Mehul Shah & Ashish Rukhaiyar
Mumbai, 15 December 2011
The Securities and Exchange Board of India (Sebi) has transferred quite a few officials who were probing irregularities done during initial public offers (IPOs).
The move has surprised many in the markets, as the regulator is in the midst of looking into subscription details and trading patterns of several recent issues. Sebi is probing the role of merchant bankers, brokers and companies after questions were raised over the way some recent public issues were subscribed, amid talk of a tacit understanding between merchant bankers and promoters, as well as post-listing fluctuations in stock prices.
“Sebi has transferred quite a few officials involved in IPO investigations. It’s a surprising decision,” said a source familiar with the developments.
When contacted, a Sebi spokesperson said the regulator “undertakes transfer of officers from time to time, according to the laid-down policies. A few officials who have completed their tenure in a particular department were transferred to another department. This exercise involved officials in various departments, including the investigations department”.
The subscription details would help Sebi get clues about the names of investors who subscribed to these issues. If the same people had applied in most issues, there could be a trend.
Similarly, looking into the trading pattern would indicate if there was a concentration of volumes from a particular segment of brokers. The trading volumes in newly listed companies were several times higher than the number of shares issued by companies in IPOs, indicating there could also have been some circular trading in these.
Shares of half the companies that came out with IPOs this year had fallen 30 per cent from their issue prices till on Wednesday, data compiled by the BS Research Bureau showed. Not just that, some of these stocks like RDB Rasayans, Taksheel Solutions, Bharatiya Global, Indo Thai Securities, Shilpi Cable, Paramount Printpackaging, Acropetal Technologies Brooks Laboratories and Servalakshmi Paper have slumped 84 per cent from their issue prices.
There are allegations that some of the promoters pre-sold their issues at a 30-50 per cent discount to operators to get subscriptions. And, once the stock was listed, operators scrambled to exit, leading to wild fluctuations in prices of these stocks.
Thursday 22 December 2011
Mobile trading picks up speed
Ashish Rukhaiyar
Mumbai, 17 November 2011
Mobile trading, approved by the capital market regulator late last year, has seen a nearly fourfold jump in turnover in the past few months.
Market players say an increasing number of retail investors are embracing the new platform to deal in equities. The availability of trading applications across mobile platforms has acted as a catalyst, they say.
Mobile trading, in simple terms, refers to investors placing buy/sell orders using their mobile phones. The Securities and Exchange Board of India (Sebi) gave its go-ahead to mobile trading in August last year. The regulator allowed brokerages to introduce applications for mobile phones, which clients could download and trade through. Stock exchanges provide their own versions of trading applications.
According to the National Stock Exchange (NSE), the total monthly turnover of mobile trading has risen to Rs 2,606 crore in October from Rs 715 crore in April — a 264 per cent rise in just six months. Initially, when mobile trading was launched, the monthly turnover was in the range of Rs 10-12 crore on NSE. In fact, the monthly turnover has registered a steady rise since April as more investors have started to adopt the new platform. Meanwhile, in the current year, the Bombay Stock Exchange has seen its monthly mobile trading volume more than double from Rs 6 crore to Rs 14 crore.
An NSE spokesperson said the exchange had launched applications for all smartphones and tablets along with “reasonable phones with GPRS connections”. “Volumes from mobile trading have been growing and we are confident the trend will pick up further,” said the spokesperson.
Market players, meanwhile, say the availability of trading applications across platforms — Android, BlackBerry, Windows, etc — has led to investors warming up to mobile trading. “Mobile trading is much simpler than internet trading as a simple handheld device does the trick. So, clients who are on the move use it extensively. While the percentage of investors opting for mobile trading is still minuscule, the trend is encouraging,” says Vinay Agrawal, executive director, Angel Broking.
Prior to the regulatory approval, most of the large brokerages were already providing mobile platforms through which their clients could access live quotes and portfolio details. These applications were tweaked to meet regulatory norms and buy/sell functionalities were added.
Mumbai, 17 November 2011
Mobile trading, approved by the capital market regulator late last year, has seen a nearly fourfold jump in turnover in the past few months.
Market players say an increasing number of retail investors are embracing the new platform to deal in equities. The availability of trading applications across mobile platforms has acted as a catalyst, they say.
Mobile trading, in simple terms, refers to investors placing buy/sell orders using their mobile phones. The Securities and Exchange Board of India (Sebi) gave its go-ahead to mobile trading in August last year. The regulator allowed brokerages to introduce applications for mobile phones, which clients could download and trade through. Stock exchanges provide their own versions of trading applications.
According to the National Stock Exchange (NSE), the total monthly turnover of mobile trading has risen to Rs 2,606 crore in October from Rs 715 crore in April — a 264 per cent rise in just six months. Initially, when mobile trading was launched, the monthly turnover was in the range of Rs 10-12 crore on NSE. In fact, the monthly turnover has registered a steady rise since April as more investors have started to adopt the new platform. Meanwhile, in the current year, the Bombay Stock Exchange has seen its monthly mobile trading volume more than double from Rs 6 crore to Rs 14 crore.
An NSE spokesperson said the exchange had launched applications for all smartphones and tablets along with “reasonable phones with GPRS connections”. “Volumes from mobile trading have been growing and we are confident the trend will pick up further,” said the spokesperson.
Market players, meanwhile, say the availability of trading applications across platforms — Android, BlackBerry, Windows, etc — has led to investors warming up to mobile trading. “Mobile trading is much simpler than internet trading as a simple handheld device does the trick. So, clients who are on the move use it extensively. While the percentage of investors opting for mobile trading is still minuscule, the trend is encouraging,” says Vinay Agrawal, executive director, Angel Broking.
Prior to the regulatory approval, most of the large brokerages were already providing mobile platforms through which their clients could access live quotes and portfolio details. These applications were tweaked to meet regulatory norms and buy/sell functionalities were added.
Q&A: Abhay Laijawala, Deutsche Equities India
'There is still a lot of investor goodwill for India'
Ashish Rukhaiyar & Mehul Shah
Mumbai, 15 November 2011
India’s economy is slowing but that will not lead foreign investors to capitulate, unless there is an event of significant risk, says Abhay Laijawala, head of research, Deutsche Equities India. In an interview with Ashish Rukhaiyar and Mehul Shah, he said India was still attractive for fundamental investors with a long-term horizon and that foreign flows would remain steady. Edited excerpts:
You talked about a slowdown in gross domestic product (GDP) trend growth to seven per cent in your latest report. How strong is the probability and what is the view among the investor community?
The general belief (among investors) is it’s still too early to say that. However, the risks of a slowing GDP growth trend are rising. Our report is a what-if analysis. Our economists are still maintaining an eight per cent GDP growth rate. But, clearly, with some headwinds on policy inaction, compulsions of a popular democracy and a slowing global economy, many investors are convinced GDP growth will slow down for a year. There is still a lot of investor goodwill for India and its structural drivers are very much intact. We believe the government recognises the need for reforms. What we are not certain is the timing, and timing is everything.
But does the timing of the report indicate there is a higher probability of going down to seven per cent, rather than staying above that?
That is anyone’s guess whether GDP will go down to seven per cent on a trend basis. But, as I said earlier, the risks of this happening are rising. I do think at least for the next couple of quarters, there is a possibility GDP growth might slip. I guess we have to wait and watch. However, we are increasingly being asked as to what would be the impact of a seven per cent GDP growth trajectory on earnings, market multiples and different sectors.
What impact will a slowing GDP have on the market?
If GDP slows only for 2012-13, then we think the markets have discounted it. That is because we have seen a 260-basis points compression in valuation multiples for the Sensex. If one believes the slowdown will be on a trend basis, there is potential for a further de-rating of the markets.
Your last report predicted a Sensex target of 21,000 for this year-end. It looks highly unlikely...
It’s difficult to answer this question with a high degree of certainty, given volatile global markets, rising risk aversion and a challenging macro economic situation in India. However, with most funds underweight on India, any return of risk appetite could lead to a short-term rally in the markets in the run-up to the next year.
The investor community has been talking a lot about policy inertia.
India is not the only country seeing policy inertia, which has become a phenomenon in all democracies. But we believe there are certain policies the government is working on. For example, we are already hearing the ‘no go’ criterion in coal mining has been dropped and the ministry of environment and forests is taking up projects on a case-by-case basis. So, it’s a question of timing. We believe the government’s inclination to move ahead on long pending reforms remains high, but compulsions of a popular democracy, coalition politics and a busy state election may delay its ability to move ahead.
How do you see the European crisis impacting the Indian market?
As far as Europe is concerned, it is anyone’s guess. We remain confident the governments in Europe will be responsible and try and prevent a systemic collapse akin to the Lehman moment. But it is difficult to say what would be the contours of a European package because it is a dynamic process. Markets will remain volatile until a more concrete solution comes out. We all thought the announcement that came some days before would assuage sentiments until Greece said it would be holding a referendum. Such situations will continue and, therefore, we will see markets being swayed between bouts of risk aversion and risk appetite.
Ashish Rukhaiyar & Mehul Shah
Mumbai, 15 November 2011
India’s economy is slowing but that will not lead foreign investors to capitulate, unless there is an event of significant risk, says Abhay Laijawala, head of research, Deutsche Equities India. In an interview with Ashish Rukhaiyar and Mehul Shah, he said India was still attractive for fundamental investors with a long-term horizon and that foreign flows would remain steady. Edited excerpts:
You talked about a slowdown in gross domestic product (GDP) trend growth to seven per cent in your latest report. How strong is the probability and what is the view among the investor community?
The general belief (among investors) is it’s still too early to say that. However, the risks of a slowing GDP growth trend are rising. Our report is a what-if analysis. Our economists are still maintaining an eight per cent GDP growth rate. But, clearly, with some headwinds on policy inaction, compulsions of a popular democracy and a slowing global economy, many investors are convinced GDP growth will slow down for a year. There is still a lot of investor goodwill for India and its structural drivers are very much intact. We believe the government recognises the need for reforms. What we are not certain is the timing, and timing is everything.
But does the timing of the report indicate there is a higher probability of going down to seven per cent, rather than staying above that?
That is anyone’s guess whether GDP will go down to seven per cent on a trend basis. But, as I said earlier, the risks of this happening are rising. I do think at least for the next couple of quarters, there is a possibility GDP growth might slip. I guess we have to wait and watch. However, we are increasingly being asked as to what would be the impact of a seven per cent GDP growth trajectory on earnings, market multiples and different sectors.
What impact will a slowing GDP have on the market?
If GDP slows only for 2012-13, then we think the markets have discounted it. That is because we have seen a 260-basis points compression in valuation multiples for the Sensex. If one believes the slowdown will be on a trend basis, there is potential for a further de-rating of the markets.
Your last report predicted a Sensex target of 21,000 for this year-end. It looks highly unlikely...
It’s difficult to answer this question with a high degree of certainty, given volatile global markets, rising risk aversion and a challenging macro economic situation in India. However, with most funds underweight on India, any return of risk appetite could lead to a short-term rally in the markets in the run-up to the next year.
The investor community has been talking a lot about policy inertia.
India is not the only country seeing policy inertia, which has become a phenomenon in all democracies. But we believe there are certain policies the government is working on. For example, we are already hearing the ‘no go’ criterion in coal mining has been dropped and the ministry of environment and forests is taking up projects on a case-by-case basis. So, it’s a question of timing. We believe the government’s inclination to move ahead on long pending reforms remains high, but compulsions of a popular democracy, coalition politics and a busy state election may delay its ability to move ahead.
How do you see the European crisis impacting the Indian market?
As far as Europe is concerned, it is anyone’s guess. We remain confident the governments in Europe will be responsible and try and prevent a systemic collapse akin to the Lehman moment. But it is difficult to say what would be the contours of a European package because it is a dynamic process. Markets will remain volatile until a more concrete solution comes out. We all thought the announcement that came some days before would assuage sentiments until Greece said it would be holding a referendum. Such situations will continue and, therefore, we will see markets being swayed between bouts of risk aversion and risk appetite.
Q&A: Bharat Iyer, JPMorgan
'Indian markets unlikely to slip below Oct lows'
Mehul Shah & Ashish Rukhaiyar
Mumbai, 4 November 2011
A meaningful correction in global oil prices and/or progress on key reforms would be important re-rating triggers for the Indian stock market, says Bharat Iyer, executive director and the head of India equity research at JPMorgan. He says interest in Indian equities among foreign investors remains keen. Edited excerpts from an interview with Mehul Shah and Ashish Rukhaiyar:
We have seen a rebound in global markets after leaders announced a deal to contain the euro zone debt crisis. In the US, Q3 GDP numbers have reduced fears of a double-dip recession. Is the rally sustainable?
There was extreme pessimism regarding US and Chinese growth, and the European debt crisis. All it took were modest improvements in the US and China economic outlook and ambiguous plans out of Europe to drive markets higher. Where do we go from here? Sideways, most likely, with more volatility to come. Considerable work remains to achieve a resolution on the credit crises in Europe and the outlook for global growth remains patchy.
Do you expect Indian markets to hold their October lows in the near future? What are the major risks for the market in the next three to six months?
It would take a lot of bad news for the Indian markets to go below the October lows. This would, in all probability, have to be due to a global shock. From a local perspective, the Reserve Bank signalling a pause to monetary tightening should put a floor to market valuations. A meaningful correction in global oil prices and/or progress on key reforms would be key re-rating triggers to look forward to.
FII (foreign institutional investor) flows have been moderate so far this year. How are they viewing the Indian market?
We believe FIIs have gradually raised their India stance from Underweight early in the year to Neutral at present. Interest levels in Indian equities remain keen, particularly given the uncertain global growth outlook and the correction in commodity prices.
What’s your view on the corporate results for the quarter ended September 30? Could we expect further earnings’ downgrades for the Sensex/Nifty in 2011-12?
Halfway into the Q2 reporting season, it has been a so-far-so-good case. On aggregate, corporate earnings show about 12 per cent year-over-year (yoy) growth, versus our expectations of a 10 per cent yoy growth for the universe. Companies with better performance typically report early in the season and we could see signs of stress from those announcing later.
On balance, current consensus expectations of a 16 per cent earnings growth for FY12 do appear optimistic. Growth of 10-12 per cent would be a reasonably good outcome in the backdrop of the stresses the corporate sector is subject to.
RBI has indicated a pause in its monetary tightening cycle. Has there been any change in your sectoral preferences after RBI’s announcement?
Going into the policy review, we were recommending an overweight stance on financials. The slowdown in growth has become meaningful in the recent past and with inflation showing signs of peaking, we anticipated RBI was nearing the end of the tightening cycle.
Which sectors are you overweight and underweight at present?
We prefer local sectors to global cyclicals at this stage. The outlook for local growth is much better and policy makers in India have more ammunition as compared to counterparts in the developed world.
Within local sectors, early stage cyclicals – particularly financials — appear appealing. Valuations are appealing and inflation rolling over or an end to monetary tightening is a trigger for outperformance. Near-term data points on discretionary spending could be weak and valuations are not cheap, so we await a better entry point in this space. Industrials are cheap, but lack catalysts to outperform, unless we see signs of policy action.
We are underweight on global sectors. Bottom-up, there are interesting opportunities in IT services, healthcare and metals.
Mehul Shah & Ashish Rukhaiyar
Mumbai, 4 November 2011
A meaningful correction in global oil prices and/or progress on key reforms would be important re-rating triggers for the Indian stock market, says Bharat Iyer, executive director and the head of India equity research at JPMorgan. He says interest in Indian equities among foreign investors remains keen. Edited excerpts from an interview with Mehul Shah and Ashish Rukhaiyar:
We have seen a rebound in global markets after leaders announced a deal to contain the euro zone debt crisis. In the US, Q3 GDP numbers have reduced fears of a double-dip recession. Is the rally sustainable?
There was extreme pessimism regarding US and Chinese growth, and the European debt crisis. All it took were modest improvements in the US and China economic outlook and ambiguous plans out of Europe to drive markets higher. Where do we go from here? Sideways, most likely, with more volatility to come. Considerable work remains to achieve a resolution on the credit crises in Europe and the outlook for global growth remains patchy.
Do you expect Indian markets to hold their October lows in the near future? What are the major risks for the market in the next three to six months?
It would take a lot of bad news for the Indian markets to go below the October lows. This would, in all probability, have to be due to a global shock. From a local perspective, the Reserve Bank signalling a pause to monetary tightening should put a floor to market valuations. A meaningful correction in global oil prices and/or progress on key reforms would be key re-rating triggers to look forward to.
FII (foreign institutional investor) flows have been moderate so far this year. How are they viewing the Indian market?
We believe FIIs have gradually raised their India stance from Underweight early in the year to Neutral at present. Interest levels in Indian equities remain keen, particularly given the uncertain global growth outlook and the correction in commodity prices.
What’s your view on the corporate results for the quarter ended September 30? Could we expect further earnings’ downgrades for the Sensex/Nifty in 2011-12?
Halfway into the Q2 reporting season, it has been a so-far-so-good case. On aggregate, corporate earnings show about 12 per cent year-over-year (yoy) growth, versus our expectations of a 10 per cent yoy growth for the universe. Companies with better performance typically report early in the season and we could see signs of stress from those announcing later.
On balance, current consensus expectations of a 16 per cent earnings growth for FY12 do appear optimistic. Growth of 10-12 per cent would be a reasonably good outcome in the backdrop of the stresses the corporate sector is subject to.
RBI has indicated a pause in its monetary tightening cycle. Has there been any change in your sectoral preferences after RBI’s announcement?
Going into the policy review, we were recommending an overweight stance on financials. The slowdown in growth has become meaningful in the recent past and with inflation showing signs of peaking, we anticipated RBI was nearing the end of the tightening cycle.
Which sectors are you overweight and underweight at present?
We prefer local sectors to global cyclicals at this stage. The outlook for local growth is much better and policy makers in India have more ammunition as compared to counterparts in the developed world.
Within local sectors, early stage cyclicals – particularly financials — appear appealing. Valuations are appealing and inflation rolling over or an end to monetary tightening is a trigger for outperformance. Near-term data points on discretionary spending could be weak and valuations are not cheap, so we await a better entry point in this space. Industrials are cheap, but lack catalysts to outperform, unless we see signs of policy action.
We are underweight on global sectors. Bottom-up, there are interesting opportunities in IT services, healthcare and metals.
Management rejig likely at united stock exchange
Palak Shah & Ashish Rukhaiyar
Mumbai, 2 November 2011
With the exit of T S Narayanaswami and Saurav Arora, the exchange is scouting for currency specialists.
Just a year after launching operations, the United Stock Exchange (USE) is looking at a makeover of its management team. The exchange has lost significant market share in the recent past and two of its key officials have also quit. People familiar with the development say the exchange is considering getting persons with proven expertise in the currency derivatives segment.
While chairman and managing director T S Narayanaswami resigned from the exchange in early October, Saurav Arora — designated as president in-charge of business development & marketing — has also moved out of the currency bourse, which marked its entry with record volumes in September last year.
USE was launched on September 20, 2010, with an opening-day volume of 9.88 million contracts, a world record for first-day trading at any new exchange.
