Stock Market

Rising compliance cost hits broking firms' margins

2009-10-22T19:00:00.000+05:30

At a time of a slowdown, brokerages are facing intense pressure on their incomes. Volumes are falling and brokers, in general, are a

worried lot. It is at a time like this when the regulator SEBI, with the objective of making the markets more compliant, has decided to come up with additional regulations.

Competition is intense among brokerages and there is no way broking rates could be raised. Hence, they are facing lower margins. At the same time, compliance is something that no brokerage wants to compromise on. This is largely because clients prefer dealing with a brokerage whose reputation is aboveboard.

The latest circular from the regulator says that an employee of a brokerage house has to verify and sign every new account. A direct selling agent (DSA) or a franchisee is not allowed to do it. Further, if a broking company has memberships in both BSE and NSE through two different companies, employees of only the company which is a member of the exchange can verify that form.

Most brokers work through their franchisees and have DSAs who acquire customers in smaller cities.

Another compliance requirement which has come up this year is that a copy of the signed client agreement has to be given to a client. This document often runs to 50 pages and there is a cost attached to photocopying and sending it by a courier. This could run to Rs 40-50 per client. Players like Sharekhan digitises account opening forms and sends a CD to the customer. Angel Broking, sends this form along with the account opening kit to the customers, thereby cutting down the couriering cost. An acknowledgement that needs to be given to clients for every collateral received is done through a text message.

Finally, the exchange also stipulates, margin statements need to be mailed to clients on a daily basis. Here, there is the cost of printing and couriering as well. Some smart brokers, mail this along with the contract notes to clients with the idea of cutting costs.

For the markets to be healthy, there is a need for strong compliance apart from, of course, having a watchdog. Brokers are not complaining since there are long-term benefits.

2 October 2009

2009-10-02T23:34:00.000+05:30

2 October 2009

Many have welcomed this three-day working week, shortened by Monday's celebrations for Hindu Goddess Durga and Mahatma Gandhi's birthday today.

Particularly lawyers from AZB, Freshfields and Platinum had a long non-working weekend to look forward to after the intense Bharti Airtel-MTN merger talks collapsed.
Capital markets lawyers could also use a break. At least 17 draft IPO prospectuses were filed by a handful of firms in the last week as clients scrambled before the expiry of their March accounts.

And law firm managers deserve a holiday too. Vaish Associates made history by inking India's first best friendship with a Chinese-Singaporean firm, which is looking to attack the Indian market from Shanghai.

However, it is unlikely that the ex-ALMT partner who started up his own firm will have much rest this weekend.

The managers of Hemant Sahai and Paras Kuhad will probably have their hands full too in bedding down yesterday's merger between the firms to create PHA Advocates.

The firms' practice areas are certainly a good fit. "The merger will bring about synergies […] combining strengths of the litigation and corporate practice," comments ex-Paras Kuhad partner Bunty Jha, who left one year ago.

Others close to the firms are less charitable. Some fear cultural clashes and Hemant Sahai in particular has faced a tough year of partner defections.

Granted, managing partner Hemant Sahai has vowed to replenish his old firm's ranks aggressively and PHA has a more modern democratic management structure that they want to build on further.

But somehow the numbers do not quite stack up: will the merged firm be 50 lawyers smaller than both firms were in aggregate? And what will happen to two of their offices?

http://www.legallyindia.com/

Derivatives deals before 2006 were speculative, rules Kolkata ITAT

2009-09-05T19:25:00.002+05:30

IT IS a ruling that could have an impact on assessments of stock market brokers and derivatives traders prior to April 2006. In variance to a Mumbai tribunal ruling, a special bench of the Kolkata Income Tax Appellate Tribunal (ITAT) recently held that derivatives transactions conducted before April 2006 were speculative, and income or loss arising from such deals cannot be offset against non-speculative losses or gains.

Tax experts pointed out that in light of the ruling, several old cases involving stock market constituents could be reopened or pending assessments could be severely hit. They expect the special bench ruling to be contested in a higher court.

The special bench judgement was delivered in a case pertaining to a Kolkata-based assessee — Shree Capital Services — for the assessment year 2004-05. It varied with a Mumbai tribunal ruling of September 25, 2007, in case of SSKI Investor Services for the assessment year 2001-02. The Kolkata special bench ruled: “Futures and options transactions are speculative U/S 43(5). Sec 43 (5) (d) is not retrospective.” Prior to the amendment of Section 43(5) of the IT Act, there was ambiguity regarding the treatment of income or loss generated from d e r i v a t i v e s transactions. However, the ambiguity was removed by an amendment {S. 43(5)(d)} effective from April 2006, which ruled that if such t r a n s a c t i o n s were carried out on recognised stock exchanges, they would not be deemed speculative.

The Bombay tribunal had in 2007 clarified the amendment to Section 43(5) was retrospective by ruling, “Dealing in derivatives is a separate type of t r a n s a c t i o n , which does not involve any purchase or sale of shares. Therefore, a loss on account of derivatives trading cannot be treated as speculative at all.”

When contacted, most brokers said they were unaware of the special bench judgement. Currently, loss or profit from a derivatives transaction can be offset against other non-speculative profit or loss. This provides some tax relief to assessees, who deal in stock futures and options.

However, by ruling that the amendment is not retrospective, assessments pending prior to April 1, 2006 will be hit, with assessees being unable to avail of tax relief. “Although the special bench judgement practically overrules the division bench judgement, there are several other Supreme Court judgements upholding the view that any amendment which is clarificatory in nature is always retrospective,” said chartered accountant Bhupendra Shah. “Therefore, the special bench judgement is most likely to be contested further before the Kolkata High Court on that line.”

LEGAL WRANGLE
Tax experts pointed out that in light of the ruling, several old cases involving stock market constituents could be reopened or pending assessments could be severely hit

They expect the special bench ruling to be contested in a higher court

The Bombay tribunal had in 2007 clarified the amendment to Section 43(5) was retrospective

Currently, loss or profit from a derivatives transaction can be offset against other non-speculative profit or loss

Source:
Economic Times
Ram N Sahgal & Vijay Gurav MUMBAI

New Sebi norms reduce public issue time to 10 days

2009-09-05T19:21:00.002+05:30

THE Securities and Exchange Board of India (Sebi) has notified new guidelines that, among other things, reduces the overall time period for public issues to 10 days, and seeks disclosures relating to pledged shares in the prospectus.

The new guidelines — Issue of Capital and Disclosure Requirements (ICDR) Regulations — replace the existing Disclosure and Investor Protection (DIP) guidelines. Earlier, there was no clarity on the timeframe, especially when the price band was revised.

According to a Sebi circular, ICDR regulations, while incorporating the provisions of DIP guidelines, have included “certain changes made by removing the redundant provisions, modifying certain provisions on account of changes necessitated due to market design and bringing more clarity to the provisions.”

