (total number of outstanding contracts), or $5 million. For traders, the ceiling is on the gross open positions of $25 million, or 15% of the total open interest.

For banks, however, the gross open position limit is $100 million, or 15% of the total open interest. However, banks are still not active in the segment since they have access to the over-the-counter forex market that is much more efficient.

Since August, when the futures were first launched, daily volumes have gone up from a few million dollars to as much as a billion dollars in early March. But they are still a tiny fraction of the activity in the OTC market, where banks trade with each other through the telephone.

Also, dealers say inadequate volumes on the three currency futures platforms make any meaningful arbitrage difficult, especially since the minimum ticket size on the currency futures bourses of $1,000 is far too small. By doubling daily limits, Sebi hopes to bring greater depth to the market. Greater volumes in the market will also help in bringing banks to the platforms — a move that will improve liquidity considerably.

'Conspiracy' seen in RTS bulk deals

Ashish Rukhaiyar
MUMBAI
March 09, 2009

INITIAL investigations into the fraudulent bulk ‘buy’ orders in RTS Power shares show that the three investors who decamped after placing huge bids may have been mere fronts for the actual mastermind of the whole operation. The three accused — Mukesh Konde, Nitesh Jadhav and Ashok Waje — who placed the orders, are absconding and so is Hetal Patel, who was the singlelargest seller of RTS shares on that day.

The broking outfits — Geojit, Networth Stock Broking, Tata Securities and Dawnay Day — through which the ‘buy’ orders were executed, are learnt to have suffered a collective loss of Rs 8 crore, as the buyers had only paid them the margin money.

These broking firms have already lodged complaints with the Securities and Exchange Board of India (Sebi), the Bombay Stock Exchange (BSE), Economic Offences Wing (EOW), in addition to moving the Bombay High Court.

The court has asked BSE to block the payout of funds to Hetal Patel, who had placed the ‘sell’ order for 1.15-lakh shares through Indiabulls Securities. Of the three absconding buyers, Mukesh Konde placed the biggest orders, 1.42-lakh shares in two tranches of 90,000 shares and 52,000 shares.

Interestingly, names of Konde and Patel feature in a number of bulk deals in Usher Agro and Nexxoft Infotel in the period between May and September 2008. According to people familiar with the development, the RTS ‘buy’ order fraud was set into motion in December, when Jadhav joined Networth Stock Broking as a relationship manager.

He then introduced Konde as one of his first clients to the outfit. He did not disclose that he and Konde had been colleagues at another retail broking house previously. Meanwhile, Konde and Waje also opened trading accounts with Geojit and Dawnay Day.

“All the accused are either in their late 20s or early 30s. Bank statements of these entities show disproportionate funds to their income,” says a person closely involved with the matter. “Nitesh’s (Jadhav) father retired as a liftman from BSE in 2000. Hetal Patel is a 31-year old lady with an Andheri address,” he says.

Interestingly, Patel’s bank statement, which authorities have managed to obtain on the direction of the High Court, shows crores of rupees moving in and out almost on a daily basis. “There is a credit of few crores and immediately the money is transferred out through RTGS (Real-Time Gross Settlement System). Even Konde’s bank account shows similar fund movement,” said the person. This led officials to believe that all the accused could be acting as a front for a larger player who is operating behind the scene.

HIT & RUN

The three accused who placed the orders are absconding
The broking cos, through which ‘buy’ orders were executed have suffered a Rs 8-cr collective loss
The broking cos have lodged complaints with Sebi, BSE, EOW

PSU bank stocks seen losing favour with FIIs

Ashish Rukhaiyar & Gaurav Pai
MUMBAI
March 04, 2009

WITH India’s economic growth expected to cool down further, shares of public sector banks (PSBs) seem to be losing charm with foreign institutional investors. Till some months ago, foreign funds were willing to fork out a hefty premium for a stake in these banks. But not any longer. Over the past few weeks, this premium has narrowed down considerably, and in quite a few cases, shares have changed hands at a discount to the market price.

BSE has a special trading window for companies where the FII investment limit has been reached. Through this segment, foreign investors can buy or sell shares among themselves, without disturbing the overall FII investment limit in the stock.

In mid-January, a leading US-based FII sold nearly 1.25-crore shares of BoB through the special window at Rs 235 when the spot price was Rs 240. A clutch of domestic mutual funds were believed to be buyers in the deal. In other instances, more than 1-crore shares each of OBC and Union Bank were sold in a similar fashion although the quantum of discount varied in both the cases.

