Ashish Rukhaiyar
Mumbai, December 28, 2010
Sebi ensured a level-playing field between small and institutional investors.
Retail investors in stock markets had reasons to cheer this year, especially due to the investing opportunities available in the form of initial public offerings (IPOs) and follow-on public offers (FPOs). Also, the Securities and Exchange Board of India (Sebi) introduced several measures to ensure a level-playing field between small and institutional investors in the primary market.
For one, retail investors can put a larger amount in IPOs. In October, Sebi doubled the investment limit from Rs 1-2 lakh. The retail entities stand to gain, as it will increase the probability of getting allotted a higher number of shares at a time when the retail portion is subscribed many times, while attracting more investors.
In addition, retail investors (compared to institutions and high net-worth individuals) get more time to apply in IPOs. The IPO bidding window will be open for an extra day for them, after it is closed for other bidders. It implies that they can make investment decisions after factoring in the institutional demand.
And, the impact was immediately visible. MOIL, which was the first government-owned entity to hit the market after the new limits were notified, saw its retail portion subscribed more than 32 times.
Similarly, the retail segment of Shipping Corporation of India’s IPO was subscribed more than six times. More recently, government-owned Punjab & Sind Bank saw retail quota being subscribed a massive 44.45 times. To put things in perspective, the much-hyped IPO of Coal India, launched before the rise in limit, had seen the retail segment subscribed only 2.28 times.
“Most Sebi initiatives were taken with the retail investor in focus,” says Motilal Oswal, chairman and managing director, Motilal Oswal Financial Services. “These initiatives, while making the system more efficient, have provided investors many benefits. Investors gain from the money, which now remains blocked in the bank account till the time of allotment. The extra day (in IPO bidding) gives them ample time to make their investment decisions,” he adds.
Retail investors who prefer Asba (application supported by blocked amount) had yet another reason to smile. Their money will be blocked for a lesser time with the overall IPO time frame compressed to 12 days from the earlier 21 days. While Asba allows investors to earn bank interest on the blocked amount, the reduced time frame makes the money available quicker. And, with the Reserve Bank of India asking banks to pay a daily interest from April 1, it will increase the interest earnings for investors.
In an indirect move, the margin requirement for institutional investors while applying in an IPO was raised from 10-100 per cent. Retail investors will rejoice as the disparity between small and large investors have been done away with. A lower margin led to the creation of artificial demand, since the quantum of money to be paid up-front was only 10 per cent. “This would avoid inflated demand in public issues and provide a level-playing field to investors subscribing for securities,” according to Sebi.
Small investors who want to dabble in stocks, but don’t have an access to a computer or a broker throughout the day, can use mobile phones. Earlier, investors could only view their portfolio on cellphones, and not execute any trade.
On a different note, companies taking investors’ complaints lightly were taken to task by the market regulator. In December, more than 10 companies and their directors were barred from accessing the securities market for having failed to address the investors’ grievances. Retail investors will surely feel more empowered after this.
Friday 31 December 2010
NRIs bet big on Indian stocks
Ashish Rukhaiyar
Mumbai, December 28, 2010
Net buyers of shares worth nearly Rs 94 crore in the current calendar year.
At a time when retail investors are shying away and institutional investors are in a state of flux, a niche set of investors is slowly increasing exposure to the domestic equity market. Non-resident Indians (NRIs) have been collectively putting in a sizeable amount of money in the secondary market, apart from investing in most initial public offers (IPOs).
According to data with stock exchanges, NRIs have been net buyers of shares worth nearly Rs 94 crore in the current calendar year. While this is small compared to other classes of investors, the data show that NRIs will end 2010 as net buyers for the first time since 2007.
Also, the yearly flows will be the highest since separate data for NRIs are being maintained. NRIs have been net buyers in most of 2010, except January and December.
Market players attribute this to the economy’s impressive growth rate and the returns generated by the stock market in recent years. “Most NRI investors are long-term in nature and prefer largecaps to known names,” says Pankaj Pandey, head (research), ICICI Direct.
“They like to hold on to their shares and do not generally indulge in aggressive churning. They prefer the ‘buy and hold’ strategy while investing in companies that have a good earnings outlook and, at the same time, have a good dividend paying history. While IPOs are also popular among NRIs, they prefer only the well-known names.”
In the primary market, NRIs have invested in most recent issues. Government-owned entities are one of their favourites, say market participants. Rough estimates put the NRI investment in the primary market at Rs 50 crore this year.
According to data collated by Karvy, NRIs have put in a sizeable number of bids in all issues, including Shipping Corporation of India, Power Grid Corporation, Electrosteel, Gujarat Pipavav and Ramky Infrastructure. In Power Grid and SCI, NRIs were allotted 15.6 million shares and 309,000 shares, respectively; in Electrosteel, 780,000 shares.
While the share of NRI bids is less than one per cent of the total portion reserved for retail and high net worth individuals, it is much higher compared to the IPOs of previous years.
“NRIs invest in large numbers in good quality IPOs and have increased their exposure this year,” says Uday Patil, director (investment banking), Keynote Corporate Services. “The returns provided by the Indian stock market are higher than most other markets of the world and this has attracted a lot of NRIs.”
Mumbai, December 28, 2010
Net buyers of shares worth nearly Rs 94 crore in the current calendar year.
At a time when retail investors are shying away and institutional investors are in a state of flux, a niche set of investors is slowly increasing exposure to the domestic equity market. Non-resident Indians (NRIs) have been collectively putting in a sizeable amount of money in the secondary market, apart from investing in most initial public offers (IPOs).
According to data with stock exchanges, NRIs have been net buyers of shares worth nearly Rs 94 crore in the current calendar year. While this is small compared to other classes of investors, the data show that NRIs will end 2010 as net buyers for the first time since 2007.
Also, the yearly flows will be the highest since separate data for NRIs are being maintained. NRIs have been net buyers in most of 2010, except January and December.
Market players attribute this to the economy’s impressive growth rate and the returns generated by the stock market in recent years. “Most NRI investors are long-term in nature and prefer largecaps to known names,” says Pankaj Pandey, head (research), ICICI Direct.
“They like to hold on to their shares and do not generally indulge in aggressive churning. They prefer the ‘buy and hold’ strategy while investing in companies that have a good earnings outlook and, at the same time, have a good dividend paying history. While IPOs are also popular among NRIs, they prefer only the well-known names.”
In the primary market, NRIs have invested in most recent issues. Government-owned entities are one of their favourites, say market participants. Rough estimates put the NRI investment in the primary market at Rs 50 crore this year.
According to data collated by Karvy, NRIs have put in a sizeable number of bids in all issues, including Shipping Corporation of India, Power Grid Corporation, Electrosteel, Gujarat Pipavav and Ramky Infrastructure. In Power Grid and SCI, NRIs were allotted 15.6 million shares and 309,000 shares, respectively; in Electrosteel, 780,000 shares.
While the share of NRI bids is less than one per cent of the total portion reserved for retail and high net worth individuals, it is much higher compared to the IPOs of previous years.
“NRIs invest in large numbers in good quality IPOs and have increased their exposure this year,” says Uday Patil, director (investment banking), Keynote Corporate Services. “The returns provided by the Indian stock market are higher than most other markets of the world and this has attracted a lot of NRIs.”
Sebi to link brokers to Asba, reduce IPO time
Ashish Rukhaiyar
Mumbai, December 15, 2010
Move likely to lead to an exponential rise in Asba use.
The Securities and Exchange Board of India (Sebi) is quickly moving towards its goal of compressing the initial public offering (IPO) period from 12 days to seven days.
The market regulator plans to integrate brokers with online Asba – Application Supported by Blocked Amount – a software provided by stock exchanges. Industry players say modifications are being made to ensure an exponential rise in the reach of Asba, vital to speeding up application and refund processes in IPOs.
According to people involved in the process, once the mechanism is in place, brokers will play a larger role in procuring Asba forms. At present, a broker only collects the Asba form from the investor and deposits it at the bank where the investor has his account.
Sebi introduced Asba in September 2008 to reduce the time taken for primary market issuances. Under Asba, an applicant can bid without his money moving out of the bank account; the money is debited only at the time of allotment of shares. This eliminates delays due to refunds.
“We are ready with the interface and are only waiting for confirmation from various intermediaries, including brokers, registrars and SCSBs (self-certified syndicate banks),” said a stock exchange official. “These entities will have to change their back-office systems to integrate with the new mechanism. There will be an interface between SCSBs and brokers that will help the latter key in the details directly in the online application mechanism,” he said.
The change
In other words, the exchanges would provide stock brokers access to the online Asba mechanism, wherein brokers would be able to key in details like the demat account number, the depository participant ID, the bank account number, the permanent account number and the bid details. Thereafter, banks that have access to the system will verify the account details and block the amount.
“Finally, brokers will become an integral part of Asba, which will increase its reach,” said a compliance officer of a domestic brokerage. “All brokers will push for Asba after the new mechanism is in place. Right now, we end up as courier agents, picking up the form from the investor and depositing it in the bank. Asba helps eliminate a lot of procedural delays in the (IPO application) system,” he said.
The market regulator has already clarified that brokers and sub-brokers will be entitled to a share in the Asba commission.
While initially the facility was available only for retail applicants, it was extended to institutional investors this April. In its attempt to widen the reach of Asba, Sebi asked exchanges to provide the forms on their websites.
Mumbai, December 15, 2010
Move likely to lead to an exponential rise in Asba use.
The Securities and Exchange Board of India (Sebi) is quickly moving towards its goal of compressing the initial public offering (IPO) period from 12 days to seven days.
The market regulator plans to integrate brokers with online Asba – Application Supported by Blocked Amount – a software provided by stock exchanges. Industry players say modifications are being made to ensure an exponential rise in the reach of Asba, vital to speeding up application and refund processes in IPOs.
According to people involved in the process, once the mechanism is in place, brokers will play a larger role in procuring Asba forms. At present, a broker only collects the Asba form from the investor and deposits it at the bank where the investor has his account.
Sebi introduced Asba in September 2008 to reduce the time taken for primary market issuances. Under Asba, an applicant can bid without his money moving out of the bank account; the money is debited only at the time of allotment of shares. This eliminates delays due to refunds.
“We are ready with the interface and are only waiting for confirmation from various intermediaries, including brokers, registrars and SCSBs (self-certified syndicate banks),” said a stock exchange official. “These entities will have to change their back-office systems to integrate with the new mechanism. There will be an interface between SCSBs and brokers that will help the latter key in the details directly in the online application mechanism,” he said.
The change
In other words, the exchanges would provide stock brokers access to the online Asba mechanism, wherein brokers would be able to key in details like the demat account number, the depository participant ID, the bank account number, the permanent account number and the bid details. Thereafter, banks that have access to the system will verify the account details and block the amount.
“Finally, brokers will become an integral part of Asba, which will increase its reach,” said a compliance officer of a domestic brokerage. “All brokers will push for Asba after the new mechanism is in place. Right now, we end up as courier agents, picking up the form from the investor and depositing it in the bank. Asba helps eliminate a lot of procedural delays in the (IPO application) system,” he said.
The market regulator has already clarified that brokers and sub-brokers will be entitled to a share in the Asba commission.
While initially the facility was available only for retail applicants, it was extended to institutional investors this April. In its attempt to widen the reach of Asba, Sebi asked exchanges to provide the forms on their websites.
After loan scam, LIC becomes cautious on equity investing
Ashish Rukhaiyar
Mumbai, December 14, 2010
Routes large orders through brokerages of public sector entities.
Life Insurance Corporation of India (LIC), the largest domestic financial institution active in the equity market, appears to be in cautious mode.
Institutional dealers empanelled with LIC say block deals have become rare. Most large transactions are being done through the brokerage arms of institutions partly owned by public sector entities.
The dealers say the insurance major is playing safe after the housing finance scam. On November 24, the Central Bureau of Investigation arrested eight people, including LIC Housing Finance CEO R R Nair and LIC Secretary (investments), Naresh K Chopra, for allegedly giving loans to private builders after taking bribes. There is also a buzz that the equity investments of LIC are under the scanner.
“After the bribe-for-loan scam, we haven’t really got any big trades from LIC,” said an institutional dealer with a domestic brokerage empanelled with LIC. “The information that we have got is that it is placing big orders mostly with the brokerage arms of government entities like IDBI (IDBI Capital) and SBI (SBI Capital Markets). It is relatively safer to trade through those entities, given the current environment,” he said.
According to a section of the dealers, LIC has also become selective in terms of stocks. Apart from the liquid counters, LIC is mostly looking at listed public sector companies, they say, adding that illiquid stocks are now on the “avoid” list.
“LIC was a favourite among promoters looking at placement of shares,” said another institutional dealer, on condition of anonymity. “All that has changed, with the insurance company becoming more selective.” Adding: “In the past, LIC has bought shares directly from many promoters, including that of a shipping company and a couple of Gujarat-based diversified business groups. There is, however, nothing unusual in LIC going slow on investments in the context of some recent news flow. Also, the overall activity in the market has gone down in the last couple of weeks.”
Recent months have seen the insurance major restructuring investment strategy through its empanelled brokers. It is believed that LIC has been trying to streamline operations by bringing down the number of brokers through which it trades in the equity market. The number of empanelled brokerages is estimated around 150.
In August, LIC wrote to its empanelled brokers, seeking data on research recommendations for the past 17 months. LIC wanted to review the recommendations and the relative return from these stocks compared to the benchmark, the Sensex. Some months prior to that, it slashed the brokerage fee from 15 basis points (bps) to 10 bps.
According to brokers, the average transaction size for LIC executed by most empanelled entities is Rs 30-40 lakh. For larger brokerages, the ticket size is around Rs 1 crore; the biggest gets trades worth a little over Rs 5 crore.
Mumbai, December 14, 2010
Routes large orders through brokerages of public sector entities.
Life Insurance Corporation of India (LIC), the largest domestic financial institution active in the equity market, appears to be in cautious mode.
Institutional dealers empanelled with LIC say block deals have become rare. Most large transactions are being done through the brokerage arms of institutions partly owned by public sector entities.
The dealers say the insurance major is playing safe after the housing finance scam. On November 24, the Central Bureau of Investigation arrested eight people, including LIC Housing Finance CEO R R Nair and LIC Secretary (investments), Naresh K Chopra, for allegedly giving loans to private builders after taking bribes. There is also a buzz that the equity investments of LIC are under the scanner.
“After the bribe-for-loan scam, we haven’t really got any big trades from LIC,” said an institutional dealer with a domestic brokerage empanelled with LIC. “The information that we have got is that it is placing big orders mostly with the brokerage arms of government entities like IDBI (IDBI Capital) and SBI (SBI Capital Markets). It is relatively safer to trade through those entities, given the current environment,” he said.
According to a section of the dealers, LIC has also become selective in terms of stocks. Apart from the liquid counters, LIC is mostly looking at listed public sector companies, they say, adding that illiquid stocks are now on the “avoid” list.
“LIC was a favourite among promoters looking at placement of shares,” said another institutional dealer, on condition of anonymity. “All that has changed, with the insurance company becoming more selective.” Adding: “In the past, LIC has bought shares directly from many promoters, including that of a shipping company and a couple of Gujarat-based diversified business groups. There is, however, nothing unusual in LIC going slow on investments in the context of some recent news flow. Also, the overall activity in the market has gone down in the last couple of weeks.”
Recent months have seen the insurance major restructuring investment strategy through its empanelled brokers. It is believed that LIC has been trying to streamline operations by bringing down the number of brokers through which it trades in the equity market. The number of empanelled brokerages is estimated around 150.
In August, LIC wrote to its empanelled brokers, seeking data on research recommendations for the past 17 months. LIC wanted to review the recommendations and the relative return from these stocks compared to the benchmark, the Sensex. Some months prior to that, it slashed the brokerage fee from 15 basis points (bps) to 10 bps.
According to brokers, the average transaction size for LIC executed by most empanelled entities is Rs 30-40 lakh. For larger brokerages, the ticket size is around Rs 1 crore; the biggest gets trades worth a little over Rs 5 crore.
Sebi vets UID use for stock market deals
Ashish Rukhaiyar
Mumbai, December 10, 2010
The Securities and Exchange Board of India (Sebi) has taken the first step towards evaluating the feasibility of using the unique identification (UID) number for all securities market transactions.
Nandan Nilekani, who is heading the UID project, met Sebi brass yesterday and explained how the number could be relevant in capital market transactions. The meeting was attended by stock exchange officials, investment bankers, brokers, fund managers, registrars and depository participants.
According to a person privy to the development, the importance of the meeting can be gauged from the fact that top Sebi officials, including Chairman C B Bhave, besides whole-time members and executive directors, were present. Recent reports suggest that the Ministry of Finance has asked Sebi to see if UID can be made mandatory for all securities market transactions.
“The session aimed at creating awareness about UID among various market participants,” said a person who attended the meeting, adding, “It is too early to comment on the implementation, as the process of issuing UIDs has only begun.”
UID was launched on September 29, when 10 residents of Tembhali village in Nandurbar, Maharashtra, were issued their numbers. According to the website of the Unique Identification Authority of India, over 600 million UIDs will be issued over five years.
“The meeting was a starting point for evaluating UID from the capital market perspective,” said another person who attended the proceedings. “We discussed how it could be applied (in stock market transactions). For instance, regulators wanted to know how it could capture change in the address of the investor, as a lot of corporate actions (dividends, AGM reports) require addresses of shareholders,” he said.
Others who attended the meeting included Sanjay Sharma of Deutsche Bank (also the vice-chairman of the Association of Merchant Bankers of India), Milind Barve of HDFC Mutual Fund and S Subramaniam of Enam. Top officials of the Bombay Stock Exchange, the National Stock Exchange and representatives of depositories and registrars were also present.
According to industry players, a move towards UID will mean a paradigm shift from the current use of the permanent account number (PAN) for all stock market transactions. “Multiple PANs in the name of a single person is a systemic risk, which will be eliminated by migrating to UID. One cannot have multiple UIDs, as the system will also capture fingerprints and iris details,” said the head of a domestic retail brokerage.
Mumbai, December 10, 2010
The Securities and Exchange Board of India (Sebi) has taken the first step towards evaluating the feasibility of using the unique identification (UID) number for all securities market transactions.
Nandan Nilekani, who is heading the UID project, met Sebi brass yesterday and explained how the number could be relevant in capital market transactions. The meeting was attended by stock exchange officials, investment bankers, brokers, fund managers, registrars and depository participants.
According to a person privy to the development, the importance of the meeting can be gauged from the fact that top Sebi officials, including Chairman C B Bhave, besides whole-time members and executive directors, were present. Recent reports suggest that the Ministry of Finance has asked Sebi to see if UID can be made mandatory for all securities market transactions.
“The session aimed at creating awareness about UID among various market participants,” said a person who attended the meeting, adding, “It is too early to comment on the implementation, as the process of issuing UIDs has only begun.”
UID was launched on September 29, when 10 residents of Tembhali village in Nandurbar, Maharashtra, were issued their numbers. According to the website of the Unique Identification Authority of India, over 600 million UIDs will be issued over five years.
“The meeting was a starting point for evaluating UID from the capital market perspective,” said another person who attended the proceedings. “We discussed how it could be applied (in stock market transactions). For instance, regulators wanted to know how it could capture change in the address of the investor, as a lot of corporate actions (dividends, AGM reports) require addresses of shareholders,” he said.