Under the new guidelines, the option of a 75% book building and 25% fixed price issue — which was rarely exercised — has been done away with. It has to be either a fixed price issue or a book-built one. Also, companies coming out with fixed price issues would no longer need to publish the price in the draft document.

The new guidelines stipulate that the total issue period should not exceed 10 days, including any revision in the price. The earlier guidelines were not clear on this matter, especially when the price band was revised. Meanwhile, the allotment/refund period in public issues has been capped at 15 days. Previously, the allotment/refund period for fixed price was 30 days.

In another important development and in its attempt to bring in more transparency in the grievance redressal mechanism, the market regulator has directed stock exchanges to disclose details of complaints lodged by investors against trading members and companies listed on the exchange, on their website. These disclosures would also include details pertaining to arbitration and penal action against trading members.

The new regulations also give Sebi the control of the surplus money in green shoe option bank account, as this money would have to be transferred to Sebi’s Investor Protection and Education Fund (IPEF). Earlier, this surplus money was transferred to the Investor Protection Fund of stock exchanges.

Among other things, the new guidelines have also clarified the definition of employees, key management personnel, restrictions on advertisements, currency of financial statements and the documents that have to be attached with the due diligence certificate.

Sub-brokers may not require Sebi stamp

2009-09-05T19:18:00.003+05:30

SUB-BROKERS in the stock market are likely to be exempted from the requirement of registering with the capital market regulator before starting their operations as per a proposal under consideration of the finance ministry and the Securities and Exchange Board of India (Sebi).

The move is to promote self-regulation through an industry body under the supervision of Sebi, said an official who asked not to be named. Other than registration, all other market operations will, however, be directly regulated by Sebi, he said.

The proposal is also in line with the recommendations made on Wednesday by the committee on investor awareness and protection chaired by Pension Fund Regulatory Development Authority (PFRDA) chairman D Swarup. The panel suggested a self-regulatory organisation (SRO) to be called the Financial Well-Being Board of India for all investment advisors cutting across products, regulators and markets. The proposed body will also ensure that a set of common standards are followed by all investment advisors.

There are about 50,000 subbrokers now and the number is growing, making it difficult for Sebi to dedicate time and resources for something that could be done at the industry level. “The first level of due diligence of sub-brokers can be done by an SRO, under Sebi’s supervision,” said the official. That is, assessing the eligibility, qualifications and the statutory requirements for operating as a sub-broker will be done by SRO.

The proposal indicates that the government’s plan to rely more on self-regulation by the industry stays so only under the statutory regulator’s supervision and only at the level of filtering new entrants. The global financial crisis had shown that excessive self-regulation may boomerang.

Source :

Economic times 5-Sep-2009

Gireesh Chandra Prasad NEW DELHI

PR-SEBI Board Meeting

2009-02-02T20:18:00.001+05:30

PR No. 73/2009 SEBI Board Meeting
The SEBI Board meeting held in Mumbai today took the following decisions:

(i) Listed companies to declare dividend on per share basis only
It has been decided to amend the listing agreement to provide that listed entities shall declare dividend on per-share basis only. At present, there is no uniformity in declaring dividend. Some companies declare dividend on per share basis and some as a percentage of face value of the shares. Declaration of dividend as a percentage of face value has the potential to mislead the investors in case face values of the shares of two companies are different.

(ii) Timelines for bonus issues reduced
It has been decided to reduce the period for completing a bonus issue to 15 days, where no shareholders’ approval is required as per articles of association of the company and to 60 days where shareholders’ approval is required as per Articles of Association of the company. At present, in terms of the DIP Guidelines, listed companies are required to complete a bonus issue within a maximum period of six months from the date of approval of the issue by the Board of the company.

(iii) Time frame for announcing the price band for Initial Public Offering (IPO) shortened
It has been decided to amend the DIP Guidelines to enable the issuer company making an IPO to declare the floor price/ price band at least two working days before the date of opening of IPO subject to wide dissemination of price band through newspaper advertisements, availability in websites etc. The issue advertisements shall also disclose the financial ratios calculated for both upper and lower end of the price band. At present, in terms of the DIP Guidelines, in case of an IPO, either the floor price or the price band is required to be disclosed in the Red Herring Prospectus (RHP) i.e. about two weeks before the date of opening of the IPO.

(iv)Review of preferential allotment guidelines for warrants :
It has been decided to amend the DIP Guidelines to increase the upfront margin to be paid by allottees of warrants to 25%. At present, in terms of DIP Guidelines, the allottees of warrants are required to pay a margin of 10% as upfront payment at the time of allotment.

(v) Relaxation of pricing norms - Satyam Computer Services Ltd.(Satyam)
The SEBI Board examined the request of Satyam Computers Services Limited for exemption from certain provisions of SEBI (Substantial Acquisition of Shares and Takeovers) Regulations 1997. The Board recognized the special circumstances that have arisen in the affairs of the company and concluded that the issue needs to be dealt with in the general context. Accordingly it was decided to appropriately amend the regulations / guidelines to enable a transparent process for arriving at the price for such acquisition.
The above measures will be effective from the date of amendment to the Regulations / DIP Guidelines / Listing Agreement.

(vi) Investor Protection and Education Fund (IPEF):
The Board approved regulations for governance of IPEF. The fund may be credited by:
i) contribution as may be made by the Board to the Fund.
ii)Grants and donations given to the Fund by the Central Government, State Government or any other entity approved by Board for this purpose;
iii)Proceeds of foreclosures of deposit/innovation of bank guarantee/sale of the securities kept in the escrow accounts by an acquirer in case of non fulfillment of its obligations under the Securities and Exchange Board of India (SAST) Regulations, 1997.
vi.(a) The Fund shall be used for investor protection and promotion of investor awareness and education. The Fund would be utilized for the following purposes in particular:-
i) Educational activities– seminars, training, research and publications – aimed at investors;
ii) Awareness programmes through media – print, electronic or otherwise – aimed at investors;
iii) Funding investor education and awareness activities of Investors’ Associations recognized by SEBI;
iv) Aiding SEBI recognized investor associations to undertake legal proceedings in the interest of investors in securities that are listed or proposed to be listed;

Mumbai
February 2, 2009

Sebi broadens definition of insider in new norms

2008-12-11T16:19:00.002+05:30

Any Person Connected With A Co In The Past Or Present & Recipient Of Price-Sensitive Information Is An Insider

CAPITAL markets regulator Sebi has tightened its insider-trading norms by broadening the definition of the term insider to include any person who is and was connected with a company and is the recipient of pricesensitive information. The regulator has now amended its regulations to prohibit trades by a designated insider within a short period of six months. What this implies is that an insider cannot enter into an opposing transaction within a period of six months. In other words, if a company insider has acquired, or been allotted shares of his own company, he cannot sell shares of that company for the next six months from the time of purchase or allotment.