Dealers say during the bull run, banking majors like SBI and PNB commanded a premium as high as 20% in this segment over the spot price. Other PSBs such as BoB, Bank of India, Union Bank and OBC were quoted at a premium of 8-12%.

According to an institutional dealer, PNB is currently being traded at a premium of 0.9-1.4% while for BoB, the same is around 1.15-1.46% in the FII window. This gains importance as the premium, at which these shares were traded in the FII window, was one of the most widely-watched indicators of FII sentiment. “There were hardly any sellers and so the premium was very high for stocks like SBI and PNB, but with FIIs strapped for liquidity, the premium has come down drastically,” he added.

Incidentally, the FII holding in SBI has fallen below the trigger limit of 18%, which is the first time in many years. A section of market players attribute the fall to The Children Investment Fund (TCI) — the largest single foreign investor in the Indian banking sector — which has been diluting its stake in many banking majors.

Sebi issues show cause to Price Waterhouse

This is the first time that the market regulator has sent such a notice to the statutory auditor of a listed entity, questioning it on the procedure followed while carrying out its duties

Ashish Rukhaiyar
MUMBAI
Feb 27, 2009

CAPITAL markets regulator Sebi has sent a show cause notice to audit firm Price Waterhouse, asking them to clarify on the processes and standards followed while auditing the books of Satyam Computers. This could be the first time that Sebi has sent out such a notice to the statutory auditor of a listed entity questioning it on the procedures it followed while carrying out its duties.

When contacted, Price Waterhouse confirmed the development, but didn’t elaborate. “Price Waterhouse confirms receipt of a show cause notice from the Securities and Exchange Board of India as part of its investigation into Satyam Computer Services. The notice is under examination. As this is an ongoing investigation at a preliminary stage, it is inappropriate to comment further. We continue to cooperate fully with the ongoing investigations into Satyam,” said the audit firm.

Price Waterhouse is being probed for its alleged role in the Satyam Computer financial fraud after former chairman B Ramalinga Raju, on January 7, admitted to falsifying the books of the software company for over seven years.

According to persons familiar with the development, Price Waterhouse has submitted documents and computer files pertaining to Satyam Computer, spread over the past seven years, running into over 60,000 pages of documents. This apart, the audit firm is also conducting its own investigation into the matter to find out how a fraud of such magnitude went unnoticed for so many years, the sources added.

Also, this is not the first time that Price Waterhouse has been issued a notice in the Satyam fraud. Last month, the Institute of Chartered Accountants of India, the apex body of accountants, served a show-cause notice to Price Waterhouse for allegedly not following standard auditing procedures.

ICAI officials said that the institute has taken a serious view of the alleged role of Price Waterhouse, due to the impact it has on the auditing profession. But, it is likely that the audit firm could get away lightly, as accountancy firms limit the extent of their liability in their contracts with clients. Typically, auditors restrict the quantum of their liability to the extent of the fees that they receive from the company. ICAI can only recommend blacklisting the audit firm.

Bulk trades in RTS under lens

Brokers Complain To Sebi, Allege Sellers Acted
In Collusion With Fraudulent Buyer

Ashish Rukhaiyar
MUMBAI
Feb 18, 2009

A GROUP of individual investors has left a few retail broking firms in the lurch by decamping after placing large ‘buy’ orders in RTS Power Corporation shares. The broking firms have filed a complaint with the capital market regulator, the Securities and Exchange Board of India (Sebi), and some of them have approached the police.

ET has learnt that the Bombay Stock Exchange (BSE) has blocked the payout of funds to those investors who sold RTS shares through bulk deals on February 11, 2009. This development could not be independently confirmed with BSE. An email sent to the bourse did not elicit any response till the time of going to press. The broking firms, which were duped, have alleged that some of the sellers in the bulk trade segment were acting in collusion with fraudulent buyers.

According to an official at a broking firm, Mukesh Konde — one of the entities named in the complaint — placed a large order amounting to nearly Rs 8 crore and then refused to pay the remaining margin. The ‘buy’ order was placed through various broking firms, including Geojit Securities, Networth Stock Broking, Sharekhan and Tata Capital.

“He was a regular client and so we allowed him to trade on a lower margin,” said an official with one of the broking firms (that has filed the complaint) on condition of anonymity. “He (Mr Konde) said he would square off the trade later in the day. He, however, vanished after placing the order,” said the official.

In other words, according to the official, he succeeded in creating large volumes at the counter, and pushing up the stock price, with the help of the margin money. Another official, when asked about the issue, refused to talk saying, “The matter is under investigation.”

