Mar 28, 2008
Ashish Rukhaiyar & Gaurav Pai
MUMBAI
IN AN attempt to boost the securities lending and borrowing mechanism, stock exchanges are considering a proposal where market participants may not have to pay the whole margin upfront. Internationally, players have to deposit cash (or some equivalent) equal to, or slightly higher than the amount of shares borrowed. A stock exchange official said, to begin with, this may be restricted to roughly around 40% of the worth of securities.
Recently, capital market regulator Sebi had asked stock exchanges and depositories to put in place a screen-based system for implementation of the stock lending and borrowing mechanism by April 21. However, most players are awaiting further clarity or details on the scheme.
One of the most-awaited clause is the amount of cash (or equivalent called as margin) that participants have to pay upfront. If this is fixed at 40%, it would mean that for a crore of stocks borrowed from the exchange window, only Rs 40 lakh will have to be kept with the exchange (or more accurately its clearing house) as the deposit.
Once these borrowed stocks are returned within seven days, the deposit would be returned and only the pre-fixed interest will be paid to the lender. This, of course, if the contract for borrowed securities is not ‘rolled over’. The official further explained that the 40% initial margin will have, among others, 10% value at risk (VaR) and 5% extreme loss margin, (ELM), among others.
However, for a person who wants to bet against a rising share by selling it, the futures & options segment is likely to be a cheaper bet than the cash market. While selling futures on a stock, one has to pay only a fifth of the total exposure as initial margin. However, the mark-to-market transactions are likely to be calculated in both scenarios.
The market is no stranger to the lending borrowing mechanism. After Sebi reintroduced Badla in 1996, NSE had introduced the Automated Lending and Borrowing Mechanism (ALBM), which was soon followed by the BSE’s Borrowing and Lending of Securities Scheme (BLESS). Both were essentially sophisticated forms of badla.
However, once derivatives was introduced in 2000, ALBM and badla were banned as it was felt that the purpose of leverage was well served by individual stocks futures. “Given the considerable similarities in software requirements between the proposed securities lending mechanism and the old ALBM system, I would think that the exchanges should not need more than 2-3 weeks to get this off the ground,” JR Verma of IIM-A had said recently.
Saturday, 29 March 2008
Brokers to give daily margin info to clients
Mar 24, 2008
Ashish Rukhaiyar
MUMBAI
MUMBAI
STOCK BROKING firms will have to notify clients about their (the client’s) daily margin positions from April 1, according to a Securities and Exchange Board of India (Sebi) directive. The move follows a spate of complaints from investors that brokers have been liquidating their positions citing insufficient margins, even though their margin accounts had enough funds.
The other common complaint is that investors are not aware of the quantum of margin money that had to be deposited to replenish the account. Such complaints could soon become a thing of the past once the new rule is implemented. During a free fall — as was seen during January 2008 and in May 2006 — brokers promptly square off clients’ positions, at times, it is claimed, not giving them adequate notice.
Often, it is alleged, brokers use the funds of their least-preferred clients to meet the margin commitments of their high-volume customers. The market regulator is of the view that if investors are informed about their margin positions on a daily basis, it would become easier for them to replenish the dwindling margin.
It’s a tough call for brokers
“IF informed on a daily basis, investors can see when their margin positions are approaching dangerous levels,” said a source. This would minimise instances of brokerages liquidating client positions for want of margins, he added. This will help investors who trade frequently in the derivatives and/or the cash market and who operate by keeping open positions.
However, there seems to be a slight confusion as to how brokerages will inform their clients about their margin position. While some say the additional information would be made a part of the digital contract note, there are others who say that a separate note (about margin position) would be mailed to all the clients everyday.
“We believe that the digital contract note has to include the margin position from April 1 onwards,” says Angel Broking’s executive director Amit Majumdar. “The software programme needs to be changed so that it goes back to the ledger to pick up the margin position. This might slow down the process resulting in a printing delay,” adds Mr Majumdar who heads the operations, finance and alternate business of the broking outfit.
In a similar context, the operations head of another domestic brokerage said that “they would now start issuing a separate margin statement” as the “circular does not specify the method of communication”. “Our clients will be aware of their margin positions before the markets open the next morning,” he added.
While Sebi wanted to implement the new regulation from February 18 onwards, brokers sought an extension of the deadline saying they needed more time to complete the back office software modifications for providing the additional information to their clients on a daily basis. Curiously, the stock exchanges came out with a circular only on February 11 asking brokerages to inform clients of their margin positions from February 18 onwards.