The new stringent norms are aimed at curbing the misuse of price-sensitive information, especially by those working at senior positions in listed companies.

The new regulations, which have been notified, now define an insider as any person who is, or was, connected with the company, or is deemed to have been connected with the company. Further, an insider will also include a person who is reasonably expected to have access to unpublished price-sensitive information of the company, or has received, or has had access to such price-sensitive information. Dependents of all those who are defined as insiders will also now come under the ambit of regulations.

Under the new rules, there is an also an absolute prohibition on such persons from taking positions in derivative transactions in the shares of the company at any time. In the case of subscription to initial public offers (IPOs), a designated insider will have to hold their investments for a minimum period of 30 days.

Early this year, Sebi had proposed the introduction of short-swing profits generated through inside information. As a corporate governance measure, which aligns the interests of a company’s shareholders to that of the company’s insiders, it had proposed this additional regulation based on the practice prevalent in the US. Under the new regulations, Sebi will proceed against those violating the rules on the basis of its statute book rather than the earlier proposal, under which unjust gains made by an insider were to be surrendered to the company. In a bid to curb the abuse of privileged corporate information, Sebi had initially proposed that company insiders would have to return any profits made from the purchase and sale of company shares to the company, if both transactions occur within a six-month period.

Sebi has also brought dependents of designated insiders under the ambit of the new rules.

Sebi open to sharing board agenda with public

SEBI on Thursday signalled its intention to ensure greater transparency in the working of the regulator, with its decision to place details of the agenda of the board in the public domain. The Sebi board has also decided to adopt a code of conduct to avoid a conflict of interest, involving members of the board, reports Our Bureau in Mumbai.

This code will be put up on the Sebi website, shortly. All these decisions were taken unanimously. The move to share the board agenda — reckoned to be the first in the sphere of public policy-making in the country — could well put pressure on other regulatory agencies and those engaged in public policy to open up their decision-making process to greater public scrutiny. Starting from the next board meeting, Sebi will list out the agenda papers submitted to the board on all policy issues and the minutes of such meetings.

This is expected to be done within a few days of the meeting. The agenda papers of Thursday’s board meeting will be in public domain by December 15, for instance. “When we demand transparency from the world, we also ought to do the same. People will be able to get a sense of what went into the decisions taken by us,” a senior official who did not want to be quoted said.

Managing risk in today’s world

2008-12-11T15:35:00.003+05:30

ONE of the telling stories in the subprime saga is about how Citigroup’s former CEO woke up to the bank’s problems. In September 2007, Chuck Prince asks his CFO, Thomas Maheras, if everything was OK. Yes, everything is fine, Maheras reassures him.

That’s what Maheras has been saying for a while. Rather belatedly, it occurs to Prince to get the position double-checked. A risk management group is asked to examine the bank’s mortgage-related holdings. The truth soon comes tumbling out and Citigroup announces billions of dollars in losses.

So, is this how one of the top banks in the world managed risk? By relying on the word of one executive? According to a story in the International Herald Tribune, the senior risk officer and Maheras’ deputy were close pals, so the hard questions were not asked. That says something about the culture of the bank. If a man at the top keeps quiet, nobody else is supposed to ask questions.

At Lehman Brothers, the CEO, Richard Fuld, left risk management to a trusted deputy, Joe Gregory. Gregory apparently relied on ‘instinct’, not hard analysis, when it came to managing risk. A senior executive, steeped for years in the real estate business, warns him that things are getting out of hand. Gregory’s ‘instinct’ tells him he should get rid of the troublesome guy. Fuld goes along. The rest, as they, is history.

Just think of it. Citigroup had over $2 trillion in assets; Lehman Brothers $640 billion. And the decisions on risk or even information about risk exposures were confined to two or three people! Leave aside the board, even the people working in these firms had no clue what they had got into.

The problem with firms in distress today was not just that they had the wrong risk management models. It was not lack of talent either. It was that life-and-death decisions about risk were concentrated in a few people at the top. Autocratic decision-making is what destroyed many of the biggest financial firms in the world.

So let’s get this straight: risk management is not about fancy models or employing rocket scientists. It is an aspect of firm governance. If risk is to be properly managed, it is absolutely essential, first, that a large number of people within the firm should be involved in the risk-taking decisions. An even larger number should have the information on risk exposures.

When you see how the mighty have fallen in the present crisis, you begin to understand why a firm’s processes need to be democratic, why it is necessary to actively foster diversity and dissent. Doing so is not a matter of practising virtue. It is simply a condition for a firm’s long-run performance. That was the theme of a magnificent business book that came out in 2004, The Wisdom of Crowds (James Surowiecki). And yet, as the failures in the present crisis clearly show, the modern firm remains one of the most undemocratic institutions in the world.

Secondly, risk management is not just an executive function but a function of the board. Most of the boards at today’s troubled firms abdicated this function. For a board to perform this function, we must get the composition of the board right. We need institutional investors to nominate independent directors. Having ‘independent’ directors who serve at the pleasure of management won’t do.

We also need representation on boards for employees and minority shareholders. One reason India’s public sector banks have a reasonably good handle on risk is that internal processes in the public sector are more democratic and employees are represented on boards. There is no better check on management than an officer and staff cadre that is duly empowered — these are people who are well clued into what is going on.

Thirdly, the design of compensation matters. Since performance in a bank shows up over a long period, incentives must be linked to long-term performance. Much has been written about this.

Fourthly, it is vital to get the scale of operations right. Is it possible for any CEO, however talented his team, to manage $2 trillion in assets? Talk to the CEO of a commercial bank in India with $30 billion in assets. He will tell you that he is fully stretched in monitoring risk. We know that some banks are too big to fail; many are also too big to succeed.

Fifthly, risk management is too important to be left to firms. Regulators have a vital role to play — in specifying capital requirements, in defining exposures to sensitive sectors, in bank supervision and in laying down norms for entry.

Risk management is not just about rigorous modelling of risk. The secret of risk management lies elsewhere — in embracing precepts of good management and regulation. Make firm processes truly democratic. Involve the board in risk management. Think through the design of compensation. Make sure the scale of operations is manageable. Don’t allow financial innovation to run ahead of regulation.

• Autocratic decision-making is what destroyed many of the biggest financial firms in the world

• If risk is to be rightly managed, the large number of people within the firm should be involved in the risk-taking decisions

• Make sure the scale of operations is manageable. Don’t allow financial innovation to run ahead of regulation.

THE BIG PICTURE - T T RAM MOHAN

Bankruptcy... amazing explanation

2008-10-11T09:07:00.002+05:30

Off late we have been listening a lot about bankruptcy…

If you could read patiently and understand, it's a great knowledge!

Once there was a little island country. The land of this country was the tiny island itself. The total money in circulation was 2 Rs as there were only two pieces of 1 Rs coins circulating around.