Others who attended the meeting included Sanjay Sharma of Deutsche Bank (also the vice-chairman of the Association of Merchant Bankers of India), Milind Barve of HDFC Mutual Fund and S Subramaniam of Enam. Top officials of the Bombay Stock Exchange, the National Stock Exchange and representatives of depositories and registrars were also present.
According to industry players, a move towards UID will mean a paradigm shift from the current use of the permanent account number (PAN) for all stock market transactions. “Multiple PANs in the name of a single person is a systemic risk, which will be eliminated by migrating to UID. One cannot have multiple UIDs, as the system will also capture fingerprints and iris details,” said the head of a domestic retail brokerage.
Twist in the tale: Bhave likely to get extension
Ashish Rukhaiyar
Mumbai, December 7, 2010
With just two months left for his tenure to end and three months after the government set up a search committee to find his successor, Securities and Exchange Board of India (Sebi) Chairman C B Bhave may end up getting an extension.
People familiar with the development said this might be necessary taking into account some important ongoing investigations against big companies and market operators. It is believed that an extension will ensure the continuity of the investigations.
The sources, however, added this “school of thought is still in its infancy” and no written communique had been sent either by the Prime Minister’s Office or the Ministry of Finance to the selection panel formed to choose the next chairman.
In what could be just a coincidence, a meeting of the search committee on Friday to interview the shortlisted candidates was cancelled at the last minute.
“One cannot say for sure if he will get an extension, but the idea has definitely been discussed,” said a senior industry official on condition of anonymity. “The factors that strengthen his case are the ongoing investigations and the transparency he has brought in the way some market intermediaries function,” he added.
The recent past has seen the market regulator take a tough stance against entities, including Sahara Group, Murli Industries, Ackruti City, Welspun Corporation and Brushman India. The Mumbai-based high networth individual, Sanjay Dangi, has also been barred on allegations of market manipulation. The regulator is also in the midst of a high-profile legal tussle with the MCX Stock Exchange, currently being fought in the Bombay High Court.
Another theory doing the rounds is that the government will be in no mood to attract fresh controversy by appointing a new chairman when it is already grappling with a number of allegations at the Centre.
“There is always a lobby favouring and opposing each candidate. One cannot predict until the file is signed,” says another veteran who has worked with three Sebi chiefs. “Bhave emerged from nowhere the last time and it cannot be ruled out again. The government can play safe by giving him an extension for two years. Mutual funds may be opposing him, but that is not a neutral view. Also, we keep hearing that candidates are not showing keen interest in the top job this time,” he explains.
While media reports earlier suggested that a total of seven candidates were in the fray for the post, only three-four managed to make it to the final list. While UTI Chairman and MD
U K Sinha is said to be one of the front-runners, others in the fray include Ministry of Company Affairs Secretary R Bandyopadhyay and Reserve Bank of India (RBI) Deputy Governor K C Chakrabarty. According to some media reports, State Bank of India Chairman O P Bhatt has opted out. The selection committee is headed by Cabinet Secretary K M Chandrasekhar and comprises Finance Secretary Ashok Chawla, Financial Services Secretary R Gopalan and Personnel Secretary Shantanu Consul.
Mumbai, December 7, 2010
With just two months left for his tenure to end and three months after the government set up a search committee to find his successor, Securities and Exchange Board of India (Sebi) Chairman C B Bhave may end up getting an extension.
People familiar with the development said this might be necessary taking into account some important ongoing investigations against big companies and market operators. It is believed that an extension will ensure the continuity of the investigations.
The sources, however, added this “school of thought is still in its infancy” and no written communique had been sent either by the Prime Minister’s Office or the Ministry of Finance to the selection panel formed to choose the next chairman.
In what could be just a coincidence, a meeting of the search committee on Friday to interview the shortlisted candidates was cancelled at the last minute.
“One cannot say for sure if he will get an extension, but the idea has definitely been discussed,” said a senior industry official on condition of anonymity. “The factors that strengthen his case are the ongoing investigations and the transparency he has brought in the way some market intermediaries function,” he added.
The recent past has seen the market regulator take a tough stance against entities, including Sahara Group, Murli Industries, Ackruti City, Welspun Corporation and Brushman India. The Mumbai-based high networth individual, Sanjay Dangi, has also been barred on allegations of market manipulation. The regulator is also in the midst of a high-profile legal tussle with the MCX Stock Exchange, currently being fought in the Bombay High Court.
Another theory doing the rounds is that the government will be in no mood to attract fresh controversy by appointing a new chairman when it is already grappling with a number of allegations at the Centre.
“There is always a lobby favouring and opposing each candidate. One cannot predict until the file is signed,” says another veteran who has worked with three Sebi chiefs. “Bhave emerged from nowhere the last time and it cannot be ruled out again. The government can play safe by giving him an extension for two years. Mutual funds may be opposing him, but that is not a neutral view. Also, we keep hearing that candidates are not showing keen interest in the top job this time,” he explains.
While media reports earlier suggested that a total of seven candidates were in the fray for the post, only three-four managed to make it to the final list. While UTI Chairman and MD
U K Sinha is said to be one of the front-runners, others in the fray include Ministry of Company Affairs Secretary R Bandyopadhyay and Reserve Bank of India (RBI) Deputy Governor K C Chakrabarty. According to some media reports, State Bank of India Chairman O P Bhatt has opted out. The selection committee is headed by Cabinet Secretary K M Chandrasekhar and comprises Finance Secretary Ashok Chawla, Financial Services Secretary R Gopalan and Personnel Secretary Shantanu Consul.
Half-a-dozen real estate IPOs face delay
Raghavendra Kamath & Ashish Rukhaiyar
Mumbai, November 27, 2010
The mega real estate loan scam could delay the initial public offers (IPOs) of over half-a-dozen real estate developers because of poor investor sentiment, said bankers and analysts tracking the sector.
“It will be very difficult for real estate entities to raise money through IPOs at this juncture,” said Gyan Mohan, executive vice-president and head, investment banking, IDBI Capital Markets.
According to Prime Database, which tracks primary capital markets, eight real estate companies have got the final approval from the market regulator to launch IPOs. These include Raheja Universal, Lodha Developers, Lavasa Corporation and Kumar Urban Development. Together, they were looking to raise Rs 9,500 crore.
“Though it has been said that this is not a systemic risk, investor sentiment has been impacted. The sector was anyway facing transparency issues,” said Mohan.
The IPOs are crucial for these developers to repay debt. For instance, New Delhi-based BPTP was planning to use a fourth of the IPO proceeds of Rs 1,500 crore to lower debt.
“I do not think any property developer will bring out a public issue in the current financial year. Those who try IPOs and QIPs (qualified institutional placements) will have to undergo a lot of scrutiny and due diligence in the coming days,” says Amit Goenka, national director, capital transactions, Knight Frank India.
Developers like Lodha agree. “The markets are still volatile and previous issues have not done very well. We may take a view in the new year,” said Abhisheck Lodha, managing director of Lodha Developers.
The benchmark BSE Sensex has fallen 2.3 per cent, or 448 points, since November 19.
To tap elsewhere
Due to delay in raising funds through selling equity and from public sector banks, the cost of borrowing for real estate companies will rise and developers may have to borrow more from private banks, non-banking finance companies and private equity (PE) firms, bankers say.
At present, property developers borrow at between 10.5 per cent and 14 per cent, depending on their credit profile. This may rise by 50-100 basis points.
“Conditions are quite adverse for the real estate sector. In debt, the cost of funds is based on the perceived risk. The riskier the assets, the higher is the price. Even RBI has increased the risk weight for real estate loans,” said a head of fixed-income capital markets at a foreign investment bank.
RBI increased the standard asset provisioning by commercial banks for teaser home loans from 0.4 per cent to two per cent, capped the loan-to-value ratio at 80 per cent and increased the risk weight on loans of more than Rs 75 lakh to above 125 per cent in the November 2 monetary policy.
Goenka says though private lenders will increase rates, private equity firms cannot increase their return expectations from developers, as they’ve already been asking for 25 per cent returns.
“PE firms will get more credible opportunities and put more money in the sector,” he adds.
However, some developers say funding from public banks will resume once the dust raised by the scam settles. “Banks cannot afford to not do business with property developers as they earn a good spread. Once things settle down, funding will continue as usual,” said the chief financial officer of a Mumbai-based listed company.
Mumbai, November 27, 2010
The mega real estate loan scam could delay the initial public offers (IPOs) of over half-a-dozen real estate developers because of poor investor sentiment, said bankers and analysts tracking the sector.
“It will be very difficult for real estate entities to raise money through IPOs at this juncture,” said Gyan Mohan, executive vice-president and head, investment banking, IDBI Capital Markets.
According to Prime Database, which tracks primary capital markets, eight real estate companies have got the final approval from the market regulator to launch IPOs. These include Raheja Universal, Lodha Developers, Lavasa Corporation and Kumar Urban Development. Together, they were looking to raise Rs 9,500 crore.
“Though it has been said that this is not a systemic risk, investor sentiment has been impacted. The sector was anyway facing transparency issues,” said Mohan.
The IPOs are crucial for these developers to repay debt. For instance, New Delhi-based BPTP was planning to use a fourth of the IPO proceeds of Rs 1,500 crore to lower debt.
“I do not think any property developer will bring out a public issue in the current financial year. Those who try IPOs and QIPs (qualified institutional placements) will have to undergo a lot of scrutiny and due diligence in the coming days,” says Amit Goenka, national director, capital transactions, Knight Frank India.
Developers like Lodha agree. “The markets are still volatile and previous issues have not done very well. We may take a view in the new year,” said Abhisheck Lodha, managing director of Lodha Developers.
The benchmark BSE Sensex has fallen 2.3 per cent, or 448 points, since November 19.
To tap elsewhere
Due to delay in raising funds through selling equity and from public sector banks, the cost of borrowing for real estate companies will rise and developers may have to borrow more from private banks, non-banking finance companies and private equity (PE) firms, bankers say.
At present, property developers borrow at between 10.5 per cent and 14 per cent, depending on their credit profile. This may rise by 50-100 basis points.
“Conditions are quite adverse for the real estate sector. In debt, the cost of funds is based on the perceived risk. The riskier the assets, the higher is the price. Even RBI has increased the risk weight for real estate loans,” said a head of fixed-income capital markets at a foreign investment bank.
RBI increased the standard asset provisioning by commercial banks for teaser home loans from 0.4 per cent to two per cent, capped the loan-to-value ratio at 80 per cent and increased the risk weight on loans of more than Rs 75 lakh to above 125 per cent in the November 2 monetary policy.
Goenka says though private lenders will increase rates, private equity firms cannot increase their return expectations from developers, as they’ve already been asking for 25 per cent returns.
“PE firms will get more credible opportunities and put more money in the sector,” he adds.
However, some developers say funding from public banks will resume once the dust raised by the scam settles. “Banks cannot afford to not do business with property developers as they earn a good spread. Once things settle down, funding will continue as usual,” said the chief financial officer of a Mumbai-based listed company.
New Takeover Code likely to be delayed
Ashish Rukhaiyar
Mumbai, November 26, 2010
The new Takeover Code that proposes sweeping changes in the way mergers and acquisitions are done in India is unlikely to get the final regulatory approval in the next couple of months. It is expected that the new set of regulations will be implemented only around the end of the current financial year.
According to people familiar with the development, the Securities and Exchange Board of India (Sebi) is unlikely to arrive at a decision on the Takeover Code during its next board meet as the Finance Ministry is yet to take a final call on some of the recommendations and wants the market regulator to go slow on it.
“While Sebi has said that it will discuss the Takeover Code in its next board meet, it is highly unlikely that a final decision will be taken,” said a person privy to the development. “There are already talks that the regulator has been told to go slow on the issue and also wait for the new chairman to join in. This will push it to February,” he said.
The capital market regulator, during its board meeting held on October 25, had discussed various issues related to the Takeover Code but decided against taking a final decision. “It was felt that some more time was required to discuss the recommendations of the panel. Our discussions remained inconclusive and we will continue the discussions at the next board level,” chairman C B Bhave had said while addressing the media after the board meet.
Incidentally, it is well over four months since the Takeover Panel, formed under the chairmanship of C Achuthan, submitted its 139-page report to the market regulator. The committee, which was formed in September 2009, has recommended an increase in the open offer trigger limit from the current 15 per cent to 25 per cent. Further, the open offer has to be made for all the shares of the target company and not for a minor part of it.
Interestingly, the recommendations invited a lot of feedback from industry participants when the regulator uploaded the same for public comments. Reports suggest that majority of market participants are not comfortable with the clause that open offer needs to be made for 100 per cent of the shares as against the current practice of 20 per cent.
The industry view is that it will escalate the cost of M&A and would deter many genuine buyers from making an acquisition. The regulator, after factoring in the industry feedback, is believed to be in favour of a reduction in the open offer size even while sticking to the panel’s recommendation of increasing the open offer trigger limit to 25 per cent.
Mumbai, November 26, 2010
The new Takeover Code that proposes sweeping changes in the way mergers and acquisitions are done in India is unlikely to get the final regulatory approval in the next couple of months. It is expected that the new set of regulations will be implemented only around the end of the current financial year.
According to people familiar with the development, the Securities and Exchange Board of India (Sebi) is unlikely to arrive at a decision on the Takeover Code during its next board meet as the Finance Ministry is yet to take a final call on some of the recommendations and wants the market regulator to go slow on it.
“While Sebi has said that it will discuss the Takeover Code in its next board meet, it is highly unlikely that a final decision will be taken,” said a person privy to the development. “There are already talks that the regulator has been told to go slow on the issue and also wait for the new chairman to join in. This will push it to February,” he said.
The capital market regulator, during its board meeting held on October 25, had discussed various issues related to the Takeover Code but decided against taking a final decision. “It was felt that some more time was required to discuss the recommendations of the panel. Our discussions remained inconclusive and we will continue the discussions at the next board level,” chairman C B Bhave had said while addressing the media after the board meet.
Incidentally, it is well over four months since the Takeover Panel, formed under the chairmanship of C Achuthan, submitted its 139-page report to the market regulator. The committee, which was formed in September 2009, has recommended an increase in the open offer trigger limit from the current 15 per cent to 25 per cent. Further, the open offer has to be made for all the shares of the target company and not for a minor part of it.
Interestingly, the recommendations invited a lot of feedback from industry participants when the regulator uploaded the same for public comments. Reports suggest that majority of market participants are not comfortable with the clause that open offer needs to be made for 100 per cent of the shares as against the current practice of 20 per cent.
The industry view is that it will escalate the cost of M&A and would deter many genuine buyers from making an acquisition. The regulator, after factoring in the industry feedback, is believed to be in favour of a reduction in the open offer size even while sticking to the panel’s recommendation of increasing the open offer trigger limit to 25 per cent.
Destination India for global university funds
Kalpana Pathak & Ashish Rukhaiyar
Mumbai, November 15, 2010
International university endowment funds have stepped up their presence in the Indian stock markets to cash in on the high returns. Data from the Securities and Exchange Board of India (Sebi) show that the number of such funds investing in the Indian market has gone up three-fold to around 20 this year, against six in 2008.
Several of these international university endowment funds have also increased the target asset allocation towards emerging markets in 2010.
President and fellows of Harvard College, for instance, have doubled the target investment in emerging markets to 10 per cent for 2010, against five per cent in 2005. Harvard, the richest US school, has a $27.6 billion endowment, followed by Yale University’s $16.7 billion.
University of Washington’s consolidated endowment fund has increased allocation to emerging equity markets to 17 per cent, from 12 per cent last year. The consolidated endowment fund consists of 3,100 separate endowments, accordin g to the university’s website.
The Board of Regents of the University of Texas System at Austin, as per its general endowment fund investment policy, will allocate a maximum investment target of 25 per cent in emerging markets, against the minimum target of 10 per cent for the financial year 2011.
The universities park their money – locally and internationally – with public and private equity, stocks, real estate, commodities and bonds, among others. University Endowment Funds are registered as Foreign Institutional Investors (FIIs).
Other registered endowment funds include: The Duke Endowment; Cornell University; Emory University; The John Hopkins University; The Ohio State University and Massachusetts Institute of Technology Basic Retirement Plan.
“Many universities have increased investment allocation from their endowment funds to the emerging markets and they are long-term investors in the market. Between India and China, India is a more liquid market,” said Siddharth Shah, head, funds practice, Nishith Desai Associates.
Harvard Management Company (HMC) did not divulge details of what portion of its investment is directed to the Indian market. “The management company does not discuss its investments or investment strategies publicly other than what is reported in their annual reports,” John Longbrake, senior director of communications, HMC told Business Standard in an emailed statement.
Industry insiders said endowment funds have an internal allocation which they either use by making direct investments or engage fund managers to manage funds.
This year so far, FIIs have infused a record Rs 28,562 crore ($6.4 billion) in October, nearly one-fourth of the total inflows in the stock market. The total net investment by FIIs now stands at $24.79 billion — the highest in a single year.
Market experts said overseas funds inflow from these universities will only increase. “We will see many more universities registering with SEBI in days to come. Emerging economies like India and China will provide an opportunity of better rate of returns to these universities,” said a senior manager from a Mumbai-based private equity firm.
For instance, HMC in its annual report said that its emerging market equities and high-yield returns were strong at 17.6 per cent and 19.6 per cent, although they did not beat their benchmarks.
Mumbai, November 15, 2010
International university endowment funds have stepped up their presence in the Indian stock markets to cash in on the high returns. Data from the Securities and Exchange Board of India (Sebi) show that the number of such funds investing in the Indian market has gone up three-fold to around 20 this year, against six in 2008.
Several of these international university endowment funds have also increased the target asset allocation towards emerging markets in 2010.
President and fellows of Harvard College, for instance, have doubled the target investment in emerging markets to 10 per cent for 2010, against five per cent in 2005. Harvard, the richest US school, has a $27.6 billion endowment, followed by Yale University’s $16.7 billion.
University of Washington’s consolidated endowment fund has increased allocation to emerging equity markets to 17 per cent, from 12 per cent last year. The consolidated endowment fund consists of 3,100 separate endowments, accordin g to the university’s website.
The Board of Regents of the University of Texas System at Austin, as per its general endowment fund investment policy, will allocate a maximum investment target of 25 per cent in emerging markets, against the minimum target of 10 per cent for the financial year 2011.
The universities park their money – locally and internationally – with public and private equity, stocks, real estate, commodities and bonds, among others. University Endowment Funds are registered as Foreign Institutional Investors (FIIs).
Other registered endowment funds include: The Duke Endowment; Cornell University; Emory University; The John Hopkins University; The Ohio State University and Massachusetts Institute of Technology Basic Retirement Plan.
“Many universities have increased investment allocation from their endowment funds to the emerging markets and they are long-term investors in the market. Between India and China, India is a more liquid market,” said Siddharth Shah, head, funds practice, Nishith Desai Associates.
Harvard Management Company (HMC) did not divulge details of what portion of its investment is directed to the Indian market. “The management company does not discuss its investments or investment strategies publicly other than what is reported in their annual reports,” John Longbrake, senior director of communications, HMC told Business Standard in an emailed statement.
Industry insiders said endowment funds have an internal allocation which they either use by making direct investments or engage fund managers to manage funds.
This year so far, FIIs have infused a record Rs 28,562 crore ($6.4 billion) in October, nearly one-fourth of the total inflows in the stock market. The total net investment by FIIs now stands at $24.79 billion — the highest in a single year.
Market experts said overseas funds inflow from these universities will only increase. “We will see many more universities registering with SEBI in days to come. Emerging economies like India and China will provide an opportunity of better rate of returns to these universities,” said a senior manager from a Mumbai-based private equity firm.