The Association of NSE Members of India (ANMI) wrote a letter to Sebi on February 14 asking for an extension until April 1. Incidentally, ANMI, in its letter, also asked the regulator to permit members to use the SMS facility to inform clients about their margin positions.
The brokers’ body was of the view that using SMS for informing “the clients total margins on T (trading) day and change from T+1 day” would “save time and providing of information will be near instantaneous”. Brokers can provide the balance of the required information on the foot of the contract note after required software modifications are completed, added the letter. However, Sebi has still not responded to the SMS query.
Foreign funds take shelter under 'warehousing' deals
Park Their Shares With Other Market
Participants As Further Fall Seen
Mar 21, 2008
Gaurav Pai & Ashish Rukhaiyar
MUMBAI
HUGE blocks of shares continue to change hands amid volatile market conditions. Nothing unusual about that. Except that quite a few of those “block deals” could be “friendly transactions”, as foreign fund managers try to minimise the haemorrhaging of their portfolios.
A section of the market players alleges that these are warehousing deals which will be reversed at a later date. But some others feel the deals are a result of creation of new sub-accounts after the Sebi diktat on participatory notes (P-notes). Experts also add that after the Bear Stearns episode, such transactions have been on the rise.
Dealers say that foreign funds have taken to temporarily parking their shares with other market participants due to the prospect of further fall in share prices and investors abroad asking for their money to be returned. There is always a prior understanding of the price of sale and the subsequent price of buyback, they add.
The entity ‘warehousing’ shares is usually another foreign fund or an institution holding a participatory note. Brokers also suggest that certain promoters are also a part of this operation.
For instance, if fund A is holding shares of company B in its portfolio, then A will park those shares in some investment company indirectly controlled by B. At times, the promoters agree to such deals, else the erosion in market capitalisation would be severe if fund A decides to sell those shares in the market.
“If they (funds) stick to their shares, there is a chance that prices will fall further,” says Biranchi Sahu, head of institutional equity at. “Naturally, some of the FIIs are shifting their shares to other FIIs or P-note entities with an understanding that these will be brought back later,” he adds.
In some instances, the fund is not able to sell the shares in the market because that stock is hitting the lower end of the circuit filter. At the same time, because of the steady slide in the stock price, the fund’s net asset value gets eroded. To prevent this, the fund enters into an agreement with another institution to buy those shares temporarily. The transaction will be reversed when market conditions improve. They would compensate the entity (who is buying the shares) through some means, mostly monetary.
However, Centrum Stock Broking managing director Devesh Kumar feels, “This could be because of conversion of P-note holdings into sub-accounts.” He says that when investors get a sub-account with a new entity, they tend to “transfer their earlier holdings to the new account”.
FIIs have invested over Rs 3,000 crore in the period between January 15 and March 17, but have also sold shares to the tune Rs 16,000 crore. During the period, the Sensex tanked 5,400 points to end at 14,809 on Wednesday.
Participants As Further Fall Seen
Mar 21, 2008
Gaurav Pai & Ashish Rukhaiyar
MUMBAI
HUGE blocks of shares continue to change hands amid volatile market conditions. Nothing unusual about that. Except that quite a few of those “block deals” could be “friendly transactions”, as foreign fund managers try to minimise the haemorrhaging of their portfolios.
A section of the market players alleges that these are warehousing deals which will be reversed at a later date. But some others feel the deals are a result of creation of new sub-accounts after the Sebi diktat on participatory notes (P-notes). Experts also add that after the Bear Stearns episode, such transactions have been on the rise.
Dealers say that foreign funds have taken to temporarily parking their shares with other market participants due to the prospect of further fall in share prices and investors abroad asking for their money to be returned. There is always a prior understanding of the price of sale and the subsequent price of buyback, they add.
The entity ‘warehousing’ shares is usually another foreign fund or an institution holding a participatory note. Brokers also suggest that certain promoters are also a part of this operation.
For instance, if fund A is holding shares of company B in its portfolio, then A will park those shares in some investment company indirectly controlled by B. At times, the promoters agree to such deals, else the erosion in market capitalisation would be severe if fund A decides to sell those shares in the market.
“If they (funds) stick to their shares, there is a chance that prices will fall further,” says Biranchi Sahu, head of institutional equity at. “Naturally, some of the FIIs are shifting their shares to other FIIs or P-note entities with an understanding that these will be brought back later,” he adds.