Meanwhile, suspicion was further raised when a few other entities offloaded shares in large quantities on the same day. Bulk deal data clearly show that entities like Sophia Growth, Hetal Patel and Chetan Nimawat sold shares on February 11 and that the shares were bought earlier (not on February 11). Incidentally, the stock has almost doubled in the past couple of months, with sudden spurts in trading volumes on some days. On February 11, more than 15 lakh shares of RTS were traded on BSE.

“We believe the sellers are the real operators, as they had already cornered the shares before February 11,” said the broking official. “And to top it all, the sellers made sure that none of the buyside broking firms (Geojit, Sharekhan, Networth) were used to offload the shares,” he added.

Sebi smells circular trading in Spice Comm rally

Regulator Begins Probe, Seeks Details Of Trade From SEs
On Three Days Since January 29 When Stock Surged 228%

Nishanth Vasudevan & Ashish Rukhaiyar
MUMBAI
Feb 11, 2009

THE Securities and Exchange Board of India (Sebi) is probing if there was any circular trading in shares of Spice Communications, which had risen sharply of late. A top Sebi official told ET that the market regulator has asked stock exchanges for details of trading in Spice shares in the three sessions since January 29, when the stock surged 228%.

“Prima facie, the trading pattern throws up a lot of questions. The case is high on our priority list,” the official said, while refusing to divulge further details.

The rally in this stock during this period stumped most market watchers, who said the low-free float, provided traders the ammunition to ramp up the stock. Free float means the shareholding of non-promoters, which is supposed to be at least 25% of the total equity, unless in exceptional cases such as public sector companies.

As per shareholding data on BSE, the floating stock in the company is only 80 lakh shares out of the company’s total equity of roughly 6.9-crore shares. This is because Telecom Malaysia India, which is a non-promoter, holds 49%, or 3.38 crore shares, while the existing promoter group, including Idea Cellular, owns 49.9% of the total equity, or 3.44 crore shares.

In the three sessions, when the stock rallied, the average daily volumes were 2.7-crore shares, against a daily aggregate of 7,000 shares in January. Market watchers said the list of shares, where prices have been ramped up in recent months due to “low-free float”, may not be restricted to Spice. Fund managers and brokers said the reason behind such stock price surges, through this method, is the absence of maintaining a free float in spirit, though it is present on paper.

“Today, there are a number of companies with lowfree float that can be manipulated and a lot of such trades are difficult to track down, as the participation of a wider range of people is ensured through spreading of rumours,” said a senior broker familiar with the process.

In another instance of alleged circular trading in the past couple of months, shares of a Mumbai-based realty company were driven up after a sizeable portion of the free-floating stock was cornered by friendly broker circles. The buzz in the investor community is that the move was aimed at countering the attack of bear traders on the stock.

Derivatives panel roots for physical settlement

Sebi-Appointed Committee Feels Physical Settlement In
Futures Will Limit Manipulation & Curb Excessive Speculation
Ashish Rukhaiyar
MUMBAI
Feb 10, 2009

IT IS an old and contentious issue, but a resolution appears nowhere in sight. The Sebi-appointed derivatives committee is learnt to have reiterated its suggestion of introducing physical settlement for trades in stock futures. This, the committee feels, will limit the possibility of manipulation and also curb excessive speculation. While the market regulator is yet to take a view, the recommendation has once again stirred a debate among market participants.

One section feels the right approach is to provide an option of physical settlement, while another section thinks the settlement of futures trades is anyway linked to the price of the physical shares and hence, the current rule (of settling only in cash) is fine.

At present, if a trader has bought stocks futures at Rs 100, and the price of that is Rs 90 on the settlement day, he has to pay up Rs 10. Likewise, a trader who has short-sold a stock future at Rs 100, will suffer a loss of Rs 10, if the price on settlement day is Rs 110. In case the physical settlement is allowed, the bullish trader can take delivery of the shares, if he is hopeful of the price going up soon. Similarly, the short seller can offer delivery of the shares, if he expects a decline in price.

Veteran market participant and managing director of Asit C Mehta Investment Intermediates, Deena Mehta, feels that in the absence of physical delivery, the system simply flushes out all trades at the end of the month when the contract expires. “There is no logical conclusion to the futures trade,” she points out.

Interestingly, this issue was first raised in 1997 by the first advisory committee on derivatives, headed by former Sebi member LC Gupta, who is now the director of Delhi-based Society for Capital Market Research & Development. “Sound principles say the outstanding of any deliverable asset should be settled by delivery and not by cash,” says Mr Gupta. “One also needs to bear in mind that the asset, in this case shares, is limited while cash is unlimited. That also explains the massive spurt in the volume of single-stock futures during the last bull run,” he adds.