For instance, HMC in its annual report said that its emerging market equities and high-yield returns were strong at 17.6 per cent and 19.6 per cent, although they did not beat their benchmarks.
Investors use 'future' strategy to profit from PGCIL FPO
Ashish Rukhaiyar
Mumbai, November 11, 2010
Short the stock, hope to get shares much cheaper in the follow-on offer
Power Grid Corporation of India (PGCIL) has been one of the top traded derivatives contracts in the last few sessions. This is because investors embarked on a time-tested strategy amid the follow-on offering (FPO) of the government-owned entity. The frenzy has been such that the market-wide position limit in the stock was crossed today. As a result, exchanges barred brokers from creating fresh positions.
According to derivatives experts, many traders are going short on the stock in the derivatives segment in anticipation of allotment in the FPO. With the FPO attractively priced at Rs85-90, investors are locking-in a decent profit, as the derivatives contracts are trading well above the upper end of the price band.
The game-plan is simple. Investors are shorting the stock, with a plan to square off the positions later based on the FPO allotment at Rs90 a share. According to data on the National Stock Exchange website, futures contracts for November expiry are trading around Rs100.
“The strategy was widely used in the past few sessions, but with the market-wide position being crossed, this is the end of it,” said T S Harihar, senior vice-president, ICICI Securities. “There was a lot of demand for the Rs90 put option and the Rs110 call option from traders looking to reduce their risk. There is a feeling the issue will be subscribed 10 to 15 times,” said Harihar.
PGCIL has seen a steady rise in the number of contracts and the quantum of open interest. On October 25, 3,447 contracts were traded, which rose to 35,047 today. The open interest in the period surged from 18.57 million to 103.58 million. The stock closed at Rs102.15 in the cash segment today.
Interestingly, there was a buzz in the market that some brokers tried to trade large blocks even after the market-wide position was breached. Derivatives dealers said there could be instances of such brokers being penalised by the exchange.
Meanwhile, market players are talking about a change of stance towards the FPO from investors, especially high networth individuals (HNIs), after the breach of the position limit.
“The run-up in the price after the announcement of the price band has created interest from all categories of investors, particularly HNIs,” said Arun Kejriwal, director, KRIS. “This led to the market-wide position limit being crossed and could lead to dampening of interest, as locking-in of returns will not be possible now,” he explained.
Mumbai, November 11, 2010
Short the stock, hope to get shares much cheaper in the follow-on offer
Power Grid Corporation of India (PGCIL) has been one of the top traded derivatives contracts in the last few sessions. This is because investors embarked on a time-tested strategy amid the follow-on offering (FPO) of the government-owned entity. The frenzy has been such that the market-wide position limit in the stock was crossed today. As a result, exchanges barred brokers from creating fresh positions.
According to derivatives experts, many traders are going short on the stock in the derivatives segment in anticipation of allotment in the FPO. With the FPO attractively priced at Rs85-90, investors are locking-in a decent profit, as the derivatives contracts are trading well above the upper end of the price band.
The game-plan is simple. Investors are shorting the stock, with a plan to square off the positions later based on the FPO allotment at Rs90 a share. According to data on the National Stock Exchange website, futures contracts for November expiry are trading around Rs100.
“The strategy was widely used in the past few sessions, but with the market-wide position being crossed, this is the end of it,” said T S Harihar, senior vice-president, ICICI Securities. “There was a lot of demand for the Rs90 put option and the Rs110 call option from traders looking to reduce their risk. There is a feeling the issue will be subscribed 10 to 15 times,” said Harihar.
PGCIL has seen a steady rise in the number of contracts and the quantum of open interest. On October 25, 3,447 contracts were traded, which rose to 35,047 today. The open interest in the period surged from 18.57 million to 103.58 million. The stock closed at Rs102.15 in the cash segment today.
Interestingly, there was a buzz in the market that some brokers tried to trade large blocks even after the market-wide position was breached. Derivatives dealers said there could be instances of such brokers being penalised by the exchange.
Meanwhile, market players are talking about a change of stance towards the FPO from investors, especially high networth individuals (HNIs), after the breach of the position limit.
“The run-up in the price after the announcement of the price band has created interest from all categories of investors, particularly HNIs,” said Arun Kejriwal, director, KRIS. “This led to the market-wide position limit being crossed and could lead to dampening of interest, as locking-in of returns will not be possible now,” he explained.
MCX-SX likely to file appeal on Sebi rejection today
Ashish Rukhaiyar
Mumbai, November 8, 2010
September order barring it from being a full-fledged exchange is unsound.
The legal battle between MCX Stock Exchange (MCX-SX) and the Securities and Exchange Board of India (Sebi) is set to move to the next level. Tomorrow, the exchange is expected to file an appeal in the Securities Appellate Tribunal (SAT), challenging the Sebi order of September 23 which rejected its request to be allowed to offer various new products.
Tomorrow is also the concluding date for challenging the 68-page Sebi order. It had barred MCX-SX from offering equity and equity derivatives, interest rate futures and a separate platform for small and medium enterprises. Among the reasons given by Sebi was failiure to comply with shareholding norms and illegal buyback agreements by promoters. MCX-SX, which currently offers trading only in currency futures, was given a 45-day window to appeal against the order.
The order can be challenged at either the high court (HC) here or the SAT. Sources say the latter is likely. “Till last week, the lawyers were divided on the appropriate forum for appeal against the Sebi order and meetings were held over the weekend,” said a person familiar with the development. “It, however, appears the exchange will move SAT, that is well equipped to go into the merits of the case.”
MCX-SX’s managing director, Joseph Massey, during a press briefing in September, had said the exchange would “soon” decide on which of the two forums to challenge the Sebi order. Attempts to contact the MCX-SX spokesperson on Sunday proved futile.
The regulator and the exchange have had a tug of wills for some time. In an unprecedented move, MCX-SX had petitioned the HC in July, asking for a direction to Sebi on why it had been sitting on the former’s application for permission to operate as a full-fledged stock exchange. The petition said the regulator had not given any response even three months after MCX-SX had fulfilled the key condition of bringing down the promoters’ stake.
Sebi, while finally rejecting the application, said the exchange was not fully compliant with the ‘Manner of Increasing & Maintaining Public Shareholding’ norms for recognised stock exchanges. The regulator said the substitution of shares with warrants by the bourse’s founding promoters, Financial Technologies and Multi-Commodity Exchange, was an attempt to “work around the requirements” and was not a recognised mode of complying with shareholding norms.
Sebi said MCX-SX had been “dishonest” by withholding material information on the buyback arrangements of its promoters with other shareholders. MCX-SX said this was “character assassination”.
Mumbai, November 8, 2010
September order barring it from being a full-fledged exchange is unsound.
The legal battle between MCX Stock Exchange (MCX-SX) and the Securities and Exchange Board of India (Sebi) is set to move to the next level. Tomorrow, the exchange is expected to file an appeal in the Securities Appellate Tribunal (SAT), challenging the Sebi order of September 23 which rejected its request to be allowed to offer various new products.
Tomorrow is also the concluding date for challenging the 68-page Sebi order. It had barred MCX-SX from offering equity and equity derivatives, interest rate futures and a separate platform for small and medium enterprises. Among the reasons given by Sebi was failiure to comply with shareholding norms and illegal buyback agreements by promoters. MCX-SX, which currently offers trading only in currency futures, was given a 45-day window to appeal against the order.
The order can be challenged at either the high court (HC) here or the SAT. Sources say the latter is likely. “Till last week, the lawyers were divided on the appropriate forum for appeal against the Sebi order and meetings were held over the weekend,” said a person familiar with the development. “It, however, appears the exchange will move SAT, that is well equipped to go into the merits of the case.”
MCX-SX’s managing director, Joseph Massey, during a press briefing in September, had said the exchange would “soon” decide on which of the two forums to challenge the Sebi order. Attempts to contact the MCX-SX spokesperson on Sunday proved futile.
The regulator and the exchange have had a tug of wills for some time. In an unprecedented move, MCX-SX had petitioned the HC in July, asking for a direction to Sebi on why it had been sitting on the former’s application for permission to operate as a full-fledged stock exchange. The petition said the regulator had not given any response even three months after MCX-SX had fulfilled the key condition of bringing down the promoters’ stake.
Sebi, while finally rejecting the application, said the exchange was not fully compliant with the ‘Manner of Increasing & Maintaining Public Shareholding’ norms for recognised stock exchanges. The regulator said the substitution of shares with warrants by the bourse’s founding promoters, Financial Technologies and Multi-Commodity Exchange, was an attempt to “work around the requirements” and was not a recognised mode of complying with shareholding norms.
Sebi said MCX-SX had been “dishonest” by withholding material information on the buyback arrangements of its promoters with other shareholders. MCX-SX said this was “character assassination”.
Unlisted firms on investors' radar
Ashish Rukhaiyar
Mumbai, November 2, 2010
Brokers buy stock options from employees of companies planning IPOs.
With the markets on a high, a few investors and brokers are fancying their chances in the unlisted space. Brokers are scouting for companies likely to go public in the near future and have a large number of employees sitting on stock options.
The modus operandi is simple and legal. Brokers and investors first identify companies that are likely to come out with initial public offerings (IPOs) in the future. Thereafter, they enquire about the small fraction of shareholding available with the employees or may be other investors. The share transfer is done with proper contract notes.
Take the instance of Tata Technologies. The shares of the Pune-based Tata Group company, which is into engineering & information technology services, enterprise technology solutions and product distribution & support, are being traded among a group of investors in the unlisted space. The shares, mostly available in the physical form, are changing hands around Rs 450 per share.
Sunil Chandak, a veteran in this field, has been buying Tata Technologies for himself and his close group of investors for quite some time. “Tata Technologies is a subsidiary of Tata Motors and is into high-end automation and designing. Fundamentally, it is a very sound company, with high growth potential. The IPO is expected next year,” he says.
Sesa Industries, an unlisted subsidiary of Sesa Goa, is also witnessing steady growth in the number of investors eyeing its shares. The company is in the midst of being merged with Sesa Goa. The court verdict on the scheme of amalgamation is expected soon. The swap ratio has been fixed at one share of Sesa Goa for every five shares of Sesa Industries.
Future Ventures, which has already filed the draft prospectus for an IPO to raise Rs 750 crore, has also seen a significant number of its shares being traded in the recent past at an average price of Rs 16-17. In this case, investors have bought shares from some entities that were allotted these at par during the early days of the company.
Such investors, especially high networth individuals, also remain on the lookout for companies which are listed on regional stock exchanges (RSEs) and planning to list either on the Bombay Stock Exchange (BSE) or the National Stock Exchange (NSE). Listing on the two national exchanges increases visibility, attracting investors in larger numbers.
Government-owned Orissa Minerals Development Company (OMDC) is one such example. The share price of the company, which was listed on the Calcutta Stock Exchange, was around Rs 22,000 before it made its entry on NSE and BSE in August. On Thursday, it closed at Rs 71,000 on NSE.
“OMDC has proved to be a multibagger in just around a year,” says Deepak Mehta, an independent investor. “OMDC, trading between Rs 20,000 and Rs 22,000 a share till a few months back, got listed on BSE and NSE and has been steadily rising since. Prior to OMDC, I had invested in Oil India and Tanla Solutions, and that too proved fruitful. The last few picks from the unlisted space have been good,” says Mehta, who has been investing in unlisted shares for the last few years.
Jitendra Agarwal, an independent analyst, has also been in this business for quite some time. He is buying Metals and Scrap Trading Corporation of India (MSTC), a Mini Ratna Category - I entity. “MSTC is a profit-making public sector unit, with an equity of just 22 million and a reserve of over Rs 400 crore. The last year earnings per share was Rs 391.
The government recently announced that all minerals have to be sold through the e-auction route. MSTC is likely to be a big beneficiary,” says Agarwal. According to him, MSTC is trading around Rs 4,000 a share.
In another instance, Hindustan Vidyut, a company listed on the Delhi Stock Exchange (DSE), has seen an increase in the quantum of trading. The shares, available in the range of Rs 1,400 to Rs 1,500, are rising on the back of the government’s thrust on divestment.
Some other notable unlisted companies which have seen hectic trading in the recent past include Metals and Scrap Trading Corporation of India (MSTC), TCS Eserve, Mohan Meakins, Raj Travels, Nandan Biomatrix, Pilani Investments and Sistema Shyam Teleservices. Shares of exchanges like BSE and DSE have also seen significant trading in the recent past, say brokers.
Experts, however, caution against the pitfalls in this space due to absence of research notes and media reports about corporate actions. “The risk in the unlisted space is higher, but we invest only after a detailed research,” says Mehta. “It is a game of patience. The shares are locked in for a year after the IPO, but the profits are generally worth the wait. We look for stocks with deep value.”
Mumbai, November 2, 2010
Brokers buy stock options from employees of companies planning IPOs.
With the markets on a high, a few investors and brokers are fancying their chances in the unlisted space. Brokers are scouting for companies likely to go public in the near future and have a large number of employees sitting on stock options.
The modus operandi is simple and legal. Brokers and investors first identify companies that are likely to come out with initial public offerings (IPOs) in the future. Thereafter, they enquire about the small fraction of shareholding available with the employees or may be other investors. The share transfer is done with proper contract notes.
Take the instance of Tata Technologies. The shares of the Pune-based Tata Group company, which is into engineering & information technology services, enterprise technology solutions and product distribution & support, are being traded among a group of investors in the unlisted space. The shares, mostly available in the physical form, are changing hands around Rs 450 per share.
Sunil Chandak, a veteran in this field, has been buying Tata Technologies for himself and his close group of investors for quite some time. “Tata Technologies is a subsidiary of Tata Motors and is into high-end automation and designing. Fundamentally, it is a very sound company, with high growth potential. The IPO is expected next year,” he says.
Sesa Industries, an unlisted subsidiary of Sesa Goa, is also witnessing steady growth in the number of investors eyeing its shares. The company is in the midst of being merged with Sesa Goa. The court verdict on the scheme of amalgamation is expected soon. The swap ratio has been fixed at one share of Sesa Goa for every five shares of Sesa Industries.
Future Ventures, which has already filed the draft prospectus for an IPO to raise Rs 750 crore, has also seen a significant number of its shares being traded in the recent past at an average price of Rs 16-17. In this case, investors have bought shares from some entities that were allotted these at par during the early days of the company.
Such investors, especially high networth individuals, also remain on the lookout for companies which are listed on regional stock exchanges (RSEs) and planning to list either on the Bombay Stock Exchange (BSE) or the National Stock Exchange (NSE). Listing on the two national exchanges increases visibility, attracting investors in larger numbers.
Government-owned Orissa Minerals Development Company (OMDC) is one such example. The share price of the company, which was listed on the Calcutta Stock Exchange, was around Rs 22,000 before it made its entry on NSE and BSE in August. On Thursday, it closed at Rs 71,000 on NSE.
“OMDC has proved to be a multibagger in just around a year,” says Deepak Mehta, an independent investor. “OMDC, trading between Rs 20,000 and Rs 22,000 a share till a few months back, got listed on BSE and NSE and has been steadily rising since. Prior to OMDC, I had invested in Oil India and Tanla Solutions, and that too proved fruitful. The last few picks from the unlisted space have been good,” says Mehta, who has been investing in unlisted shares for the last few years.
Jitendra Agarwal, an independent analyst, has also been in this business for quite some time. He is buying Metals and Scrap Trading Corporation of India (MSTC), a Mini Ratna Category - I entity. “MSTC is a profit-making public sector unit, with an equity of just 22 million and a reserve of over Rs 400 crore. The last year earnings per share was Rs 391.
The government recently announced that all minerals have to be sold through the e-auction route. MSTC is likely to be a big beneficiary,” says Agarwal. According to him, MSTC is trading around Rs 4,000 a share.
In another instance, Hindustan Vidyut, a company listed on the Delhi Stock Exchange (DSE), has seen an increase in the quantum of trading. The shares, available in the range of Rs 1,400 to Rs 1,500, are rising on the back of the government’s thrust on divestment.
Some other notable unlisted companies which have seen hectic trading in the recent past include Metals and Scrap Trading Corporation of India (MSTC), TCS Eserve, Mohan Meakins, Raj Travels, Nandan Biomatrix, Pilani Investments and Sistema Shyam Teleservices. Shares of exchanges like BSE and DSE have also seen significant trading in the recent past, say brokers.
Experts, however, caution against the pitfalls in this space due to absence of research notes and media reports about corporate actions. “The risk in the unlisted space is higher, but we invest only after a detailed research,” says Mehta. “It is a game of patience. The shares are locked in for a year after the IPO, but the profits are generally worth the wait. We look for stocks with deep value.”
Brokers eye FII refund money from Coal India
Ashish Rukhaiyar
Mumbai, October 25, 2010
After the allotment of shares of Coal India, foreign institutional investors (FIIs) will be sitting on a massive amount of cash, courtesy the huge over-subscription and the mechanism of proportionate allotment. Market participants are wondering if this refund money will be allocated to India in general or flow back into the country of origin.
While a section of the market participants is of the view that a fraction of the money would be allocated to the Indian secondary market, there are others who feel the money would be reserved to subscribe to mega IPOs lined up by the government. While Coal India has been the country’s largest IPO, there are already reports that Indian Oil Corporation will tap the market with an offering of the size of Rs 19,000 crore.
Another theory doing the rounds is that many of the global funds that invest in index stocks across the world have put in huge bids on expectation that the stock will be included in Sensex and Nifty by virtue of its sheer size. There is a likelihood that these funds will buy shares of Coal India from the secondary market, say institutional dealers.
At the upper end of the price band, the market capitalisation of Coal India would be around Rs 1.55 lakh crore, making it the seventh-largest listed entity. This would make it a strong candidate for inclusion in the indices.
The institutional portion of the Coal India IPO has been subscribed nearly 25 times with bids received for 7,019.46 million shares, as against 284.24 million on offer.
Of this, FIIs account for bids for 4,933.87 million shares or a little over 70 per cent of the total institutional demand. In other words, FIIs have put in bids worth nearly Rs 1.21 lakh crore in this issue.
Post allotment of shares worth around Rs 6,966 crore (50 per cent of the net issue) to the institutional investors, FIIs will be left with a whopping cash balance of Rs 1.13 lakh crore or $26 billion. Incidentally, this number is currently the single-most important issue being discussed at the institutional desk across brokerages. Dealers are still not sure if they will get a chunk of the FII money that will be available post the allotment of shares.
"Coal India saw 770 applications in the institutional segment, out of which nearly 600 belong to the FIIs," said an investment banker associated with the issue. "Some of the bidders belong to newer destinations that do not have much exposure to the Indian market. These funds are likely to invest a significant amount of the refund money in the stock markets here," he added.
Mumbai, October 25, 2010
After the allotment of shares of Coal India, foreign institutional investors (FIIs) will be sitting on a massive amount of cash, courtesy the huge over-subscription and the mechanism of proportionate allotment. Market participants are wondering if this refund money will be allocated to India in general or flow back into the country of origin.
While a section of the market participants is of the view that a fraction of the money would be allocated to the Indian secondary market, there are others who feel the money would be reserved to subscribe to mega IPOs lined up by the government. While Coal India has been the country’s largest IPO, there are already reports that Indian Oil Corporation will tap the market with an offering of the size of Rs 19,000 crore.
Another theory doing the rounds is that many of the global funds that invest in index stocks across the world have put in huge bids on expectation that the stock will be included in Sensex and Nifty by virtue of its sheer size. There is a likelihood that these funds will buy shares of Coal India from the secondary market, say institutional dealers.