In some instances, the fund is not able to sell the shares in the market because that stock is hitting the lower end of the circuit filter. At the same time, because of the steady slide in the stock price, the fund’s net asset value gets eroded. To prevent this, the fund enters into an agreement with another institution to buy those shares temporarily. The transaction will be reversed when market conditions improve. They would compensate the entity (who is buying the shares) through some means, mostly monetary.
However, Centrum Stock Broking managing director Devesh Kumar feels, “This could be because of conversion of P-note holdings into sub-accounts.” He says that when investors get a sub-account with a new entity, they tend to “transfer their earlier holdings to the new account”.
FIIs have invested over Rs 3,000 crore in the period between January 15 and March 17, but have also sold shares to the tune Rs 16,000 crore. During the period, the Sensex tanked 5,400 points to end at 14,809 on Wednesday.
It's just business: BSE goes long on A'bad comex
BSE Might Have Paid A Significant Amount
For 26% In NMCE, But It Can Dilute The Stake Later
Mar 15, 2008
Ashish Rukhaiyar & Gaurav Pai
MUMBAI
THE news of Asia’s oldest stock exchange acquiring a substantial stake in the Ahmedabad-based National Multi Commodity Exchange (NMCE) may have come as a surprise to many. To those in the know, it was a pure financial move by the Bombay Stock Exchange (BSE) in that it may prove to be a multi-bagger going forward when some financial bigwigs enter the commodity arena.
Recently, the BSE bought a 26% stake in NMCE for an undisclosed amount of money. People familiar with the deal say that the stock exchange had to shell out around Rs 40 crore for the stake, valuing the comex at around Rs 150 crore.
“BSE is of the firm belief that going ahead, others would be interested in acquiring a stake in NMCE. At that time, it would have an option of diluting a part of its stake and that too at a premium,” says a source.
It is clear that the stock exchange would not be involved in the daily working of the comex. BSE members would also not be automatically eligible for NMCE memberships. They would have to submit a request to the Forward Markets Commission (FMC).
BSE is said to have tried its luck with MCX but steep valuations were a hindrance. Also, the National Stock Exchange has a small stake in the exchange. It is also said that the timing of the deal has a lot to do with the forthcoming public issue of Multi Commodity Exchange (MCX) that is being valued at over $1 billion.
BSE knows that if it enters the arena at the right time at the right price, then going ahead it would be able to net a cool gain, said the official. Similarly, NCDEX was out of the question since NSE is one of the largest shareholders with a 15% stake in it. This brought NMCE, a strong player in agri commodities, into the picture. NMCE occupies the third slot among the leading commodity exchanges of the country. The daily average turnover of the Ahmedabad-based exchange is around Rs 500 crore.
“BSE’s larger counterpart (National Stock Exchange) already has a presence in the commodity market via NCDEX,” said an official. In his view, it was only a matter of time before BSE took a stake in one of the leading commodity exchanges. “BSE does not have a commodity licence and FMC would not give a new one. So, the only option was to acquire a stake in any of the three leading commodity exchanges,” added the official.
FMC norms stipulate that a single domestic investor cannot be given more than 26% stake in a commodity exchange. In the case of foreign investors, the limit has been capped at 5%. While the stake would make BSE eligible for a board representation, it is believed that the stock exchange would ask for two representations on the NMCE board.
For 26% In NMCE, But It Can Dilute The Stake Later
Mar 15, 2008
Ashish Rukhaiyar & Gaurav Pai
MUMBAI
THE news of Asia’s oldest stock exchange acquiring a substantial stake in the Ahmedabad-based National Multi Commodity Exchange (NMCE) may have come as a surprise to many. To those in the know, it was a pure financial move by the Bombay Stock Exchange (BSE) in that it may prove to be a multi-bagger going forward when some financial bigwigs enter the commodity arena.
Recently, the BSE bought a 26% stake in NMCE for an undisclosed amount of money. People familiar with the deal say that the stock exchange had to shell out around Rs 40 crore for the stake, valuing the comex at around Rs 150 crore.
“BSE is of the firm belief that going ahead, others would be interested in acquiring a stake in NMCE. At that time, it would have an option of diluting a part of its stake and that too at a premium,” says a source.
It is clear that the stock exchange would not be involved in the daily working of the comex. BSE members would also not be automatically eligible for NMCE memberships. They would have to submit a request to the Forward Markets Commission (FMC).
BSE is said to have tried its luck with MCX but steep valuations were a hindrance. Also, the National Stock Exchange has a small stake in the exchange. It is also said that the timing of the deal has a lot to do with the forthcoming public issue of Multi Commodity Exchange (MCX) that is being valued at over $1 billion.