1) There were 3 citizens living on this island country. A owned the land. B and C each owned 1 Rs.

2) B decided to purchase the land from A for 1 Rs. So, now A and C own 1 Rs each while B owned a piece of land that is worth 1 Rs.

* The net asset of the country now = 3 Rs.

3) Now C thought that since there is only one piece of land in the country, and land is non producible asset, its value must definitely go up. So, he borrowed 1 Rs from A, and together with his own 1 Rs, he bought the land from B for 2 Rs.

*A has a loan to C of 1 Rs, so his net asset is 1 Rs.
* B sold his land and got 2 Rs, so his net asset is 2 Rs.
* C owned the piece of land worth 2 Rs but with his 1 Rs debt to A, his net residual asset is 1 Rs.
* Thus, the net asset of the country = 4 Rs.

4) A saw that the land he once owned has risen in value. He regretted having sold it. Luckily, he has a 1 Rs loan to C. He then borrowed 2 Rs from B and acquired the land back from C for 3 Rs. The payment is by 2 Rs cash (which he borrowed) and cancellation of the 1 Rs loan to C. As a result, A now owned a piece of land that is worth 3 Rs. But since he owed B 2 Rs, his net asset is 1 Rs.

* B loaned 2 Rs to A. So his net asset is 2 Rs.
* C now has the 2 coins. His net asset is also 2 Rs.
* The net asset of the country = 5 Rs. A bubble is building up.

(5) B saw that the value of land kept rising. He also wanted to own the land. So he bought the land from A for 4 Rs. The payment is by borrowing 2 Rs from C, and cancellation of his 2 Rs loan to A.

* As a result, A has got his debt cleared and he got the 2 coins. His net asset is 2 Rs.
* B owned a piece of land that is worth 4 Rs, but since he has a debt of 2 Rs with C, his net Asset is 2 Rs.
* C loaned 2 Rs to B, so his net asset is 2 Rs.

* The net asset of the country = 6 Rs; even though, the country has only one piece of land and 2 Rs in circulation.

(6) Everybody has made money and everybody felt happy and prosperous.

(7) One day an evil wind blew, and an evil thought came to C's mind. "Hey, what if the land price stop going up, how could B repay my loan. There is only 2 Rs in circulation, and, I think after all the land that B owns is worth at most only 1 Rs, and no more."

(8) A also thought the same way.

(9) Nobody wanted to buy land anymore.

* So, in the end, A owns the 2 Rs coins, his net asset is 2 Rs.
* B owed C 2 Rs and the land he owned which he thought worth 4 Rs is now 1 Rs. So his net asset is only 1 Rs.
* C has a loan of 2 Rs to B. But it is a bad debt. Although his net asset is still 2 Rs, his Heart is palpitating.
* The net asset of the country = 3 Rs again.

(10) So, who has stolen the 3 Rs from the country ? Of course, before the bubble burst B thought his land was worth 4 Rs. Actually, right before the collapse, the net asset of the country was 6 Rs on paper. B's net asset is still 2 Rs, his heart is palpitating.

(11) B had no choice but to declare bankruptcy. C as to relinquish his 2 Rs bad debt to B, but in return he acquired the land which is worth 1 Rs now.

* A owns the 2 coins, his net asset is 2 Rs.
* B is bankrupt, his net asset is 0 Rs. ( he lost everything )
* C got no choice but end up with a land worth only 1 Rs

* The net asset of the country = 3 Rs.

************ **End of the story; BUT ************ ********* ******

There is however a redistribution of wealth.
A is the winner, B is the loser, C is lucky that he is spared.
A few points worth noting -

(1) when a bubble is building up, the debt of individuals to one another in a country is also building up.
(2) This story of the island is a closed system whereby there is no other country and hence no foreign debt. The worth of the asset can only be calculated using the island's own currency. Hence, there is no net loss.
(3) An over-damped system is assumed when the bubble burst, meaning the land's value did not go down to below 1 Rs.
(4) When the bubble burst, the fellow with cash is the winner. The fellows having the land or extending loan to others are the losers. The asset could shrink or in worst case, they go bankrupt.
(5) If there is another citizen D either holding a Rs or another piece of land but refrains from taking part in the game, he will neither win nor lose. But he will see the value of his money or land go up and down like a see saw.
(6) When the bubble was in the growing phase, everybody made money.
(7) If you are smart and know that you are living in a growing bubble, it is worthwhile to borrow money (like A ) and take part in the game. But you must know when you should change everything back to cash.
(8) As in the case of land, the above phenomenon applies to stocks as well.
(9) The actual worth of land or stocks depends largely on psychology.

Options outdo futures for first time in 8 years

2008-09-02T11:12:00.001+05:30

Besides tax advantages, more and more players are finding options more profitable than futures especially in a -bound market

ONCE seen as a product meant only for the more refined investors, options are becoming more popular than futures, which are more of mass market products. Data reveal that in August, options trading outpaced futures for the first time ever since derivatives were introduced in India eight years ago.

Market participants attribute this trend to the growing number of players, including institutions, that are finding options much more profitable, especially in the current range-bound market. Besides, the tax effectiveness of options over futures after a change in rules this year has made it more appealing to day traders and professional jobbers.

Options are derivative contracts that offer a buyer the right, but not the obligation, to buy (call) or sell (put) a security at an agreed price (strike price) during a certain period of time or on a specific date (exercise date). When an investor buys an option, the profits that he can make are infinite, but more importantly the losses he may have to incur are limited. In futures both the profits — and losses — can be infinite.

“More and more investors are using options to ride the volatility in the market, which is leading to better volumes in the segment,” says Sailav Kaji, head of derivatives at PINC, a domestic broking house. “The increased participation is leading to still better liquidity and more efficient transactions,” he says.

According to data compiled by ET, options registered a total volume of Rs 3.12 lakh crore in August, which is higher than that of futures at Rs 3.01 lakh crore. Even the average daily turnover of options (Rs 15,605.09 crore) has moved ahead of futures (Rs 15,022.44 crore) for the first time ever in August.

Mr Kaji also points out that the recent introduction of long-dated options has lead to increased interest in the options segment, although volumes there are still to pick up. Options received a major boost when finance minister P Chidambaram, in Union Budget 2008-09, amended the way securities transaction tax (STT) was to be levied on it. According to the new guidelines, if the option is not exercised, the seller has to pay STT on the premium. If the option is exercised, buyer has to pay STT on settlement price. The move led to many day traders and jobbers switching to options that also allows them to leverage more as compared to futures.

“Leverage and tax treatment are the two most important reasons for the increasing popularity of options,” says Edelweiss Securities assistant vice president Vivek Jain. “Most of the institutional and retail brokerages have started advocating options over futures in the current market scenario,” he added.