Former whole-time member of Sebi, JR Verma, however, does not agree with Mr Gupta’s views. “It is an ideological issue,” he says. “There would not be much of a difference because in both the situations, arbitrage would bring the prices in line,” he explains. “Even in the current system, the settlement is linked to the price of the share, which is the underlying,” he adds. He, meanwhile, highlights the fact that futures contracts on many commodities have been moved to a cash settlement basis instead of physical settlement.

Countering this view, Ms Mehta says: “For those who want to manipulate the market, it is easy to maintain the last day prices so that the settlement rates are high/low as desired. If all trades have to logically close, then such manipulations will have no place in the market.”

Meanwhile, brokers arguing for cash settlement say the volume would fall sharply if physical settlement is introduced. “The costs would go up if traders are forced to settle the contracts in shares,” said a broker, on condition of anonymity. “The cost would go up as traders would have to borrow shares,” he added.

Sebi may plug pledged share gaps

May seek details on the end use
of funds raised through pledging
Ashish Rukhaiyar & Reena Zachariah
MUMBAI
Feb 10, 2009

THE Securities and Exchange Board of India (Sebi) is planning to make it compulsory for promoters to disclose the end use of funds raised through pledging their shares with financiers, a move intended to increase transparency and provide more information to investors. Such information would help investors find out if the money has been used to fund comparatively risky activities, like property speculation, unrelated diversification or personal expenditure.

The regulator is also considering putting in place rules to prevent misuse of the holding company structure by promoters to get around the disclosure requirements. Often, promoters hold shares in the listed company through a privately-held company. Technically, it is possible for them to raise money by pledging the equity of the unlisted company, which holds the shares of the listed company.

While Sebi requires promoters to disclose the quantum of pledged shares in the listed entities, they are not required to make any disclosure of pledged shares in their holding companies, which, in turn, has a stake in the listed company. Many promoters, market participants said, may resort to the holding company structure to circumvent the norms on disclosure of pledged shares.

Meanwhile, market watchers have pointed out that the data on pledged shares put up on the stock exchanges’ websites do not reveal the full picture. Brokers said that the practice of pledging of shares by promoters is not new. But, the information relevant to investors is the purpose for which the funds were raised. Most promoters, who have disclosed details of their pledged shares, have said that the money was raised for meeting working capital requirements.

Sebi move may help check fund diversion
BUT, brokers said, there are many instances where the funds were used by promoters to raise their stakes in the listed entities through creeping acquisition, conversion of warrants or simply to prop up the stock price. It is believed that some promoters also used this route to acquire personal assets.

“It is an important piece of information to the public... so that promoters don’t divert the funds into non-core businesses. The first step towards disclosures has created awareness among investors... they can now ask promoters at general body meetings the purpose of raising funds through pledging shares,” said a person familiar with the development.

According to data compiled from the stock exchanges, promoters of over 90 listed companies have pledged shares to borrow money. Some of the big names in Corporate India, where promoters have borrowed money by pledging their shares, include Tata Steel, Godrej Consumer Products, Great Offshore, Aban Offshore, Asian Paints, GVK Power and Infrastructure, Gillette India and Tata Teleservices.

Prima Database managing director Prithvi Haldea said: “It is not enough for a promoter only to disclose the number of shares pledged. To make the information more meaningful, we need to know the end use of funds and do subsequent mapping of fund utilisation.”

Bear cartel role under Sebi scanner

Cos Allege Role Of Bears In Dramatic Fall Of
Stocks Even When Fundamentals Are Strong
Nishanth Vasudevan & Ashish Rukhaiyar
MUMBAI
Jan 23, 2009

THE Securities and Exchange Board of India (Sebi) is learnt to be examining the alleged role of a group of bear operators in the sharp fall of a few shares in recent weeks. A number of market sources say that the aggrieved companies have approached the market regulator to discuss the role of the ‘bear cartel’ in the decline of their shares. A top Sebi official told ET that the regulator is looking into the matter, without divulging further details.

According to market participants familiar with the matter, the bear cartel, led by two traders, has upped its ante in recent times, targeting shares that are relatively vulnerable to swift declines. Of these, one is a veteran market player who has returned to the stock market after being away for some time, and who, in the past, had battled some of the most famous bull operators on Dalal Street. The other is said to be a high-stake player, whose aggressive bets — mostly on the short side — have driven him to near ruin on a couple of occasions in the past.

It is not clear if the players are operating in tandem or separately. But their targets have been common. They are mostly companies where valuations are perceived to be ‘excessive’ or those firms whose promoters are believed by the market to have pledged shares with financiers.