The resignations have come as a body blow to the exchange, known to leverage on the expertise and reach of both the officials. Saurav Arora is the son of Gaurav Arora, owner of Jaypee Capital, one of the founder promoters and the largest volume generator at USE. After the de-mutualisation of the exchange, Jaypee currently holds five per cent stake in USE.
When contacted, both T S Narayanaswami and Saurav Arora declined comment. Meanwhile, a source close to Jaypee Capital said the entity would not be selling its stake in USE and further elaborated that Saurav’s appointment at USE was for a “limited period”. Arora, an alumni of Harvard and Delhi University, was “looking for other opportunities”, it added.
Meanwhile, USE has seen its fortunes dwindle in the recent past, especially after reports of it coming under the regulatory scanner for concentration of volumes. Further, the exchange, that pitched itself as ‘India’s newest stock exchange’, saw the volumes fall at a time when its rivals — MCX Stock Exchange (MCX-SX) and National Stock Exchange (NSE) — managed to hold on to their respective market shares.
According to data compiled by the BS Research Bureau, in October, USE’s share in the total currency futures segment fell to under 13 per cent, which, at its peak, hovered around 30 per cent. The daily average volume in the month shrunk to Rs 3,541 crore, from Rs 7,994 crore the previous month.
The month of August saw USE commanding an average daily turnover of Rs 15,597 crore, marginally lower than those of MCX-SX and NSE. Incidentally, in May, USE’s share in the currency segment was nearly 30 per cent, with an average daily volume of nearly Rs 14,000 crore. The exchange currently operates in the currency derivatives space and offers currency futures in all the four currency pairs permitted by the Securities and Exchange Board of India. Also, it is only one of the two stock exchanges in the country to offer currency options in the dollar-rupee pair.
USE was in the news recently on account of a regulatory probe for alleged concentration of trades by a single member. Reportedly, only a few brokers accounted for the majority of volumes registered on the exchange. More importantly, Gaurav Arora-owned Jaypee Capital, also a shareholder in USE, accounted for nearly 80 per cent of the entire turnover.
Mumbai, 2 November 2011
With the exit of T S Narayanaswami and Saurav Arora, the exchange is scouting for currency specialists.
Just a year after launching operations, the United Stock Exchange (USE) is looking at a makeover of its management team. The exchange has lost significant market share in the recent past and two of its key officials have also quit. People familiar with the development say the exchange is considering getting persons with proven expertise in the currency derivatives segment.
While chairman and managing director T S Narayanaswami resigned from the exchange in early October, Saurav Arora — designated as president in-charge of business development & marketing — has also moved out of the currency bourse, which marked its entry with record volumes in September last year.
USE was launched on September 20, 2010, with an opening-day volume of 9.88 million contracts, a world record for first-day trading at any new exchange.
The resignations have come as a body blow to the exchange, known to leverage on the expertise and reach of both the officials. Saurav Arora is the son of Gaurav Arora, owner of Jaypee Capital, one of the founder promoters and the largest volume generator at USE. After the de-mutualisation of the exchange, Jaypee currently holds five per cent stake in USE.
When contacted, both T S Narayanaswami and Saurav Arora declined comment. Meanwhile, a source close to Jaypee Capital said the entity would not be selling its stake in USE and further elaborated that Saurav’s appointment at USE was for a “limited period”. Arora, an alumni of Harvard and Delhi University, was “looking for other opportunities”, it added.
Meanwhile, USE has seen its fortunes dwindle in the recent past, especially after reports of it coming under the regulatory scanner for concentration of volumes. Further, the exchange, that pitched itself as ‘India’s newest stock exchange’, saw the volumes fall at a time when its rivals — MCX Stock Exchange (MCX-SX) and National Stock Exchange (NSE) — managed to hold on to their respective market shares.
According to data compiled by the BS Research Bureau, in October, USE’s share in the total currency futures segment fell to under 13 per cent, which, at its peak, hovered around 30 per cent. The daily average volume in the month shrunk to Rs 3,541 crore, from Rs 7,994 crore the previous month.
The month of August saw USE commanding an average daily turnover of Rs 15,597 crore, marginally lower than those of MCX-SX and NSE. Incidentally, in May, USE’s share in the currency segment was nearly 30 per cent, with an average daily volume of nearly Rs 14,000 crore. The exchange currently operates in the currency derivatives space and offers currency futures in all the four currency pairs permitted by the Securities and Exchange Board of India. Also, it is only one of the two stock exchanges in the country to offer currency options in the dollar-rupee pair.
USE was in the news recently on account of a regulatory probe for alleged concentration of trades by a single member. Reportedly, only a few brokers accounted for the majority of volumes registered on the exchange. More importantly, Gaurav Arora-owned Jaypee Capital, also a shareholder in USE, accounted for nearly 80 per cent of the entire turnover.
I-bankers' track record disclosure: Investors to gain little
Mehul Shah, Ashish Rukhaiyar & Ronak Shah
Mumbai, 14 October 2011
Which is a better merchant banking entity? Enam or JM Financial? Or, those owned by institutions, such as ICICI Securities, IDFC Capital or SBI Capital Markets?
Come November 1, investors will get a chance to judge the track record of investment bankers, based on how the issues managed by them fared. However, the short duration mandated by the Securities and Exchange Board of India (Sebi) means long-term investors will not get much insight, experts say.
Based on the parameters laid out by Sebi in its circular last month, Business Standard analysed the performance of India’s top 10 investment bankers in terms of the number of initial public offers (IPOs) managed by them over the last three financial years.
According to Sebi, from November 1, while filing documents for new issues, merchant bankers will have to disclose data for all the issues managed over the last three financial years. The disclosures would include the issue price, performance on the day of listing and the price movement on the 10th, 20th and the 30th day. The same has to be compared with the movement of the benchmark index.
A closer look at the data compiled by the BS Research Bureau shows that most issues managed to close above their respective issue prices on the listing day. Over the previous three financial years, a total of 132 issues were managed by the top 10 bankers, of which 77 offerings stayed above the issue price on the day of listing. However, the picture changed over a one-month period, when the number of issues trading at a discount rose to 71 and those trading at a premium declined to 61. (See table)
For instance, of the 12 offerings managed by ICICI Securities, eight stayed above the issue price on the first day. Over a month, however, only two traded above the issue price.
Officials at investors’ associations favour the move to include the track record of investment bankers in the prospectus, but believe the time period to judge the issue should be longer.
“This will be an additional tool for investors. If a merchant banker has consistently done bad, investors will be cautious while selecting an issue,” said A K Narayan, president of the Tamil Nadu Investors’ Association. “The listing day or 30 days after listing is too short a period to judge the issue. They should definitely include one-year performance, too,” he added.
“The listing day performance is not a good indication. Performance should be judged after at least a 3-6 month period,” said G S Sood, president of the New Delhi-based Society for Consumers’ and Investors’ Protection. “The entire exercise should be conducted with a view to take corrective action against the erring investment bankers and curb the nexus between promoters and investment bankers indulging in manipulative practices,” he added.
Merchant bankers, meanwhile, are not fully convinced that disclosures in the proposed form would help investors take a better-informed decision, as envisaged by the regulator.
“If I am managing a Rs 1,000-crore IPO, the investor needs to know if I am capable enough of handling such a large offering,” says the director of a domestic merchant banking entity featuring in the top ten list.
"Industry players have conducted surveys which say nearly 90 per cent of the applicants invest only for listing gains and sell the shares on the day of listing. So, why will the investor be interested in knowing what happens to my issue on 20th or 30th day,” he asked.
“Once the company is listed, we don’t have any control over its performance. If the issue is subscribed multiple times, it shows enough appetite among investors at the issue price,” said a Mumbai-based investment banker, requesting anonymity.
Mumbai, 14 October 2011
Which is a better merchant banking entity? Enam or JM Financial? Or, those owned by institutions, such as ICICI Securities, IDFC Capital or SBI Capital Markets?
Come November 1, investors will get a chance to judge the track record of investment bankers, based on how the issues managed by them fared. However, the short duration mandated by the Securities and Exchange Board of India (Sebi) means long-term investors will not get much insight, experts say.
Based on the parameters laid out by Sebi in its circular last month, Business Standard analysed the performance of India’s top 10 investment bankers in terms of the number of initial public offers (IPOs) managed by them over the last three financial years.
According to Sebi, from November 1, while filing documents for new issues, merchant bankers will have to disclose data for all the issues managed over the last three financial years. The disclosures would include the issue price, performance on the day of listing and the price movement on the 10th, 20th and the 30th day. The same has to be compared with the movement of the benchmark index.
A closer look at the data compiled by the BS Research Bureau shows that most issues managed to close above their respective issue prices on the listing day. Over the previous three financial years, a total of 132 issues were managed by the top 10 bankers, of which 77 offerings stayed above the issue price on the day of listing. However, the picture changed over a one-month period, when the number of issues trading at a discount rose to 71 and those trading at a premium declined to 61. (See table)
For instance, of the 12 offerings managed by ICICI Securities, eight stayed above the issue price on the first day. Over a month, however, only two traded above the issue price.
Officials at investors’ associations favour the move to include the track record of investment bankers in the prospectus, but believe the time period to judge the issue should be longer.
“This will be an additional tool for investors. If a merchant banker has consistently done bad, investors will be cautious while selecting an issue,” said A K Narayan, president of the Tamil Nadu Investors’ Association. “The listing day or 30 days after listing is too short a period to judge the issue. They should definitely include one-year performance, too,” he added.
“The listing day performance is not a good indication. Performance should be judged after at least a 3-6 month period,” said G S Sood, president of the New Delhi-based Society for Consumers’ and Investors’ Protection. “The entire exercise should be conducted with a view to take corrective action against the erring investment bankers and curb the nexus between promoters and investment bankers indulging in manipulative practices,” he added.
Merchant bankers, meanwhile, are not fully convinced that disclosures in the proposed form would help investors take a better-informed decision, as envisaged by the regulator.
“If I am managing a Rs 1,000-crore IPO, the investor needs to know if I am capable enough of handling such a large offering,” says the director of a domestic merchant banking entity featuring in the top ten list.
"Industry players have conducted surveys which say nearly 90 per cent of the applicants invest only for listing gains and sell the shares on the day of listing. So, why will the investor be interested in knowing what happens to my issue on 20th or 30th day,” he asked.
“Once the company is listed, we don’t have any control over its performance. If the issue is subscribed multiple times, it shows enough appetite among investors at the issue price,” said a Mumbai-based investment banker, requesting anonymity.
BS People: Bhuvnesh Singh & Neel Shahani
Barclays hires duo with institutional clout
Ashish Rukhaiyar
Mumbai, 13 October 2011
When Barclays Capital announced the appointment of Bhuvnesh Singh and Neel Shahani as part of the institutional desk, the business strategy of the London-headquartered entity was clearly evident.
The institutional desk of Barclays Bank Plc, which has been a late-starter in India, was looking at people who could bring ready business and big-ticket clientele along with them.
Bhuvnesh SinghSingh, who heads the equity research team in India, is known for his analytical capabilities. He has been ranked highly for his research in various sectors, including telecom, technology and industrials.
Singh will be responsible for developing Barclays Capital’s Indian equity research business and will report to Stephen O’Sullivan, head of Asia Ex-Japan equity research. Interestingly, the appointment comes close on the heels of Bhavtosh Vajpayee who joined as managing director and head of equities of the India unit.
Shahani, on the other hand, brings to the table nearly two decades of experience in sales and trading. Prior to joining Barclays, Shahani was managing the sales trading team tracking global markets at India Infoline. Shahani has handled large funds during his earlier stints with CLSA, HSBC, JM Financial.
Neel ShahaniShahani may well be a part of an industry that is looked upon as a symbol of capitalism, but there is also a social side to him. He is a part of the board of trustees of Akanksha, a non-profit organisation involved in education of less privileged children from Mumbai's slum areas. The Lancaster-based Franklin and Marshall College alumnus is also on the board of GiveIndia, which is a donation platform for around 200 NGOs.
The new-look team - which is not yet fully staffed has its goals clearly laid out. Barclays Capital is known for its non-equity capabilities (bond, primary debt offerings and fixed income research) and is aggressively eyeing a slice in the equity segment that is currently in the doldrums.
The hirings also come at a time when many of the global majors are increasing their strength in India. So, it does not come as a surprise that the British major is vying for people that already share a good rapport and relation with some of the biggest and most influential clients looking at India.
Ashish Rukhaiyar
Mumbai, 13 October 2011
When Barclays Capital announced the appointment of Bhuvnesh Singh and Neel Shahani as part of the institutional desk, the business strategy of the London-headquartered entity was clearly evident.
The institutional desk of Barclays Bank Plc, which has been a late-starter in India, was looking at people who could bring ready business and big-ticket clientele along with them.
Bhuvnesh SinghSingh, who heads the equity research team in India, is known for his analytical capabilities. He has been ranked highly for his research in various sectors, including telecom, technology and industrials.
Singh will be responsible for developing Barclays Capital’s Indian equity research business and will report to Stephen O’Sullivan, head of Asia Ex-Japan equity research. Interestingly, the appointment comes close on the heels of Bhavtosh Vajpayee who joined as managing director and head of equities of the India unit.
Shahani, on the other hand, brings to the table nearly two decades of experience in sales and trading. Prior to joining Barclays, Shahani was managing the sales trading team tracking global markets at India Infoline. Shahani has handled large funds during his earlier stints with CLSA, HSBC, JM Financial.
Neel ShahaniShahani may well be a part of an industry that is looked upon as a symbol of capitalism, but there is also a social side to him. He is a part of the board of trustees of Akanksha, a non-profit organisation involved in education of less privileged children from Mumbai's slum areas. The Lancaster-based Franklin and Marshall College alumnus is also on the board of GiveIndia, which is a donation platform for around 200 NGOs.
The new-look team - which is not yet fully staffed has its goals clearly laid out. Barclays Capital is known for its non-equity capabilities (bond, primary debt offerings and fixed income research) and is aggressively eyeing a slice in the equity segment that is currently in the doldrums.
The hirings also come at a time when many of the global majors are increasing their strength in India. So, it does not come as a surprise that the British major is vying for people that already share a good rapport and relation with some of the biggest and most influential clients looking at India.
Sebi hints curbs on fund manager compensation
Ashish Rukhaiyar
Mumbai, 6 October 2011
Even as regulators in the developed markets deliberate on the sensitive matter of fees earned by bankers and brokers, the Indian capital market watchdog has hinted its intentions of regulating the commissions of private equity and venture capital f und managers. While the final norms are yet to be announced, various industry bodies are already opposing any such move.
In August, the Securities and Exchange Board of India (Sebi) released a concept paper on proposed alternate investment funds (AIF) regulations. Those were essentially meant to regulate venture capital funds, private equity funds, debt funds, real estate funds and PIPE (private investment in public equity) funds, among others. Further, the regulator said it “may” lay down the fee criteria as well.
“The Board (Sebi) may specify criteria for charging performance fee of the managers of AIF,” says regulation 13(1)(d) of the proposed norms. In other words, Sebi may decide the quantum of fees/commissions that a fund manager can charge from the investors.
Market participants say that any such move by the regulator would prove to be restrictive and impact the overall growth of the fund industry. They feel that since these funds deal with high net-worth individuals and other well-informed investors, negotiations on the fee count should be left to the parties involved.
The industry’s initial reaction, says Gautam Mehra, executive director (tax and regulatory services) of PwC India, has been that given that fund managers in AIFs would deal with sophisticated investors who understand the performance fee criteria. Since this is based on accepted and prevalent market practices, this may continue to be left to individual negotiations.
“This would depend on how the regulations around this are ultimately framed. If they lay down criteria that make the fee charging more restrictive than at present, it would impact the industry players,” he adds.
Interestingly, the Confederation of Indian Industry, while welcoming the proposed AIF norms, has suggested some changes. One of them is on the issue of the regulator retaining the powers to specify criteria for charging performance fees by the fund managers.
The industry body is of the view that the payment of performance fees should be market driven and based on the performance and record of the fund manager. On the other hand, the CFA Institute has suggested that part of the performance fees can be locked in for the duration of the fund.
“The popular industry view seems to be that any form of regulatory control may interfere with the commercials of the fund,” says Ashish Bhakta, partner, Advaya Legal.
“The proposed provision would empower Sebi to specify criteria for charging performance fee of the fund managers in such manner that the performance fee does not encourage excessive risk or highly speculative activities. This would negatively impact the growth of the fund management industry in India. Also the proposed provisions would restrict the ability of parties to come to a mutual understanding under a private contract between them,” he explains.
This is, however, not the first time that the 1992-formed Sebi is regulating the fee structure for the fund industry. In October last year, the regulator specified that portfolio managers should charge a performance-based fee only on the high water mark principle, that is, based on the increase in portfolio value in excess of the previously achieved high water mark.
Mumbai, 6 October 2011
Even as regulators in the developed markets deliberate on the sensitive matter of fees earned by bankers and brokers, the Indian capital market watchdog has hinted its intentions of regulating the commissions of private equity and venture capital f und managers. While the final norms are yet to be announced, various industry bodies are already opposing any such move.
In August, the Securities and Exchange Board of India (Sebi) released a concept paper on proposed alternate investment funds (AIF) regulations. Those were essentially meant to regulate venture capital funds, private equity funds, debt funds, real estate funds and PIPE (private investment in public equity) funds, among others. Further, the regulator said it “may” lay down the fee criteria as well.
“The Board (Sebi) may specify criteria for charging performance fee of the managers of AIF,” says regulation 13(1)(d) of the proposed norms. In other words, Sebi may decide the quantum of fees/commissions that a fund manager can charge from the investors.
Market participants say that any such move by the regulator would prove to be restrictive and impact the overall growth of the fund industry. They feel that since these funds deal with high net-worth individuals and other well-informed investors, negotiations on the fee count should be left to the parties involved.
The industry’s initial reaction, says Gautam Mehra, executive director (tax and regulatory services) of PwC India, has been that given that fund managers in AIFs would deal with sophisticated investors who understand the performance fee criteria. Since this is based on accepted and prevalent market practices, this may continue to be left to individual negotiations.
“This would depend on how the regulations around this are ultimately framed. If they lay down criteria that make the fee charging more restrictive than at present, it would impact the industry players,” he adds.
Interestingly, the Confederation of Indian Industry, while welcoming the proposed AIF norms, has suggested some changes. One of them is on the issue of the regulator retaining the powers to specify criteria for charging performance fees by the fund managers.
The industry body is of the view that the payment of performance fees should be market driven and based on the performance and record of the fund manager. On the other hand, the CFA Institute has suggested that part of the performance fees can be locked in for the duration of the fund.
“The popular industry view seems to be that any form of regulatory control may interfere with the commercials of the fund,” says Ashish Bhakta, partner, Advaya Legal.
“The proposed provision would empower Sebi to specify criteria for charging performance fee of the fund managers in such manner that the performance fee does not encourage excessive risk or highly speculative activities. This would negatively impact the growth of the fund management industry in India. Also the proposed provisions would restrict the ability of parties to come to a mutual understanding under a private contract between them,” he explains.