Industry participants said brokers, sensing the possible opportunities, have also lowered the brokerage on options trading. “Brokerages charge anything between 7 and 8 basis points to clients that want to trade in futures,” said a broker who did not wish to be named. “The same broker would charge 2-3 basis points for options,” he added.

“Day traders are left with no options but to trade in options since trading in any other category of products attracts too much STT for a transaction to be profitable,” says Rajesh Baheti, MD of Crosseas Capital Services, a large Mumbai-based brokerage that specialises in arbitrage trading.

He only buttresses his claim when he says that activity in the index futures is only from the hedgers while those in the stock futures has fallen to almost a quarter of the levels in January this year.

More than 50% of the volumes in the stock market are made by brokerages like Mr Baheti’s. These arbitrage chasers do not take any bets on the direction of a stock, but only seek to lock in the differences between the price of a stock and the futures based on it.

But, Mr Baheti says that nearly all of the volumes are restricted to index options, since single stock options still do not have enough liquidity for transactions to be profitable.

Gaurav Pai & Ashish Rukhaiyar MUMBAI
gaurav.pai@timesgroup.com

FOREX FUTURES: CURTAIN RAISER

2008-08-29T17:07:00.002+05:30

Punters, day traders gear up for forex futures play
Once a domain of banks, currency futures trading is now open to individuals with an appetite for risks. But there still are a few glitches that need to be addressed

FOR the first time, from Friday, individuals will be allowed to punt in foreign currency, just as they bet on stock and commodity futures. Till now, only banks could do that, but only up to a limit. All others had to have an actual underlying like exports or imports, or at least a proof of it. From now on, day traders and punters, snooping around for a new market, may try their hand in currency futures.

While Friday’s volumes may be driven by a command performance by banks, the real volume will gradually come from commodity traders, pure speculators and small businesses who get no credit line from banks. Companies and retail investors can take positions through banks and brokerages. At the moment many broking houses are opting for a trading member status (rather than clearing member), preferring a wait-and-watch policy to find out how volumes pick up.

THE PLAYERS

An investor who is long gold futures should ideally gain when gold prices go up in the international markets. However, the gain may be wiped out by a fall in the dollar against rupee. This is because the trading position in gold futures is in rupees. These commodity traders may take currency futures as a hedge through offsetting positions.

An outright forward contract which exporters and importers enter into require the banks to extend a credit line. (This is primarily to take care of a situation where a corporate dishonours the commitment). For small exporters, many banks are not be willing to extend a credit line, which makes it difficult for them to book a forward cover. And even if they do, the rate would be less attractive than what would be offered to a big corporate with millions of dollar to cover.

When the commodity futures started some years ago, a substantial portion of the volume was driven by speculators. Chances are that the same may happen in currency futures.

TECHNICAL HITCH

But, those desiring to trade in currency futures might not get that chance in many parts of India. The major issue facing brokers is lack of CTCL (computer-to-computer linked) terminals with currency futures software installed on them as over 85% of the country’s brokers use software provided by Financial Technologies (FT), which is yet to come out with a currency futures add-on software.

The other option is to buy web-based CTCL software from DotEx, an initiative of NSE. However, being web-based, the speed and efficiency of this software will be incumbent on internet connectivity used by brokers. The CTCL is a link-up from a VSAT or leased line provided by NSE to a broker location. At locations where the broker is directly linked to the NSE terminal there will be no problem in accessing the currency futures product. Only other locations linked to the VSAT or leased line and using ODIN software provided by FT will need to delay the launch.

“Out of 500 of our countrywide locations, just 50 are linked directly to the NSE terminals. Additionally, we have purchased DotEx web-based currency futures software to test in 50 other locations. While we need not wait for the FT add-on, we will have to await the client response to the DotEx software before launching it in other locations. So, we will be able to provide clients with the currency futures product only at 100 locations to begin with,” said a top broker on condition of anonymity.

According to Devang Neralla, director-technologies, FT: “We are ready to develop the currency futures add-on but will have to wait for the NSE to release a message format for vendors like us. Upon receiving this we should take upwards of 45 days to install the add-on to ODIN.” Another issue that lacks clarity, according to brokers, is whether the country’s 30,000 sub-brokers will be allowed to provide currency futures trading. A bulk of the equities volumes is pumped in by these brokers, but nowhere do the Sebi-RBI guidelines make a mention of these entities being allowed to be part of currency futures trading. Despite these hurdles, brokers are ready to kick off currency trading.

“Any exchange desirous of launching currency futures has to have at least 50 broker members. To start with, NSE has more than 50 brokers registered with Sebi and considering that 100 brokers control 85% of the market in the country, there won’t be problem in participation,” said CJ George, MD, Geojit Financial Services.

Interestingly, the FT group has also received an in-principle nod from Sebi to launch a currency futures exchange.

TAX ANGLE

On the taxation front, experts say that any profit or loss arising from transactions will be deemed speculative in cases where there is no underlying exposure. A speculative loss can be adjusted only against a speculative profit.

In case a retail investor derives a gain by selling a rupee futures — buying rupee and selling dollar — it will be added to her income and tax will be charged at the slab rate she falls under. Where there is genuine hedging exposure, say by an importer or exporter, the loss can be offset against business gain. This then will be charged at a flat 30% rate applicable for corporates.

“There is no question of long- or short-term capital gains in currency futures transactions as delivery is non-existent, unlike in OTC currency transactions. Such gains also do not apply to derivatives transactions on the F&O equities segment. I think I-T is not even aware that futures go online tomorrow (Friday). My guess is where there is genuine underlying exposure, the resultant loss can be adjusted against business gain, otherwise the gain or loss will be deemed speculative,” said

Vishal Bhuwania, a tax consultant.

HOW DOES CURRENCY FUTURES WORK?

An importer wants to make a dollar payment for a shipment one month later. Fearing that the rupee could fall against the dollar to 44, he buys dollar for 43 on the exchange. One month later, if the rupee falls to 44, he still buys dollar by paying 43 since the price was locked in at 43. So, he makes a paper profit of Re 1 by squaring off his position, and selling dollar for 44. On the spot market, however, he still has to pay Rs 44 to buy one dollar. The net impact is neither gain nor loss. Similarly, an exporter will do just the opposite

THE ROADBLOCKS
There aren't enough CTCL (computer-to-computer linked) terminals with currency futures software installed on them

There is no clarity whether the country's 30,000 sub-brokers will be allowed to provide currency futures trading

HOW MUCH SHOULD ONE PAY?
The minimum size of a contract is $1000, which can be purchased by paying a margin of just 1.75% of the contract value

Brokers continue to be wary over currency futures trade

2008-08-27T15:53:00.001+05:30

Foreign Exchange Dealers Association Tries To Clear Doubts During Meeting With Broking Houses And Members

THOUGH the imminent launch of exchange-traded currency futures is a logical step towards making the rupee a fully-convertible currency, broker apprehensions with regard to the new product persist.