At the upper end of the price band, the market capitalisation of Coal India would be around Rs 1.55 lakh crore, making it the seventh-largest listed entity. This would make it a strong candidate for inclusion in the indices.
The institutional portion of the Coal India IPO has been subscribed nearly 25 times with bids received for 7,019.46 million shares, as against 284.24 million on offer.
Of this, FIIs account for bids for 4,933.87 million shares or a little over 70 per cent of the total institutional demand. In other words, FIIs have put in bids worth nearly Rs 1.21 lakh crore in this issue.
Post allotment of shares worth around Rs 6,966 crore (50 per cent of the net issue) to the institutional investors, FIIs will be left with a whopping cash balance of Rs 1.13 lakh crore or $26 billion. Incidentally, this number is currently the single-most important issue being discussed at the institutional desk across brokerages. Dealers are still not sure if they will get a chunk of the FII money that will be available post the allotment of shares.
"Coal India saw 770 applications in the institutional segment, out of which nearly 600 belong to the FIIs," said an investment banker associated with the issue. "Some of the bidders belong to newer destinations that do not have much exposure to the Indian market. These funds are likely to invest a significant amount of the refund money in the stock markets here," he added.
Sebi study finds IPO grading futile
Ashish Rukhaiyar
Mumbai, October 20, 2010
No correlation between the grades and performance of shares
Ever since grading for initial public offers (IPO) was introduced, industry participants have been divided over its effectiveness.
Now, perhaps for the first time, an analysis by the capital market regulator has concluded there is no correlation between the grades and the performance of the shares after listing.
People familiar with the development, however, say it is unlikely the regulator will do away with the mechanism.
The Securities and Exchange Board of India (Sebi) introduced optional IPO grading in April 2006. In May 2007, it made grading mandatory for all unlisted companies.
The cost is borne by the issuer. Rating agencies such as Crisil and Care grade companies on a scale of one to five, with five indicating strong fundamentals.
Some months ago, a Sebi department was asked to analyse the efficiency of the mechanism and the correlation, if any, with the performance of the shares. When the initial analysis revealed lack of any correlation, the officials were asked to refer to similar studies done by the rating agencies. The conclusion remained unchanged. Sources say the report has been given to the Sebi board.
Why do it?
“There is no correlation, which clearly proves IPO gradings do not serve any purpose,” said a person privy to the analysis. “If the post-listing price movement is more dependent on the secondary market movement, what is the point of getting IPOs graded? Also, India is perhaps the only country in the world where such a system exists,” he adds.
The study has been circulated to all Sebi board members for comments and, if approved, will be presented to the Primary Market Advisory Committee. However, it is believed the regulator is in no mood to revisit the grading process in the near future.
“IPO grading was introduced on an experimental basis and we need to wait and watch for some more time before arriving at a conclusion,” said a senior Sebi official, on condition of anonymity.
Interestingly, the Sebi analysis is in sharp contrast to that done by Crisil in July. Crisil concluded that companies with higher IPO grades commanded a higher price to earnings multiple.
“Companies with a high IPO grade of four/five (indicating above-average fundamentals) command an average P/E multiple of 28x, compared to 11.2x for companies with an IPO grade of 1/5 (indicating poor fundamentals). Companies with IPO grades of 2/5 and 3/5 have been trading at average P/E multiples of 17.4x and 23.5x, respectively,” said the report.
Interestingly, IPO grading does not consider the price at which the shares are offered in an issue. “Since IPO grading does not consider the issue price, the investor needs to make an independent judgment regarding the price at which to bid for/subscribe to the shares,” says the ‘Frequently Asked Questions’ section of the IPO grading part on Sebi’s website.
Mumbai, October 20, 2010
No correlation between the grades and performance of shares
Ever since grading for initial public offers (IPO) was introduced, industry participants have been divided over its effectiveness.
Now, perhaps for the first time, an analysis by the capital market regulator has concluded there is no correlation between the grades and the performance of the shares after listing.
People familiar with the development, however, say it is unlikely the regulator will do away with the mechanism.
The Securities and Exchange Board of India (Sebi) introduced optional IPO grading in April 2006. In May 2007, it made grading mandatory for all unlisted companies.
The cost is borne by the issuer. Rating agencies such as Crisil and Care grade companies on a scale of one to five, with five indicating strong fundamentals.
Some months ago, a Sebi department was asked to analyse the efficiency of the mechanism and the correlation, if any, with the performance of the shares. When the initial analysis revealed lack of any correlation, the officials were asked to refer to similar studies done by the rating agencies. The conclusion remained unchanged. Sources say the report has been given to the Sebi board.
Why do it?
“There is no correlation, which clearly proves IPO gradings do not serve any purpose,” said a person privy to the analysis. “If the post-listing price movement is more dependent on the secondary market movement, what is the point of getting IPOs graded? Also, India is perhaps the only country in the world where such a system exists,” he adds.
The study has been circulated to all Sebi board members for comments and, if approved, will be presented to the Primary Market Advisory Committee. However, it is believed the regulator is in no mood to revisit the grading process in the near future.
“IPO grading was introduced on an experimental basis and we need to wait and watch for some more time before arriving at a conclusion,” said a senior Sebi official, on condition of anonymity.
Interestingly, the Sebi analysis is in sharp contrast to that done by Crisil in July. Crisil concluded that companies with higher IPO grades commanded a higher price to earnings multiple.
“Companies with a high IPO grade of four/five (indicating above-average fundamentals) command an average P/E multiple of 28x, compared to 11.2x for companies with an IPO grade of 1/5 (indicating poor fundamentals). Companies with IPO grades of 2/5 and 3/5 have been trading at average P/E multiples of 17.4x and 23.5x, respectively,” said the report.
Interestingly, IPO grading does not consider the price at which the shares are offered in an issue. “Since IPO grading does not consider the issue price, the investor needs to make an independent judgment regarding the price at which to bid for/subscribe to the shares,” says the ‘Frequently Asked Questions’ section of the IPO grading part on Sebi’s website.
I-bankers make 'sensible' bids for shipping corp, Hind Copper
Ashish Rukhaiyar
Mumbai, October 12, 2010
Quote nearly 50 basis points as against near-zero fee for earlier PSU issues.
Around a fortnight ago, Securities and Exchange Board of India (Sebi) Chairman C B Bhave expressed concern over investment bankers quoting near-zero fee for bagging divestment mandates.
The impact is already visible. Investment bankers say sensible fees have been quoted for the follow-on public offers (FPO) of Shipping Corporation of India (SCI) and Hindustan Copper.
According to people familiar with the development, the selected investment bankers have quoted nearly 50 basis points, or 0.5 per cent, for these issues. While this is still low and the bankers will not be able to make a hefty profit, they will at least break even, they add.
“Both the issues will see the bankers make at least some money,” said a banker, on condition of anonymity. “The fee that has been quoted is 0.48 per cent,” he added. Incidentally, while this may appear negligible, it is much higher than in the earlier issues. For example, bankers quoted as low as 0.00000001 per cent in Power Grid Corporation’s issue.
The lead managers for the SCI issue are SBI Capital Markets, IDFC Capital and ICICI Securities. Hindustan Copper’s five bankers are ICICI Securities, Enam, Kotak Mahindra Capital, SBI Capital Markets and UBS Securities.
“We will be paid more than our costs,” said the head of an investment banking entity that has bagged the mandate. “While the quantum is still below one per cent, the bankers were sensible this time.”
Low bidding
According to a note by SMC Capitals in March, bankers were paid only Rs 10.25 crore for raising Rs 22,300 crore in four divestment offers. “The merchant banking fees of PSU public issues are as low as 0.05 per cent of the issue size,” it noted.
Reports further suggest that six banks together quoted a total fee of just Rs 12,500 last month to manage the IPO of Coal India, which will raise around Rs 15,000 crore.
While the trend of zero fee was being heavily debated within the banking community, the Sebi chairman questioned the rationale of bankers losing Rs 3-4 crore per mandate.
“(Investment bankers) need to introspect whether it is a healthy competition,” Bhave said on September 24 while addressing a gathering of investment bankers. He suggested a “code of conduct or ethics” to avoid such competition.
Checks, incentives
Another banker familiar with the process says it is “unfortunate” that the lead managers quote an “abysmally” low number to bag the mandate, but the government is too big an entity to be neglected and the competition is really tight.
“It is not that the government does not want to pay. Unfortunately, banks make bids in a manner the government can do nothing about it. To be associated with the government has a lot of advantages in terms of secondary market trades, research and getting new institutional clients. It doesn't, however, compensate entirely,” he said.
Mumbai, October 12, 2010
Quote nearly 50 basis points as against near-zero fee for earlier PSU issues.
Around a fortnight ago, Securities and Exchange Board of India (Sebi) Chairman C B Bhave expressed concern over investment bankers quoting near-zero fee for bagging divestment mandates.
The impact is already visible. Investment bankers say sensible fees have been quoted for the follow-on public offers (FPO) of Shipping Corporation of India (SCI) and Hindustan Copper.
According to people familiar with the development, the selected investment bankers have quoted nearly 50 basis points, or 0.5 per cent, for these issues. While this is still low and the bankers will not be able to make a hefty profit, they will at least break even, they add.
“Both the issues will see the bankers make at least some money,” said a banker, on condition of anonymity. “The fee that has been quoted is 0.48 per cent,” he added. Incidentally, while this may appear negligible, it is much higher than in the earlier issues. For example, bankers quoted as low as 0.00000001 per cent in Power Grid Corporation’s issue.
The lead managers for the SCI issue are SBI Capital Markets, IDFC Capital and ICICI Securities. Hindustan Copper’s five bankers are ICICI Securities, Enam, Kotak Mahindra Capital, SBI Capital Markets and UBS Securities.
“We will be paid more than our costs,” said the head of an investment banking entity that has bagged the mandate. “While the quantum is still below one per cent, the bankers were sensible this time.”
Low bidding
According to a note by SMC Capitals in March, bankers were paid only Rs 10.25 crore for raising Rs 22,300 crore in four divestment offers. “The merchant banking fees of PSU public issues are as low as 0.05 per cent of the issue size,” it noted.
Reports further suggest that six banks together quoted a total fee of just Rs 12,500 last month to manage the IPO of Coal India, which will raise around Rs 15,000 crore.
While the trend of zero fee was being heavily debated within the banking community, the Sebi chairman questioned the rationale of bankers losing Rs 3-4 crore per mandate.
“(Investment bankers) need to introspect whether it is a healthy competition,” Bhave said on September 24 while addressing a gathering of investment bankers. He suggested a “code of conduct or ethics” to avoid such competition.
Checks, incentives
Another banker familiar with the process says it is “unfortunate” that the lead managers quote an “abysmally” low number to bag the mandate, but the government is too big an entity to be neglected and the competition is really tight.
“It is not that the government does not want to pay. Unfortunately, banks make bids in a manner the government can do nothing about it. To be associated with the government has a lot of advantages in terms of secondary market trades, research and getting new institutional clients. It doesn't, however, compensate entirely,” he said.
Global pension funds increase India exposure through IPOs
Ashish Rukhaiyar
Mumbai, October 8, 2010
Amend charters to invest in companies that don’t have set market capitalisation.
Global pension funds have started investing aggressively in primary market offers. Till recently, they were not looking beyond some of the largest Indian listed companies.
Foreign pension funds usually did not invest in any unlisted company, including initial public offers (IPO), as their investment charters did not allow them to venture outside the largecaps. Pension funds have strict parameters related to market capitalisation, which also put IPOs outside the investment matrix.
“Some pension funds have amended their charters and can now invest directly in IPOs,” says the executive director of a leading foreign investment banking entity. “The amended charter allows them to invest in companies that do not have any set market capitalisation,” he added, while declining to name the funds that had done so in the recent past. Some pension funds from Denmark and Paris are believed to have invested in quite a few IPOs recently.
According to the Securities and Exchange Board of India, over 30 pension funds are registered in India as foreign institutional investors (FIIs). Pension funds of some notable entities, including American Airlines, British Petroleum, Aviva, British Airways, Citigroup, Shell, United Nations, Lloyds, Rolls-Royce, IBM and Unilever, are registered in India.
“Some of the really long pension funds globally which were not quite active in India are now present here,” says Indraneil Borkakoty, executive director and head of equity capital markets, Nomura Securities India. “The increase in the number of FII registrations proves this. Pension funds don’t face the kind of redemption pressure that other hedge or long funds face. So, higher participation from pension funds is good for the market. If ever there is a pull-back, it will not be so drastic,” he explains.
Pension funds, collectively, account for one of the largest investor groups globally, with assets under management (AUM) in trillions of dollars. A report by Morgan Stanley in 2008 pegged the total AUM of pension funds in excess of $20 trillion, more than sovereign wealth funds, insurance companies, hedge funds and even private equity. While the latest numbers are not available, rough estimates peg the AUM at over $30 trillion.
A section of investment bankers, acknowledging that pension funds are investing more in India, say some of the entities also invest through other registered FIIs. This, they say, helps achieve the motive without much changes in the investment charter.
“Pension funds, like other investors across the globe, are increasing exposure to India, but this is not to say that they are increasing their exposure to the IPO market only,” says Munesh Khanna, CEO & MD, Centrum Capital. “Many of them also invest in Indian secondary equity markets through other funds of FIIs. Accordingly, as they increase their exposure to India, the exposure to IPOs also goes up.”
Vinay Menon, managing director – equity capital & derivatives markets, JPMorgan India, says, “Pension funds have been investing in Indian IPOs for a long time” but the recent past “has seen many more long-only funds coming to India from some newer destinations”.
Mumbai, October 8, 2010
Amend charters to invest in companies that don’t have set market capitalisation.
Global pension funds have started investing aggressively in primary market offers. Till recently, they were not looking beyond some of the largest Indian listed companies.
Foreign pension funds usually did not invest in any unlisted company, including initial public offers (IPO), as their investment charters did not allow them to venture outside the largecaps. Pension funds have strict parameters related to market capitalisation, which also put IPOs outside the investment matrix.
“Some pension funds have amended their charters and can now invest directly in IPOs,” says the executive director of a leading foreign investment banking entity. “The amended charter allows them to invest in companies that do not have any set market capitalisation,” he added, while declining to name the funds that had done so in the recent past. Some pension funds from Denmark and Paris are believed to have invested in quite a few IPOs recently.
According to the Securities and Exchange Board of India, over 30 pension funds are registered in India as foreign institutional investors (FIIs). Pension funds of some notable entities, including American Airlines, British Petroleum, Aviva, British Airways, Citigroup, Shell, United Nations, Lloyds, Rolls-Royce, IBM and Unilever, are registered in India.
“Some of the really long pension funds globally which were not quite active in India are now present here,” says Indraneil Borkakoty, executive director and head of equity capital markets, Nomura Securities India. “The increase in the number of FII registrations proves this. Pension funds don’t face the kind of redemption pressure that other hedge or long funds face. So, higher participation from pension funds is good for the market. If ever there is a pull-back, it will not be so drastic,” he explains.
Pension funds, collectively, account for one of the largest investor groups globally, with assets under management (AUM) in trillions of dollars. A report by Morgan Stanley in 2008 pegged the total AUM of pension funds in excess of $20 trillion, more than sovereign wealth funds, insurance companies, hedge funds and even private equity. While the latest numbers are not available, rough estimates peg the AUM at over $30 trillion.
A section of investment bankers, acknowledging that pension funds are investing more in India, say some of the entities also invest through other registered FIIs. This, they say, helps achieve the motive without much changes in the investment charter.
“Pension funds, like other investors across the globe, are increasing exposure to India, but this is not to say that they are increasing their exposure to the IPO market only,” says Munesh Khanna, CEO & MD, Centrum Capital. “Many of them also invest in Indian secondary equity markets through other funds of FIIs. Accordingly, as they increase their exposure to India, the exposure to IPOs also goes up.”
Vinay Menon, managing director – equity capital & derivatives markets, JPMorgan India, says, “Pension funds have been investing in Indian IPOs for a long time” but the recent past “has seen many more long-only funds coming to India from some newer destinations”.
Q&A: Indraneil Borkakoty, Nomura India
'Low fee is not good for bankers'
Ashish Rukhaiyar
Mumbai, October 5, 2010
The booming primary market does not worry Indraneil Borkakoty, Nomura India’s new executive director and head of equity capital market (ECM, or the investment banking division). Borkakoty, who was heading the ECM vertical at Kotak Mahindra Capital till a month back, says investment in initial public offers (IPOs) will create a wider market for investors and control overheating of the secondary market. In a chat with Ashish Rukhaiyar, he talks on various issues like zero fee, foreign inflows and inflation. Edited excerpts:
There’s a perception that Nomura is not aggressive in the IPO arena. In 2009 and 2010 (till date), you managed just two issues.
We got our merchant banking licence only in December 2008. We have already done nine deals, including qualified institutional placements, American depository receipts and foreign currency convertible bonds. But yes, two IPOs. We have got quite a few mandates now in the capital market segment and are building our ECM franchise across the region.
In research, we have become number two in Asia ex-Japan. With many people coming on board, we are seeing a lot of traction now. We have firm mandates for four-five IPOs that should happen in the current financial year.
Has Nomura been pitching for divestment issues?
Yes, we recently started pitching for these transactions. From both domestic as well as global perspectives, these are important dealings. Public sector undertakings are high-quality companies and transactions in these tend to be large. In addition to attracting funds from the existing players in India, these offerings tend to attract capital from investors that have not yet started investing in the country.
But what will you say about the trend of quoting near-zero fee for bagging government mandates?
In government transactions, it is not just the fee that one considers. Obviously, low fee is not a good thing. But, there are other benefits like visibility on the global platform and league table credits. As mentioned earlier, you also attract a lot of first-time investors for these primary offerings. The sheer size of the deal is also important for the banking business per se, in terms of investor relationships.
India accounted for 16 per cent of the total ECM volume of Asia ex-Japan during the first half of this year. Going forward, do you expect any rise in India’s share?
It will definiitely go up, but it is difficult to put a time-frame. A large part of fund-raising in the region will essentially be driven by China and India. To that extent, India’s share should expand. In terms of the sheer size of the economy, the capital requirement will be much higher than many other countries in the region.
In the secondary market, foreign and domestic investors appear to have taken a contrarian bet on the markets. What explains this trend?
It is based on each one’s perception of valuations. It is always healthy to have certain set of buyers and sellers in the market.
Globally, there are a very few markets witnessing the kind of growth like India. So, from an FII (foreign institutional investor) perspective, it makes sense to be invested in growth markets than in developed markets, which are not providing returns. Meanwhile, domestic institutions are taking this opportunity to book profit.
Do you expect any trend reversal in terms of FII flows?
The flows are only improving. A lot of general funds, which invest a large part of their capital in developed markets, will probably churn their portfolios to increase the weight of emerging markets, thereby directing further flows into India.
The government is talking about spending some trillion dollars on infrastructure in the next four-five years. It will include foreign participation and open another investment avenue. So, whatever gets churned does not necessarily have to go to the secondary market, which may create a bubble.
What are the key concerns for the market?
The most important concern is inflation, since it has a direct bearing on liquidity. Any increase in interest rates will reduce liquidity. There is a soft interest rate regime globally, as governments are focusing on growth. But, it will be important to see how governments in the US and Europe view interest rates.