This is, however, not the first time that the 1992-formed Sebi is regulating the fee structure for the fund industry. In October last year, the regulator specified that portfolio managers should charge a performance-based fee only on the high water mark principle, that is, based on the increase in portfolio value in excess of the previously achieved high water mark.
Sebi member selection hits CVC hurdle
Ashish Rukhaiyar
Mumbai, 4 October 2011
The Securities and Exchange Board of India (Sebi) will have to wait a little more to get two new whole-time members on board. According to people familiar with the development, the selection of at least one candidate has hit the Central Vigilance Commission (CVC) hurdle. This could delay the whole process.
According to reports, former Central Bank of India chairman and managing director, S Sridhar, and Rajeev Agrawal, a 1983-batch Indian Revenue Services (IRS) officer, have been selected for the members’ post. Industry sources, however, say Sridhar’s selection has been stuck at CVC, as the bank and the former chairman have been named in the V K Shunglu Committee report over alleged irregularities in the Commonwealth Games (CWG).
“Central Bank (of India) was the official banker for the Commonwealth Games and has been named in the report, along with Sridhar, who was at the helm when the games were organised,” said a person privy to the development. “This has led to his selection getting stuck at CVC, though he has said in the past that the allegations are baseless,” he added on the conditions of anonymity.
The Shunglu Committee has alleged in its report that Sridhar was “personally interested” in CWG contracts as a relative was posted in London and was part of the CWG Organising Committee. Sridhar, when contacted, declined to comment on the issue.
Meanwhile, the probe committee has also alleged some irregularities on the bank’s part on matters like accounting treatment of certain expenditures, purchase & distribution of free tickets and entering into sponsorship agreements without prior approval of the finance ministry. Reports, incidentally, suggest that Sridhar has refuted all these allegations, calling it “baseless” that his relative influenced any of his decisions.
The developments would come as a severe blow to Sebi, which has been functioning with only one whole-time member (WTM) since July, when M S Sahoo and K M Abraham retired. At present, Prashant Saran is the lone WTM at Sebi.
Interestingly, Agrawal’s selection has also got delayed due to these developments because, industry sources say, the government wants to notify both the names together and, therefore, is waiting for all the necessary approvals. Once the CVC clearance is received, the names will be sent to the Cabinet’s Appointments Committee, headed by Prime Minister Manmohan Singh.
Mumbai, 4 October 2011
The Securities and Exchange Board of India (Sebi) will have to wait a little more to get two new whole-time members on board. According to people familiar with the development, the selection of at least one candidate has hit the Central Vigilance Commission (CVC) hurdle. This could delay the whole process.
According to reports, former Central Bank of India chairman and managing director, S Sridhar, and Rajeev Agrawal, a 1983-batch Indian Revenue Services (IRS) officer, have been selected for the members’ post. Industry sources, however, say Sridhar’s selection has been stuck at CVC, as the bank and the former chairman have been named in the V K Shunglu Committee report over alleged irregularities in the Commonwealth Games (CWG).
“Central Bank (of India) was the official banker for the Commonwealth Games and has been named in the report, along with Sridhar, who was at the helm when the games were organised,” said a person privy to the development. “This has led to his selection getting stuck at CVC, though he has said in the past that the allegations are baseless,” he added on the conditions of anonymity.
The Shunglu Committee has alleged in its report that Sridhar was “personally interested” in CWG contracts as a relative was posted in London and was part of the CWG Organising Committee. Sridhar, when contacted, declined to comment on the issue.
Meanwhile, the probe committee has also alleged some irregularities on the bank’s part on matters like accounting treatment of certain expenditures, purchase & distribution of free tickets and entering into sponsorship agreements without prior approval of the finance ministry. Reports, incidentally, suggest that Sridhar has refuted all these allegations, calling it “baseless” that his relative influenced any of his decisions.
The developments would come as a severe blow to Sebi, which has been functioning with only one whole-time member (WTM) since July, when M S Sahoo and K M Abraham retired. At present, Prashant Saran is the lone WTM at Sebi.
Interestingly, Agrawal’s selection has also got delayed due to these developments because, industry sources say, the government wants to notify both the names together and, therefore, is waiting for all the necessary approvals. Once the CVC clearance is received, the names will be sent to the Cabinet’s Appointments Committee, headed by Prime Minister Manmohan Singh.
Monday 19 December 2011
MFs to benefit from proposed AIF regulations
Ashish Rukhaiyar & Chandan Kishore Kant
Mumbai, 30 September 2011
Sebi proposal of minimum Rs 1-crore investment to channelise HNI money towards fund houses.
The proposed regulations for alternative investment funds (AIFs) would come as a blessing in disguise for mutual funds. Market participants say the increase in the minimum investment size is bound to channelise a lot of high net worth money towards the fund industry.
Last month, the Securities and Exchange Board of India (Sebi) released a concept paper on proposed AIF norms. These would cover venture capital funds, private equity funds, debt funds, real estate funds and PIPE (private investment in public equity) funds, among others. It has proposed a minimum investment size of Rs 1 crore. The current norms allow a high net worth individual (HNI) to participate in a portfolio management scheme with as little as Rs 5 lakh.
Market participants say MFs would be the biggest beneficiary of the proposed norms, as a lot of HNIs with an investment corpus of less than Rs 1 crore would not be able to invest in PMS or other funds that come under the purview of AIF regulations. This would make MFs their preferred investment vehicle.
Gautam Mehra, executive director, tax and regulatory services, PwC India, feels the listed companies’ universe would benefit from the proposed norms, as MFs typically invest in companies listed on the stock exchanges.
“Investors in the sub-Rs 1 crore segment may explore redeploying the capital in the listed space through the MF route,” says Mehra. “Second, the investments pooled in by portfolio managers offering standardised strategies with a ticket size in the range of Rs 5 lakh to Rs 25 lakh could also get channelised to MFs, given that the offerings of such schemes are also proposed to be covered by AIF Regulations.”
MF companies have welcomed the proposed regulations. They come at a time when the sector has not been successful in attracting significant inflows from investors. Fund managers are hopeful that with the increase in investment size from Rs 5 lakh per individual to Rs 1 crore, considerable funds will get channelised.
“Earlier, an amount of Rs 5 lakh was a reasonably big sum but now it is no more a big investment. I do expect that some of these funds could come to the fund industry,” said G Pradeepkumar, chief executive officer, Union KBC Mutual Fund.
Mehra says venture capital funds invest largely in unlisted companies and in listed companies only by way of preferential allotment. So, investors who may not have an appetite for the listed space may consider increasing their commitments and continue to invest in AIFs.
The fund industry has been trying to source inflows from tier-I and tier-II cities but have failed at a time when stock markets have falen by close to 20 per cent this year. It has been losing folios continuously.
There are currently 45 players in the domestic MF sector, with overall assets under management (AUM) of Rs 6.96 lakh crore as on August 31. In 2010-11, the industry witnessed a net outflow of Rs 49,406 crore, compared with a net inflow of Rs 83,081 crore in the previous year. The highest outflow, of Rs 13,000 crore, was in equity schemes.
Mumbai, 30 September 2011
Sebi proposal of minimum Rs 1-crore investment to channelise HNI money towards fund houses.
The proposed regulations for alternative investment funds (AIFs) would come as a blessing in disguise for mutual funds. Market participants say the increase in the minimum investment size is bound to channelise a lot of high net worth money towards the fund industry.
Last month, the Securities and Exchange Board of India (Sebi) released a concept paper on proposed AIF norms. These would cover venture capital funds, private equity funds, debt funds, real estate funds and PIPE (private investment in public equity) funds, among others. It has proposed a minimum investment size of Rs 1 crore. The current norms allow a high net worth individual (HNI) to participate in a portfolio management scheme with as little as Rs 5 lakh.
Market participants say MFs would be the biggest beneficiary of the proposed norms, as a lot of HNIs with an investment corpus of less than Rs 1 crore would not be able to invest in PMS or other funds that come under the purview of AIF regulations. This would make MFs their preferred investment vehicle.
Gautam Mehra, executive director, tax and regulatory services, PwC India, feels the listed companies’ universe would benefit from the proposed norms, as MFs typically invest in companies listed on the stock exchanges.
“Investors in the sub-Rs 1 crore segment may explore redeploying the capital in the listed space through the MF route,” says Mehra. “Second, the investments pooled in by portfolio managers offering standardised strategies with a ticket size in the range of Rs 5 lakh to Rs 25 lakh could also get channelised to MFs, given that the offerings of such schemes are also proposed to be covered by AIF Regulations.”
MF companies have welcomed the proposed regulations. They come at a time when the sector has not been successful in attracting significant inflows from investors. Fund managers are hopeful that with the increase in investment size from Rs 5 lakh per individual to Rs 1 crore, considerable funds will get channelised.
“Earlier, an amount of Rs 5 lakh was a reasonably big sum but now it is no more a big investment. I do expect that some of these funds could come to the fund industry,” said G Pradeepkumar, chief executive officer, Union KBC Mutual Fund.
Mehra says venture capital funds invest largely in unlisted companies and in listed companies only by way of preferential allotment. So, investors who may not have an appetite for the listed space may consider increasing their commitments and continue to invest in AIFs.
The fund industry has been trying to source inflows from tier-I and tier-II cities but have failed at a time when stock markets have falen by close to 20 per cent this year. It has been losing folios continuously.
There are currently 45 players in the domestic MF sector, with overall assets under management (AUM) of Rs 6.96 lakh crore as on August 31. In 2010-11, the industry witnessed a net outflow of Rs 49,406 crore, compared with a net inflow of Rs 83,081 crore in the previous year. The highest outflow, of Rs 13,000 crore, was in equity schemes.
India Inc's fund-raising seen below 2008 level
Somasroy Chakraborty & Ashish Rukhaiyar
Mumbai, 28 September 2011
Volatility in local share markets have hit India Inc's equity fund-raising plans, with the total deal value this year set to fall below the level seen in 2008. This has squeezed the fee income of investment banks in the country and triggered job losses in many of these firms.
“This year has been challenging for the primary market. Around $9 billion has been raised so far, and we don't expect much in the last (October-December) quarter,” said Sanjay Sharma, head (equity capital markets), Deutsche Bank Group, India.
In the first eight months this calendar year, Indian companies raised $9.2 billion, compared with $29.9 billion raised in 2010, according to Dealogic data. In 2008, Indian companies raised $13.8 billion through equity issuances.
The fee earned by investment banks so far this year is estimated at around euro 52 million, compared with euro 238 million last year. In 2008, investment banks earned euro98 million by managing equity issuances of domestic firms. The shrinking fee pool has also taken its toll on headcounts, with many banks shrinking their investment banking teams in the last few weeks.
“This would be the most difficult year for equity capital markets in a long time. With PE (price earnings) multiples contracting, promoters are also weary of selling equity. Foreign institutional investors have backed out from emerging markets, including India,” said Tarun Kataria, chief executive, Religare Capital Markets, India.
Bombay Stock Exchange's benchmark index, Sensex, has plunged 17.46 per cent since the beginning of this financial year, making it difficult for corporate entities to raise funds through equity issuances.
While investment banks claimed their bill rates were not affected despite a slowdown in deal flows, they plan to maximise their share in the declining fee pool by offering value-added services.
“For investment banks, the fees, as a percentage of amount raised, has not really come down over the last few years, and we see the differentiation between banks is more in terms of the quality of service offered,” Sharma said.
Deutsche Bank has the largest share of fee income from equity issuances in India so far this year. It earned euro 3.7 million, managing three deals between January and August.
“Market conditions this year have been pretty tough. The ability of Indian companies to raise equity capital in this environment has been limited. The fund flow from foreign institutional investors has remained muted and hence, primary issuances would continue to struggle,” said a senior official in charge of equity capital markets of a British bank in India.
Industry players expect companies in financial services and infrastructure sectors to lead the recovery, once the market volatility subsides.
“Today, rate-sensitive sectors like infrastructure, real estate and banking are not doing well in the secondary market and hence, these would find it difficult to raise money. However, once the market improves, these sectors would pick up first. In terms of products, I expect QIPs (qualified institutional placement) and follow-on offers to take the lead, before IPOs (initial public offers) pick up,” Sharma said.
Mumbai, 28 September 2011
Volatility in local share markets have hit India Inc's equity fund-raising plans, with the total deal value this year set to fall below the level seen in 2008. This has squeezed the fee income of investment banks in the country and triggered job losses in many of these firms.
“This year has been challenging for the primary market. Around $9 billion has been raised so far, and we don't expect much in the last (October-December) quarter,” said Sanjay Sharma, head (equity capital markets), Deutsche Bank Group, India.
In the first eight months this calendar year, Indian companies raised $9.2 billion, compared with $29.9 billion raised in 2010, according to Dealogic data. In 2008, Indian companies raised $13.8 billion through equity issuances.
The fee earned by investment banks so far this year is estimated at around euro 52 million, compared with euro 238 million last year. In 2008, investment banks earned euro98 million by managing equity issuances of domestic firms. The shrinking fee pool has also taken its toll on headcounts, with many banks shrinking their investment banking teams in the last few weeks.
“This would be the most difficult year for equity capital markets in a long time. With PE (price earnings) multiples contracting, promoters are also weary of selling equity. Foreign institutional investors have backed out from emerging markets, including India,” said Tarun Kataria, chief executive, Religare Capital Markets, India.
Bombay Stock Exchange's benchmark index, Sensex, has plunged 17.46 per cent since the beginning of this financial year, making it difficult for corporate entities to raise funds through equity issuances.
While investment banks claimed their bill rates were not affected despite a slowdown in deal flows, they plan to maximise their share in the declining fee pool by offering value-added services.
“For investment banks, the fees, as a percentage of amount raised, has not really come down over the last few years, and we see the differentiation between banks is more in terms of the quality of service offered,” Sharma said.
Deutsche Bank has the largest share of fee income from equity issuances in India so far this year. It earned euro 3.7 million, managing three deals between January and August.
“Market conditions this year have been pretty tough. The ability of Indian companies to raise equity capital in this environment has been limited. The fund flow from foreign institutional investors has remained muted and hence, primary issuances would continue to struggle,” said a senior official in charge of equity capital markets of a British bank in India.
Industry players expect companies in financial services and infrastructure sectors to lead the recovery, once the market volatility subsides.
“Today, rate-sensitive sectors like infrastructure, real estate and banking are not doing well in the secondary market and hence, these would find it difficult to raise money. However, once the market improves, these sectors would pick up first. In terms of products, I expect QIPs (qualified institutional placement) and follow-on offers to take the lead, before IPOs (initial public offers) pick up,” Sharma said.
Sebi questions USE on trade concentration
Ashish Rukhaiyar & Palak Shah
Mumbai, 27 September 2011
Allegations on Jaypee Capital alone accounting for bulk of turnover, something not permitted under the rules.
The United Stock Exchange (USE) has come under the regulatory scanner for alleged concentration of trades by a single member. The regulator has questioned the effectiveness of the exchange’s surveillance and risk mechanism measures that allowed such an occurrence.
According to reports, only a few brokers account for a majority of the volume registered on USE. More important, Gurgaon-based Jaypee Capital, also a shareholder in USE, accounts for nearly 80 per cent of the turnover. USE currently operates in the currency derivatives space and offers currency futures in all the four currency pairs permitted by the Securities and Exchange Board of India (Sebi). It is also one of the only two stock exchanges in the country to offer currency options in the dollar-rupee pair.
“This puts a big question mark on the surveillance mechanism, as there should have been alerts thrown up by the system and the exchange should have taken note of it," said an official familiar with the development. "Questions have been raised as this is something the regulator is not comfortable with. It is against the spirit of the law."
Sebi has clearly said on numerous occasions that concentration of positions with a single member will not be entertained and exchanges should have robust surveillance and risk mechanism measures to monitor such developments.
The regulator has also directed exchanges to put in place systems to monitor "position concentration, open interest across trading members... alerts on large traded quantity." Further, "exchanges were also advised to suitably warn their members against self trades," in a surveillance meet held in December 2008.
Jaypee Capital is a direct shareholder in USE. Gaurav Arora, managing director and founder of the brokerage entity, and his son, Saurav Arora, hold another one per cent each. USE chief executive officer and managing director, T S Nayaranaswami, could not be reached for comments, despite repeated attempts.
"Concentration of positions with one single entity is a clear breach of FUTP (Fraudulent and Unfair Trade Practices)," says Ameet Naik of Naik, Naik & Co. "One cannot have brokers with trading rights, as that was the whole idea behind pushing for demutualisation. Then, there are also codes and ethics followed by brokers, violation of which could have serious impact," says Naik, who specialises in securities regulations.
Data shows that while Jaypee Capital accounted for nearly 80 per cent of the turnover, some of the banks (Andhra Bank, Union Bank of India, Indian Bank, Bank of India and Bank of Baroda) were responsible for a marginal share in the volume. USE’s stakeholders include the Bombay Stock Exchange, which owns 15 per cent, along with 28 banks and three corporate houses.
Last Friday, the volume on USE dropped significantly to Rs 6,514 crore after clocking a little over Rs 12,000 crore the previous day. Interestingly, MCX Stock Exchange (MCX-SX) and the National Stock Exchange registered volumes of Rs 29,992 crore and Rs 35,393 crore, respectively.
On Monday, USE registered a turnover of Rs 8,038 crore, while MCX-SX and NSE clocked volumes of Rs 26,616 crore and Rs 19,067 crore. USE’s first-day turnover had surpassed the combined currency segment of NSE and MCX-SX. The exchange had made a big-bang debut last year, cornering a near 52 per cent market share in the currency derivatives segment. Jaypee and Union Bank, incidentally, conducted the first trade on the exchange.
REGULATOR TALK
Sebi says such practices are against the spirit of law
Surveillance, risk mechanisms should throw such alerts, the regulator asserts
Jaypee Capital accounted for nearly 80% volume on USE
Jaypee is a shareholder in USE; public sector stakeholder banks account for only a marginal share in volumes
Mumbai, 27 September 2011
Allegations on Jaypee Capital alone accounting for bulk of turnover, something not permitted under the rules.
The United Stock Exchange (USE) has come under the regulatory scanner for alleged concentration of trades by a single member. The regulator has questioned the effectiveness of the exchange’s surveillance and risk mechanism measures that allowed such an occurrence.
According to reports, only a few brokers account for a majority of the volume registered on USE. More important, Gurgaon-based Jaypee Capital, also a shareholder in USE, accounts for nearly 80 per cent of the turnover. USE currently operates in the currency derivatives space and offers currency futures in all the four currency pairs permitted by the Securities and Exchange Board of India (Sebi). It is also one of the only two stock exchanges in the country to offer currency options in the dollar-rupee pair.
“This puts a big question mark on the surveillance mechanism, as there should have been alerts thrown up by the system and the exchange should have taken note of it," said an official familiar with the development. "Questions have been raised as this is something the regulator is not comfortable with. It is against the spirit of the law."
Sebi has clearly said on numerous occasions that concentration of positions with a single member will not be entertained and exchanges should have robust surveillance and risk mechanism measures to monitor such developments.
The regulator has also directed exchanges to put in place systems to monitor "position concentration, open interest across trading members... alerts on large traded quantity." Further, "exchanges were also advised to suitably warn their members against self trades," in a surveillance meet held in December 2008.