In a bid to clear the air, Foreign Exchange Dealers Association of India (Fedai) had convened a meeting between its members and select brokerage firms on Monday. In this meeting, the association attempted to explain to its members and select brokers about how the product would operate in the Indian market and what would be the procedures that traders would need to follow.

A currency future is a derivative contract to exchange one currency for another at a specified date in the future. The price would be the exchange rate, prevailing on the last trading date. Typically, one of the currencies involved in the transaction is the US dollar.

Earlier this month, RBI and Sebi had released separate guidelines for trade in currency futures.

To begin with, RBI has allowed only resident Indians to participate in currency futures, thus effectively keeping away foreign investors for now.

Initially, the central bank has allowed for trading contracts to be denominated in the US dollar and the Indian rupee. The size of the contract has been set at $1000 and the tenor at 12 months. The central bank has specified that the contracts will be quoted and settled only in Indian rupees.

For one, brokers are unclear on how to promote the product among their clients. Due to the poor performing of equity markets, a lot of retail clients are expected to stay away.

Kotak Securities senior vice-president and head of private client dealing Sandeep Nayak said: “We are targeting corporates and high net worth individuals (HNIs). To be successful in the initial stages, it would have to be a high-volume game.”

The firm received its approval ID on Tuesday and would begin intimating clients on the product shortly, he added. Mr Nayak said commissions for brokers would be set, once the business took off.

Another treasury manager pointed out that brokerages may not earn any commissions in the first few days. Clients, who have existing relationships with brokerages, may ask them to trade in currency futures on a trial basis. They may gauge how successful they are in offering quotes and how profitable the business turns out to be, before actually entering the trade.

Apart from these concerns, brokerage firms are also apprehensive over operational and taxation issues. There is still a lot of ambiguity on the tax structure and most participants are protesting against the imposition of the securities transaction tax (STT).

Also, commodity brokers in India have so far no experience in dealing with futures having currencies as an underlying asset. The concept of cash settlements is also new to these players who are used to the physical settlement mode.

Religare’s commodities’ head Jayant Manglik said: “The domestic currency futures market would offer an advantage compared with OTC trading to participants other than retail traders presently, in terms of transparency, cost-effectiveness and better access than banks.” However, a lot may depend on the taxation structure, he added.

A senior market participant added: “Several brokers are hesitant to seek a separate licence to trade in currency futures as they already have one for trading in the OTC market (where currencies are bought and sold on an over-the-counter basis). Many of the smaller players are also mulling over how to counter competition from large established players.”

It may be recalled that Sebi has stipulated a host of stringent conditions for brokerage outfits intending to seek membership on exchanges.

According to guidelines, trading members require a balance sheet net worth of Rs 1 crore while for the clearing member, it would be Rs 10 crore. The clearing member would also be subject to a liquid net worth requirement of Rs 50 lakh. Much of these requirements could be met only by larger players, and may cause entities in the lower rung to stay off.

Preeti R Iyer and Deepa Krishnan MUMBAI
preeti.iyer@timesgroup.com

Broking cos under scanner in Kirit Fatania fraud case

2008-08-27T15:40:00.001+05:30

EOW Examines Role Of Broking Houses Or Persons Connected With Them In Helping Main Accused Jhunjhunwalas
Apurv Gupta MUMBAI
Jhunjhunwala.” The EOW may seek data and information from four domestic brokerage houses — Kotak Securities, Edelweiss, Religare and Finquest — in this connection.

Besides the chain of transactions, EOW is expected to enquire whether any officials belonging to the brokerages were hand in glove with the Jhunjhunwalas. It may be mentioned that Kotak Securities, tipped off by an anonymous complainant, is currently internally investigating the role of one of its senior officials. Mr Ugale said he cannot reveal the names of the people as the matter is currently under investigation. The case is related to misappropriation of funds, forgery and cheating.

Religare Enterprises, said: “Sudhir Jhunjhunwala was a client of Religare and he is on our debtors’ list. We have filed a case against him under Section 138.” Managing

THE infamous case of fraud against spiritual guru Kirit Fatania has taken a new turn. The Economic Offences Wing (EOW) is examining whether some of stock brokerages, or persons connected with them, had helped the main accused in the case to siphon off the money. The case goes back a few months, when one Sudhir Jhunjhunwala, a disciple of Kirit Fatania, had allegedly embezzled a few crores worth of funds belonging to the latter.

Mr Jhunjhunwala had trading accounts in several brokerages. According to Punjabrao Ugale, deputy commissioner of police, EOW, “We are probing to verify if there was any connivance of the brokerages with the accused — Sudhir Jhunjhunwala and his wife Madhu director of Finquest Hardik Patel refused to talk on the matter. Email queries sent to him remain unanswered. Edelweiss Securities has also not responded to ET’s email queries. Though there is no official confirmation on the same, sources maintain that the official has had closed links with Jhunjhunwala. Kotak Securities denied that it had received any communication from EOW so far.

Kirit Fatania had lodged a complaint early this year with the EOW after the duo — Sudhir Jhunjhunwala and his wife Madhu defrauded the guru and his followers. The couple allegedly collected money from him and some other businessmen, promising a handsome interest of about 5% every month. But after getting the cash, they had disappeared. According to sources, Jhunjhunwala used to play big in the markets and is said to have made huge losses in the market.

Kirit was approached by Sudhir Jhunjhunwala and his wife in January last year, expressing their willingness to become the guru’s followers. The couple organised a katha on January 29 last year and also collected some money from other followers, promising 5% interest per month on the money invested with the couple. Kiritbhai along with his followers — Mumbai-based chartered accountant Jimmy Pandey and a Chennai-based investor G Murthy among others — garnered about Rs 30 crore. According to sources, Jhunjhunwala has large debit balance in some prominent brokerages and is absconding. Though the exact amount in each brokerage is not known as of now. Sources said some of the brokerages have gone out of way to fund his trades.

apurv.gupta@timesgroup.com

Once bitten, never shy

2008-08-27T15:31:00.002+05:30

Many brokerages burnt their fingers in the recent market crash by funding their clients. But, they are still to learn a lesson.

IN the days following the stock market crash in January this year, retail broking firms were chasing their clients to recover outstandings, known in broking parlance as ‘uncovered debits’. All put together, these firms had to write off a few crores in their balance sheets because of such trades, which are not backed with collateral.

Ideally, one would have expected broking firms to tone down by this nasty experience. But seven months on, the lessons of the January crash appear to have been already forgotten...till the next time the market goes into a free-fall.