Ashish Rukhaiyar
Mumbai, October 5, 2010
The booming primary market does not worry Indraneil Borkakoty, Nomura India’s new executive director and head of equity capital market (ECM, or the investment banking division). Borkakoty, who was heading the ECM vertical at Kotak Mahindra Capital till a month back, says investment in initial public offers (IPOs) will create a wider market for investors and control overheating of the secondary market. In a chat with Ashish Rukhaiyar, he talks on various issues like zero fee, foreign inflows and inflation. Edited excerpts:
There’s a perception that Nomura is not aggressive in the IPO arena. In 2009 and 2010 (till date), you managed just two issues.
We got our merchant banking licence only in December 2008. We have already done nine deals, including qualified institutional placements, American depository receipts and foreign currency convertible bonds. But yes, two IPOs. We have got quite a few mandates now in the capital market segment and are building our ECM franchise across the region.
In research, we have become number two in Asia ex-Japan. With many people coming on board, we are seeing a lot of traction now. We have firm mandates for four-five IPOs that should happen in the current financial year.
Has Nomura been pitching for divestment issues?
Yes, we recently started pitching for these transactions. From both domestic as well as global perspectives, these are important dealings. Public sector undertakings are high-quality companies and transactions in these tend to be large. In addition to attracting funds from the existing players in India, these offerings tend to attract capital from investors that have not yet started investing in the country.
But what will you say about the trend of quoting near-zero fee for bagging government mandates?
In government transactions, it is not just the fee that one considers. Obviously, low fee is not a good thing. But, there are other benefits like visibility on the global platform and league table credits. As mentioned earlier, you also attract a lot of first-time investors for these primary offerings. The sheer size of the deal is also important for the banking business per se, in terms of investor relationships.
India accounted for 16 per cent of the total ECM volume of Asia ex-Japan during the first half of this year. Going forward, do you expect any rise in India’s share?
It will definiitely go up, but it is difficult to put a time-frame. A large part of fund-raising in the region will essentially be driven by China and India. To that extent, India’s share should expand. In terms of the sheer size of the economy, the capital requirement will be much higher than many other countries in the region.
In the secondary market, foreign and domestic investors appear to have taken a contrarian bet on the markets. What explains this trend?
It is based on each one’s perception of valuations. It is always healthy to have certain set of buyers and sellers in the market.
Globally, there are a very few markets witnessing the kind of growth like India. So, from an FII (foreign institutional investor) perspective, it makes sense to be invested in growth markets than in developed markets, which are not providing returns. Meanwhile, domestic institutions are taking this opportunity to book profit.
Do you expect any trend reversal in terms of FII flows?
The flows are only improving. A lot of general funds, which invest a large part of their capital in developed markets, will probably churn their portfolios to increase the weight of emerging markets, thereby directing further flows into India.
The government is talking about spending some trillion dollars on infrastructure in the next four-five years. It will include foreign participation and open another investment avenue. So, whatever gets churned does not necessarily have to go to the secondary market, which may create a bubble.
What are the key concerns for the market?
The most important concern is inflation, since it has a direct bearing on liquidity. Any increase in interest rates will reduce liquidity. There is a soft interest rate regime globally, as governments are focusing on growth. But, it will be important to see how governments in the US and Europe view interest rates.
Most FIIs comply with new norms on structure
Mehul Shah & Ashish Rukhaiyar
Mumbai, October 1, 2010
Most foreign institutional investors (FIIs) operating as multi-class share vehicles have changed their structure to meet the new regulatory requirements, officials familiar with the matter have said.
Yesterday, the Securities and Exchange Board of India (Sebi) said FIIs and sub-accounts that had not complied with its guidelines specified on April 15 would not be permitted to take fresh positions in the cash and derivatives markets from Friday.
“A large number of FIIs with an MCV (multi-class vehicle) structure have already restructured themselves. So, the number of non-compliant entities would be a small percentage of registered FIIs in India and that too mostly fringe players,” said Siddharth Shah, head, funds practice, Nishith Desai Associates.
“My guess is that there will not be any significant impact on liquidity flows. One may see some increase in the amount of offshore derivative instruments, as the non-compliant entities will now swap their exposure through them.”
FIIs have pumped in $18.37 billion (Rs 82,300 crore) in the Indian stock market so far this year, the highest in any calendar year. Sebi is not comfortable with foreign investors from tax havens having a multi-class structure, as some of these are believed to be used for round-tripping (the same capital returning here in the form of foreign investment) of funds.
On April 15, the regulator asked new applicants as well as existing FIIs and sub-accounts to give more information about their structures. It asked applicants to furnish declarations that they were not a protected cell company (PCC) or a segregated portfolio company (SPC).
The applicants also have to declare they are not a multi-class share vehicle (MCV) under their constitution. If they are, they need to undertake that common portfolios will be allocated across various share classes and will be broad-based. Sebi had set a deadline of September 30 for all FIIs and sub-accounts for complying with the guidelines.
A structure like a PCC or SPC segregates assets and liabilities of investors by providing for distinct assets, either in the form of a separate class of share, or a dedicated sub-fund attributed to each investor. An entity like an MCV has the flexibility to issue multiple classes of shares having differential benefits attached, so that each class has the ability to represent the interest of a particular investor, or for specific investments.
By rough estimates, around 40 per cent of registered FIIs would have to change their structure to meet Sebi norms. As of September 29, there were 1,726 registered FIIs in India, while the number of registered sub-accounts was 5,523, Sebi data showed.
Mumbai, October 1, 2010
Most foreign institutional investors (FIIs) operating as multi-class share vehicles have changed their structure to meet the new regulatory requirements, officials familiar with the matter have said.
Yesterday, the Securities and Exchange Board of India (Sebi) said FIIs and sub-accounts that had not complied with its guidelines specified on April 15 would not be permitted to take fresh positions in the cash and derivatives markets from Friday.
“A large number of FIIs with an MCV (multi-class vehicle) structure have already restructured themselves. So, the number of non-compliant entities would be a small percentage of registered FIIs in India and that too mostly fringe players,” said Siddharth Shah, head, funds practice, Nishith Desai Associates.
“My guess is that there will not be any significant impact on liquidity flows. One may see some increase in the amount of offshore derivative instruments, as the non-compliant entities will now swap their exposure through them.”
FIIs have pumped in $18.37 billion (Rs 82,300 crore) in the Indian stock market so far this year, the highest in any calendar year. Sebi is not comfortable with foreign investors from tax havens having a multi-class structure, as some of these are believed to be used for round-tripping (the same capital returning here in the form of foreign investment) of funds.
On April 15, the regulator asked new applicants as well as existing FIIs and sub-accounts to give more information about their structures. It asked applicants to furnish declarations that they were not a protected cell company (PCC) or a segregated portfolio company (SPC).
The applicants also have to declare they are not a multi-class share vehicle (MCV) under their constitution. If they are, they need to undertake that common portfolios will be allocated across various share classes and will be broad-based. Sebi had set a deadline of September 30 for all FIIs and sub-accounts for complying with the guidelines.
A structure like a PCC or SPC segregates assets and liabilities of investors by providing for distinct assets, either in the form of a separate class of share, or a dedicated sub-fund attributed to each investor. An entity like an MCV has the flexibility to issue multiple classes of shares having differential benefits attached, so that each class has the ability to represent the interest of a particular investor, or for specific investments.
By rough estimates, around 40 per cent of registered FIIs would have to change their structure to meet Sebi norms. As of September 29, there were 1,726 registered FIIs in India, while the number of registered sub-accounts was 5,523, Sebi data showed.
Q&A: Giles Nelson, Strategy Director, Apama
'Smart order routing will force inefficiency out of the market'
Palak Shah & Ashish Rukhaiyar
Mumbai, September 29, 2010
At the time when regulators around the world are blaming algorithmic trading for all the evil in stock markets, Giles Nelson, co-founder of Apama, the most used algo, says it is becoming a technology. In an interview with Palak Shah & Ashish Rukhaiyar, he talks about the growing influence of algorithmic trading in India. Edited excerpts:
How is algorithmic trading evolving? What is its future in India?
It is becoming a future technology. Nearly 70 per cent of equity trades in the US originate from algorithmic trading in one way or other. It is catching up in Europe, Brazil, Australia and Asia. In India, spending on softwares for algorithmic trading is going to be easily worth $100 million in two years. The market share of algo trade will rise from 15 per cent at present to 50 per cent in the next three years.
The number of trades on the NSE (National Stock Exchange) are 10 times that of the London Stock Exchange. Both NSE and BSE (Bombay Stock Exchange) are offering co-location facility; smart order routing and mobile trading has now been allowed, too. Also, commodity exchanges are catching up on algo trading. It is being put to use in foreign exchange derivatives too.
That’s an enormous reason to do algorithmic trading. Smart order routing will force inefficiency out of the market, reduce price discrepancies between the two main equity exchanges and increase competition. NSE’s process of validating every algo was putting a significant brake on its growth. The process is unsustainable and will be short-lived.
There are concerns that algo trading leads to distortion of price and its discovery, that it encourages excessive speculation.
Criticism has been going on for over a year after the ‘flash crash’ in the US stock market. Nobody has yet understood what caused the flash crash. There were other reasons, including the structure of the market. Algo technology itself is difficult and neutral; it is not right to only blame it for anything that goes wrong in the market. Sometimes, massive control and malicious entries behind it is where difficulties lie.
About 70 per cent of equity trades in the US coming from smaller high-frequency trading firms, using different algo trading models, is a potential issue. There may be circumstances of price distortion. But there is more liquidity in markets which have high algo trading. It reduces spreads between prices, makes it cheaper not only for the algo trader but also the investor.
Algo trading is banned for things that it is not responsible for. There has been controversy about dark pools. First of all, naked access should be banned. All orders that are through electronic means or manually should go through a pre-trading process. It will prevent instances like last year in the UK, where a global oil trader bought seven billion barrels of oil when he was drunk. This impacted the global crude price.
Is there an adequate regulatory framework? Are you offering complex algo patterns in India?
Mandatory pre-trade risk and market surveillance should be there within the regulators and the exchanges. Regulators have the rear-view mirror approach when it comes to understanding market softwares. They do not have the capability to know what is happening on a realtime basis. The technology that SEC, the US stock market regulator, was using was two decades old. Regulators have to catch up here. All parties in the trading cycle should take more responsibility to ensure appropriate risk control and surveillance.
We are offering vanilla algorithms and smart order routing in India through Apama. It is an algorithmic trading software used for multi-exchange markets such as US and Europe. The software is a transparent box and can be looked into. It offers not only a platform but also tools to change algos with a changing market. We have Reliance, HDFC as our clients, but we have started marketing it only this year.
How big is the third-party algo vendor business? What are the profit margins?
It’s difficult to answer. Global business is probably a couple of billion dollars a year, when you look at all the platforms, connectivity, the hardware, and so on. We are a $500-million organisation, with operations in 180 countries. Apama, which is used in risk management and surveillance, apart from trading, earns us a number of million dollars per year. Quite a significant number.
Palak Shah & Ashish Rukhaiyar
Mumbai, September 29, 2010
At the time when regulators around the world are blaming algorithmic trading for all the evil in stock markets, Giles Nelson, co-founder of Apama, the most used algo, says it is becoming a technology. In an interview with Palak Shah & Ashish Rukhaiyar, he talks about the growing influence of algorithmic trading in India. Edited excerpts:
How is algorithmic trading evolving? What is its future in India?
It is becoming a future technology. Nearly 70 per cent of equity trades in the US originate from algorithmic trading in one way or other. It is catching up in Europe, Brazil, Australia and Asia. In India, spending on softwares for algorithmic trading is going to be easily worth $100 million in two years. The market share of algo trade will rise from 15 per cent at present to 50 per cent in the next three years.
The number of trades on the NSE (National Stock Exchange) are 10 times that of the London Stock Exchange. Both NSE and BSE (Bombay Stock Exchange) are offering co-location facility; smart order routing and mobile trading has now been allowed, too. Also, commodity exchanges are catching up on algo trading. It is being put to use in foreign exchange derivatives too.
That’s an enormous reason to do algorithmic trading. Smart order routing will force inefficiency out of the market, reduce price discrepancies between the two main equity exchanges and increase competition. NSE’s process of validating every algo was putting a significant brake on its growth. The process is unsustainable and will be short-lived.
There are concerns that algo trading leads to distortion of price and its discovery, that it encourages excessive speculation.
Criticism has been going on for over a year after the ‘flash crash’ in the US stock market. Nobody has yet understood what caused the flash crash. There were other reasons, including the structure of the market. Algo technology itself is difficult and neutral; it is not right to only blame it for anything that goes wrong in the market. Sometimes, massive control and malicious entries behind it is where difficulties lie.
About 70 per cent of equity trades in the US coming from smaller high-frequency trading firms, using different algo trading models, is a potential issue. There may be circumstances of price distortion. But there is more liquidity in markets which have high algo trading. It reduces spreads between prices, makes it cheaper not only for the algo trader but also the investor.
Algo trading is banned for things that it is not responsible for. There has been controversy about dark pools. First of all, naked access should be banned. All orders that are through electronic means or manually should go through a pre-trading process. It will prevent instances like last year in the UK, where a global oil trader bought seven billion barrels of oil when he was drunk. This impacted the global crude price.
Is there an adequate regulatory framework? Are you offering complex algo patterns in India?
Mandatory pre-trade risk and market surveillance should be there within the regulators and the exchanges. Regulators have the rear-view mirror approach when it comes to understanding market softwares. They do not have the capability to know what is happening on a realtime basis. The technology that SEC, the US stock market regulator, was using was two decades old. Regulators have to catch up here. All parties in the trading cycle should take more responsibility to ensure appropriate risk control and surveillance.
We are offering vanilla algorithms and smart order routing in India through Apama. It is an algorithmic trading software used for multi-exchange markets such as US and Europe. The software is a transparent box and can be looked into. It offers not only a platform but also tools to change algos with a changing market. We have Reliance, HDFC as our clients, but we have started marketing it only this year.
How big is the third-party algo vendor business? What are the profit margins?
It’s difficult to answer. Global business is probably a couple of billion dollars a year, when you look at all the platforms, connectivity, the hardware, and so on. We are a $500-million organisation, with operations in 180 countries. Apama, which is used in risk management and surveillance, apart from trading, earns us a number of million dollars per year. Quite a significant number.
Realty IPOs set to break 6-month Jinx
Raghavendra Kamath & Ashish Rukhaiyar
Mumbai, September 29, 2010
Property developers need cash to reduce large debts.
Real estate developers are back in the primary markets after a lull of six months, as stock indices have touched new highs and property prices have crossed their earlier peaks in major cities.
Oberoi Realty and Prestige Estates are planning their initial public offers (IPOs) next month. Kalpataru and Lavasa Corporation have filed their draft red herring prospectuses (DHRPs) in the past fortnight. Between the four of them, they are planning to raise over Rs 5,000 crore from the primary market.
Nitesh Estates was the last developer to launch an IPO, in April this year. Though at least a dozen real estate developers filed DRHPs to raise over Rs 12,000 crore and about half of them got the market regulator’s nod, volatility in the markets forced most of them to postpone their plans.
Factors such as poor retail participation in recent issues – Nitesh Estates and DB Realty are two examples – and these stocks trading below their listed price added to the nervousness of IPO aspirants, analysts tracking the sector said.
However, things have changed after the recent exuberance in stock and property markets.
“Equity markets are doing well and the property sector is showing growth. Developers want to use this opportunity to raise capital. This allows developers to improve balance sheets and improve their debt to equity ratio,” says Tarun Bhatia, director, capital markets, Crisil Research.
In the current month itself, the BSE Sensex has gained 12 per cent and crossed the psychological 20,000-mark. On the property front, prices in areas such as South Mumbai have crossed the 2007 peak.
According to central bank estimates, realty developers have piled up Rs 75,000 crore debt and need to pay around Rs 25,000 crore in interest and principal this financial year. Hence, successful IPOs are critical for developers such as Emaar MGF, BPTP and Lodha, among others, who want to use part of the IPO proceeds to pay off their debts.
The IPO aspirants are more than hopeful. “We would like to undertake the journey when the weather is good. We are a zero-debt company and have marquee investors (Morgan Stanley). Hence, we see a successful IPO,” says Vikas Oberoi, managing director, Oberoi Realty, which plans to raise Rs 1,100 crore through an IPO.
How does the market see the prospects of realty IPOs, given that a dozen are in the queue and a similar number of companies from different sectors have hit the market this month?
“The first few (real estate) issues will go through smoothly, before investors again start focusing on valuations,” says Sanjay Sakhuja, chief executive officer, Ambit Corporate Finance. “While domestic investors are a bit cautious, FIIs have a very strong positive view on emerging markets.''
Amit Goenka, national director, capital transactions, Knight Frank, believes only two-three IPOs will hit the markets this year. He feels another half a dozen will join the queue.
“IPOs will happen only if 30-40 per cent of the issue is sold in pre-IPO placements,” says Goenka. “If the project pipeline of a developer is not robust and is highly dependent on future cash flows, the issue may face some problems.”
Valuations
Valuation will be a key issue for the success of real estate IPOs, apart from the track record, cash flows, transparency and management depth of developers, among others, say analysts tracking the sector.
“In the real estate sector, there is still some disconnect between investors and developers in terms of valuations. Investors will look for more clarity on sustainability of sales and the delivery front,” said Rajiv Sahni, partner (real estate practice), Ernst & Young.
Investors will look for more clarity on the sustainability of sales and the delivery front,” said Rajiv Sahni, partner (real estate practice), Ernst & Young.
“A developer whose perception has changed in the mind of the investor will perhaps manage to do a successful IPO.”.
In early 2008, Delhi-based Emaar MGF had to reduce the price band twice and push back the closing date by five days before withdrawing the IPO, due to poor subscriptions to the issue. Though there were reports about Emaar MGF cutting its IPO size by half before hitting the market again, the company has not announced anything so far. So, too, with other IPO aspirants such as Sahara, Neptune and others.
Knight Frank’s Goenka believes that if the IPO valuation is 50-55 times the company’s 12-month trailing earnings, it is acceptable. “But most of them are still at 70-75 times their trailing earnings,’’ he says. “Though developers have learnt their lessons and valuations are much more reasonable than two years ago, the greed has not completely gone out.’’
But developers say valuations are not a problem.”We were planning to raise Rs 1,000 crore when the market was at 14,000; now they are at 20,000,’’ says Oberoi.
Developers such as Lodha say they will watch the performance of the IPOs of Oberoi and Prestige before taking a call on its public issue.
“Healthy internal cash flows give us liberty of time. We want to see if investors make money in two of these issues before deciding our timing,’’ says Abhisheck Lodha, managing director of Lodha Developers.
Mumbai, September 29, 2010
Property developers need cash to reduce large debts.
Real estate developers are back in the primary markets after a lull of six months, as stock indices have touched new highs and property prices have crossed their earlier peaks in major cities.
Oberoi Realty and Prestige Estates are planning their initial public offers (IPOs) next month. Kalpataru and Lavasa Corporation have filed their draft red herring prospectuses (DHRPs) in the past fortnight. Between the four of them, they are planning to raise over Rs 5,000 crore from the primary market.
Nitesh Estates was the last developer to launch an IPO, in April this year. Though at least a dozen real estate developers filed DRHPs to raise over Rs 12,000 crore and about half of them got the market regulator’s nod, volatility in the markets forced most of them to postpone their plans.
Factors such as poor retail participation in recent issues – Nitesh Estates and DB Realty are two examples – and these stocks trading below their listed price added to the nervousness of IPO aspirants, analysts tracking the sector said.
However, things have changed after the recent exuberance in stock and property markets.