Jaypee Capital is a direct shareholder in USE. Gaurav Arora, managing director and founder of the brokerage entity, and his son, Saurav Arora, hold another one per cent each. USE chief executive officer and managing director, T S Nayaranaswami, could not be reached for comments, despite repeated attempts.
"Concentration of positions with one single entity is a clear breach of FUTP (Fraudulent and Unfair Trade Practices)," says Ameet Naik of Naik, Naik & Co. "One cannot have brokers with trading rights, as that was the whole idea behind pushing for demutualisation. Then, there are also codes and ethics followed by brokers, violation of which could have serious impact," says Naik, who specialises in securities regulations.
Data shows that while Jaypee Capital accounted for nearly 80 per cent of the turnover, some of the banks (Andhra Bank, Union Bank of India, Indian Bank, Bank of India and Bank of Baroda) were responsible for a marginal share in the volume. USE’s stakeholders include the Bombay Stock Exchange, which owns 15 per cent, along with 28 banks and three corporate houses.
Last Friday, the volume on USE dropped significantly to Rs 6,514 crore after clocking a little over Rs 12,000 crore the previous day. Interestingly, MCX Stock Exchange (MCX-SX) and the National Stock Exchange registered volumes of Rs 29,992 crore and Rs 35,393 crore, respectively.
On Monday, USE registered a turnover of Rs 8,038 crore, while MCX-SX and NSE clocked volumes of Rs 26,616 crore and Rs 19,067 crore. USE’s first-day turnover had surpassed the combined currency segment of NSE and MCX-SX. The exchange had made a big-bang debut last year, cornering a near 52 per cent market share in the currency derivatives segment. Jaypee and Union Bank, incidentally, conducted the first trade on the exchange.
REGULATOR TALK
Sebi says such practices are against the spirit of law
Surveillance, risk mechanisms should throw such alerts, the regulator asserts
Jaypee Capital accounted for nearly 80% volume on USE
Jaypee is a shareholder in USE; public sector stakeholder banks account for only a marginal share in volumes
Sebi sees slowdown in decision-making
Ashish Rukhaiyar
Mumbai, 21 September 2011
The Securities and Exchange Board of India (Sebi) is short of senior management. Besides, recent controversies surrounding former whole-time member K M Abraham’s letter to the finance ministry had slowed down the decision-making process significantly, said market participants.
This was reflected in some of the recent meetings that the finance ministry has had with market participants, including stock exchanges. Participants in the meeting said queries from the finance ministry on progress on the separate platform for small and medium enterprises could not be addressed because Sebi was represented by a northern zone official. Similarly, the takeover code has not been notified though it had been cleared by both the finance ministry and the Sebi over a month before.
The vacancies created by the exit of two whole-time directors, M S Sahoo and K M Abraham, who completed their terms, haven’t been filled for two months. At present, there is only one whole-time director – Prashant Saran – with the market regulator.
“The working of Sebi has certainly been affected, as the work that was divided among three members is now being looked after by just one,” a Sebi official said. “The Sebi mandate encompasses a lot of segments and it is difficult for one person to look after so many verticals simultaneously,” he added, wishing not to be named.
Some reports suggest that former Central Bank of India chairman and managing director S Sridhar, along with Rajeev Agrawal, a 1983-batch Indian Revenue Services (IRS) officer, have been selected as members. A formal notification is still awaited.
Also, while three of the four executive directors (ED) — K N Vaidyanathan, J N Gupta and Pradnya Sarvade — have completed their terms, only one ED, J Ranganayakulu, was granted an extension. According to Sebi sources, the three EDs have been replaced by S Ravindran, S Raman and R K Padmanabhan.
Interestingly, there has been no formal notification about the appointments of Raman and R K Padmanabhan on the market regulator’s website. Padmanabhan, a Maharashtra cadre IPS officer, is yet to join Sebi, while the other three have assumed their new roles.
Saran, the lone whole-time member, is looking after all the verticals till the new members assume charge. According to the Sebi website, Saran is directly in-charge of collective investment schemes, foreign institutional investors and the enquiry & adjudication department. The others are handled by executive directors who report to Saran.
As a whole-time member, Sahoo was in-charge of derivatives & new products, legal affairs, enforcement and regulation & supervision of market intermediaries, while Abraham handled corporate finance, investigations, vigilance and integrated surveillance, among other things.
Even the court recently remarked in a high-profile case that the affected party should go back to Sebi for a dispassionate hearing, as a new regime was in place.
Mumbai, 21 September 2011
The Securities and Exchange Board of India (Sebi) is short of senior management. Besides, recent controversies surrounding former whole-time member K M Abraham’s letter to the finance ministry had slowed down the decision-making process significantly, said market participants.
This was reflected in some of the recent meetings that the finance ministry has had with market participants, including stock exchanges. Participants in the meeting said queries from the finance ministry on progress on the separate platform for small and medium enterprises could not be addressed because Sebi was represented by a northern zone official. Similarly, the takeover code has not been notified though it had been cleared by both the finance ministry and the Sebi over a month before.
The vacancies created by the exit of two whole-time directors, M S Sahoo and K M Abraham, who completed their terms, haven’t been filled for two months. At present, there is only one whole-time director – Prashant Saran – with the market regulator.
“The working of Sebi has certainly been affected, as the work that was divided among three members is now being looked after by just one,” a Sebi official said. “The Sebi mandate encompasses a lot of segments and it is difficult for one person to look after so many verticals simultaneously,” he added, wishing not to be named.
Some reports suggest that former Central Bank of India chairman and managing director S Sridhar, along with Rajeev Agrawal, a 1983-batch Indian Revenue Services (IRS) officer, have been selected as members. A formal notification is still awaited.
Also, while three of the four executive directors (ED) — K N Vaidyanathan, J N Gupta and Pradnya Sarvade — have completed their terms, only one ED, J Ranganayakulu, was granted an extension. According to Sebi sources, the three EDs have been replaced by S Ravindran, S Raman and R K Padmanabhan.
Interestingly, there has been no formal notification about the appointments of Raman and R K Padmanabhan on the market regulator’s website. Padmanabhan, a Maharashtra cadre IPS officer, is yet to join Sebi, while the other three have assumed their new roles.
Saran, the lone whole-time member, is looking after all the verticals till the new members assume charge. According to the Sebi website, Saran is directly in-charge of collective investment schemes, foreign institutional investors and the enquiry & adjudication department. The others are handled by executive directors who report to Saran.
As a whole-time member, Sahoo was in-charge of derivatives & new products, legal affairs, enforcement and regulation & supervision of market intermediaries, while Abraham handled corporate finance, investigations, vigilance and integrated surveillance, among other things.
Even the court recently remarked in a high-profile case that the affected party should go back to Sebi for a dispassionate hearing, as a new regime was in place.
Slump forces MFs to bargain on brokerage
Ashish Rukhaiyar & Chandan Kishore Kant
Mumbai, 20 September 2011
Mutual fund houses are looking at all possible ways to reduce costs. As the latest measure, they have started negotiating with their empanelled brokers on the quantum of brokerage to be paid for every trade. Larger fund houses have already slashed the brokerage to rein in overhead costs and falling margins in a weak market.
According to institutional traders, some top fund houses reduced the brokerage by up to 25 per cent in the recent past. A large domestic fund entity backed by a leading corporate house is believed to have slashed the same from 15 basis points (bps) to 10 bps for its largest broker. Another fund house — a joint venture between an Indian and a foreign entity — has brought it from 20 bps to 15 bps.
While market participants say the trend is a direct outcome of weak market sentiment and falling volumes, which have pushed up the cost of trading, technology advancement in the form of direct market access (DMA) has also acted as a catalyst.
“Currently, the trend is limited to some large fund houses, but it can become an industry phenomena,” said an institutional dealer who trades on behalf of some domestic fund houses. “While a 25 per cent cut in brokerage has become common, some fund houses have also started giving single-digit commission to the smaller brokerages on their panel,” he added.
Meanwhile, fund house officials say they regularly negotiate the brokerage with their panel, depending on the quantum of trades routed through various brokerages. Incidentally, the move comes close on the heels of many fund houses cutting down on the number of empanelled brokerages.
“We keep negotiating and try to keep the brokerages at a minimum,” said Ajit Menon, executive vice-president & head of sales, DSP BlackRock. In a similar context, an official from Religare Mutual Fund said “it is an ongoing process of negotiating on brokerages as a part of prudent management.”
An official from one of the largest domestic fund houses said the increased acceptance of DMA among MFs had contributed to the fall in brokerage, as that involved minimal or no efforts at the broker’s end. “The broker has absolutely no role to play when orders are routed through DMA, so the question of high brokerage does not emerge,” said the sales head of a domestic fund house.
“Many fund houses have adopted it, as it lowers the impact cost. So, the average brokerage is witnessing a fall,” he added.
DMA is a facility which allows brokers to offer clients direct access to the exchange trading system through the broker’s infrastructure, without manual intervention by the broker. The Securities and Exchange Board of India also encourages DMA, as it reduces the probability of front-running activities.
Mumbai, 20 September 2011
Mutual fund houses are looking at all possible ways to reduce costs. As the latest measure, they have started negotiating with their empanelled brokers on the quantum of brokerage to be paid for every trade. Larger fund houses have already slashed the brokerage to rein in overhead costs and falling margins in a weak market.
According to institutional traders, some top fund houses reduced the brokerage by up to 25 per cent in the recent past. A large domestic fund entity backed by a leading corporate house is believed to have slashed the same from 15 basis points (bps) to 10 bps for its largest broker. Another fund house — a joint venture between an Indian and a foreign entity — has brought it from 20 bps to 15 bps.
While market participants say the trend is a direct outcome of weak market sentiment and falling volumes, which have pushed up the cost of trading, technology advancement in the form of direct market access (DMA) has also acted as a catalyst.
“Currently, the trend is limited to some large fund houses, but it can become an industry phenomena,” said an institutional dealer who trades on behalf of some domestic fund houses. “While a 25 per cent cut in brokerage has become common, some fund houses have also started giving single-digit commission to the smaller brokerages on their panel,” he added.
Meanwhile, fund house officials say they regularly negotiate the brokerage with their panel, depending on the quantum of trades routed through various brokerages. Incidentally, the move comes close on the heels of many fund houses cutting down on the number of empanelled brokerages.
“We keep negotiating and try to keep the brokerages at a minimum,” said Ajit Menon, executive vice-president & head of sales, DSP BlackRock. In a similar context, an official from Religare Mutual Fund said “it is an ongoing process of negotiating on brokerages as a part of prudent management.”
An official from one of the largest domestic fund houses said the increased acceptance of DMA among MFs had contributed to the fall in brokerage, as that involved minimal or no efforts at the broker’s end. “The broker has absolutely no role to play when orders are routed through DMA, so the question of high brokerage does not emerge,” said the sales head of a domestic fund house.
“Many fund houses have adopted it, as it lowers the impact cost. So, the average brokerage is witnessing a fall,” he added.
DMA is a facility which allows brokers to offer clients direct access to the exchange trading system through the broker’s infrastructure, without manual intervention by the broker. The Securities and Exchange Board of India also encourages DMA, as it reduces the probability of front-running activities.
Mutual fund houses trim broker panel to cut costs
Ashish Rukhaiyar
Mumbai, 15 September 2011
The prevailing pessimism in the equity arena has compelled even the biggest capital market participants to rework strategies. With volumes down to a trickle compared to earlier months, revenue has taken a hit and every conceivable way to cut costs is being implemented across the board.
Mutual fund houses, which have been battling distribution-related issues for some time now, have come up with a new method to reduce overhead costs. Some of the top fund houses have started cutting the number of brokers through which they place trades in the stock market. Institutional dealers say some are even hinting at a 50 per cent cut.
Market buzz is that one of top five fund houses, with around 100 brokers on its panel, is looking to bring it down to 60 in the first phase and to 40, finally. Another is looking at trimming it to 25 from the existing 40.
Financial institutions, including mutual funds, execute their buy and sell orders through a number of ‘empanelled’ brokers, who, at times, also offer discounted brokerage rates, depending on the quantum of trade routed through them. Top fund houses are known to have 80-100 brokers on their panel.
“Market conditions are such that fund houses do not see any reason in continuing with a large panel of brokers,” says an institutional dealer with a domestic brokerage. “The bigger fund houses are concentrating on the top 20-30 brokers on their panel and routing most of the trading through them. The smaller ones on the panel have been left out,” he adds.
The move would come as a body blow to many institutional brokerages that have been reeling under heavy losses due to the fall in equity market turnover. Many are heavily dependant on a few institutional clients, which account for the bulk of their business volume. The recent past saw entities like Tower Capital and Alchemy Capital close their institutional business.
Mumbai, 15 September 2011
The prevailing pessimism in the equity arena has compelled even the biggest capital market participants to rework strategies. With volumes down to a trickle compared to earlier months, revenue has taken a hit and every conceivable way to cut costs is being implemented across the board.
Mutual fund houses, which have been battling distribution-related issues for some time now, have come up with a new method to reduce overhead costs. Some of the top fund houses have started cutting the number of brokers through which they place trades in the stock market. Institutional dealers say some are even hinting at a 50 per cent cut.
Market buzz is that one of top five fund houses, with around 100 brokers on its panel, is looking to bring it down to 60 in the first phase and to 40, finally. Another is looking at trimming it to 25 from the existing 40.
Financial institutions, including mutual funds, execute their buy and sell orders through a number of ‘empanelled’ brokers, who, at times, also offer discounted brokerage rates, depending on the quantum of trade routed through them. Top fund houses are known to have 80-100 brokers on their panel.
“Market conditions are such that fund houses do not see any reason in continuing with a large panel of brokers,” says an institutional dealer with a domestic brokerage. “The bigger fund houses are concentrating on the top 20-30 brokers on their panel and routing most of the trading through them. The smaller ones on the panel have been left out,” he adds.
The move would come as a body blow to many institutional brokerages that have been reeling under heavy losses due to the fall in equity market turnover. Many are heavily dependant on a few institutional clients, which account for the bulk of their business volume. The recent past saw entities like Tower Capital and Alchemy Capital close their institutional business.
BS People: Praveen Chakravarty
Public policy enthusiast joins Anand Rathi
Ashish Rukhaiyar
Mumbai, 8 September 2011
Ever since Anand Rathi Financial Services lost its senior high-profile equities team last year, a search for a person with prior experience in a foreign firm was on. The search ended early this month when it announced the appointment of Praveen Chakravarty to head its investment banking and equities segments.
Chakravarty had earlier helped BNP Paribas set up its India equities business. He had joined the bank in 2007 as the chief operating officer (COO) and head of research.
People who know Chakravarty say that he is not the usual market expert who relishes doling out numbers and projections. While spreadsheets are his forte, he is more known for his passion for public policy matters, said a managing director of a rival foreign brokerage.
After staying with BNP Paribas for three years, he quit in 2010 to be a part of the government's ambitious Unique Identification Authority of India (UIDAI) project as a volunteer for its financial inclusion initiative.
His stint with Anand Rathi will help the domestic brokerage in not only getting some big institutional clients on board, but also in the venture capital (VC) and private equity (PE) space. Chakravarty is the co-founder of Mumbai Angels, which focuses on start-ups and early stage companies in need of VC/PE funding.
Chakravarty, who is an alumni of BITS Pilani, also sits on the boards of many start-ups. In 2007, he was a founding board member and investor in Inmobi (earlier known as mKhoj) and has also invested in movie rental firm MadHouse that was acquired by Seventymm.
The MBA from Wharton School has earlier worked with technology majors Microsoft and IBM. He was also a part of the India team of Thomas Wiesel, a US-based investment banking entity. Interestingly, when he moved out of Thomas Wiesel to join BNP Paribas, Paribas was sued for around Rs 100 crore in damages for the defection of 20 other co-workers. The two firms eventually reached an agreement.
Chakravarty is joining Anand Rathi at a time when even the bigger players are finding it tough to sustain themselves in the market. So it remains to be seen if he will be able to work his magic. The stakes will be higher this time around since he also owns a piece of his new employer.
Ashish Rukhaiyar
Mumbai, 8 September 2011
Ever since Anand Rathi Financial Services lost its senior high-profile equities team last year, a search for a person with prior experience in a foreign firm was on. The search ended early this month when it announced the appointment of Praveen Chakravarty to head its investment banking and equities segments.
Chakravarty had earlier helped BNP Paribas set up its India equities business. He had joined the bank in 2007 as the chief operating officer (COO) and head of research.
People who know Chakravarty say that he is not the usual market expert who relishes doling out numbers and projections. While spreadsheets are his forte, he is more known for his passion for public policy matters, said a managing director of a rival foreign brokerage.
After staying with BNP Paribas for three years, he quit in 2010 to be a part of the government's ambitious Unique Identification Authority of India (UIDAI) project as a volunteer for its financial inclusion initiative.
His stint with Anand Rathi will help the domestic brokerage in not only getting some big institutional clients on board, but also in the venture capital (VC) and private equity (PE) space. Chakravarty is the co-founder of Mumbai Angels, which focuses on start-ups and early stage companies in need of VC/PE funding.
Chakravarty, who is an alumni of BITS Pilani, also sits on the boards of many start-ups. In 2007, he was a founding board member and investor in Inmobi (earlier known as mKhoj) and has also invested in movie rental firm MadHouse that was acquired by Seventymm.
The MBA from Wharton School has earlier worked with technology majors Microsoft and IBM. He was also a part of the India team of Thomas Wiesel, a US-based investment banking entity. Interestingly, when he moved out of Thomas Wiesel to join BNP Paribas, Paribas was sued for around Rs 100 crore in damages for the defection of 20 other co-workers. The two firms eventually reached an agreement.
Chakravarty is joining Anand Rathi at a time when even the bigger players are finding it tough to sustain themselves in the market. So it remains to be seen if he will be able to work his magic. The stakes will be higher this time around since he also owns a piece of his new employer.
It's raining AGMs in September
Ashish Rukhaiyar
Mumbai, 7 September 2011
For an investor who holds shares in the top-listed companies, September is going to be a busy month. Especially if attending annual general meetings (AGMs) is high on the radar. There are some days when more than 10 companies have scheduled their AGMs.
According to a recent report by Ingovern Research Services, many large companies that feature among the top 500 listed entities have scheduled AGMs this month. This has made it difficult for investors to attend the meetings, increasing the likelihood of proxy voting, it says.
“Of the companies in the S&P CNX 500 index, 154 have their AGMs in September,” says the research entity that claims to be India’s first independent proxy analysis firm. The existing regulatory framework allows a listed company to hold its AGM within six months from the financial year-end.
Of these 154 companies, 18 are part of the benchmark S&P CNX Nifty of the National Stock Exchange (NSE). While another 13 belong to the Nifty Junior, 123 are part of the CNX 500 index. Interestingly, a majority of the meetings are to be held in the last week of September.
The list of these companies include Maruti, Wockhardt, IFCI, TVS Motor, BPCL, Grasim, REC, NHPC, NTPC, BHEL, Coal India, Educomp, Parsvnath Developers, Provogue, Jai Corp, Mastek, Suzlon and Gitanjali Gems, among others.