On paper, every brokerage will claim that they do not undertake any client’s transactions unless adequate margins have been collected. But try placing an order with your stock broker for a cash market transaction; he will readily accept it even if there are no funds in your trading account currently. The broker collects the cheque for the transaction at the end of the day. Depending on the location where the client resides, and the bank he holds his account with, it could take at least three days for the cheque to get cleared. Cash market transactions are settled on a T+2 basis, which means the pay-in of funds for shares purchased has to be made to the exchange within two days from the time of the trade. But since the client’s cheque usually takes more than two days to clear, it is the broker who ends up funding the transaction till the time he receives money from his client. Apart from carrying a risk on his books, the broker is also violating a Sebi regulation — a broker cannot fund a client, unless it is explicitly for margin trading. In margin trading, the client has to pay the broker 50% of the transaction value in cash, and the broker finances the remaining portion for an interest cost.

In case of F&O trades, brokers exercise a bit more caution. They collect some margin upfront which is mostly in the form of shares. But market watchers caution that it is more of a security deposit and not really a margin deposit. The broker will still be at risk, in case of a sudden adverse movement in the market, as the prices of those shares pledged as margin, too will fluctuate.

Till 2005, brokers were funding client transactions with money from their NBFC arms. The rules relating to broker funding were modified in December 2005, whereby brokers could no longer use money from their NBFC subsidiaries to fund client trades. But brokers found a way to get around this rule. They now direct their clients to NBFCs — either their own arms or those with which the brokerages have a tie up. The client opens a bank account and the NBFC which loans the money holds the power of attorney for that account. Stock market regulations are satisfied, as the money is seen coming from the client’s bank account, while in reality, it is the broker’s NBFC which is still providing the money.

“Nothing has really changed, except that a bank account has now come into the picture,” says the head of broking of a retail brokerage.

Market watchers cite two reasons why brokers are keen to fund their clients in this manner, even if it means an additional risk on their books, and the threat of regulatory action. The main reason is to retain high volume investors — especially HNIs — who are limited in number, and being wooed by every major retail broking house. The other reason is the shortcoming in the country’s banking infrastructure. Investors can transfer funds to their brokers’ accounts on a real-time basis, only if their banks have the Real Time Gross Settlement (RTGS) facility.

At present, this facility is available only in select bank branches across the country. “Unless the RTGS facility is implemented across the country, clients will not be in a position to transfer funds to their brokers promptly even if they wish to,” says Vipul Modi, president, Investor Grievance Forum.

This has also hurt investors during the January crisis, when brokers liquidated client positions because of the steep fall in share prices. The brokers faced margin calls from the exchanges, and since investors were not in a position to provide the funds instantly, the positions were squared off, leading to disputes. Many brokers question the effectiveness of rules that cannot be complied with because of systemic inadequacies.

In some cases, brokers are using existing stock exchange regulations to work their way around the rule, preventing them from funding client transactions, other than for margin trading.

Under present norms, brokers can square off their clients’ positions if the latter do not meet their payment obligations within seven days. The rule was originally made to protect both clients as well as brokers’ interests. But brokers have now distorted this rule. Many brokerages are now said to be offering five-day products, whereby they purchase shares on behalf of their clients and fund those positions for five days under the pretext that the client is not paying up. On the sixth trading session, the position is squared off and the difference settled in cash between the broker and his client.

Technically, the broker cannot charge interest to the client as this is not legally a margin-funded transaction. But once again, brokers have found an escape route in an existing rule, which caps the brokerage commission at 2.5%. Prevailing brokerage charges are 0.10-0.25%. But the broking commission for five-day products is fixed at 2.5%. The extra 2.25% a client pays as brokerage is actually the interest charge for the five-day funding that the broker provides him.

Santosh Nair
nair.santosh@timesgroup.com

Future of currency futures

2008-08-27T15:26:00.002+05:30

IN THE movie Wall Street, Gordon Gekko wakes up his broker Charlie with the words: “Money never sleeps pal…London’s deregulated, the Orient is hungrier than us. Just let the money circle the world, sport, buying and selling, and if you’re smart it comes back paying...This is your wake-up call. Go to work.” India has now agreed to join this round-the-clock game of currency derivatives, somewhat reluctantly and in a rather truncated form. The much-awaited exchange-traded currency futures trading goes live on August 29.

A large number of exchanges, banks, dealers, exchange brokers and speculators are all getting ready to join in. But, also get ready for some fun and games. In fact, India is getting into the game at the right time. World-over, exchange-traded currency derivatives are slowly eating into the traditional foreign exchange trading platforms, especially the spot and overthe-counter markets. According to a white paper on global foreign exchange trends, released by the Chicago Mercantile Exchange (CME) in 2007, it is the buy-side customer who is driving the shift to a screen-based exchange-traded market. The paper states: “Many new buy-side customers no longer depend upon the advice, liquidity or credit traditionally supplied by these (spot) dealers.”

Incidentally, though CME started life as butter and eggs exchange, it has over the years, and after some mergers (with, such as, Chicago Board of Trade and the soon-to-be-completed New York Mercantile Exchange), evolved into the largest US financial derivatives exchange. CME created the first financial futures in 1972 when it offered a futures contract between the dollar and seven currencies. It is, therefore, interesting to notice that Indian commodity exchanges have also lined up to offer currency derivatives trading. The next logical question, therefore, is: will competition for volumes and customers, especially in financial derivatives, drive some consolidation in Indian commodity exchanges?

A lot will depend on the market microstructure and how it evolves over time. A few things will, however, need to be ironed out to make sure the market is not still-born, like some of the other markets launched in recent times. The first issue is the link between the existing OTC market and the exchange-traded futures market that is about to kick off soon. While the OTC market will understandably continue to dominate in volume terms, the first-cut structure of the futures market seems to indicate that fetters have already been put on its growth.

Here’s how. First, participants in the exchange cannot keep an open position larger than $5 million, a small limit compared to the typical hedging needs of those with currency exposures. This will necessarily force big corporates to stay rooted in the existing OTC market, and attract only very small companies and punters to the futures exchanges. While speculators provide liquidity and efficient price discovery to any market, their role will be constrained by the predominance of the OTC market and the apprehension of illiquidity in the futures market.

Second, the report of the technical committee on exchange traded currency futures has prescribed that trading hours be restricted between 9 am to 5 pm. Apart from raising fundamental questions about why the committee should be bothering about this issue, and not leaving it to the discretion of the exchange, it also displays the regulators’ determination to keep its control over even the futures market. The OTC market is largely a telephone-quote driven market, dominated by banks. The RBI typically uses one of the large public sector banks to send its currency signals through this market, despite all its claims of allowing the rupee to float freely. With both markets closing simultaneously, and the OTC market’s signalling role dominating, the futures markets will have to necessarily follow, and not lead.

It also raises another crucial point. What happens when either there is a huge movement in global currency rates after market closes? Also, since comexes remain open till pretty late, what happens when a trader opens a new position in crude, due to sudden volatility in global crude prices, but is unable to immediately hedge his position in the dollar-rupee market?