“Equity markets are doing well and the property sector is showing growth. Developers want to use this opportunity to raise capital. This allows developers to improve balance sheets and improve their debt to equity ratio,” says Tarun Bhatia, director, capital markets, Crisil Research.
In the current month itself, the BSE Sensex has gained 12 per cent and crossed the psychological 20,000-mark. On the property front, prices in areas such as South Mumbai have crossed the 2007 peak.
According to central bank estimates, realty developers have piled up Rs 75,000 crore debt and need to pay around Rs 25,000 crore in interest and principal this financial year. Hence, successful IPOs are critical for developers such as Emaar MGF, BPTP and Lodha, among others, who want to use part of the IPO proceeds to pay off their debts.
The IPO aspirants are more than hopeful. “We would like to undertake the journey when the weather is good. We are a zero-debt company and have marquee investors (Morgan Stanley). Hence, we see a successful IPO,” says Vikas Oberoi, managing director, Oberoi Realty, which plans to raise Rs 1,100 crore through an IPO.
How does the market see the prospects of realty IPOs, given that a dozen are in the queue and a similar number of companies from different sectors have hit the market this month?
“The first few (real estate) issues will go through smoothly, before investors again start focusing on valuations,” says Sanjay Sakhuja, chief executive officer, Ambit Corporate Finance. “While domestic investors are a bit cautious, FIIs have a very strong positive view on emerging markets.''
Amit Goenka, national director, capital transactions, Knight Frank, believes only two-three IPOs will hit the markets this year. He feels another half a dozen will join the queue.
“IPOs will happen only if 30-40 per cent of the issue is sold in pre-IPO placements,” says Goenka. “If the project pipeline of a developer is not robust and is highly dependent on future cash flows, the issue may face some problems.”
Valuations
Valuation will be a key issue for the success of real estate IPOs, apart from the track record, cash flows, transparency and management depth of developers, among others, say analysts tracking the sector.
“In the real estate sector, there is still some disconnect between investors and developers in terms of valuations. Investors will look for more clarity on sustainability of sales and the delivery front,” said Rajiv Sahni, partner (real estate practice), Ernst & Young.
Investors will look for more clarity on the sustainability of sales and the delivery front,” said Rajiv Sahni, partner (real estate practice), Ernst & Young.
“A developer whose perception has changed in the mind of the investor will perhaps manage to do a successful IPO.”.
In early 2008, Delhi-based Emaar MGF had to reduce the price band twice and push back the closing date by five days before withdrawing the IPO, due to poor subscriptions to the issue. Though there were reports about Emaar MGF cutting its IPO size by half before hitting the market again, the company has not announced anything so far. So, too, with other IPO aspirants such as Sahara, Neptune and others.
Knight Frank’s Goenka believes that if the IPO valuation is 50-55 times the company’s 12-month trailing earnings, it is acceptable. “But most of them are still at 70-75 times their trailing earnings,’’ he says. “Though developers have learnt their lessons and valuations are much more reasonable than two years ago, the greed has not completely gone out.’’
But developers say valuations are not a problem.”We were planning to raise Rs 1,000 crore when the market was at 14,000; now they are at 20,000,’’ says Oberoi.
Developers such as Lodha say they will watch the performance of the IPOs of Oberoi and Prestige before taking a call on its public issue.
“Healthy internal cash flows give us liberty of time. We want to see if investors make money in two of these issues before deciding our timing,’’ says Abhisheck Lodha, managing director of Lodha Developers.
Sebi to set framework for overseas indices
Ashish Rukhaiyar
Mumbai, September 27, 2010
Will lay down criteria for market cap and liquidity.
Indian stock exchanges that wish to launch trading facility in overseas indices will have to wait for some more months as the Securities and Exchange Board of India (Sebi) is working on a detailed regulatory framework to govern cross-listing arrangements.
According to a person privy to the development, the regulator aims to get only “good quality” indices in India and so would lay down the criteria for market capitalisation and liquidity. Only those overseas indices that fulfill these criteria would be allowed to trade on the Indian bourses.
Currently, there are no such guidelines and it is believed that the process will take around three to four months. The regulator plans to put in place comprehensive norms that would serve as the base for all such future alliances.
“The work on the regulatory framework is on and the process will take around three to four months,” said a person not wishing to be named. “Having a regulatory structure in place is better than evaluating cross-listing arrangements on a case to case basis. The guidelines will also serve as a base on which future cross-listing tie-ups can be done,” he added.
Currently, the National Stock Exchange (NSE) is the only Indian equity bourse that has entered into cross-listing arrangements. Under the arrangement with the Chicago Mercantile Exchange (CME), NSE has exclusive rights for starting trading in the S&P 500 and the Dow Jones Industrial Average rupee-denominated futures contracts for trading in India. This is being made available to NSE via sub-licences from the CME Group, Standard & Poor’s and Dow Jones, respectively.
“Exchanges cannot just go out and get any index in the Indian market. Some conditions need to be fulfilled,” said the person. “The regulator might also lay down the geographies from where the indices could be brought for trading on the Indian stock exchange platform,” he added.
This issue assumes significance, as the Indian exchanges are looking at increasing their bouquet of offerings to garner more market share and also to enhance their overall valuation. Globally, some of the leading bourses like Chicago Mercantile Exchange and SGX boast of offering trading facilities in a number of overseas indices.
Meanwhile, NSE has also signed a letter of intent with the London Stock Exchange for getting the FTSE 100 in India. “As part of the letter (of intent), both exchanges declared their intent to explore the feasibility of an agreement whereby FTSE Group may licence the FTSE 100 Index to the NSE, and whereby the NSE may licence the S&P CNX Nifty to London Stock Exchange Group for the purpose of issuing and trading options and other index contracts,” says the NSE release dated July 28.
MCX Stock Exchange (MCX-SX) has also entered into a tie-up with FTSE to facilitate creation of international investment products — including international FTSE indices — to be listed and traded on MCX-SX.
Mumbai, September 27, 2010
Will lay down criteria for market cap and liquidity.
Indian stock exchanges that wish to launch trading facility in overseas indices will have to wait for some more months as the Securities and Exchange Board of India (Sebi) is working on a detailed regulatory framework to govern cross-listing arrangements.
According to a person privy to the development, the regulator aims to get only “good quality” indices in India and so would lay down the criteria for market capitalisation and liquidity. Only those overseas indices that fulfill these criteria would be allowed to trade on the Indian bourses.
Currently, there are no such guidelines and it is believed that the process will take around three to four months. The regulator plans to put in place comprehensive norms that would serve as the base for all such future alliances.
“The work on the regulatory framework is on and the process will take around three to four months,” said a person not wishing to be named. “Having a regulatory structure in place is better than evaluating cross-listing arrangements on a case to case basis. The guidelines will also serve as a base on which future cross-listing tie-ups can be done,” he added.
Currently, the National Stock Exchange (NSE) is the only Indian equity bourse that has entered into cross-listing arrangements. Under the arrangement with the Chicago Mercantile Exchange (CME), NSE has exclusive rights for starting trading in the S&P 500 and the Dow Jones Industrial Average rupee-denominated futures contracts for trading in India. This is being made available to NSE via sub-licences from the CME Group, Standard & Poor’s and Dow Jones, respectively.
“Exchanges cannot just go out and get any index in the Indian market. Some conditions need to be fulfilled,” said the person. “The regulator might also lay down the geographies from where the indices could be brought for trading on the Indian stock exchange platform,” he added.
This issue assumes significance, as the Indian exchanges are looking at increasing their bouquet of offerings to garner more market share and also to enhance their overall valuation. Globally, some of the leading bourses like Chicago Mercantile Exchange and SGX boast of offering trading facilities in a number of overseas indices.
Meanwhile, NSE has also signed a letter of intent with the London Stock Exchange for getting the FTSE 100 in India. “As part of the letter (of intent), both exchanges declared their intent to explore the feasibility of an agreement whereby FTSE Group may licence the FTSE 100 Index to the NSE, and whereby the NSE may licence the S&P CNX Nifty to London Stock Exchange Group for the purpose of issuing and trading options and other index contracts,” says the NSE release dated July 28.
MCX Stock Exchange (MCX-SX) has also entered into a tie-up with FTSE to facilitate creation of international investment products — including international FTSE indices — to be listed and traded on MCX-SX.
I-bankers hit back at Sebi on PSU floats
Mehul Shah & Ashish Rukhaiyar
Mumbai, September 26, 2010
Say regulator’s criticism of near-zero fee for government issues unfounded
Investment bankers have dismissed the capital market regulator Sebi’s concerns over near-zero fee for managing public sector issues.
Bankers say the fee is a function of competition and, globally, too, government mandates are done at a lower cost compared with private sector issues.
In an event organised by merchant bankers on Friday, Securities and Exchange Board of India (Sebi) Chairman C B Bhave had said investment bankers need to introspect whether it is healthy competition to quote near-zero fees to bag government issues.
For example, reports suggest that six investment bankers have quoted a fee of Rs 12,500 to manage the Coal India issue that aims to mop up over Rs 13,000 crore next month.
However, bankers, who spoke on the condition of anonymity, said near-zero fee for government issues is a function of market dynamics.
“As an investment banker, I would love to charge higher fees for public sector issues. But I have to quote a low fee because of competition,” said managing director of a domestic investment bank, who has worked on many government issues.
Interestingly, investment bankers with an experience of working with governments across the world find nothing wrong in the zero-fee game, which, they say, is a “global practice”.
“For any investment banker, including us, the government is an important constituent. These issues are very large and, therefore, everybody wants to manage them,” said the managing director of a leading foreign investment bank. “If the rule of the game is less money, you make less money. But that is true globally, too. Revenue from government transactions is significantly lower than those from the private sector.”
Another banker who has been part of the lead managers in a few divestment issues said the fee is also a factor of the quantum of sales and marketing activities that need to be done to make the issue a success (story). “Quality public sector issues have ready takers and the bankers do not really need to go out and convince investors to put in large bids.”
“It is true that managing a divestment issue burns a hole in the investment banker's pocket. But the efforts involved in marketing a public sector issue is far less than that for a private entity,” he said.
Among the recent government issues, Engineers India Limited was subscribed 13.35 times, while SJVN was subscribed 6.51 times.
Mumbai, September 26, 2010
Say regulator’s criticism of near-zero fee for government issues unfounded
Investment bankers have dismissed the capital market regulator Sebi’s concerns over near-zero fee for managing public sector issues.
Bankers say the fee is a function of competition and, globally, too, government mandates are done at a lower cost compared with private sector issues.
In an event organised by merchant bankers on Friday, Securities and Exchange Board of India (Sebi) Chairman C B Bhave had said investment bankers need to introspect whether it is healthy competition to quote near-zero fees to bag government issues.
For example, reports suggest that six investment bankers have quoted a fee of Rs 12,500 to manage the Coal India issue that aims to mop up over Rs 13,000 crore next month.
However, bankers, who spoke on the condition of anonymity, said near-zero fee for government issues is a function of market dynamics.
“As an investment banker, I would love to charge higher fees for public sector issues. But I have to quote a low fee because of competition,” said managing director of a domestic investment bank, who has worked on many government issues.
Interestingly, investment bankers with an experience of working with governments across the world find nothing wrong in the zero-fee game, which, they say, is a “global practice”.
“For any investment banker, including us, the government is an important constituent. These issues are very large and, therefore, everybody wants to manage them,” said the managing director of a leading foreign investment bank. “If the rule of the game is less money, you make less money. But that is true globally, too. Revenue from government transactions is significantly lower than those from the private sector.”
Another banker who has been part of the lead managers in a few divestment issues said the fee is also a factor of the quantum of sales and marketing activities that need to be done to make the issue a success (story). “Quality public sector issues have ready takers and the bankers do not really need to go out and convince investors to put in large bids.”
“It is true that managing a divestment issue burns a hole in the investment banker's pocket. But the efforts involved in marketing a public sector issue is far less than that for a private entity,” he said.
Among the recent government issues, Engineers India Limited was subscribed 13.35 times, while SJVN was subscribed 6.51 times.
Brokers to get bulk of Asba fee
Ashish Rukhaiyar
Mumbai, September 24, 2010
Sebi panel gives recommendation, approval expected soon.
The Securities and Exchange Board of India (Sebi) will soon rework the guidelines for Asba (application supported by blocked amount) in public offer applications to make it more acceptable to capital market intermediaries. The new norms will see banks and brokers sharing the commission, a long-standing demand of the latter.
According to two persons familiar with the development, the proposal has been made by a Sebi committee. The regulator’s approval is expected soon.
The committee proposed a 25-75 formula for sharing, said a source on condition of anonymity. Brokers will get 75 per cent commission while the rest will go to the bank. The committee members feel brokers should get more as they market the IPOs.
Asba commissions have been a point of debate since the mechanism was introduced in September 2008. The committee members deliberated on the details reached a consensus, said another person privy to the discussions. “The idea is to have a role-based incentive or compensation system in place. The proposals have been forwarded to Sebi and we expect the final approval pretty soon,” he said, requesting condition anonymity, as the proposals have not been made public.
Meanwhile, Sebi Chairman C B Bhave has publicly acknowledged again that the norms need to be reviewed. “We are talking to merchant bankers to know the glitches in Asba; there is a need to increase the rate of investors applying for shares through Asba,” Bhave said at an event in Kochi on Tuesday.
Under Asba, the applicant can bid even as the money stays in his/her bank account. The amount is debited only at the time of allotment. This process eliminates delays due to refunds, speeding the process. While initially, the Asba facility was only for retail applicants, it was extended to institutional investors in April.
Experts tracking the primary market mechanism say Asba can gain wider acceptance if brokers are given incentives.
Since brokers bring investors, the commission needs to be split between banks and brokers, they say. At present, banks get the commission and that is the biggest reason why Asba has not taken off in a big way, says Prithvi Haldea of PRIME Database.
Merchant bankers say while the current norms give banks the right to commission, brokers also manage to get a share, based on an informal arrangement. The proportion is based on the number of applications the broker routes through a particular bank.
According to a status note prepared by a Sebi committee in 2009, Asba applications in some IPOs accounted for 12 per cent of all retail applications. While latest numbers are not available, market players say there has been an increase in the number of takers.
Mumbai, September 24, 2010
Sebi panel gives recommendation, approval expected soon.
The Securities and Exchange Board of India (Sebi) will soon rework the guidelines for Asba (application supported by blocked amount) in public offer applications to make it more acceptable to capital market intermediaries. The new norms will see banks and brokers sharing the commission, a long-standing demand of the latter.
According to two persons familiar with the development, the proposal has been made by a Sebi committee. The regulator’s approval is expected soon.
The committee proposed a 25-75 formula for sharing, said a source on condition of anonymity. Brokers will get 75 per cent commission while the rest will go to the bank. The committee members feel brokers should get more as they market the IPOs.
Asba commissions have been a point of debate since the mechanism was introduced in September 2008. The committee members deliberated on the details reached a consensus, said another person privy to the discussions. “The idea is to have a role-based incentive or compensation system in place. The proposals have been forwarded to Sebi and we expect the final approval pretty soon,” he said, requesting condition anonymity, as the proposals have not been made public.
Meanwhile, Sebi Chairman C B Bhave has publicly acknowledged again that the norms need to be reviewed. “We are talking to merchant bankers to know the glitches in Asba; there is a need to increase the rate of investors applying for shares through Asba,” Bhave said at an event in Kochi on Tuesday.
Under Asba, the applicant can bid even as the money stays in his/her bank account. The amount is debited only at the time of allotment. This process eliminates delays due to refunds, speeding the process. While initially, the Asba facility was only for retail applicants, it was extended to institutional investors in April.
Experts tracking the primary market mechanism say Asba can gain wider acceptance if brokers are given incentives.
Since brokers bring investors, the commission needs to be split between banks and brokers, they say. At present, banks get the commission and that is the biggest reason why Asba has not taken off in a big way, says Prithvi Haldea of PRIME Database.
Merchant bankers say while the current norms give banks the right to commission, brokers also manage to get a share, based on an informal arrangement. The proportion is based on the number of applications the broker routes through a particular bank.
According to a status note prepared by a Sebi committee in 2009, Asba applications in some IPOs accounted for 12 per cent of all retail applications. While latest numbers are not available, market players say there has been an increase in the number of takers.
Sebi may clear MCX-SX stance this week
Ashish Rukhaiyar
Mumbai, September 21, 2010
The Securities and Exchange Board of India (Sebi) is expected to come out this week with its decision on the application of MCX Stock Exchange (MCX-SX) for launching a full-fledged equity bourse. The High Court here had set a deadline of September 30 for the regulator to decide on the matter.
According to a source, Sebi whole-time member K M Abraham had a number of meetings with MCX-SX officials in the past couple of weeks and is now set to decide. The meetings were held to allow the exchange to reply to the concerns raised by Sebi.
It is believed the exchange was also questioned about the 10 per cent collective holding of Financial Technologies (India) Ltd (FTIL) and Multi Commodity Exchange (MCX). The regulations clearly specify that persons acting in concert should not hold more than five per cent.
"Apart from the warrant and buy-back issue, the exchange officials were asked about the collective holding of FTIL and MCX. Prima facie it appears that both the entities are persons acting in concert," said a person on condition of anonymity.
FTIL owns 30 per cent in MCX, which is also the world's largest exchange for silver trading in terms of the number of futures contracts traded in 2009. Incidentally, Jignesh Shah is the chairman of FTIL and also vice-chairman of MCX.
The respective boards of FTIL and MCX have, however, already passed resolutions that the entities "would at no point of time of violate the MIMPS guidelines of shareholding structures and limit".
Said MCX-SX in an emailed response: "As per the High Court directive of August 10 regarding MCX-SX permission from Sebi to start trading in equities and other segments, MCX-SX has complied with all necessary directives and informed Sebi accordingly."
Meanwhile, Reserve Bank of India Deputy Governor Shyamala Gopinath, while inaugurating the United Stock Exchange (USE), said: “A diversified ownership is very necessary in a market infrastructure company. Ultimately, exchanges are public utilities... (It) is a means of good governance” Endorsing her views, Sebi chairman C B Bhave said: “I am happy that USE is coming with a diversified ownership. We need to see they serve the supposed purpose.”
Legal experts say the highly publicised matter could also move to the Securities Appellate Tribunal (SAT) if MCX-SX wants to challenge the Sebi order, even as the high court would remain an option.
"It's a subtle difference:- both would be open to MCX," says Sandeep Parekh, founder of Finsec Law Advisors and a former executive director (legal) at Sebi. "They could go to the HC, particularly since they have already filed a writ, asking Sebi to take a decision. But the nature of powers of the HC are more limited. It can only look at illegality, bias, etc. In contrast, they can go as a matter of right to SAT, which will not only look at the legality of the order but also the detailed merits of the order and accept, reject or modify the Sebi order," explains Parekh.
Mumbai, September 21, 2010
The Securities and Exchange Board of India (Sebi) is expected to come out this week with its decision on the application of MCX Stock Exchange (MCX-SX) for launching a full-fledged equity bourse. The High Court here had set a deadline of September 30 for the regulator to decide on the matter.
According to a source, Sebi whole-time member K M Abraham had a number of meetings with MCX-SX officials in the past couple of weeks and is now set to decide. The meetings were held to allow the exchange to reply to the concerns raised by Sebi.
It is believed the exchange was also questioned about the 10 per cent collective holding of Financial Technologies (India) Ltd (FTIL) and Multi Commodity Exchange (MCX). The regulations clearly specify that persons acting in concert should not hold more than five per cent.