According to the research house, such bunching of AGMs "poses challenges" to investors who hold shares in many companies. There is not enough time to do proper due diligence and attending AGMs itself turns out to be an ardous task. The inability to attend AGMs leads to the “need for proxy voting services/solutions”, it says.
At least 10 companies have scheduled AGMs on each of four days of the current month (September 23, 24, 28, 30). On September 27 and September 29, as many as 14 companies would be doing so.
People tracking this development say such bunching also puts a question mark on the corporate governance norms in many of these companies. Representatives of investor associations allege such a situation helps the company make adjustments in the balance sheet to appease stock market players.
"If a company has nothing to hide, it can conduct its AGM earlierm too," says Hinesh Doshi , vice-president, Investors' Grievances Forum (IGF). “Such companies may also have corporate governance issues. There could be some adjustments in the cash flow or the profit as per bank loans or maybe something that could help push the stock price.”
According to Doshi, law makers could look at some of the global practices followed for giving time to companies for AGMs. In many countries, three to four months is the maximum time stipulated for a company to hold its AGM after the financial year comes to an end.
Mumbai, 7 September 2011
For an investor who holds shares in the top-listed companies, September is going to be a busy month. Especially if attending annual general meetings (AGMs) is high on the radar. There are some days when more than 10 companies have scheduled their AGMs.
According to a recent report by Ingovern Research Services, many large companies that feature among the top 500 listed entities have scheduled AGMs this month. This has made it difficult for investors to attend the meetings, increasing the likelihood of proxy voting, it says.
“Of the companies in the S&P CNX 500 index, 154 have their AGMs in September,” says the research entity that claims to be India’s first independent proxy analysis firm. The existing regulatory framework allows a listed company to hold its AGM within six months from the financial year-end.
Of these 154 companies, 18 are part of the benchmark S&P CNX Nifty of the National Stock Exchange (NSE). While another 13 belong to the Nifty Junior, 123 are part of the CNX 500 index. Interestingly, a majority of the meetings are to be held in the last week of September.
The list of these companies include Maruti, Wockhardt, IFCI, TVS Motor, BPCL, Grasim, REC, NHPC, NTPC, BHEL, Coal India, Educomp, Parsvnath Developers, Provogue, Jai Corp, Mastek, Suzlon and Gitanjali Gems, among others.
According to the research house, such bunching of AGMs "poses challenges" to investors who hold shares in many companies. There is not enough time to do proper due diligence and attending AGMs itself turns out to be an ardous task. The inability to attend AGMs leads to the “need for proxy voting services/solutions”, it says.
At least 10 companies have scheduled AGMs on each of four days of the current month (September 23, 24, 28, 30). On September 27 and September 29, as many as 14 companies would be doing so.
People tracking this development say such bunching also puts a question mark on the corporate governance norms in many of these companies. Representatives of investor associations allege such a situation helps the company make adjustments in the balance sheet to appease stock market players.
"If a company has nothing to hide, it can conduct its AGM earlierm too," says Hinesh Doshi , vice-president, Investors' Grievances Forum (IGF). “Such companies may also have corporate governance issues. There could be some adjustments in the cash flow or the profit as per bank loans or maybe something that could help push the stock price.”
According to Doshi, law makers could look at some of the global practices followed for giving time to companies for AGMs. In many countries, three to four months is the maximum time stipulated for a company to hold its AGM after the financial year comes to an end.
Foreign investors paint gloomy India picture
Ashish Rukhaiyar
Mumbai, 26 August 2011
If the latest strategy reports of some leading foreign institutional investors (FIIs) are anything to go by, then the outlook for the Indian equity market appears bleak. This, in spite of a section of experts pitching for the current attractive valuations.
While Credit Suisse is of the view that India’s global linkages are now higher than what it was in 2008, CLSA has cut its year-end Sensex target by nearly seven per cent to 18,200. Morgan Stanley is also overweight on all BRIC (Brazil, Russia, India and China) nations, except India.
“While the sharp correction in the market may suggest attractive valuations, we note the pace of corporate earnings downgrades has intensified in the recent results season,” said CLSA in its report released on Wednesday. “We lower 12-m Sensex target to 18,200 as we lower the target multiple to 13x to factor in the earnings downgrade risk,” it said.
India’s benchmark 30-share Sensex of the Bombay Stock Exchange (BSE) has declined more than 20 per cent from its peak in November last year, which technically means the index is in bear territory. It is also one of the worst performers among all leading equity indices this calendar year. On Thursday, the Sensex lost 139 points to close at 16,146.
This time around, analysts are even skeptical in betting on the “decoupling” theory that would help India in tiding over the global uncertainty in a relatively better manner. In 2008, when the sub-prime crisis was at its peak, a section of market analysts were of the view that Indian domestic consumption would help the economy in “decoupling” from the then global crisis.
“India’s global linkages are now higher than in 2008. Against the market consensus, we believe slowing global growth will expand the trade deficit and hurt GDP growth,” said Credit Suisse. It said corporate leverage has not improved, with companies with high leverage now more than in FY08. According to the Swiss major, around 50 per cent of the globally-linked Nifty EPS, which was largely uncut so far, is likely to see downward revisions.
Credit Suisse is also worried over the fact that Indian companies are highly leveraged at a time when globally companies are trying to reduce the extent of leverage. “While the world over the balance sheets of companies seems to have improved since the last crisis, the same has not happened in India. In fact, the number of companies with high leverage is now higher than it was in FY08.”
Last week, when the Indian indices lost ground, they registered their fourth straight weekly loss — the longest losing streak since the collapse of Lehman Brothers in 2008. According to Bloomberg, earnings for 46 per cent of Sensex companies missed analyst estimates in the June quarter. That compared with 33 per cent which lagged behind forecasts in the previous quarter.
This comes on the back of Morgan Stanley downgrading India in its latest report on the emerging markets. The report has maintained its underweight call on India and further reduced India’s ranking from 15 to 16. “India may not be able to respond given the starting point of a high fiscal deficit. In India, the government may focus more on boosting private sector confidence through policy reforms,” said the report.
Mumbai, 26 August 2011
If the latest strategy reports of some leading foreign institutional investors (FIIs) are anything to go by, then the outlook for the Indian equity market appears bleak. This, in spite of a section of experts pitching for the current attractive valuations.
While Credit Suisse is of the view that India’s global linkages are now higher than what it was in 2008, CLSA has cut its year-end Sensex target by nearly seven per cent to 18,200. Morgan Stanley is also overweight on all BRIC (Brazil, Russia, India and China) nations, except India.
“While the sharp correction in the market may suggest attractive valuations, we note the pace of corporate earnings downgrades has intensified in the recent results season,” said CLSA in its report released on Wednesday. “We lower 12-m Sensex target to 18,200 as we lower the target multiple to 13x to factor in the earnings downgrade risk,” it said.
India’s benchmark 30-share Sensex of the Bombay Stock Exchange (BSE) has declined more than 20 per cent from its peak in November last year, which technically means the index is in bear territory. It is also one of the worst performers among all leading equity indices this calendar year. On Thursday, the Sensex lost 139 points to close at 16,146.
This time around, analysts are even skeptical in betting on the “decoupling” theory that would help India in tiding over the global uncertainty in a relatively better manner. In 2008, when the sub-prime crisis was at its peak, a section of market analysts were of the view that Indian domestic consumption would help the economy in “decoupling” from the then global crisis.
“India’s global linkages are now higher than in 2008. Against the market consensus, we believe slowing global growth will expand the trade deficit and hurt GDP growth,” said Credit Suisse. It said corporate leverage has not improved, with companies with high leverage now more than in FY08. According to the Swiss major, around 50 per cent of the globally-linked Nifty EPS, which was largely uncut so far, is likely to see downward revisions.
Credit Suisse is also worried over the fact that Indian companies are highly leveraged at a time when globally companies are trying to reduce the extent of leverage. “While the world over the balance sheets of companies seems to have improved since the last crisis, the same has not happened in India. In fact, the number of companies with high leverage is now higher than it was in FY08.”
Last week, when the Indian indices lost ground, they registered their fourth straight weekly loss — the longest losing streak since the collapse of Lehman Brothers in 2008. According to Bloomberg, earnings for 46 per cent of Sensex companies missed analyst estimates in the June quarter. That compared with 33 per cent which lagged behind forecasts in the previous quarter.
This comes on the back of Morgan Stanley downgrading India in its latest report on the emerging markets. The report has maintained its underweight call on India and further reduced India’s ranking from 15 to 16. “India may not be able to respond given the starting point of a high fiscal deficit. In India, the government may focus more on boosting private sector confidence through policy reforms,” said the report.
Sebi may go slow on consent orders
Palak Shah & Ashish Rukhaiyar
Mumbai, 24 August 2011
Chairman reviewing process after indicating it seems arbitrary.
The consent order mechanism adopted by the Securities and Exchange Board of India (Sebi) in 2007 to settle cases with wrongdoers in the equity market would now take a back seat.
Sebi's new chairman, U K Sinha, has expressed disapproval of the ‘arbitrary’ way in which some serious cases were settled by the regulator in the past, said top officials. He is reviewing the process and it would take some time before consent orders are passed, say officials.
Under such orders, those charged with specific violations were let off by paying a settlement charge, without admitting or denying guilt. This helped Sebi rake in close to Rs 200 crore in just over four years. Even some of the serious market manipulation cases and those related to the Initial Public Offer scam were let off under consent terms.
Sinha believes many such orders “gave an impression to the outside world about arbitrariness and subjectivity”. Early in January this year, in one of the highest-ever consent charges imposed by Sebi, it directed the brass of Reliance Infrastructure and Reliance Natural Resources to pay Rs 50 crore as settlement charges.
Among others, SMC Global Securities and Action Financial Services had filed for consent application seven times. Mumbai-based Systematix Shares & Stocks had filed for the same six times. Chennai-based Shriram group had six group entities, including Pioneer Overseas and SR Real Estate Finance, and its chairman filed 14 consent applications for violating the takeover regulations.
Sebi officials say that in a 13-page letter dated July 8 to the union finance secretary, Sinha has said there is a "prevailing perception" that Sebi’s consent orders were "subjective" and “provide an escape route to offenders and the quality of orders is not high and is not transparent”.
The chairman came to this conclusion after conducting an internal study, not done earlier, on the way in which consent orders were passed by Sebi. According to reports, the study shows the orders had varied widely from member to issuing member. In quantum, it varied from 50 per cent to a third to a sixth, when the period of debarment of two to five years was calculated. In the cases of companies making misleading announcements, debarment has varied from six months to two years to five years. For non-compliance of summons cases, the amount has varied from Rs 1 lakh to Rs 20 lakh.
A wide variation, unaccompanied by sufficient reason, gives an impression to the outside world about arbitrariness and subjectivity. Sinha feels good enforcement action must have some element of predictability with regard to similar cases, based on quantum and degree of offence.
"While it is easier to frame broader guidelines, the authorities (Sebi) need to look if there has been any inconsistency in imposing penalties for a similar kind of offence," says R S Loona, managing partner of Alliance Corporate Lawyers. "There are instances wherein the penalty has been substantially different for similar offences. Some kind of formula or guidelines are required to be framed for uniformity," adds Loona, who had earlier served Sebi as executive director in the legal division.
The consent order system, under debate, is copied from the US. The logic being that the regulator avoids long-drawn litigation and monetary penalties were the biggest deterrents to financial crimes. Also, when coupled with the embarrassment of the charges being published on the regulator’s website, it would be a sufficient check.
The system, however, was subverted, as there was no attempt to link seriousness of charges to the amount paid and some wrongdoers were let off. Consent applications are cleared by Sebi’s internal panel and put before a high powered advisory committee (HPAC), headed by a retired HC judge. The orders are passed by a two-member bench of whole-time Sebi directors.
Legal experts say, the process of arriving at the consent amount is non-transparent and final orders are sketchy. Until December 31, 2010, Sebi received 2,220 applications, of which 1,023 were approved by HPAC. Of these, 982 were settled. These include 74 applications in respect of which consent orders were passed by the Securities Appellate Tribunal and the Supreme Court, where cases were pending.
Sebi has also rejected 743 applications and declined to pass orders for reasons like the terms of settlement proposed by the applicants were not commensurate with the acts of violation.
Mumbai, 24 August 2011
Chairman reviewing process after indicating it seems arbitrary.
The consent order mechanism adopted by the Securities and Exchange Board of India (Sebi) in 2007 to settle cases with wrongdoers in the equity market would now take a back seat.
Sebi's new chairman, U K Sinha, has expressed disapproval of the ‘arbitrary’ way in which some serious cases were settled by the regulator in the past, said top officials. He is reviewing the process and it would take some time before consent orders are passed, say officials.
Under such orders, those charged with specific violations were let off by paying a settlement charge, without admitting or denying guilt. This helped Sebi rake in close to Rs 200 crore in just over four years. Even some of the serious market manipulation cases and those related to the Initial Public Offer scam were let off under consent terms.
Sinha believes many such orders “gave an impression to the outside world about arbitrariness and subjectivity”. Early in January this year, in one of the highest-ever consent charges imposed by Sebi, it directed the brass of Reliance Infrastructure and Reliance Natural Resources to pay Rs 50 crore as settlement charges.
Among others, SMC Global Securities and Action Financial Services had filed for consent application seven times. Mumbai-based Systematix Shares & Stocks had filed for the same six times. Chennai-based Shriram group had six group entities, including Pioneer Overseas and SR Real Estate Finance, and its chairman filed 14 consent applications for violating the takeover regulations.
Sebi officials say that in a 13-page letter dated July 8 to the union finance secretary, Sinha has said there is a "prevailing perception" that Sebi’s consent orders were "subjective" and “provide an escape route to offenders and the quality of orders is not high and is not transparent”.
The chairman came to this conclusion after conducting an internal study, not done earlier, on the way in which consent orders were passed by Sebi. According to reports, the study shows the orders had varied widely from member to issuing member. In quantum, it varied from 50 per cent to a third to a sixth, when the period of debarment of two to five years was calculated. In the cases of companies making misleading announcements, debarment has varied from six months to two years to five years. For non-compliance of summons cases, the amount has varied from Rs 1 lakh to Rs 20 lakh.
A wide variation, unaccompanied by sufficient reason, gives an impression to the outside world about arbitrariness and subjectivity. Sinha feels good enforcement action must have some element of predictability with regard to similar cases, based on quantum and degree of offence.
"While it is easier to frame broader guidelines, the authorities (Sebi) need to look if there has been any inconsistency in imposing penalties for a similar kind of offence," says R S Loona, managing partner of Alliance Corporate Lawyers. "There are instances wherein the penalty has been substantially different for similar offences. Some kind of formula or guidelines are required to be framed for uniformity," adds Loona, who had earlier served Sebi as executive director in the legal division.
The consent order system, under debate, is copied from the US. The logic being that the regulator avoids long-drawn litigation and monetary penalties were the biggest deterrents to financial crimes. Also, when coupled with the embarrassment of the charges being published on the regulator’s website, it would be a sufficient check.
The system, however, was subverted, as there was no attempt to link seriousness of charges to the amount paid and some wrongdoers were let off. Consent applications are cleared by Sebi’s internal panel and put before a high powered advisory committee (HPAC), headed by a retired HC judge. The orders are passed by a two-member bench of whole-time Sebi directors.
Legal experts say, the process of arriving at the consent amount is non-transparent and final orders are sketchy. Until December 31, 2010, Sebi received 2,220 applications, of which 1,023 were approved by HPAC. Of these, 982 were settled. These include 74 applications in respect of which consent orders were passed by the Securities Appellate Tribunal and the Supreme Court, where cases were pending.
Sebi has also rejected 743 applications and declined to pass orders for reasons like the terms of settlement proposed by the applicants were not commensurate with the acts of violation.
BS People: Rahul Gupta
Saviour of Shinsei joins Ambit
Ashish Rukhaiyar
Mumbai, 23 August 2011
There are hardly any domestic broking entities that are building up an arsenal at a time when the markets are in the doldrums. So it came as a surprise to many when Ambit Holdings announced the high profile appointment of 51-year old Rahul Gupta as deputy group chief executive officer.
Gupta has worked in almost all the leading Asian economies and should help give insight to the private wealth and institutional equities businesses here. Gupta is also expected to bring international best practices into areas like risk, operations and technology, amongst others.
Gupta’s achievements in the financial services industry are well known. When he moved out of Shinsei Bank, Wall Street Journal, Asia wrote that without the initiative led by him to buyback capital at distressed levels Shinsei Bank could have lost an additional 95 billion yen (over $1 billion) in fiscal years 2008 and 2009.
Interestingly, when Gupta joined the board of Shinsei Bank, he earned the distinction of being the first Indian ever to be appointed to the board of directors of a Japanese bank. At Shinsei, he was handling a balance sheet in excess of $120 billion.
An alumni of Mumbai's Jamnalal Bajaj Institute of Management Studies, Gupta has also held senior positions at DBS Bank, Singapore, Deutsche Bank, India, HSBC, India and Societe Generale, India. He is also a senior advisor with the global consulting firm Oliver Wyman and a board member of SICOM, India representing J C Flowers & Co.
Gupta joins Ambit a time when domestic entities have been cutting costs and diversifying into new verticals in an attempt to stay afloat. While Ambit does boast of a notable institutional and private client business, the recent past has shown that the undercurrent has the potential to disturb the biggest of players. Certainly, Gupta will have his plate full.
Ashish Rukhaiyar
Mumbai, 23 August 2011
There are hardly any domestic broking entities that are building up an arsenal at a time when the markets are in the doldrums. So it came as a surprise to many when Ambit Holdings announced the high profile appointment of 51-year old Rahul Gupta as deputy group chief executive officer.
Gupta has worked in almost all the leading Asian economies and should help give insight to the private wealth and institutional equities businesses here. Gupta is also expected to bring international best practices into areas like risk, operations and technology, amongst others.
Gupta’s achievements in the financial services industry are well known. When he moved out of Shinsei Bank, Wall Street Journal, Asia wrote that without the initiative led by him to buyback capital at distressed levels Shinsei Bank could have lost an additional 95 billion yen (over $1 billion) in fiscal years 2008 and 2009.
Interestingly, when Gupta joined the board of Shinsei Bank, he earned the distinction of being the first Indian ever to be appointed to the board of directors of a Japanese bank. At Shinsei, he was handling a balance sheet in excess of $120 billion.
An alumni of Mumbai's Jamnalal Bajaj Institute of Management Studies, Gupta has also held senior positions at DBS Bank, Singapore, Deutsche Bank, India, HSBC, India and Societe Generale, India. He is also a senior advisor with the global consulting firm Oliver Wyman and a board member of SICOM, India representing J C Flowers & Co.
Gupta joins Ambit a time when domestic entities have been cutting costs and diversifying into new verticals in an attempt to stay afloat. While Ambit does boast of a notable institutional and private client business, the recent past has shown that the undercurrent has the potential to disturb the biggest of players. Certainly, Gupta will have his plate full.
Transaction charges may hit currency volumes
Palak Shah & Ashish Rukhaiyar
Mumbai, 17 August 2011
The exchange-traded currency derivatives market, which boasts of daily volumes in excess of Rs 50,000 crore, is expected to see a dip in the turnover. Market players said arbitrageurs who operate on wafer-thin margins will be affected once exchanges start levying transaction charges.