“The bear cartel has used the most relevant topics such as balance sheet irregularities and triggering of margin calls, which have created huge panic in other stocks, as weapons to trigger panic in the targeted stock,” said a person familiar with the matter.

This group of operators, in recent weeks, has successfully targeted companies such as Educomp Solutions, Rolta India and Ruchi Soya. Another person close to the matter said that two of these three companies have approached Sebi, though this could not be officially ascertained.

In the latest case, shares of Educomp were hammered on Tuesday on market talks that its accounting practices were questionable. The company refuted these allegations and also filed a complaint with the economic offences wing of the Crime Branch, saying that some vested interests were trying to beat down the stock price by spreading false information. An Educomp spokesperson said that company officials would meet Sebi on this matter soon.

In the case of Rolta, shares fell 60% in a single day on speculation that stocks pledged by promoters have been sold by financiers. This has been repeatedly denied by company’s chairman Kamal Singh. Rolta CFO Hiranya Ashar said that his company wrote to Sebi on January 14.

“We have asked the regulator to look into the unusual trading pattern in our stock. We have reasons to believe that a group of people is trying to hammer our stock.” People familiar with the thinking in the bear circle said that the target list does not stop here and may extend to more companies whose accounting standards are suspect.

It is believed that the same group of operators was involved in the sharp slide in ICICI Bank in September because of speculation about bank’s exposure to stressed assets overseas. The private sector bank had approached Sebi to check if there was a ‘concerted attempt’ to drive its share price down.

PRICK & CHOOSE
The cartel has upped its ante in recent times, targeting shares that are relatively vulnerable to swift declines
The cartel targets cos with ‘excessive’ valuations or those firms whose promoters are believed to have pledged shares with financiers
Cos like Educomp, Rolta and Ruchi Soya have been victims

Sebi rakes in Rs 40 cr via consent orders

Regulator Settles Close To 400 Cases
In Just Over A Year Under The New System
Reena Zachariah & Ashish Rukhaiyar
MUMBAI
Jan 01, 2009

THE market regulator’s decision to put resolution of disputes on the fast track is working well. In just over a year after announcing rules for consent orders, the Securities and Exchange Board of India (Sebi) has settled close to 400 cases, a senior Sebi official said.

Although the new system of settling disputes in capital markets between a regulator and the accused through a penalty, or a fine, was introduced in April 2007, the whole process gathered steam in the last six months of the year. Sebi has garnered close to Rs 40 crore through the consent order system, through various cases such as market manipulation & price rigging, insider trading and capital “issue” related manipulation, among others.

The consent and compounding process helps reduce the backlog of pending cases both with the regulator and with the courts. The new system has been modelled on the lines of a similar system in the US. The Securities and Exchange Commission (SEC) settles over 90% of administrative/civil cases against market intermediaries by consent orders.

The regulator also took some other major policy initiatives this year. In August, a joint panel of RBI and Sebi decided to introduce currency futures in the exchanges to manage volatility in the value of rupee.

Mutual funds, which have emerged as one of the important class of financial intermediaries among investors, witnessed some tough challenges this year, especially the close-ended ones. The recent rush by large corporate investors in fixed maturity plans (FMPs) to redeem their investments resulted in considerable pressure on fund houses, forcing Sebi to review its norms relating to this product. The regulator recently imposed a ban on early exit by investors in close-ended schemes and made it mandatory for fund houses to list these schemes.

In order to address the asset-liability mismatches, the regulator said for closeended schemes, the underlying assets will not have a maturity beyond the date on which the schemes expires. Over the course of the past two years, FMPs had emerged as one of the most popular products offered by fund houses.

As part of the market regulator’s reform process for the primary market, it introduced an alternative mode of payment, applications supported by blocked amount (ASBA) in issues, whereby the application money remains in the investors’ account till the finalisation of basis of allotment in the issue.

This was a major departure from the current practice of retail investors paying upfront the full amount for the shares that have bid for, while large institutional investors need to put only 10% of the money. Sebi’s move implies that a retail investor can participate in a public or rights issue without the application money, actually leaving his bank account, thus eliminating the refund process.

However, the results couldn’t be ascertained as the IPO market fully dried up, due to the global credit crisis. In view of the current market conditions, Sebi also took a U-turn by doing away with the restrictions on issue of participatory notes by foreign institutional investors against securities, including derivatives, as the underlying.

VALUE PLAY
In August, a joint panel of RBI and Sebi decided to introduce currency futures in the stock exchanges to manage volatility in the value of rupee. MFs witnessed some tough challenges this year, especially the close-ended ones.