"Apart from the warrant and buy-back issue, the exchange officials were asked about the collective holding of FTIL and MCX. Prima facie it appears that both the entities are persons acting in concert," said a person on condition of anonymity.
FTIL owns 30 per cent in MCX, which is also the world's largest exchange for silver trading in terms of the number of futures contracts traded in 2009. Incidentally, Jignesh Shah is the chairman of FTIL and also vice-chairman of MCX.
The respective boards of FTIL and MCX have, however, already passed resolutions that the entities "would at no point of time of violate the MIMPS guidelines of shareholding structures and limit".
Said MCX-SX in an emailed response: "As per the High Court directive of August 10 regarding MCX-SX permission from Sebi to start trading in equities and other segments, MCX-SX has complied with all necessary directives and informed Sebi accordingly."
Meanwhile, Reserve Bank of India Deputy Governor Shyamala Gopinath, while inaugurating the United Stock Exchange (USE), said: “A diversified ownership is very necessary in a market infrastructure company. Ultimately, exchanges are public utilities... (It) is a means of good governance” Endorsing her views, Sebi chairman C B Bhave said: “I am happy that USE is coming with a diversified ownership. We need to see they serve the supposed purpose.”
Legal experts say the highly publicised matter could also move to the Securities Appellate Tribunal (SAT) if MCX-SX wants to challenge the Sebi order, even as the high court would remain an option.
"It's a subtle difference:- both would be open to MCX," says Sandeep Parekh, founder of Finsec Law Advisors and a former executive director (legal) at Sebi. "They could go to the HC, particularly since they have already filed a writ, asking Sebi to take a decision. But the nature of powers of the HC are more limited. It can only look at illegality, bias, etc. In contrast, they can go as a matter of right to SAT, which will not only look at the legality of the order but also the detailed merits of the order and accept, reject or modify the Sebi order," explains Parekh.
Bourses may have to wait more for currency options
Ashish Rukhaiyar
Mumbai, September 17, 2010
Sebi unlikely to give go-ahead before a decision on MCX-SX tussle.
Stock exchanges in India will have to wait for some more time before getting the final regulatory approval for launching currency options trading. According to people familiar with the development, the Securities and Exchange Board of India (Sebi) is unlikely to give the go-ahead before a final decision on the ongoing legal tussle with MCX-SX. The high court here has set a deadline of September 30 for Sebi to decide on the MCX-SX matter.
Currently, only the National Stock Exchange (NSE) and MCX Stock Exchange (MCX-SX) offer trading in currency futures, the segment on which currency options will be launched. Both have been doing mock trading in currency options for quite some time and are waiting for the final approval. It is well over a month since the regulator released a circular allowing the introduction of options contracts on the rupee-dollar spot rate.
Industry observers say the regulator will give exchanges the permission to go live with currency options only after sorting the legal tussle with MCX-SX. The one-year extension to the latter does not allow it to launch any "new class" of contracts in securities.
"Sebi wants to promote a level playing field between all the exchanges. If Sebi gives approval to one exchange, the other might raise an objection, which is not conducive to the current situation," said a person familiar with the development. It is believed that if NSE is given approval for launching currency options even while a final decision on the court battle with MCX-SX is awaited, then questions might be raised even in the court rooms. Sebi is already facing allegations of "favouritism" towards NSE.
MCX-SX has petitioned the HC for a response from the regulator on its application for permission to operate as a full-fledged stock exchange. The petition says Sebi should either reject or approve its proposal to do trading in equities, equity derivatives, interest rate derivatives, mutual funds and a separate platform for small and medium enterprises. The petition said the regulator gave no response even three months after MCX-SX fulfiled a key condition, of bringing down the promoters' stake.
Mumbai, September 17, 2010
Sebi unlikely to give go-ahead before a decision on MCX-SX tussle.
Stock exchanges in India will have to wait for some more time before getting the final regulatory approval for launching currency options trading. According to people familiar with the development, the Securities and Exchange Board of India (Sebi) is unlikely to give the go-ahead before a final decision on the ongoing legal tussle with MCX-SX. The high court here has set a deadline of September 30 for Sebi to decide on the MCX-SX matter.
Currently, only the National Stock Exchange (NSE) and MCX Stock Exchange (MCX-SX) offer trading in currency futures, the segment on which currency options will be launched. Both have been doing mock trading in currency options for quite some time and are waiting for the final approval. It is well over a month since the regulator released a circular allowing the introduction of options contracts on the rupee-dollar spot rate.
Industry observers say the regulator will give exchanges the permission to go live with currency options only after sorting the legal tussle with MCX-SX. The one-year extension to the latter does not allow it to launch any "new class" of contracts in securities.
"Sebi wants to promote a level playing field between all the exchanges. If Sebi gives approval to one exchange, the other might raise an objection, which is not conducive to the current situation," said a person familiar with the development. It is believed that if NSE is given approval for launching currency options even while a final decision on the court battle with MCX-SX is awaited, then questions might be raised even in the court rooms. Sebi is already facing allegations of "favouritism" towards NSE.
MCX-SX has petitioned the HC for a response from the regulator on its application for permission to operate as a full-fledged stock exchange. The petition says Sebi should either reject or approve its proposal to do trading in equities, equity derivatives, interest rate derivatives, mutual funds and a separate platform for small and medium enterprises. The petition said the regulator gave no response even three months after MCX-SX fulfiled a key condition, of bringing down the promoters' stake.
Margin funding takes centre stage
Ashish Rukhaiyar
Mumbai, September 7, 2010
NBFCs owned by brokerages do brisk business after recent listing gains.
At a time brokerage income is dwindling and margins for distribution of third-party products are next to nothing, non-banking financial companies (NBFCs) are providing the much-needed relief to brokers. The significant listing gains posted by recent initial public offers (IPOs) have prompted investors to borrow margin money from NBFCs.
Most large- and mid-sized brokerages have NBFCs that are primarily into IPO financing for retail as well as high net worth individuals (HNIs). As there is a limit on the margin a brokerage can directly provide its clients, investors are rushing to NBFCs.
Market players, while acknowledging that NBFC financing is gaining steady ground, say competition is tight and margins wafer-thin. “The last two-three issues saw the revival of the NBFC business,” said Girish Dev, chief executive, Networth Stock Broking, adding, “SKS Microfinance and Gujarat Pipavav Ports are prime examples. The mega issue of Coal India is also expected to see a lot of activity in the NBFC space. There is some confidence among retail investors. But we have to wait and watch to see how the trend pans out over a longer term. The rates, however, have become quite competitive.”
Nandip Vaidya, president (retail broking), India Infoline, said IPO financing was a function of “market conditions and the perception about the issue price”.
“There are a fair number of investors keen on funding IPOs. If the issue is perceived to be well-priced, there is a higher tendency to leverage,” added Vaidya.
Most market entities active in the NBFC space are not quite forthcoming on the rates charged from high net worth individuals and retail investors. But it is widely believed that the rates are lower than those at the height of the bull run in 2007.
“The average rate of interest for HNIs is 11-12 per cent, while that for retail investors is 14-16 per cent,” said the head of a domestic brokerage which has an NBFC. “This is less than in 2007, when the minimum rate for HNIs was 14 per cent while that for retail investors was around 17 per cent. The interest rate is also a factor of the relationship a client has with the brokerage. If he is a regular trader with us, the rate will be a bit lower,” he said.
The revival of the IPO financing business is also evident from the huge subscription numbers of the recent IPOs, especially in the HNI segment. In case of Gujarat Pipavav Ports, the HNI segment was subscribed a massive 86 times. SKS Microfinance’s HNI segment was subscribed more than 18 times. Similarly, Prakash Steelage was subscribed nearly 10 times in the HNI portion. Bajaj Corp, which opened for subscription in early August, saw the HNI portion subscribed nearly 50 times (see table).
In IPO financing, an NBFC lends a major chunk of the application money to the investor at a fixed rate of interest. After listing, the investor sells the shares and repays the money along with the interest cost. The investor profits only if listing gains are higher than his cost of funds. Hence, this activity picks up when a definite trend of stocks listing at a sizeable premium is visible. Typically, NBFCs lends around 80 per cent of the application money.
Mumbai, September 7, 2010
NBFCs owned by brokerages do brisk business after recent listing gains.
At a time brokerage income is dwindling and margins for distribution of third-party products are next to nothing, non-banking financial companies (NBFCs) are providing the much-needed relief to brokers. The significant listing gains posted by recent initial public offers (IPOs) have prompted investors to borrow margin money from NBFCs.
Most large- and mid-sized brokerages have NBFCs that are primarily into IPO financing for retail as well as high net worth individuals (HNIs). As there is a limit on the margin a brokerage can directly provide its clients, investors are rushing to NBFCs.
Market players, while acknowledging that NBFC financing is gaining steady ground, say competition is tight and margins wafer-thin. “The last two-three issues saw the revival of the NBFC business,” said Girish Dev, chief executive, Networth Stock Broking, adding, “SKS Microfinance and Gujarat Pipavav Ports are prime examples. The mega issue of Coal India is also expected to see a lot of activity in the NBFC space. There is some confidence among retail investors. But we have to wait and watch to see how the trend pans out over a longer term. The rates, however, have become quite competitive.”
Nandip Vaidya, president (retail broking), India Infoline, said IPO financing was a function of “market conditions and the perception about the issue price”.
“There are a fair number of investors keen on funding IPOs. If the issue is perceived to be well-priced, there is a higher tendency to leverage,” added Vaidya.
Most market entities active in the NBFC space are not quite forthcoming on the rates charged from high net worth individuals and retail investors. But it is widely believed that the rates are lower than those at the height of the bull run in 2007.
“The average rate of interest for HNIs is 11-12 per cent, while that for retail investors is 14-16 per cent,” said the head of a domestic brokerage which has an NBFC. “This is less than in 2007, when the minimum rate for HNIs was 14 per cent while that for retail investors was around 17 per cent. The interest rate is also a factor of the relationship a client has with the brokerage. If he is a regular trader with us, the rate will be a bit lower,” he said.
The revival of the IPO financing business is also evident from the huge subscription numbers of the recent IPOs, especially in the HNI segment. In case of Gujarat Pipavav Ports, the HNI segment was subscribed a massive 86 times. SKS Microfinance’s HNI segment was subscribed more than 18 times. Similarly, Prakash Steelage was subscribed nearly 10 times in the HNI portion. Bajaj Corp, which opened for subscription in early August, saw the HNI portion subscribed nearly 50 times (see table).
In IPO financing, an NBFC lends a major chunk of the application money to the investor at a fixed rate of interest. After listing, the investor sells the shares and repays the money along with the interest cost. The investor profits only if listing gains are higher than his cost of funds. Hence, this activity picks up when a definite trend of stocks listing at a sizeable premium is visible. Typically, NBFCs lends around 80 per cent of the application money.
A few IPO swallows don't make a stock market summer
Ashish Rukhaiyar & Mehul Shah
Mumbai, September 2, 2010
Sure, a few listings like those of SKS Microfinance and Gujarat Pipavav have seen significant investor interest, but experts say it’s too early to signal a primary market revival.
Just a fortnight after its spectacular listing, the market capitalisation of SKS Microfinance — at over Rs 8,500 crore — is higher than Federal Bank and almost at par with IDBI Bank. And the market has made Vikram Akula, founder of India’s first listed microfinance institution, richer by Rs 327 crore.
That has surprised even Akula, who had sold a fourth of his stock options in February. “I was passionate about microfinance and convinced that a commercial model could make us big. But I did not expect SKS would grow as quickly as it has and reach the size it is today,” says Akula, who is currently on a field trip in Andhra Pradesh.
But, the real winners are SKS employees. Even junior staff like loan officers and branch officers (who typically earn around Rs 1,00,000-2,00,000 per annum), have seen their wealth shoot up by lakhs after encashing their stock options.
SKS is not the only public issue that has seen significant investor interest. The IPO of Gujarat Pipavav Port, which closed for subscription on August 26, was oversubscribed about 20 times. Demand for the issue was so high that the category reserved for high net-worth individuals was subscribed 85.70 times. The APM Terminals-promoted company’s issue was oversubscribed 13.20 times in the qualified institutional buyer category and 9.15 times in the retail category.
Among the other IPOs that have come in the last couple of months, two smaller issues —Prakash Steelage and Midfield Industries — have given investors stellar returns. Shares of Prakash Steelage have more than doubled from the issue price of Rs 110, while those of Midfield Industries have gained over 55 per cent.
Or, take Jubilant Foodworks, owners of the Dominos pizza chain, whose shares have gone up almost four times to Rs 558 from its listing price in February. Year to date, the key benchmark index, the Bombay Stock Exchange (BSE) Sensex, has risen around three per cent, while the BSE Mid-cap index and BSE Small-cap index rose more than 13 per cent.
So, are there clear signals of a revival in the primary market? Investment bankers do not sound convinced. They feel interest will always be high for sectors that are not adequately represented on the stock exchanges. SKS, for example, was lucky in a way that investors did not have an alternate investment avenue in the pure-play microfinance space. Jubilant and Talwalkars also fall into this category.
“Fundamentally, I do not see any revival in the IPO market,” says Mehul Savla, director at boutique investment banking and advisory firm RippleWave Equity. “But, if there is any element of fanciness in the issue, then there would be good demand. That is the reason companies like SKS Microfinance, Jubilant Foodworks and Talwalkars did well on the bourses. There is definitely a market for niche players. For all other issues, the discount to the already-listed peers has to be significant in order to attract institutions. Investor confidence towards certain sectors is still low,” explains Savla.
While some of the recent IPOs may well have provided investors with impressive returns, the picture changes significantly if one takes into account all the public issues that have hit the capital market in the current calendar year.
For instance, the high-profile IPO of government-owned Sutlej Jal Vidyut Nigam, which was subscribed 6.51 times, is trading nearly 8 per cent lower than its issue price of Rs 26. Similarly, Jaypee Infratech has lost close to 23 per cent since May 21 when it made its debut on the stock exchanges.
Girish Nadkarni, executive director at Avendus Capital, feels the timing of an issue depends a lot on investor sentiment towards the sector. “If investor sentiment is good, the issue does well. Even with good pricing, sector aversion could play spoilsport. Having said that, I feel too much stress is placed on first-day listing performance. I think we should take a period of one year to judge the performance,” says Nadkarni.
Some of the other issues that are trading in the red since listing include Tarapur Transformers, Shree Ganesh Jewellery House, Nitesh Estates, DB Realty, Hathway Cables, Birla Shloka Edutech and Pradip Overseas. Emmbi Polyarns has been the worst performing IPO this year, with its shares losing more than 60 per cent since listing in February.
Experts say that the significant returns provided by some recent IPOs have not translated into a notable change in the confidence of issuers. Most companies are moving ahead with their listing plans at a snail’s pace and letting their peers from the sector test the waters before taking the plunge.
“There is still lot of nervousness among issuers, and the market is not giving any clear signal yet,” says Prithvi Haldea, chairman of Delhi-based Prime Database. “Unless we see some mega issues and five to six IPOs in a month on a regular basis, it is too early to say that the primary market has revived,” he added.
Prime Database figures show that there are as many as 44 companies that have obtained the regulator’s approval to launch their IPOs, but are still waiting on the sidelines.
The list includes quite a few large-sized issues like Lodha Developers (Rs 2,500 crore), Ambience (Rs 1,300 crore), BPTP (Rs 1,500 crore), Emaar MGF Land (Rs 2,000 crore), Gujarat State Petroleum Corporation (Rs 3,050 crore), Jindal Power (Rs 7,200 crore), Oberoi Realty (Rs 1,000 crore), Reliance Infratel (Rs 5,000 crore) and Sterlite Energy (Rs 5,100 crore). There are reports that Emaar MGF Land has whittled down its proposed IPO size, given the scepticism towards the real estate sector.
Mumbai, September 2, 2010
Sure, a few listings like those of SKS Microfinance and Gujarat Pipavav have seen significant investor interest, but experts say it’s too early to signal a primary market revival.
Just a fortnight after its spectacular listing, the market capitalisation of SKS Microfinance — at over Rs 8,500 crore — is higher than Federal Bank and almost at par with IDBI Bank. And the market has made Vikram Akula, founder of India’s first listed microfinance institution, richer by Rs 327 crore.
That has surprised even Akula, who had sold a fourth of his stock options in February. “I was passionate about microfinance and convinced that a commercial model could make us big. But I did not expect SKS would grow as quickly as it has and reach the size it is today,” says Akula, who is currently on a field trip in Andhra Pradesh.
But, the real winners are SKS employees. Even junior staff like loan officers and branch officers (who typically earn around Rs 1,00,000-2,00,000 per annum), have seen their wealth shoot up by lakhs after encashing their stock options.
SKS is not the only public issue that has seen significant investor interest. The IPO of Gujarat Pipavav Port, which closed for subscription on August 26, was oversubscribed about 20 times. Demand for the issue was so high that the category reserved for high net-worth individuals was subscribed 85.70 times. The APM Terminals-promoted company’s issue was oversubscribed 13.20 times in the qualified institutional buyer category and 9.15 times in the retail category.
Among the other IPOs that have come in the last couple of months, two smaller issues —Prakash Steelage and Midfield Industries — have given investors stellar returns. Shares of Prakash Steelage have more than doubled from the issue price of Rs 110, while those of Midfield Industries have gained over 55 per cent.
Or, take Jubilant Foodworks, owners of the Dominos pizza chain, whose shares have gone up almost four times to Rs 558 from its listing price in February. Year to date, the key benchmark index, the Bombay Stock Exchange (BSE) Sensex, has risen around three per cent, while the BSE Mid-cap index and BSE Small-cap index rose more than 13 per cent.
So, are there clear signals of a revival in the primary market? Investment bankers do not sound convinced. They feel interest will always be high for sectors that are not adequately represented on the stock exchanges. SKS, for example, was lucky in a way that investors did not have an alternate investment avenue in the pure-play microfinance space. Jubilant and Talwalkars also fall into this category.
“Fundamentally, I do not see any revival in the IPO market,” says Mehul Savla, director at boutique investment banking and advisory firm RippleWave Equity. “But, if there is any element of fanciness in the issue, then there would be good demand. That is the reason companies like SKS Microfinance, Jubilant Foodworks and Talwalkars did well on the bourses. There is definitely a market for niche players. For all other issues, the discount to the already-listed peers has to be significant in order to attract institutions. Investor confidence towards certain sectors is still low,” explains Savla.
While some of the recent IPOs may well have provided investors with impressive returns, the picture changes significantly if one takes into account all the public issues that have hit the capital market in the current calendar year.
For instance, the high-profile IPO of government-owned Sutlej Jal Vidyut Nigam, which was subscribed 6.51 times, is trading nearly 8 per cent lower than its issue price of Rs 26. Similarly, Jaypee Infratech has lost close to 23 per cent since May 21 when it made its debut on the stock exchanges.
Girish Nadkarni, executive director at Avendus Capital, feels the timing of an issue depends a lot on investor sentiment towards the sector. “If investor sentiment is good, the issue does well. Even with good pricing, sector aversion could play spoilsport. Having said that, I feel too much stress is placed on first-day listing performance. I think we should take a period of one year to judge the performance,” says Nadkarni.
Some of the other issues that are trading in the red since listing include Tarapur Transformers, Shree Ganesh Jewellery House, Nitesh Estates, DB Realty, Hathway Cables, Birla Shloka Edutech and Pradip Overseas. Emmbi Polyarns has been the worst performing IPO this year, with its shares losing more than 60 per cent since listing in February.