The National Stock Exchange (NSE), post a directive from the Competition Commission of India (CCI), has already announced that trades in the currency derivatives segment will attract transaction charges from August 22. United Stock Exchange (USE) and MCX Stock Exchange (MCX-SX) is expected to decide on the quantum of charges soon.
“Arbitrageurs were attracted to this segment because of zero charges, which is set to go now,” said a dealer with a domestic entity active in the currency derivatives segment. “Though STT (securities transaction tax) is still not applicable to currency trades, the transaction charges will greatly impact the thin margins. So volumes will obviously take a hit.”
According to market players, entities like SMC Global and Jaypee Capital are among the biggest players in the currency derivatives segment, which offers futures contract in rupee-dollar, rupee-yen, rupee-pound and rupee-euro along with options contracts in rupee-dollar. They further said arbitrageurs in the equity derivatives have almost been forced to shut shop due to high trading costs.
Data compiled by the BS Research Bureau showed the average daily turnover in the currency derivatives segment is in excess of Rs 72,000 crore in August. In July, the daily average was around Rs 50,000 crore.
The segment, which was launched in 2009, saw a gradual increase in volumes as exchanges did not impose any kind of charges in their attempt to attract more players. A bitter fight between NSE and MCX-SX, however, saw the issue being challenged at CCI, which ruled that NSE should impose transaction charges.
“In deference to the order of Competition Commission of India against NSE and without prejudice to the rights and contentions of the exchange in the matter, it has been decided to levy transaction charges in the currency derivatives segment,” the exchange said in a circular last week.
NSE said the members will have to pay between Rs 1 and Rs 1.15 for every Rs 1,00,000 turnover in the currency futures segment. In addition, five paise per lakh will be charged towards NSE investor protection fund trust. On currency option contracts, members will pay a transaction fee between Rs 30 and Rs 40 on every Rs 1,00,000 of premium payable. A premium of Rs 2 per Rs 1,00,000 will go towards investor protection fund.
A senior official from USE said “exchange officials will meet soon to decide on the quantum of transaction charges” for the currency derivatives segment. MCX-SX, which forced NSE to levy charges, has welcomed the move terming it “positive” for the “development of the currency derivatives market”.
A fall in volumes, however, will be bad news for market players who are already bearing the brunt of a growing rupee market in Dubai. The rupee-dollar futures contracts generate daily average trades of around Rs 1,500 crore on DGCX.
Volumes are hitting new records every month and rupee-dollar contracts have become the fastest growing derivative instruments on DGCX with a rise of over 16 times in 2011, compared to last year. The Indian currency contracts account for 60 per cent of the total trading volumes on DGCX and 90 per cent of the overall currency futures segment.
Mumbai, 17 August 2011
The exchange-traded currency derivatives market, which boasts of daily volumes in excess of Rs 50,000 crore, is expected to see a dip in the turnover. Market players said arbitrageurs who operate on wafer-thin margins will be affected once exchanges start levying transaction charges.
The National Stock Exchange (NSE), post a directive from the Competition Commission of India (CCI), has already announced that trades in the currency derivatives segment will attract transaction charges from August 22. United Stock Exchange (USE) and MCX Stock Exchange (MCX-SX) is expected to decide on the quantum of charges soon.
“Arbitrageurs were attracted to this segment because of zero charges, which is set to go now,” said a dealer with a domestic entity active in the currency derivatives segment. “Though STT (securities transaction tax) is still not applicable to currency trades, the transaction charges will greatly impact the thin margins. So volumes will obviously take a hit.”
According to market players, entities like SMC Global and Jaypee Capital are among the biggest players in the currency derivatives segment, which offers futures contract in rupee-dollar, rupee-yen, rupee-pound and rupee-euro along with options contracts in rupee-dollar. They further said arbitrageurs in the equity derivatives have almost been forced to shut shop due to high trading costs.
Data compiled by the BS Research Bureau showed the average daily turnover in the currency derivatives segment is in excess of Rs 72,000 crore in August. In July, the daily average was around Rs 50,000 crore.
The segment, which was launched in 2009, saw a gradual increase in volumes as exchanges did not impose any kind of charges in their attempt to attract more players. A bitter fight between NSE and MCX-SX, however, saw the issue being challenged at CCI, which ruled that NSE should impose transaction charges.
“In deference to the order of Competition Commission of India against NSE and without prejudice to the rights and contentions of the exchange in the matter, it has been decided to levy transaction charges in the currency derivatives segment,” the exchange said in a circular last week.
NSE said the members will have to pay between Rs 1 and Rs 1.15 for every Rs 1,00,000 turnover in the currency futures segment. In addition, five paise per lakh will be charged towards NSE investor protection fund trust. On currency option contracts, members will pay a transaction fee between Rs 30 and Rs 40 on every Rs 1,00,000 of premium payable. A premium of Rs 2 per Rs 1,00,000 will go towards investor protection fund.
A senior official from USE said “exchange officials will meet soon to decide on the quantum of transaction charges” for the currency derivatives segment. MCX-SX, which forced NSE to levy charges, has welcomed the move terming it “positive” for the “development of the currency derivatives market”.
A fall in volumes, however, will be bad news for market players who are already bearing the brunt of a growing rupee market in Dubai. The rupee-dollar futures contracts generate daily average trades of around Rs 1,500 crore on DGCX.
Volumes are hitting new records every month and rupee-dollar contracts have become the fastest growing derivative instruments on DGCX with a rise of over 16 times in 2011, compared to last year. The Indian currency contracts account for 60 per cent of the total trading volumes on DGCX and 90 per cent of the overall currency futures segment.
Investors stay away from 91-day t-bill derivatives
Ashish Rukhaiyar & Abhijit Lele
Mumbai, 4 August 2011
The 91-day treasury bill (t-bill) futures contract, launched a month before, appears to be losing favour with investors. The volumes are down to a pittance as major institutional entities, including banks, are still shying away from the segment. The current market condition is also not conducive for taking a directional call on the interest rates, say experts.
The National Stock Exchange (NSE) launched 91-day t-bill futures contracts on July 4 and the first day saw turnover in excess of Rs 730 crore. The next couple of days also saw the volumes staying above the Rs 300-crore mark. The past few days, however, have seen the volume dropping to one-tenth of the initial days.
On August 1, the volume was a paltry Rs 14.70 crore — the lowest since launch. On most days in the recent past, the volumes have been in the range of Rs 20-40 crore. The underlying market, meanwhile, saw a volume of Rs 740 crore and Rs 175 crore on August 2 and August 3, respectively, according to data available with Clearing Corporation of India.
Corporate houses, which deal in floating rate bonds, are expected to use this instrument to hedge against interest rate volatility. Even the mutual fund industry, which has a lot of debt funds, can use futures on 91-day t-bill for hedging purposes.
Banks, however, are expected to be the biggest user as they invest significantly in t-bill as part of their treasury operations. Experts, interestingly, say while the product does not suffer from any inherent flaw, the market condition currently is not ripe for taking a directional call on interest rates.
“Trading has not picked up in the current interest rate environment as the yields have only moved up and players are unable to take call on future. For trading momentum two way quotes are necessary,” says T S Srinivasan, general manager and head of treasury, Indian Overseas Bank. Another head of treasury with a medium-sized private bank said future contracts offer hedge against rate risk.
“Players will be inclined take a cover only when there is substantial upheaval in the interest rate. At present, the expectation is of steady upward rise in yields so less reason to buy future on 91-day bill. Also, if one takes cover, the upside gain is limited.” he explained.
The stock exchange, meanwhile, is firing all cylinders to convince more and more players to trade in the instrument, which was seen as a probable game-changer for the interest-rate futures (IRF) segment. NSE has plans to organise awareness seminars across the country in the near future.
“The product will become liquid only when the members are told how to use this product or how to trade in it,” said a senior NSE official. “What is lacking is market development and knowledge. We will conduct seminars to educate our members,” he added.
The IRF segment was launched in 2009 with futures on 10-year government bonds. The contracts were allowed to be settled with delivery of government securities with a tenor between nine and 12 years. The segment, however, failed to enthuse market participants with the biggest fear being that of dumping of illiquid bonds. Market players want the entire segment to be moved to cash-settlement basis, a demand that the Securities and Exchange Board of India is looking into.
Mumbai, 4 August 2011
The 91-day treasury bill (t-bill) futures contract, launched a month before, appears to be losing favour with investors. The volumes are down to a pittance as major institutional entities, including banks, are still shying away from the segment. The current market condition is also not conducive for taking a directional call on the interest rates, say experts.
The National Stock Exchange (NSE) launched 91-day t-bill futures contracts on July 4 and the first day saw turnover in excess of Rs 730 crore. The next couple of days also saw the volumes staying above the Rs 300-crore mark. The past few days, however, have seen the volume dropping to one-tenth of the initial days.
On August 1, the volume was a paltry Rs 14.70 crore — the lowest since launch. On most days in the recent past, the volumes have been in the range of Rs 20-40 crore. The underlying market, meanwhile, saw a volume of Rs 740 crore and Rs 175 crore on August 2 and August 3, respectively, according to data available with Clearing Corporation of India.
Corporate houses, which deal in floating rate bonds, are expected to use this instrument to hedge against interest rate volatility. Even the mutual fund industry, which has a lot of debt funds, can use futures on 91-day t-bill for hedging purposes.
Banks, however, are expected to be the biggest user as they invest significantly in t-bill as part of their treasury operations. Experts, interestingly, say while the product does not suffer from any inherent flaw, the market condition currently is not ripe for taking a directional call on interest rates.
“Trading has not picked up in the current interest rate environment as the yields have only moved up and players are unable to take call on future. For trading momentum two way quotes are necessary,” says T S Srinivasan, general manager and head of treasury, Indian Overseas Bank. Another head of treasury with a medium-sized private bank said future contracts offer hedge against rate risk.
“Players will be inclined take a cover only when there is substantial upheaval in the interest rate. At present, the expectation is of steady upward rise in yields so less reason to buy future on 91-day bill. Also, if one takes cover, the upside gain is limited.” he explained.
The stock exchange, meanwhile, is firing all cylinders to convince more and more players to trade in the instrument, which was seen as a probable game-changer for the interest-rate futures (IRF) segment. NSE has plans to organise awareness seminars across the country in the near future.
“The product will become liquid only when the members are told how to use this product or how to trade in it,” said a senior NSE official. “What is lacking is market development and knowledge. We will conduct seminars to educate our members,” he added.
The IRF segment was launched in 2009 with futures on 10-year government bonds. The contracts were allowed to be settled with delivery of government securities with a tenor between nine and 12 years. The segment, however, failed to enthuse market participants with the biggest fear being that of dumping of illiquid bonds. Market players want the entire segment to be moved to cash-settlement basis, a demand that the Securities and Exchange Board of India is looking into.
Q&A: Ratnesh Kumar, Standard Chartered Securities (India)
'Market unlikely to come out of range before year-end'
Ashish Rukhaiyar & Mehul Shah
Mumbai, 4 August 2011
Given the inflationary pressures and growth cooling off, there are some earning downgrades still left in the system, says Ratnesh Kumar,managing director and chief executive officer of Standard Chartered Securities (India). In an interview with Ashish Rukhaiyar and Mehul Shah, he says investors are waiting for the downgrades to happen so that the bad news is out of the way and long-term focus can return. Edited excerpts:
Not many companies are keen to come out with their IPOs. Why?
The beauty of equities is that the market determines everything. The issuances never drive the market down, it is the other way round. The pool of global investors looking at India is now deep enough and very large issuances can be done, provided the pricing is right and there is conviction in the minds of the investors. The reality is that India is one of the worst performing markets in the world in the current year. Also, rates have been going up, inflation is high and there has been bad press regarding scandals.
When do you expect the market to come out of the woods?
There are some global factors that are pretty big and unpredictable. It is not just about India and Indian inflation or growth. The best strategy is to first believe we will be a high growth economy and then look at specific opportunities. The year 2011 is unlikely to see the market move out of a range before the fag end. By November or December, it is possible to look at how exactly we have shaped up in terms of our own performance. We will be in the 5-10 per cent range of where we are.
Are foreign investors still wary of investing in Indian shares?
Generally, people are underweight. They want to see the roll-over happening in inflation, rates and some bottoming of the growth forecasts. There is a feeling among analysts that earnings projections are still too high. For this year, the consensus market earnings growth is 18 per cent. Given the inflationary pressures and growth cool off, there are some earning downgrades still left in the system. Investors, I think, are waiting for these things to happen, so that the bad news is out of the way and long-term focus can return.
Investors appear to be bullish on the consumption story and defensive stocks. Why?
When you have a lot of fundamental and performance headwinds, attention shifts to the so-called defensive sectors such as consumer and pharmaceutical. There is nothing called a place to hide. If one is negative on the market, the only place to hide is cash in the bank. Historically, whenever there is a correction, it is not that defensive sectors do not go down. Recently, we downgraded Nestle, which is an absolute fantastic consumer story, but the valuations are rich now due to the relative performance of the stock.
Which sectors and stocks do you like at present?
We still like consumer and pharma sectors as a whole, since we believe they will deliver growth and valuations are still attractive. Our focus has been HUL and Titan in that sector. Another sector we have liked for some time is telecom, which many have found odd. We think some of the irrational competition in telecom has subsided. Bharti and Idea are the two stocks that we have liked. Chances are that gradually, without touching headline tariffs, realisations will stabilise or even start inching up. I think the street could be positively surprised by the telecom sector. These are the kind of stories that we are urging investors to focus on. Select auto stocks like Bajaj and Maruti also look attractive. Within the IT space, we like HCL Technologies. We are also positive on niche sectors like ports.
Ashish Rukhaiyar & Mehul Shah
Mumbai, 4 August 2011
Given the inflationary pressures and growth cooling off, there are some earning downgrades still left in the system, says Ratnesh Kumar,managing director and chief executive officer of Standard Chartered Securities (India). In an interview with Ashish Rukhaiyar and Mehul Shah, he says investors are waiting for the downgrades to happen so that the bad news is out of the way and long-term focus can return. Edited excerpts:
Not many companies are keen to come out with their IPOs. Why?
The beauty of equities is that the market determines everything. The issuances never drive the market down, it is the other way round. The pool of global investors looking at India is now deep enough and very large issuances can be done, provided the pricing is right and there is conviction in the minds of the investors. The reality is that India is one of the worst performing markets in the world in the current year. Also, rates have been going up, inflation is high and there has been bad press regarding scandals.
When do you expect the market to come out of the woods?
There are some global factors that are pretty big and unpredictable. It is not just about India and Indian inflation or growth. The best strategy is to first believe we will be a high growth economy and then look at specific opportunities. The year 2011 is unlikely to see the market move out of a range before the fag end. By November or December, it is possible to look at how exactly we have shaped up in terms of our own performance. We will be in the 5-10 per cent range of where we are.
Are foreign investors still wary of investing in Indian shares?
Generally, people are underweight. They want to see the roll-over happening in inflation, rates and some bottoming of the growth forecasts. There is a feeling among analysts that earnings projections are still too high. For this year, the consensus market earnings growth is 18 per cent. Given the inflationary pressures and growth cool off, there are some earning downgrades still left in the system. Investors, I think, are waiting for these things to happen, so that the bad news is out of the way and long-term focus can return.
Investors appear to be bullish on the consumption story and defensive stocks. Why?
When you have a lot of fundamental and performance headwinds, attention shifts to the so-called defensive sectors such as consumer and pharmaceutical. There is nothing called a place to hide. If one is negative on the market, the only place to hide is cash in the bank. Historically, whenever there is a correction, it is not that defensive sectors do not go down. Recently, we downgraded Nestle, which is an absolute fantastic consumer story, but the valuations are rich now due to the relative performance of the stock.
Which sectors and stocks do you like at present?
We still like consumer and pharma sectors as a whole, since we believe they will deliver growth and valuations are still attractive. Our focus has been HUL and Titan in that sector. Another sector we have liked for some time is telecom, which many have found odd. We think some of the irrational competition in telecom has subsided. Bharti and Idea are the two stocks that we have liked. Chances are that gradually, without touching headline tariffs, realisations will stabilise or even start inching up. I think the street could be positively surprised by the telecom sector. These are the kind of stories that we are urging investors to focus on. Select auto stocks like Bajaj and Maruti also look attractive. Within the IT space, we like HCL Technologies. We are also positive on niche sectors like ports.
Pvt, foreign banks ramp up equity mkts teams
Somasroy Chakraborty, Mehul Shah & Ashish Rukhaiyar
Mumbai, 3 August 2011
See long-term opportunity in the Indian markets, hire at the top level for future requirements.
Foreign and private sector banks in India are strengthening their equity capital markets teams, with top level hires, at a time when the equity issuances by domestic companies are fading due to volatility in local stock markets.
Bankers and industry analysts say the hiring spree is based on future needs, as these lenders see an opportunity in the Indian equities markets in the long run.
“You need to have a basic conviction that India is going to be a long-term growth story and, in the short term, it may have some blips. You also need to ascertain whether you have an equities business set-up, which can compete with the best. Once you have these two convictions, this is clearly the best time to build your business,” Standard Chartered Securities’ India MD & CEO Ratnesh Kumar said.
Standard Chartered roped in A Rajagopal, former head of equity capital markets in India, towards the end of last year to set up the equity capital markets business of the bank here. Rajagopal is currently the managing director and head of equity capital markets for the bank’s South and Southeast Asia operations.
Standard Chartered Securities has also reinforced its equities team in the past 12 months, recruiting senior officials in institutional research and sales. The headcount in its research team has been now increased to 20 people.
Royal Bank of Scotland (RBS), which has decided to exit from its retail and commercial banking businesses in India, is also in the hiring mode and is expanding its equity markets’ team.
“We are fully focused with our debt and equity capital markets teams by way of advisory, capital markets and financing. These will be integral part of that service and we will look at engaging with clients,” RBS CEO for Singapore and Southeast Asia and head of global banking and markets in India, Madan Menon, told Business Standard in an interview earlier this month.
The bank has hired 10 people across its research and trading desks, including a new head for its equities business. "To the extent we need, we will make appropriate investments in this market. There will certainly be more hiring,” Menon says.
Even private sector banks are not far behind, with the country’s second-largest private bank, HDFC Bank, appointing Rakesh Singh as the head of its investment banking division earlier this year. Before this appointment, Singh was the managing director and co-head of financing advisory at Rothschild.
Following this appointment, HDFC Bank managed its first-ever equity issuance, when it got the mandate as the co-book running lead manager for Muthoot Finance’s initial public offer (IPO).
These recruitments are happening at a time when volatile share markets have hit India Inc’s share sale plans, estimated to be over Rs 30,000 crore for this year. Several big-ticket IPOs, like those of Jindal Power, Lodha Developers, Reliance Infratel and Sterlite Energy, have been deferred as investors’ appetite remains low and promoters are unwilling to pare stake at low valuations.
In the first seven months of this calendar year, the number of first-time public offers by Indian companies stood at 24, compared to 64 in the 2010 calendar year, data compiled from Prime Database by BS Research Bureau shows. Companies raised Rs 4,738.45 crore from IPOs till July this year, compared to Rs 37,534 crore mopped up in the period last year.