BSE knows that if it enters the arena at the right time at the right price, then going ahead it would be able to net a cool gain, said the official. Similarly, NCDEX was out of the question since NSE is one of the largest shareholders with a 15% stake in it. This brought NMCE, a strong player in agri commodities, into the picture. NMCE occupies the third slot among the leading commodity exchanges of the country. The daily average turnover of the Ahmedabad-based exchange is around Rs 500 crore.
“BSE’s larger counterpart (National Stock Exchange) already has a presence in the commodity market via NCDEX,” said an official. In his view, it was only a matter of time before BSE took a stake in one of the leading commodity exchanges. “BSE does not have a commodity licence and FMC would not give a new one. So, the only option was to acquire a stake in any of the three leading commodity exchanges,” added the official.
FMC norms stipulate that a single domestic investor cannot be given more than 26% stake in a commodity exchange. In the case of foreign investors, the limit has been capped at 5%. While the stake would make BSE eligible for a board representation, it is believed that the stock exchange would ask for two representations on the NMCE board.
Friday, 29 February 2008
Private placements to remain favourite route
Feb 29, 2008
Gaurav Pai & Ashish Rukhaiyar
Even as the market regulator is laying the ground for reviving the corporate debt market in India, private placement of bonds remains the most popular option for companies looking to raise funds in India, says the Economic Survey. Markets experts say that this trend is likely to continue, considering the comfort that this route brings along with it, namely opacity. The regulator is hoping that the proposed platform for electronic issuance and trading of corporate bonds will soon make the private placement route redundant.
Over the last few years, private placements — as in selling bonds to a select group of large, bulge bracket investors — has emerged as the preferred way, as the issuance can be closed in just a couple of days that too with investors one is familiar with. However, the regulator has always objected to the process due to its lack of transparency.
“The current system is opaque with the issuer dependant on few arrangers and going ahead one might see e-issuance gaining popularity due to its more transparent mechanism,” says Srinivasa Raghavan, head (treasury) at IDBI Gilts. He does not feel there will be any change in the number of issues and the quantum of mobilisation through this method, though. “It is mandatory for pension funds and insurance companies that are flush with funds to subscribe to such issuances,” he reasons.
Deepak Koyane, director at SPA Capital, a financial advisory firm says that an electronic issuance is always desirable as there is always a chance that a few investors “corner all the bonds issued” and then keep the prices “protected” in the future.
The total amount of the capital raised through different instruments in the primary market was 31.5% higher in 2007 as compared to 2006, says the survey. Component-wise, private placement at Rs 1, 11,838 crore (up to November 2007) accounted for the major share during the calendar year 2007.
According to a recent release by PRIME database, the major reason for this substantial increase was the continuing large mobilisation by all-India financial institutions and banks besides the private sector. On an industrywise basis, the financial services sector continued to dominate the market, raising almost 90% of the total amount. Power ranked second with a 7% share, followed by roads & highways.
Nationalised banks (who take this route to for raise Tier 2 capital for meeting capital adequacy requirements) and other financial institutions like PFC and Nabard are the usual suspects in the game.
Standard Chartered Bank’s managing director & regional head (South Asia Capital Markets) Prakash Subramanian KV says irrespective of the route taken by companies to sell their bonds (ie to raise money) - the number will only go up in the coming years. “The market will only grow bigger in size especially since RBI has blocked the external commercial borrowings route for raising funds,” he says.
RBI has not allowed companies to raise funds through the ECB route since a year, the incoming dollar was sending the rupee higher.
Sebi to tweak F&O rules to check swings
Meets Brokers, Exchange DelegationsFeb 13, 2008
Ashish Rukhaiyar & Gaurav Pai
IN A move to check wild stock swings, markets regulator Securities and Exchange Board of India (Sebi) is planning to overhaul the derivatives segment. The proposals under consideration include circuit filters on stocks traded in the futures and options (F&O) segment, possible changes in the marketwide position limits and review of the margining system, a person familiar with the development said.
It is believed that the swift and massive fall on January 22 shook Sebi into action. Trading was halted within minutes of opening, as indices hit the downward limits on very low volumes. Sebi has also received several suggestions from market intermediaries on how the loopholes in the current system can be plugged.
Apart from the margining system, the large number of stocks in the F&O segment was also said to have contributed to the indices going into a free fall. “Sebi officials had a long discussion with many market players, including BSE and NSE representatives,” says the source. “There were suggestions to overhaul the derivatives segment to counter speculative activity. One of the proposals was introduction of circuit filters on stocks available in the F&O segment,” he added. Currently, stocks in which futures are available have no circuit filters on the cash side.