Experts say that the significant returns provided by some recent IPOs have not translated into a notable change in the confidence of issuers. Most companies are moving ahead with their listing plans at a snail’s pace and letting their peers from the sector test the waters before taking the plunge.
“There is still lot of nervousness among issuers, and the market is not giving any clear signal yet,” says Prithvi Haldea, chairman of Delhi-based Prime Database. “Unless we see some mega issues and five to six IPOs in a month on a regular basis, it is too early to say that the primary market has revived,” he added.
Prime Database figures show that there are as many as 44 companies that have obtained the regulator’s approval to launch their IPOs, but are still waiting on the sidelines.
The list includes quite a few large-sized issues like Lodha Developers (Rs 2,500 crore), Ambience (Rs 1,300 crore), BPTP (Rs 1,500 crore), Emaar MGF Land (Rs 2,000 crore), Gujarat State Petroleum Corporation (Rs 3,050 crore), Jindal Power (Rs 7,200 crore), Oberoi Realty (Rs 1,000 crore), Reliance Infratel (Rs 5,000 crore) and Sterlite Energy (Rs 5,100 crore). There are reports that Emaar MGF Land has whittled down its proposed IPO size, given the scepticism towards the real estate sector.
LIC to assess brokers, restructure orders
Ashish Rukhaiyar
Mumbai, September 2, 2010
Move may lead to a fall in the number of empanelled brokerages.
The coming days could see a significant change in the way Life Insurance Corporation of India (LIC), also the country's largest domestic institutional investor, trades in the stock market. It has sought data on research recommendations from all its empanelled brokerages for the past 17 months, from April 1, 2009 till the end of last month.
Brokers that are part of the LIC panel view this move as a precursor to reduction in the number of empanelled brokerages, currently estimated at around 150. Based on the success of the recommendations, LIC could restructure the quantity of trading business among brokerages, they say.
In a letter written a couple of days earlier to all its empanelled brokers, LIC has expressed its intent to review the research recommendations and the relative return of stocks compared to that of the benchmark Sensex. The latest move gains further significance when seen in the light of LIC's recent decision of slashing the brokerage fee from the earlier 15 basis points (bps) to 10 bps.
LIC wants details, including the price of the stock on the date of the report, its current price and the Sensex return. Further, for brokerages that do not have research facilities, the insurance major has demanded an "explanation for the same".
"This is a significant move, based on which LIC could award trading deals in the future," says an institutional dealer with a mid-sized domestic brokerage. "For quite some time, there has been this buzz that LIC would streamline its stock market operations, including bringing down the number of empanelled brokerages. Brokers with a higher success rate in the panel could expect a higher quantity of deals from LIC. Underperformers could see their LIC business dwindling," he added.
Any change in the way LIC distributes its buy/sell orders amongst the panel could impact the bottom line of many brokerages, especially of those for whom LIC is a sizeable client. Many old and small brokerages operate in a very niche segment of rich individuals and a handful of institutions boast of LIC as one of their biggest clients.
In a recent interview with Business Standard, LIC managing director Thomas Mathew pegged this year's equity investment at Rs 60,000 crore. LIC’s total profit last year was Rs 9,432 crore.
According to brokers, the average transaction size for LIC put through by most of the empanelled entities is in the range of Rs 30-40 lakh. For the larger brokerages, the ticket size is around Rs 1 crore, while the biggest of the panel gets trade of a Rs 5 crore ticket size.
Mumbai, September 2, 2010
Move may lead to a fall in the number of empanelled brokerages.
The coming days could see a significant change in the way Life Insurance Corporation of India (LIC), also the country's largest domestic institutional investor, trades in the stock market. It has sought data on research recommendations from all its empanelled brokerages for the past 17 months, from April 1, 2009 till the end of last month.
Brokers that are part of the LIC panel view this move as a precursor to reduction in the number of empanelled brokerages, currently estimated at around 150. Based on the success of the recommendations, LIC could restructure the quantity of trading business among brokerages, they say.
In a letter written a couple of days earlier to all its empanelled brokers, LIC has expressed its intent to review the research recommendations and the relative return of stocks compared to that of the benchmark Sensex. The latest move gains further significance when seen in the light of LIC's recent decision of slashing the brokerage fee from the earlier 15 basis points (bps) to 10 bps.
LIC wants details, including the price of the stock on the date of the report, its current price and the Sensex return. Further, for brokerages that do not have research facilities, the insurance major has demanded an "explanation for the same".
"This is a significant move, based on which LIC could award trading deals in the future," says an institutional dealer with a mid-sized domestic brokerage. "For quite some time, there has been this buzz that LIC would streamline its stock market operations, including bringing down the number of empanelled brokerages. Brokers with a higher success rate in the panel could expect a higher quantity of deals from LIC. Underperformers could see their LIC business dwindling," he added.
Any change in the way LIC distributes its buy/sell orders amongst the panel could impact the bottom line of many brokerages, especially of those for whom LIC is a sizeable client. Many old and small brokerages operate in a very niche segment of rich individuals and a handful of institutions boast of LIC as one of their biggest clients.
In a recent interview with Business Standard, LIC managing director Thomas Mathew pegged this year's equity investment at Rs 60,000 crore. LIC’s total profit last year was Rs 9,432 crore.
According to brokers, the average transaction size for LIC put through by most of the empanelled entities is in the range of Rs 30-40 lakh. For the larger brokerages, the ticket size is around Rs 1 crore, while the biggest of the panel gets trade of a Rs 5 crore ticket size.
Retail traders shift from Nifty to stocks
Ashish Rukhaiyar
Mumbai, August 25, 2010
The risk appetite of retail investors is rising and they are ready to bet more on mid-cap and small-cap stocks, according to data from the derivatives segment.
In the recent past, quite a few stocks in the futures and options (F&O) segment have hit their market-wide position limits. Experts say this is an indication of investors moving away from index derivatives to individual stocks.
According to some recent announcements on the National Stock Exchange (NSE), the stocks of IFCI, Aban Offshore, Ispat Industries, ICSA, Suzlon Energy, Kingfisher Airlines, Essar Oil and Everest Kanto Cylinders have seen their market-wide positions cross the upper limit of 95 per cent.
The norms say once the market-wide position crosses the threshold, clients can trade in the derivatives contract only by offsetting their existing positions. Or, they can roll these over. In other words, clients cannot build fresh positions.
Experts tracking the derivatives segment attribute the trend to increased activity in the space outside the index constituents. With volatility taking a dip in the recent past, traders have no incentive to bet on index futures and options, say experts.
“Due to low volatility in the Nifty, a lot of trades in the derivatives space are moving to small-cap and mid-cap stocks,” said Alex Mathews, head, research, Geojit BNP Paribas. “India VIX (volatility index) is trading at an all-time low and the daily movement in the Nifty is not substantial enough for traders to make money. This tight range has made traders bet on individual stocks rather than on the index.”
India VIX is currently trading at a low of around 17. In May, it was around “concerning levels” of 35. The index is a measure of the market’s expectation of movement – upside or downside – over the near term. It plays an important role in the derivatives segment, since it is an important component in pricing of options. Low volatility implies low premium, which makes the game less lucrative for traders.
A section of analysts view this trend as a “normal occurrence” at the end of the expiry cycle of a derivatives contract. “There are four-five stocks that typically hit their market-wide position limits as the expiry day nears. These are stocks with a low free-float,” said Siddarth Bhamre, head, derivatives, Angel Broking.
Market players say the trend may be reversed if there is a rise in volatility or the daily band within which the Nifty trades. “If the Nifty becomes more volatile and the VIX also moves higher, one could see substantial action in index derivatives again. Traders will then take a break from individual stocks,” said a derivatives analyst with a domestic brokerage.
Mumbai, August 25, 2010
The risk appetite of retail investors is rising and they are ready to bet more on mid-cap and small-cap stocks, according to data from the derivatives segment.
In the recent past, quite a few stocks in the futures and options (F&O) segment have hit their market-wide position limits. Experts say this is an indication of investors moving away from index derivatives to individual stocks.
According to some recent announcements on the National Stock Exchange (NSE), the stocks of IFCI, Aban Offshore, Ispat Industries, ICSA, Suzlon Energy, Kingfisher Airlines, Essar Oil and Everest Kanto Cylinders have seen their market-wide positions cross the upper limit of 95 per cent.
The norms say once the market-wide position crosses the threshold, clients can trade in the derivatives contract only by offsetting their existing positions. Or, they can roll these over. In other words, clients cannot build fresh positions.
Experts tracking the derivatives segment attribute the trend to increased activity in the space outside the index constituents. With volatility taking a dip in the recent past, traders have no incentive to bet on index futures and options, say experts.
“Due to low volatility in the Nifty, a lot of trades in the derivatives space are moving to small-cap and mid-cap stocks,” said Alex Mathews, head, research, Geojit BNP Paribas. “India VIX (volatility index) is trading at an all-time low and the daily movement in the Nifty is not substantial enough for traders to make money. This tight range has made traders bet on individual stocks rather than on the index.”
India VIX is currently trading at a low of around 17. In May, it was around “concerning levels” of 35. The index is a measure of the market’s expectation of movement – upside or downside – over the near term. It plays an important role in the derivatives segment, since it is an important component in pricing of options. Low volatility implies low premium, which makes the game less lucrative for traders.
A section of analysts view this trend as a “normal occurrence” at the end of the expiry cycle of a derivatives contract. “There are four-five stocks that typically hit their market-wide position limits as the expiry day nears. These are stocks with a low free-float,” said Siddarth Bhamre, head, derivatives, Angel Broking.
Market players say the trend may be reversed if there is a rise in volatility or the daily band within which the Nifty trades. “If the Nifty becomes more volatile and the VIX also moves higher, one could see substantial action in index derivatives again. Traders will then take a break from individual stocks,” said a derivatives analyst with a domestic brokerage.
Realty remains a dirty word for regulators
Ashish Rukhaiyar & Raghavendra Kamath
Mumbai, August 23, 2010
Many feel the fluctuating market prices in real estate does not ensure stability required in banking space.
The year is 2007. The Indian stock market is in the midst of a great bull run. Indiabulls, a prominent name in the financial services arena, applies for a licence for mutual fund operations.
Cut to 2008. HDIL Constructions and Kumar Housing Corporation apply to the Securities and Exchange Board of India (Sebi) for launching real estate mutual funds.
There are two common threads joining the above-mentioned applicants. First, all three entities have a significant exposure to real estate. Second, all three applications are still “under process” with the market regulator.
While much time has passed since the applications were made, it seems that regulatory concerns related to two words — real estate — continue to get stronger. More importantly, Sebi is not alone in having such apprehensions.
Only early this month, when the Reserve Bank of India (RBI) released a discussion paper on allowing private players in the banking space, the central bank’s reluctance to permit real estate players in the space was most conspicuous.
“Industrial and business houses engaged in real estate activities either directly or indirectly, should not be allowed to promote banks,” said the discussion paper. “Given the sensitivity of the real estate sector, any subversion of the Chinese walls between the bank and the rest of the Group could have extremely negative consequences for financial stability,” it added.
In another instance, the central bank says that even those non-banking financial companies (NBFCs) looking to get converted into a bank should have no exposure to the real estate sector.
In October last year, RBI increased the bank’s provisioning requirement for commercial real estate, leading to increase in developers’ cost of funds. RBI took this step as it felt that there was a sharp increase in bank credit to real estate and restructuring of loans by property firms to the extent of Rs 10,000 crore. This was followed by increased provisioning for commercial real estate, making bank loans expensive for property developers.
HDFC Chairman Deepak Parekh is of the view that the regulators are cautious about real estate because of “continuous price escalation and bubble in real estate prices”. “RBI is particular that developers get money for construction and not for buying land. They think that developers cannot get into money-lending and banking as their primary business is development,” says Parekh.
Meanwhile, the market regulator is also going slow in announcing the guidelines for real estate investment trusts (REITs). Recent reports suggest that after more than two years since issuing the draft norms, Sebi is toying with the idea of canning REITs in India.
REITs, as the name suggests, are investment pools formed to invest in real estate assets. Investors also have the option of receiving regular dividend based on the investment made, mostly in commercial properties, including malls, multiplexes and office buildings.
Real estate players are not amused. “Sebi’s concerns could be different but where REIT is concerned, it should be introduced as quickly as possible as it allows retail participation in various property projects,” says R Nagaraju, head of planning and strategy, Unitech. “If you look at the international markets, especially Singapore, US or Australia, REITs have become efficient vehicle of investment. I do not think there are any fundamental problems in launching REITs here. But probably, the indiscriminate lending to housing in US must have made regulators a little cautious,” he explains.
The reluctance towards real estate entities is not limited to regulators alone. Even the investor community appears to be looking at the sector with certain amount of scepticism.
If one looks at the last one year’s performance of the BSE Realty index, it is actually trading in the red. This, at a time, when the benchmark 30-share Sensex of the Bombay Stock Exchange (BSE) has gained more than 23 per cent in the same period. The BSE Realty index comprises some of the largest listed real estate majors, including DLF, Unitech, Indiabulls Real Estate, Sobha Developers, Parsvnath and Akruti.
The post-listing performance of most of the real estate majors has not been impressive either. D B Realty, which listed on the bourses in February this year, is trading below its issue price. Similarly, Nitesh Estates is trading nearly 17 per cent below its issue price of Rs 54. The company made its debut on the stock exchanges in May. Further, there are already reports that Emaar MGF has cut down its IPO size.
“The real estate industry in India is still at a nascent stage,” says Amit Mookami, director (transaction services), KPMG. “A lot of reforms are needed with respect to knowledge transfer, foreign participation and land records. There is no benchmark valuation and land aggregation is still a problem. Big land reforms are necessary, including automation of land records,” says Mookami.
Mookami is not alone in airing concerns related to the real estate sector. An analyst with a domestic broking firm, on conditions of anonymity, says that real estate has become the favourite punching bag of many. “The sector is plagued with lack of transparency. There is an in-built component of black money. The balance sheet of many players still lacks depth and there is no stability in valuation. But we cannot forget that the system is such that introducing transparency is a Herculean task. There is just too much of vested interest involved,” he says.
“I think the problems real estate faced is legacies of the past and hence regulators are rightfully concerned about property prices,” says Ravi Ramu, director, Puravankara Projects. “With the regulators’ close watch, good developers will benefit and projects will get funds at a right price, and it will lead to better real estate scenario. It will certainly curb speculative activity in real estate,” he adds.
There has been much talk about having a regulator, too, for the sector, but nothing concrete has happened as yet. While one may think that a regulator specially for realtors might go a long way in bringing the much-needed discipline and transparency, there are many who disagree. Unless all the interested parties — developers, financiers, government authorities and end consumers — are involved in the exercise, real results would be hard to come by, argue many.
Mumbai, August 23, 2010
Many feel the fluctuating market prices in real estate does not ensure stability required in banking space.
The year is 2007. The Indian stock market is in the midst of a great bull run. Indiabulls, a prominent name in the financial services arena, applies for a licence for mutual fund operations.
Cut to 2008. HDIL Constructions and Kumar Housing Corporation apply to the Securities and Exchange Board of India (Sebi) for launching real estate mutual funds.
There are two common threads joining the above-mentioned applicants. First, all three entities have a significant exposure to real estate. Second, all three applications are still “under process” with the market regulator.
While much time has passed since the applications were made, it seems that regulatory concerns related to two words — real estate — continue to get stronger. More importantly, Sebi is not alone in having such apprehensions.
Only early this month, when the Reserve Bank of India (RBI) released a discussion paper on allowing private players in the banking space, the central bank’s reluctance to permit real estate players in the space was most conspicuous.
“Industrial and business houses engaged in real estate activities either directly or indirectly, should not be allowed to promote banks,” said the discussion paper. “Given the sensitivity of the real estate sector, any subversion of the Chinese walls between the bank and the rest of the Group could have extremely negative consequences for financial stability,” it added.
In another instance, the central bank says that even those non-banking financial companies (NBFCs) looking to get converted into a bank should have no exposure to the real estate sector.
In October last year, RBI increased the bank’s provisioning requirement for commercial real estate, leading to increase in developers’ cost of funds. RBI took this step as it felt that there was a sharp increase in bank credit to real estate and restructuring of loans by property firms to the extent of Rs 10,000 crore. This was followed by increased provisioning for commercial real estate, making bank loans expensive for property developers.
HDFC Chairman Deepak Parekh is of the view that the regulators are cautious about real estate because of “continuous price escalation and bubble in real estate prices”. “RBI is particular that developers get money for construction and not for buying land. They think that developers cannot get into money-lending and banking as their primary business is development,” says Parekh.
Meanwhile, the market regulator is also going slow in announcing the guidelines for real estate investment trusts (REITs). Recent reports suggest that after more than two years since issuing the draft norms, Sebi is toying with the idea of canning REITs in India.
REITs, as the name suggests, are investment pools formed to invest in real estate assets. Investors also have the option of receiving regular dividend based on the investment made, mostly in commercial properties, including malls, multiplexes and office buildings.
Real estate players are not amused. “Sebi’s concerns could be different but where REIT is concerned, it should be introduced as quickly as possible as it allows retail participation in various property projects,” says R Nagaraju, head of planning and strategy, Unitech. “If you look at the international markets, especially Singapore, US or Australia, REITs have become efficient vehicle of investment. I do not think there are any fundamental problems in launching REITs here. But probably, the indiscriminate lending to housing in US must have made regulators a little cautious,” he explains.
The reluctance towards real estate entities is not limited to regulators alone. Even the investor community appears to be looking at the sector with certain amount of scepticism.
If one looks at the last one year’s performance of the BSE Realty index, it is actually trading in the red. This, at a time, when the benchmark 30-share Sensex of the Bombay Stock Exchange (BSE) has gained more than 23 per cent in the same period. The BSE Realty index comprises some of the largest listed real estate majors, including DLF, Unitech, Indiabulls Real Estate, Sobha Developers, Parsvnath and Akruti.
The post-listing performance of most of the real estate majors has not been impressive either. D B Realty, which listed on the bourses in February this year, is trading below its issue price. Similarly, Nitesh Estates is trading nearly 17 per cent below its issue price of Rs 54. The company made its debut on the stock exchanges in May. Further, there are already reports that Emaar MGF has cut down its IPO size.
“The real estate industry in India is still at a nascent stage,” says Amit Mookami, director (transaction services), KPMG. “A lot of reforms are needed with respect to knowledge transfer, foreign participation and land records. There is no benchmark valuation and land aggregation is still a problem. Big land reforms are necessary, including automation of land records,” says Mookami.
Mookami is not alone in airing concerns related to the real estate sector. An analyst with a domestic broking firm, on conditions of anonymity, says that real estate has become the favourite punching bag of many. “The sector is plagued with lack of transparency. There is an in-built component of black money. The balance sheet of many players still lacks depth and there is no stability in valuation. But we cannot forget that the system is such that introducing transparency is a Herculean task. There is just too much of vested interest involved,” he says.
“I think the problems real estate faced is legacies of the past and hence regulators are rightfully concerned about property prices,” says Ravi Ramu, director, Puravankara Projects. “With the regulators’ close watch, good developers will benefit and projects will get funds at a right price, and it will lead to better real estate scenario. It will certainly curb speculative activity in real estate,” he adds.
There has been much talk about having a regulator, too, for the sector, but nothing concrete has happened as yet. While one may think that a regulator specially for realtors might go a long way in bringing the much-needed discipline and transparency, there are many who disagree. Unless all the interested parties — developers, financiers, government authorities and end consumers — are involved in the exercise, real results would be hard to come by, argue many.
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