“Most of these banks have deep pockets and they are betting big on India for the long term. Hence, it is not surprising to see hiring for equity capital markets teams in these banks rising,” a banking analyst with a domestic brokerage says.
Mumbai, 3 August 2011
See long-term opportunity in the Indian markets, hire at the top level for future requirements.
Foreign and private sector banks in India are strengthening their equity capital markets teams, with top level hires, at a time when the equity issuances by domestic companies are fading due to volatility in local stock markets.
Bankers and industry analysts say the hiring spree is based on future needs, as these lenders see an opportunity in the Indian equities markets in the long run.
“You need to have a basic conviction that India is going to be a long-term growth story and, in the short term, it may have some blips. You also need to ascertain whether you have an equities business set-up, which can compete with the best. Once you have these two convictions, this is clearly the best time to build your business,” Standard Chartered Securities’ India MD & CEO Ratnesh Kumar said.
Standard Chartered roped in A Rajagopal, former head of equity capital markets in India, towards the end of last year to set up the equity capital markets business of the bank here. Rajagopal is currently the managing director and head of equity capital markets for the bank’s South and Southeast Asia operations.
Standard Chartered Securities has also reinforced its equities team in the past 12 months, recruiting senior officials in institutional research and sales. The headcount in its research team has been now increased to 20 people.
Royal Bank of Scotland (RBS), which has decided to exit from its retail and commercial banking businesses in India, is also in the hiring mode and is expanding its equity markets’ team.
“We are fully focused with our debt and equity capital markets teams by way of advisory, capital markets and financing. These will be integral part of that service and we will look at engaging with clients,” RBS CEO for Singapore and Southeast Asia and head of global banking and markets in India, Madan Menon, told Business Standard in an interview earlier this month.
The bank has hired 10 people across its research and trading desks, including a new head for its equities business. "To the extent we need, we will make appropriate investments in this market. There will certainly be more hiring,” Menon says.
Even private sector banks are not far behind, with the country’s second-largest private bank, HDFC Bank, appointing Rakesh Singh as the head of its investment banking division earlier this year. Before this appointment, Singh was the managing director and co-head of financing advisory at Rothschild.
Following this appointment, HDFC Bank managed its first-ever equity issuance, when it got the mandate as the co-book running lead manager for Muthoot Finance’s initial public offer (IPO).
These recruitments are happening at a time when volatile share markets have hit India Inc’s share sale plans, estimated to be over Rs 30,000 crore for this year. Several big-ticket IPOs, like those of Jindal Power, Lodha Developers, Reliance Infratel and Sterlite Energy, have been deferred as investors’ appetite remains low and promoters are unwilling to pare stake at low valuations.
In the first seven months of this calendar year, the number of first-time public offers by Indian companies stood at 24, compared to 64 in the 2010 calendar year, data compiled from Prime Database by BS Research Bureau shows. Companies raised Rs 4,738.45 crore from IPOs till July this year, compared to Rs 37,534 crore mopped up in the period last year.
“Most of these banks have deep pockets and they are betting big on India for the long term. Hence, it is not surprising to see hiring for equity capital markets teams in these banks rising,” a banking analyst with a domestic brokerage says.
Hawkish RBI makes FIIs nervous
Ashish Rukhaiyar
Mumbai, 28 July 2011
Remain bullish, though, on India’s long-term prospects.
Foreign institutional investors (FIIs), which have invested around $2 billion in Indian equities this year, seem to have taken serious note of the sharp increase in policy rates by the Reserve Bank of India (RBI) yesterday. While they remain bullish on India’s long-term prospects, they feel the recent rate increases by RBI have put the markets at an additional risk in the near term and delayed the break out from the current range.
On Tuesday, when RBI increased repo and reverse repo rates by 50 basis points (bps), the Sensex fell more than 350 points. This was primarily attributed to the surprise element as the markets were expecting a 25 bps increase. The 30-share index lost another 86 points on Wednesday and closed at 18,432.
“Today’s action in equity and rates markets following RBI’s hawkish stance suggests to us that the market will likely be extra sensitive to inflation readings in the coming months,” Nomura said in a note to clients on Tuesday. To this extent, we think the markets are at a risk for the next two-three months, it added.
Interestingly, while Nomura is worried about the market reaction to inflation numbers, finance minister Pranab Mukherjee has warned that inflation may not be less than 6-7 per cent at the end of the year even as the government and RBI are making efforts to fight the rise in prices.
According to Nomura, the “potential worst-case downside scenario” is in the range of “8-10 per cent” from the current levels. It says it will start buying aggressively if the market corrects 5 per cent. Market experts believe that 5,200 will be a good support level for the Nifty, which closed at 5,547 on Wednesday.
Nomura is not the only global institution which has taken a cautious stand after yesterday’s RBI action. Morgan Stanley went a step ahead and said the RBI move had “stymied” any probable breakout of the Nifty from its trading range.
“The case that may have been building for the Nifty to break out of its trading range since the fourth quarter of 2010 has probably been stymied by this move,” it said.
Morgan Stanley, however, remains a “buyer” of Indian equity with a 12- to 18-month investment horizon, adding that small- and mid-cap stocks are looking “more attractive” than the large caps. The global financial major is bullish on domestic cyclicals such as consumer discretionary and industrials.
Goldman Sachs, meanwhile, is of the view that the equity market is still amid “choppy waters” and that stocks are “not yet ready for an upturn.” It, however, adds that the repo rate has “likely peaked for now” and “would remain stable before falling marginally by December 2012 to around 7.5 per cent”.
“While we do not expect inflation/rates to collapse, we believe stocks may start outperforming as rates/inflation decline, even though the bottom is at higher levels vis-à-vis the past cycles,” said Goldman Sachs. It expects inflation to bottom out at 4.9-5.1 per cent in the third quarter of 2012-13.
Mumbai, 28 July 2011
Remain bullish, though, on India’s long-term prospects.
Foreign institutional investors (FIIs), which have invested around $2 billion in Indian equities this year, seem to have taken serious note of the sharp increase in policy rates by the Reserve Bank of India (RBI) yesterday. While they remain bullish on India’s long-term prospects, they feel the recent rate increases by RBI have put the markets at an additional risk in the near term and delayed the break out from the current range.
On Tuesday, when RBI increased repo and reverse repo rates by 50 basis points (bps), the Sensex fell more than 350 points. This was primarily attributed to the surprise element as the markets were expecting a 25 bps increase. The 30-share index lost another 86 points on Wednesday and closed at 18,432.
“Today’s action in equity and rates markets following RBI’s hawkish stance suggests to us that the market will likely be extra sensitive to inflation readings in the coming months,” Nomura said in a note to clients on Tuesday. To this extent, we think the markets are at a risk for the next two-three months, it added.
Interestingly, while Nomura is worried about the market reaction to inflation numbers, finance minister Pranab Mukherjee has warned that inflation may not be less than 6-7 per cent at the end of the year even as the government and RBI are making efforts to fight the rise in prices.
According to Nomura, the “potential worst-case downside scenario” is in the range of “8-10 per cent” from the current levels. It says it will start buying aggressively if the market corrects 5 per cent. Market experts believe that 5,200 will be a good support level for the Nifty, which closed at 5,547 on Wednesday.
Nomura is not the only global institution which has taken a cautious stand after yesterday’s RBI action. Morgan Stanley went a step ahead and said the RBI move had “stymied” any probable breakout of the Nifty from its trading range.
“The case that may have been building for the Nifty to break out of its trading range since the fourth quarter of 2010 has probably been stymied by this move,” it said.
Morgan Stanley, however, remains a “buyer” of Indian equity with a 12- to 18-month investment horizon, adding that small- and mid-cap stocks are looking “more attractive” than the large caps. The global financial major is bullish on domestic cyclicals such as consumer discretionary and industrials.
Goldman Sachs, meanwhile, is of the view that the equity market is still amid “choppy waters” and that stocks are “not yet ready for an upturn.” It, however, adds that the repo rate has “likely peaked for now” and “would remain stable before falling marginally by December 2012 to around 7.5 per cent”.
“While we do not expect inflation/rates to collapse, we believe stocks may start outperforming as rates/inflation decline, even though the bottom is at higher levels vis-à-vis the past cycles,” said Goldman Sachs. It expects inflation to bottom out at 4.9-5.1 per cent in the third quarter of 2012-13.
Brokerages cut a sorry figure with Q1 numbers
Ashish Rukhaiyar
Mumbai, 26 July 2011
The initial set of quarterly numbers announced by some of the listed broking companies have shown that the industry is going through a rough phase. More important, the entities are sounding bearish on the near-term outlook, with the wait for positive triggers getting longer.
Today, Edelweiss Capital – one of the largest domestic brokerage entities – announced its first quarter numbers for the current financial year. The net profit at Rs 33 crore is down 23 per cent, compared to Rs 43 crore for the previous quarter ended March 31. The total income showed only a marginal increase of two per cent at Rs 396 crore. For the previous quarter, the income was pegged at Rs 386 crore.
The past few months have seen the equity markets trade in extreme volatile conditions. Indian indices have been one of the worst performers among most benchmark indices this calendar year. Though foreign institutional investors (FIIs) have been net buyers at a little over $2 billion in CY11, negative factors, both on the domestic and global front, have been affecting the market sentiments.
“The industry is facing the pain of a slowdown. Q1 was one of the worst quarters for the industry,” said Himanshu Kaji, chief operating officer (COO), Edelweiss Capital.
Edelweiss is not a stand-alone case. Early this month, Geojit BNP Paribas Financial Services – a significant player in southern India and West Asia – saw its income dip by 3.54 per cent, even as its profit rising 47 per cent. The net profit, however, saw a 30 per cent fall to Rs 4.3 crore for the quarter ended June 30, compared to the corresponding quarter of the previous financial year. The consolidated revenues also declined by four per cent on a year-on-year basis.
BNP managing director C J George attributed the fall in profitability to the adverse stock market conditions caused by the high inflation and high interest environment. The volatile and uncertain environment has also forced India Inc postpone its capital raising plans.
Edelweiss saw income from broking, investment banking, asset management and distribution businesses fall 24 per cent quarter-on-quarter. The brokerage attributed the fall to “considerable slowdown in the capital markets activity in the recent past”.
For Motilal Oswal Financial Services, investment banking fees was down 60 per cent in Q1FY12, compared to the previous quarter. Broking and related revenues were lower by 12 per cent. On the outlook front, Rashesh Shah, chairman and chief operating officer, Edelweiss Capital, expects “the challenging environment to persist in the next two or three quarters”.
Mumbai, 26 July 2011
The initial set of quarterly numbers announced by some of the listed broking companies have shown that the industry is going through a rough phase. More important, the entities are sounding bearish on the near-term outlook, with the wait for positive triggers getting longer.
Today, Edelweiss Capital – one of the largest domestic brokerage entities – announced its first quarter numbers for the current financial year. The net profit at Rs 33 crore is down 23 per cent, compared to Rs 43 crore for the previous quarter ended March 31. The total income showed only a marginal increase of two per cent at Rs 396 crore. For the previous quarter, the income was pegged at Rs 386 crore.
The past few months have seen the equity markets trade in extreme volatile conditions. Indian indices have been one of the worst performers among most benchmark indices this calendar year. Though foreign institutional investors (FIIs) have been net buyers at a little over $2 billion in CY11, negative factors, both on the domestic and global front, have been affecting the market sentiments.
“The industry is facing the pain of a slowdown. Q1 was one of the worst quarters for the industry,” said Himanshu Kaji, chief operating officer (COO), Edelweiss Capital.
Edelweiss is not a stand-alone case. Early this month, Geojit BNP Paribas Financial Services – a significant player in southern India and West Asia – saw its income dip by 3.54 per cent, even as its profit rising 47 per cent. The net profit, however, saw a 30 per cent fall to Rs 4.3 crore for the quarter ended June 30, compared to the corresponding quarter of the previous financial year. The consolidated revenues also declined by four per cent on a year-on-year basis.
BNP managing director C J George attributed the fall in profitability to the adverse stock market conditions caused by the high inflation and high interest environment. The volatile and uncertain environment has also forced India Inc postpone its capital raising plans.
Edelweiss saw income from broking, investment banking, asset management and distribution businesses fall 24 per cent quarter-on-quarter. The brokerage attributed the fall to “considerable slowdown in the capital markets activity in the recent past”.
For Motilal Oswal Financial Services, investment banking fees was down 60 per cent in Q1FY12, compared to the previous quarter. Broking and related revenues were lower by 12 per cent. On the outlook front, Rashesh Shah, chairman and chief operating officer, Edelweiss Capital, expects “the challenging environment to persist in the next two or three quarters”.
Q&A: Joe Zidle, Bank of America Merrill Lynch
'Weak US economy providing India liquidity'
Ashish Rukhaiyar
Mumbai, 20 July 2011
A weak global economy cannot be as bad for India or China as it is generally perceived, says Joe Zidle, director and global wealth management investment strategist at Bank of America Merrill Lynch. Zidle, who has also served in the US Army reserves’ Military Intelligence Unit, tells Ashish Rukhaiyar that Indian markets will peak in 2011. Edited Excerpts:
Given the current equity market scenario, do you think emerging market economies have an upper edge over developed nations?
Global equities are in the midst of a correction and our view is that this correction is happening in an environment where equities will rebound. We will finish the year higher, with equities being the number one performing asset class, followed by commodities, bonds and cash. We are overweight on emerging markets (Brazil, Russia, India, China) compared to developed markets, because the strongest economic growth is coming from here. We think the global economy will grow this year by 4.1 per cent, with the driver being emerging markets at over six per cent. Developed markets like the US, Europe and Japan will grow, may be, at two per cent.
During the 2008 crisis, analysts spoke about decoupling factors that would benefit countries like India. Do you think decoupling actually works?
India, China and some of the other emerging markets never even had a recession. The US and Europe have to keep their rates low as they have to revive the economy. What this means for a country like India is that it will provide liquidity. US companies are using this liquidity by investing in India. So, the problem with US policymakers is that they can stimulate growth but cannot control where that growth happens. This is not exactly decoupling but a weaker US and European economy will continue providing liquidity to the Indian economy.
India has been one of the worst performing markets in the current year. What are global investors, who have access to markets worldover, talking about India?
One of the primary concerns would be high oil prices, followed by high commodity prices. So, global investors are looking at the role higher oil prices will play and, in turn, how they drive inflation. Fifteen of 21 central banks of emerging markets have raised interest rates in the last six months. Our view is that India does have a better grip on inflation, as the central bank (RBI) moved early and fast by hiking rates. So our view is that the India and China story will be peaking in 2011 and then begin to come down.
Are global investors looking at India in a significant manner while deciding on their emerging market allocation?
First, investors need to get the economic outlook right. According to our estimates, in 2011, 55 cents of every new dollar of growth would come from the BRIC countries. The share of the US would be only 14 cents. Now, there are two ways in which global investors can take exposure to India. One is direct exposure and the other is US multinationals investing in India. Our view is that such entities would continue to be attracted towards India till the time the rate hike cycle is complete.
Ashish Rukhaiyar
Mumbai, 20 July 2011
A weak global economy cannot be as bad for India or China as it is generally perceived, says Joe Zidle, director and global wealth management investment strategist at Bank of America Merrill Lynch. Zidle, who has also served in the US Army reserves’ Military Intelligence Unit, tells Ashish Rukhaiyar that Indian markets will peak in 2011. Edited Excerpts:
Given the current equity market scenario, do you think emerging market economies have an upper edge over developed nations?
Global equities are in the midst of a correction and our view is that this correction is happening in an environment where equities will rebound. We will finish the year higher, with equities being the number one performing asset class, followed by commodities, bonds and cash. We are overweight on emerging markets (Brazil, Russia, India, China) compared to developed markets, because the strongest economic growth is coming from here. We think the global economy will grow this year by 4.1 per cent, with the driver being emerging markets at over six per cent. Developed markets like the US, Europe and Japan will grow, may be, at two per cent.
During the 2008 crisis, analysts spoke about decoupling factors that would benefit countries like India. Do you think decoupling actually works?
India, China and some of the other emerging markets never even had a recession. The US and Europe have to keep their rates low as they have to revive the economy. What this means for a country like India is that it will provide liquidity. US companies are using this liquidity by investing in India. So, the problem with US policymakers is that they can stimulate growth but cannot control where that growth happens. This is not exactly decoupling but a weaker US and European economy will continue providing liquidity to the Indian economy.
India has been one of the worst performing markets in the current year. What are global investors, who have access to markets worldover, talking about India?
One of the primary concerns would be high oil prices, followed by high commodity prices. So, global investors are looking at the role higher oil prices will play and, in turn, how they drive inflation. Fifteen of 21 central banks of emerging markets have raised interest rates in the last six months. Our view is that India does have a better grip on inflation, as the central bank (RBI) moved early and fast by hiking rates. So our view is that the India and China story will be peaking in 2011 and then begin to come down.
Are global investors looking at India in a significant manner while deciding on their emerging market allocation?
First, investors need to get the economic outlook right. According to our estimates, in 2011, 55 cents of every new dollar of growth would come from the BRIC countries. The share of the US would be only 14 cents. Now, there are two ways in which global investors can take exposure to India. One is direct exposure and the other is US multinationals investing in India. Our view is that such entities would continue to be attracted towards India till the time the rate hike cycle is complete.
Brokerages: forced to adapt
Current economic scene forcing tough changes in biz
Palak Shah, Ashish Rukhaiyar & Mehul Shah
Mumbai, 19 July 2011
Declining commissions, stagnant markets and increased foreign competition have forced brokerages to enter into marriages as well as new businesses.
For a quick insight into fundamental changes roiling the brokerage industry, consider Edelweiss, a stalwart of the broking arena, with 70% of its business originating in bread-and-butter equities.
“At least fifty per cent of our business now will come through the retail segment in many asset classes," says Shah. “We are diversifying from a capital markets company to a full-scale financial services firm,” said Rashesh Shah, chairman of Mumbai based Edelweiss.
Edelweiss’s revenues will now come from commodity, bond, housing, finance and life insurance businesses. “We are infusing around Rs 550 crore in the insurance business and our partner Tokio Marine will invest around Rs 1,200 crore,” says Shah. Edelweiss is planning to build a Rs 4,000 crore to Rs 5,000 crore asset book in the next three to four years in the housing finance business alone.
What is happening with Edelweiss is an indication of a major change of seismic proportions that is rocking the brokerage business in India. Pushed into a corner, with their backs to the walls because of a recent bear market, dwindling commission pools, abysmal trading volumes and foreign competition , leading brokerages are trying to morph into all-service animals while standalone mid- and small-size brokerages are being forced to consolidate, thereby fundamentally altering the brokerage landscape.
TROUBLED WATERS
One of the big drivers of this change is a decline in the broking industry’s commission pool. Broking commission is divided amongst 15,000 brokers and over 76,000 Sebi registered sub-brokers in the country. Amongst these, there are over 1,200 active brokers on NSE and over 600 on BSE alone.