Circuit filter for stocks in F&O segment to be a first
The logic is that a person who has an opposite view to the ongoing trend in the cash segment, could simply exercise his opinion in the F&O market. Simply put, if a trader felt that a share was zooming without any reason behind it, he could just short-sell its futures. However, market players pointed out to Sebi that in recently, speculative activity had zoomed, causing many shares (Essar Steel and Ispat, for instance) to rise 40-45% in one session.
Interestingly, such a system, if introduced, will be the first of its kind in the world. “The idea is not to disturb the trading habits of investors and speculators,” says the source. He added that the circuit filter, if implemented, will be high enough to be hit only on days of extreme movement like on January 22. “It is unlikely that a 20% filter (positive or negative) will be hit on normal days,” he adds.
Many delegations from the broking community are learned to have made presentations to NSE and Sebi officials. The majority has been rooting for introduction of physical settlement (delivery of shares against contracts). But a section warns this delivery should be delayed by a day, enabling both players who want to take delivery and those who do not, without disrupting the operations of the market. “This will also curb the ramping (up or down) of shares on the last day of expiry,” says a broker.
Some brokers have called for providing an easier margining system to those trades which are in opposite directions, and therefore reduces risk: for instance, buying Nifty futures and selling stock futures against it. There is a feeling that high gross exposure margins (a second line of defence unique to India) are distorting the market. There is a also a debate among players whether market makers — big players who give quotes both ways — should be introduced.
IPO investors could be in for a bumpy ride
With Change In Sentiment, Borrowing Money To Invest In IPOs May Not Pay Off
Feb 02, 2008
Gaurav Pai & Ashish Rukhaiyar
TILL a few days ago, it appeared that people with little or no understanding of equities could more than double their money in two weeks by investing in IPOs, thanks to the exorbitant prices at which these issues got listed on bourses. Some investors even decided to get ‘upgrade’ by borrowing money and investing through the non-institutional investors category in public issues, rather than through the retail portion.
Gaurav Pai & Ashish Rukhaiyar
TILL a few days ago, it appeared that people with little or no understanding of equities could more than double their money in two weeks by investing in IPOs, thanks to the exorbitant prices at which these issues got listed on bourses. Some investors even decided to get ‘upgrade’ by borrowing money and investing through the non-institutional investors category in public issues, rather than through the retail portion.
But if the listing price of Future Capital Holdings is anything to go by, there is not much good news in the short term for leveraged investors, as several issues prepare listing. Brokers say that people who are planning to invest or have invested in the forthcoming issues should brace themselves for a bumpy ride ahead.
Future Capital Holding shares on Friday closed at Rs 909.80 on NSE, a premium of Rs 144.80 or 19% to the issue price of Rs 765 per share. The stock listed at Rs 1,081 and touched Rs 1,100 briefly. Based on the number of times the issue was subscribed, the funding cost works out to roughly Rs 291 per share. All those investors who had borrowed money to subscribe, and sold on listing, would have incurred a loss unless they managed to exit above Rs 1,056. Financiers charge roughly 15% for lending money towards IPO transactions. This rate is even higher if the issue is expected to do well, and there is more demand for funds.
Future Capital Holdings issue received applications for shares more than 76 times that was being offered by the company. The IPO is backed by the promoters of Pantaloon Retail, a stock that has delivered eye-popping returns to investors in the last few years.
“When the secondary market has corrected more than 20% since the issue opened three weeks back, a dip of similar proportions in the premium in the IPO market is natural,” says a fund manager with Birla Sun Life Mutual Fund. His fund house invested in the issue only for listing gains. The other big issue to get listed in the coming days is Reliance Power. Brokers say Reliance Power shares are currently quoting at a premium of Rs 150 in the grey market, about a third of what they were quoting at about a month ago.
Here too, leveraged investors are likely to be in for a disappointment. The non-institutional investor segment — reserved for high net worth individuals and corporates — has been subscribed nearly 160 times. In short, it means that these investors will get only one share for every 160 that they have applied for. However, they will have to bear an interest cost on the entire 160 shares they had bid for.
“Reliance Power IPO may well see a repeat of what happened with the Future Capital IPO,” says Rahul Rege of Centrum Broking. “With tide having turned for equities, everybody is expecting panic selling on the first day of listing,” he added. Investors seemed to have realised the price of being complacent.
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