Problem is, over the past three years, the size of the commission pool for stockbrokers has not grown at all, although operational costs and competition have gone up. From Rs 15,000 crore in 2008, commissions went down to around Rs 9,000 crore a year later and now hovers in the Rs 10,000 to Rs 12,000 crore range.
Ditto for the investment banking business. During 2007-08, the commission pool in investment banking was around Rs 4,000 crore but in 2010—which was a good year for the business—the commission pool was not more than Rs 3,500 crore.
Not surprisingly, there is a mad rush to grow broking revenues from the retail segment, as unlike the wholesale business, the retail business is more sustainable. However, there is a larger underlying problem dragging the industry down—which is that the entire capital market sector in the country is struggling for growth. It grew 70 per cent annually from 2004 to 2008 but has been stagnant since. Brokers say that a similar period of high growth will only take place in three or four years.
CONSOLIDATION FEVER
“It is mainly the mid level and stand-alone broking firms, which need cash flow,” says Shashi Bhushan, chief executive officer of Way2Wealth. “Otherwise, while large brokers are surviving on strong balance-sheets, business for extremely small brokers comes from very strong personal relations,” he adds.
Emblematic of the trend of consolidation is the 50% acquisition of Mumbai-based Techno Shares and Stock by Way2Wealth, the financial services arm of Coffee Day Holding. “It is an effective cost management strategy as equity broking commissions are under pressure. It is our third such deal to scale the retail segment. However, Techno also has a strong institutional desk, where we see synergy,” says Bhushan. “This kind of partnerships will be the way forward for many brokers,” said Jaideep Mehta, chief executive officer of Techno Shares.
Another south Mumbai-based outfit, Networth Stock Broking, announced its decision to merge with Ahmedabad’s Monarch Projects. Networth was started by old market player S P Jain. It had Kolkata-based Ajay Kayan as its shareholder, who pitched himself against big bull Harshad Mehta in the late 1990s.
Others are joining the stampede to ally with the best partners they can find. Capital and Kishore Biyani’s Future Group, too, are in the process adding more clients. Health care major Piramal Group is eying a large Mumbai-based financial services firm, say sources.
High profile deals that the sector has witnessed in the past couple of years include HSBC buying IL&FS Investsmart, Standard Chartered Bank acquiring UTI Securities, Aditya Birla taking over Chennai-based Apollo Sindhoori and Edelweiss Securities buying Anagram Securities.
Like Edelweiss, Aditya Birla group too has an insurance business and they may look to cross sell products through their various broking branches. Axis Bank, which took over Enam Securities recently, is also expected to unveil its strategy soon. It has already launched Axis Direct, an internet broking platform.
PROSPECTING FOR BUSINESS
Anxious to add new business lines in a bleak business climate, a number of Indian stock brokerages have also forayed into real estate broking. Mumbai's India Infoline and Anand Rathi Financial have got in to commercial and residential real estate broking.
Hyderabad-based Karvy Group has revamped its real estate broking division, Geojit BNP Paribas Property Services, a division of Kochi-based Geojit BNP Paribas Financial Services, is providing commercial and real estate broking in Kochi at present and plans to expand to other major South Indian cities by the year-end.
“We think a large part of our economic advantage will come when we will be able to sell housing loans and insurance products to our capital market customers and vice-versa. This is cost advantage. So, in India, people will have to learn to cross-sell. Why shouldn’t your broker end up being your advisor?” asks Shah.
THE OVERSEAS SQUEEZE
If the business climate today weren’t tough enough, foreign players are expanding their operations in India, snapping up clients and putting more pressure on the equities business. Some of the global majors like Daiwa, Jefferies, Barclays, RBS, Espirito Santo and Newedge have made many key appointments in the recent past.
“As the market matures in any country, we have seen international brokerages taking a major share of the equities business, while local firms become more specialised players,” says Nick Paulson-Ellis, country head – India, Espirito Santo Securities.
Daiwa Securities has hired a number of people in the last few months for its equities team in India and is in the process of adding more specialists in verticals like sales, trading and research. Last month, Jefferies set up its full-service equity broking business in India.
Espirito Santo Securities is planning to hire 15-20 people across research, sales and trading. Barclays Capital expects to set up equities sales, trading and research businesses in India by the end of 2011 and plans to hire more staff. British bank RBS has also been aggressively expanding its Indian equity team.
All of this is hardly good news for any already embattled sector.
Palak Shah, Ashish Rukhaiyar & Mehul Shah
Mumbai, 19 July 2011
Declining commissions, stagnant markets and increased foreign competition have forced brokerages to enter into marriages as well as new businesses.
For a quick insight into fundamental changes roiling the brokerage industry, consider Edelweiss, a stalwart of the broking arena, with 70% of its business originating in bread-and-butter equities.
“At least fifty per cent of our business now will come through the retail segment in many asset classes," says Shah. “We are diversifying from a capital markets company to a full-scale financial services firm,” said Rashesh Shah, chairman of Mumbai based Edelweiss.
Edelweiss’s revenues will now come from commodity, bond, housing, finance and life insurance businesses. “We are infusing around Rs 550 crore in the insurance business and our partner Tokio Marine will invest around Rs 1,200 crore,” says Shah. Edelweiss is planning to build a Rs 4,000 crore to Rs 5,000 crore asset book in the next three to four years in the housing finance business alone.
What is happening with Edelweiss is an indication of a major change of seismic proportions that is rocking the brokerage business in India. Pushed into a corner, with their backs to the walls because of a recent bear market, dwindling commission pools, abysmal trading volumes and foreign competition , leading brokerages are trying to morph into all-service animals while standalone mid- and small-size brokerages are being forced to consolidate, thereby fundamentally altering the brokerage landscape.
TROUBLED WATERS
One of the big drivers of this change is a decline in the broking industry’s commission pool. Broking commission is divided amongst 15,000 brokers and over 76,000 Sebi registered sub-brokers in the country. Amongst these, there are over 1,200 active brokers on NSE and over 600 on BSE alone.
Problem is, over the past three years, the size of the commission pool for stockbrokers has not grown at all, although operational costs and competition have gone up. From Rs 15,000 crore in 2008, commissions went down to around Rs 9,000 crore a year later and now hovers in the Rs 10,000 to Rs 12,000 crore range.
Ditto for the investment banking business. During 2007-08, the commission pool in investment banking was around Rs 4,000 crore but in 2010—which was a good year for the business—the commission pool was not more than Rs 3,500 crore.
Not surprisingly, there is a mad rush to grow broking revenues from the retail segment, as unlike the wholesale business, the retail business is more sustainable. However, there is a larger underlying problem dragging the industry down—which is that the entire capital market sector in the country is struggling for growth. It grew 70 per cent annually from 2004 to 2008 but has been stagnant since. Brokers say that a similar period of high growth will only take place in three or four years.
CONSOLIDATION FEVER
“It is mainly the mid level and stand-alone broking firms, which need cash flow,” says Shashi Bhushan, chief executive officer of Way2Wealth. “Otherwise, while large brokers are surviving on strong balance-sheets, business for extremely small brokers comes from very strong personal relations,” he adds.
Emblematic of the trend of consolidation is the 50% acquisition of Mumbai-based Techno Shares and Stock by Way2Wealth, the financial services arm of Coffee Day Holding. “It is an effective cost management strategy as equity broking commissions are under pressure. It is our third such deal to scale the retail segment. However, Techno also has a strong institutional desk, where we see synergy,” says Bhushan. “This kind of partnerships will be the way forward for many brokers,” said Jaideep Mehta, chief executive officer of Techno Shares.
Another south Mumbai-based outfit, Networth Stock Broking, announced its decision to merge with Ahmedabad’s Monarch Projects. Networth was started by old market player S P Jain. It had Kolkata-based Ajay Kayan as its shareholder, who pitched himself against big bull Harshad Mehta in the late 1990s.
Others are joining the stampede to ally with the best partners they can find. Capital and Kishore Biyani’s Future Group, too, are in the process adding more clients. Health care major Piramal Group is eying a large Mumbai-based financial services firm, say sources.
High profile deals that the sector has witnessed in the past couple of years include HSBC buying IL&FS Investsmart, Standard Chartered Bank acquiring UTI Securities, Aditya Birla taking over Chennai-based Apollo Sindhoori and Edelweiss Securities buying Anagram Securities.
Like Edelweiss, Aditya Birla group too has an insurance business and they may look to cross sell products through their various broking branches. Axis Bank, which took over Enam Securities recently, is also expected to unveil its strategy soon. It has already launched Axis Direct, an internet broking platform.
PROSPECTING FOR BUSINESS
Anxious to add new business lines in a bleak business climate, a number of Indian stock brokerages have also forayed into real estate broking. Mumbai's India Infoline and Anand Rathi Financial have got in to commercial and residential real estate broking.
Hyderabad-based Karvy Group has revamped its real estate broking division, Geojit BNP Paribas Property Services, a division of Kochi-based Geojit BNP Paribas Financial Services, is providing commercial and real estate broking in Kochi at present and plans to expand to other major South Indian cities by the year-end.
“We think a large part of our economic advantage will come when we will be able to sell housing loans and insurance products to our capital market customers and vice-versa. This is cost advantage. So, in India, people will have to learn to cross-sell. Why shouldn’t your broker end up being your advisor?” asks Shah.
THE OVERSEAS SQUEEZE
If the business climate today weren’t tough enough, foreign players are expanding their operations in India, snapping up clients and putting more pressure on the equities business. Some of the global majors like Daiwa, Jefferies, Barclays, RBS, Espirito Santo and Newedge have made many key appointments in the recent past.
“As the market matures in any country, we have seen international brokerages taking a major share of the equities business, while local firms become more specialised players,” says Nick Paulson-Ellis, country head – India, Espirito Santo Securities.
Daiwa Securities has hired a number of people in the last few months for its equities team in India and is in the process of adding more specialists in verticals like sales, trading and research. Last month, Jefferies set up its full-service equity broking business in India.
Espirito Santo Securities is planning to hire 15-20 people across research, sales and trading. Barclays Capital expects to set up equities sales, trading and research businesses in India by the end of 2011 and plans to hire more staff. British bank RBS has also been aggressively expanding its Indian equity team.
All of this is hardly good news for any already embattled sector.
Initial volumes show acceptance of 91-day T-bill contracts
Ashish Rukhaiyar
Mumbai, 19 July 2011
From the initial volume in exchange-traded derivative contracts on 91-day treasury bills, industry seems to have accepted the new instrument. It has been two weeks since these were launched and the average daily turnover has been Rs 270 crore.
According to industry participants, the new instrument is being primarily used by entities wishing to hedge interest rate exposure and by arbitragers looking to make some gains based on the yield curve spread. Interest rate futures, as the name suggests, are derivative contracts with government bonds as the underlying product. Depending on one’s view on the interest rate movement, an entity can go short or long to hedge against volatility.
On July 4, when futures on 91-day T-bills were launched, the National Stock Exchange reported a volume of Rs 731.2 crore, with nearly 40,000 contracts traded. The volume nearly halved on the following days. It touched a low of Rs 63.35 crore on day, after staying over Rs 200 crore on most days last week. The average, however, has been Rs 272 crore (see table).
“Those who want to hedge their interest rate exposure will be attracted to this segment, which will also help in creating a transparent yield curve,” says J Moses Harding, executive vice president & head (global market), IndusInd Bank. “It will provide good support when the yields are going down and resistance when the yields are on the rise. Arbitragers will also be active when the yield spreads between (exchange-traded) the futures and OTC (over the counter) market is wide.”
A section of market players attributes the initial success to the product design, that incorporates a cash-settlement feature. This is in sharp contrast to futures on 10-year government bonds, that are settled with delivery of government securities with a tenor between nine and 12 years. Derivative contracts on the 10-year paper was launched in 2009 but has hardly witnessed any volume, as the entities are concerned about dumping of illiquid bonds.
Corporate houses which deal in floating rate bonds are expected to use this instrument to hedge against interest rate volatility. Even the mutual fund industry, which has a lot of debt funds, can use futures on the 91-day T-bill for hedging.
Banks, however, are expected to be the biggest user, as they invest significantly in T-bills as part of their treasury operations. Banks can go short on the contracts if they feel rates would move northwards.
Mumbai, 19 July 2011
From the initial volume in exchange-traded derivative contracts on 91-day treasury bills, industry seems to have accepted the new instrument. It has been two weeks since these were launched and the average daily turnover has been Rs 270 crore.
According to industry participants, the new instrument is being primarily used by entities wishing to hedge interest rate exposure and by arbitragers looking to make some gains based on the yield curve spread. Interest rate futures, as the name suggests, are derivative contracts with government bonds as the underlying product. Depending on one’s view on the interest rate movement, an entity can go short or long to hedge against volatility.
On July 4, when futures on 91-day T-bills were launched, the National Stock Exchange reported a volume of Rs 731.2 crore, with nearly 40,000 contracts traded. The volume nearly halved on the following days. It touched a low of Rs 63.35 crore on day, after staying over Rs 200 crore on most days last week. The average, however, has been Rs 272 crore (see table).
“Those who want to hedge their interest rate exposure will be attracted to this segment, which will also help in creating a transparent yield curve,” says J Moses Harding, executive vice president & head (global market), IndusInd Bank. “It will provide good support when the yields are going down and resistance when the yields are on the rise. Arbitragers will also be active when the yield spreads between (exchange-traded) the futures and OTC (over the counter) market is wide.”
A section of market players attributes the initial success to the product design, that incorporates a cash-settlement feature. This is in sharp contrast to futures on 10-year government bonds, that are settled with delivery of government securities with a tenor between nine and 12 years. Derivative contracts on the 10-year paper was launched in 2009 but has hardly witnessed any volume, as the entities are concerned about dumping of illiquid bonds.
Corporate houses which deal in floating rate bonds are expected to use this instrument to hedge against interest rate volatility. Even the mutual fund industry, which has a lot of debt funds, can use futures on the 91-day T-bill for hedging.
Banks, however, are expected to be the biggest user, as they invest significantly in T-bills as part of their treasury operations. Banks can go short on the contracts if they feel rates would move northwards.
With long-only funds away, SLB fails to take off
Ashish Rukhaiyar & Mehul Shah
Mumbai, 16 July 2011
More than three years have passed since the Indian equity market saw the introduction of a stock lending and borrowing (SLB) mechanism. However, the segment has hardly seen any activity till now. While a few hundred trade exchanges have been recorded in the recent months, the turnover remains abysmally low. Long-only players like insurance firms and pension funds are not allowed to participate in the segment.
SLB, as the name suggests, refers to a mechanism through which a market player can temporarily borrow shares to cover his delivery obligations. The shares are typically borrowed for a fixed fee, decided by the stock exchanges. The borrower has to return the shares at the end of the agreed term.
According to industry players, the physical settlement in equity derivatives, recently approved by the regulator, has provided a much-needed boost to SLB. However, it would take some time before the results were visible. An active SLB mechanism would require a fresh outlook by regulators, along with large institutional players, especially long-only funds.
Globally, insurance and pension funds are active in the SLB segment, providing the much-needed supply of shares. Such long-only funds are typically passive on a large corpus of shares and are, therefore keen to earn interest by lending these shares. However, in India, regulatory ambiguities have kept such players away from participating in SLB.
“Existing long-only players like insurance and mutual funds need to find this segment relevant. If there are any ambiguities, clarification should be provided,” says Vineet Bhatnagar, managing director and chief executive, MF Global Sify Securities.
Chief investment officers (CIOs) of insurance companies are not sure whether they are allowed to participate in SLB. “Ideally, we should participate in this segment, as it is a cash market product. However, we are not sure about the rules,” said the CIO of a private insurance company.
A senior Insurance Regulatory and Development Authority official said the Insurance Act did not allow insurance firms to participate in the SLB mechanism. “The Insurance Act needs to be amended for insurance firms to take part in stock lending and borrowing activity,” he said. According to data available with the National Stock Exchange, the SLB segment registered around 100 trade exchanges in July so far, with the turnover pegged at only Rs 5 lakh. In May, nearly 400 such exchanges, accounting for Rs 19 lakh, were recorded.
“The premise is that SLB means derivatives and so, insurance players should not be allowed,” says an industry source involved in enhancing the acceptance of SLB. “But that's a wrong approach, since SLB requires two kinds of participants, borrowers and suppliers. The latter is in no way involved in derivatives. They use their idle portfolio to earn interest. This is the practice followed globally,” he says.
Sebi had, early this year, given its approval to physical settlements in equity derivatives, through which the contracts have to be settled in underlying shares, instead of the current system of cash. Some feel the SLB system would take off once physical settlements gain the acceptance of investors. The Bombay Stock Exchange has already moved to the new system. It would soon introduce a market-making scheme to enhance its popularity.
Mumbai, 16 July 2011
More than three years have passed since the Indian equity market saw the introduction of a stock lending and borrowing (SLB) mechanism. However, the segment has hardly seen any activity till now. While a few hundred trade exchanges have been recorded in the recent months, the turnover remains abysmally low. Long-only players like insurance firms and pension funds are not allowed to participate in the segment.
SLB, as the name suggests, refers to a mechanism through which a market player can temporarily borrow shares to cover his delivery obligations. The shares are typically borrowed for a fixed fee, decided by the stock exchanges. The borrower has to return the shares at the end of the agreed term.
According to industry players, the physical settlement in equity derivatives, recently approved by the regulator, has provided a much-needed boost to SLB. However, it would take some time before the results were visible. An active SLB mechanism would require a fresh outlook by regulators, along with large institutional players, especially long-only funds.
Globally, insurance and pension funds are active in the SLB segment, providing the much-needed supply of shares. Such long-only funds are typically passive on a large corpus of shares and are, therefore keen to earn interest by lending these shares. However, in India, regulatory ambiguities have kept such players away from participating in SLB.
“Existing long-only players like insurance and mutual funds need to find this segment relevant. If there are any ambiguities, clarification should be provided,” says Vineet Bhatnagar, managing director and chief executive, MF Global Sify Securities.
Chief investment officers (CIOs) of insurance companies are not sure whether they are allowed to participate in SLB. “Ideally, we should participate in this segment, as it is a cash market product. However, we are not sure about the rules,” said the CIO of a private insurance company.
A senior Insurance Regulatory and Development Authority official said the Insurance Act did not allow insurance firms to participate in the SLB mechanism. “The Insurance Act needs to be amended for insurance firms to take part in stock lending and borrowing activity,” he said. According to data available with the National Stock Exchange, the SLB segment registered around 100 trade exchanges in July so far, with the turnover pegged at only Rs 5 lakh. In May, nearly 400 such exchanges, accounting for Rs 19 lakh, were recorded.
“The premise is that SLB means derivatives and so, insurance players should not be allowed,” says an industry source involved in enhancing the acceptance of SLB. “But that's a wrong approach, since SLB requires two kinds of participants, borrowers and suppliers. The latter is in no way involved in derivatives. They use their idle portfolio to earn interest. This is the practice followed globally,” he says.
Sebi had, early this year, given its approval to physical settlements in equity derivatives, through which the contracts have to be settled in underlying shares, instead of the current system of cash. Some feel the SLB system would take off once physical settlements gain the acceptance of investors. The Bombay Stock Exchange has already moved to the new system. It would soon introduce a market-making scheme to enhance its popularity.
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