Third, the market has forbidden entry to non-resident Indians and foreign institutional investors. Most overseas investors, especially portfolio investors, have turned to the Singapore-based non-deliverable forwards market to hedge their investments in India. The regulators have looked on as this offshore market has grown in size. That begs the question: is there a future for the currency futures market, without full convertibility, or without round-the-clock trading?

But it’s the regulatory front that promises some entertainment. The committee report states: “A Sebi-RBI constituted committee would meet periodically to sort out issues, if any, arising out of overlapping jurisdiction of the currency futures market.” It will be interesting to see how the three different layers of this peculiar regulatory structure — the exchanges, Sebi and RBI — manage their internal contradictions.

• The trading of currency futures on exchanges goes live on August 29

• Link between the existing OTC market and the exchange-traded futures market will decide how successful the latter will be

• Is there a future for the currency futures market without full convertibility, or without round-the-clock trading?

RAJRISHI SINGHAL

FM to set currency futures rolling on NSE this Friday

2008-08-26T11:04:00.001+05:30

FINANCE minister P Chidambaram will have a packed schedule when he visits the financial capital on Friday. To start with, he will inaugurate trading in currency futures on the National Stock Exchange of India (NSE). NSE has managed to gain the first mover advantage by being the first exchange to receive the mandatory approval from the Securities and Exchange Board of India (Sebi).

The Multi Commodity Exchange (MCX) is also believed to have received the inprinciple approval from the market regulator. BSE has also sought approval from Sebi for allowing trading in currency derivatives. Most of the leading equity brokerages have already become trading or clearing members of the new segment of NSE.

The minister will then participate in a function organised by the National Securities Depository (NSDL) to mark the operationalisation of the Central Record Keeping Agency (CRA) for the New Pension Scheme. He will then visit the Sebi headquarters and also the UTI Asset Management Company where he is expected to address the board of directors of the fund house. Similarly, he will also address the board of directors of LIC, said an official here.

Most of the leading equity brokerages have already become trading or clearing members of the new currency futures segment of the NSE. According to the joint technical committee set up by RBI and Sebi, trading members require a net worth of Rs 1 crore while for the clearing member it has been fixed at Rs 10 crore.

A regulated platform for currency futures has been in the making for quite some time considering that globally the currency market is much bigger than the stock market. According to estimates, London witnesses a daily turnover of $1 trillion in currency futures, while in New York it is said to be in the range of $500-600 billion everyday. In the Asian continent, around $350 billion worth of currency futures is traded daily in Tokyo with Singapore also reporting huge volumes.

Astrologers make a killing as bulls turn to stars

2008-08-21T13:28:00.001+05:30

Investors Are Increasingly Betting On Stars To Guide Them Through Choppy Markets

DO STARS, moons and the planets add up to profits at the stock market? To some people, the answer to this would be in the affirmative. More than anything else, it is important to understand that the dependence on astrology comes from volatility in the market. If one is in the midst of a bull run, the bucks just keeping in. Today, trends clearly indicate that a lot of investors are betting on astrology to guide them through the choppy market. This is often the time, when caution replaces greed, and stability is what is welcomed.

“Volatility and uncertainty in the market attract clients to astrology,” says Lt Col Ajay, CEO, Astromoneyguru.com, a company offering astrological services with a focus on the market. Ask him for his next prediction and pat comes the answer — crude oil prices, over the next 15 days, will again reach a level of $130.

It is not just about predictions. The element of a sound and a basic understanding of how the stock market functions can hardly be ignored. As is well known, the stock market is typically affected by factors such as companies’ fundamentals, technicals, the political scenario, to name a few. “We give recommendations based on market timing, psychology and political events,” says Dharmesh Joshi of ganeshaspeaks.com.

Strangely enough, a company’s fundamentals are never taken into consideration by the astrologers. So, how do they go about it? They start off with basic information like the date, time and place of one’s birth. Based on this, they will be in a position to predict what type of an investment is best suited to a person. This could be short-term or long-term in nature.

If, for instance, it is short-term, one is told on when one should trade and which stock or sector will be the best investment. It is not unusual to receive advice on the lines of trading in stocks starting with the letter “A” and belonging to sectors such as cement, steel or oil and gas. If the luck of that letter works in the investor’s favour, he will not have a reason to complain.

A player like ganeshaspeaks.com got into the business of predicting stock market trends five years go. Today, the client base in excess of 150 and is growing by 20% each year. Mr Joshi is quick to admit that astrology is not 100% accurate, but rather it improves the rate of success by 20-25%. He charges Rs 1,000 as a monthly fee and speaks of stock brokers and fund managers as his clientele. Indians, who today live in Saudi Arabia, London and the US, bank on his recommendations which reach them through email.

Astromoneyguru.com, meanwhile, has seen its client base jump four-fold from 1,000 to about 4,000 over the past three years. They offer services on stocks, commodities and metals. It has a 15-member team and services its clients out of Jaipur. Predictions are made on an hourly basis, weekly and a monthly basis. It does not come cheap and the fees could vary from Rs 3,500 per annum to as much as Rs 1 lakh per annum depending on the type of services required.

At the end of it, what is required is the coming together of three critical factors — an understanding of markets, astrology and a certain level of computer literacy. There are barely a handful who are good at all of these.

Prashant Mahesh MUMBAI prashant.mahesh@timesgroup.com

Fund houses may soon get to sell insurance cover

2008-08-21T12:21:00.002+05:30

Move To Help Mutual Funds Compete With Ulips

THE Indian mutual fund (MF) industry may soon be on a level-playing field with the insurance business. The next round of reforms being planned for the MF industry is expected to feature, among other things, approval for fund houses to offer insurance cover to investors for a fee. This will enable MFs to compete with unit-linked insurance plans (Ulips), the hottest selling products offered by life insurers.

According to officials close to the development, capital market regulator Sebi is considering a proposal submitted by the industry body Association of Mutual Funds in India (Amfi) to allow MF houses to offer insurance cover and also to permit them to collect the insurance premium from investors.

The current regulations bar fund houses from collecting any premium from investors. Currently, fund houses have to tie up with insurance companies for offering an insurance cover. Only two fund houses, Reliance Mutual Fund and Birla Sunlife Mutual Fund, offer systematic investment plan (SIP) products with an insurance cover now. In these cases, the insurance premium is being paid by the two fund houses.

According to industry officials, asset management companies currently offering insurance cover are large players who have the financial muscle to pay the premium themselves.
MFs have for long taken umbrage at the fact that insurers had the leeway to sell Ulips, which provide substantial exposure to equity.

Since distributors, such as banks, are allowed to charge high commissions, they have an incentive to market Ulips to investors as against plain vanilla equity MFs. The other issue is that of transparency on how much of the premium paid on Ulips actually goes into the policy holder’s account. Over 80% of the premium collected by insurance firms comes from Ulips.
In the case of MFs, Sebi has imposed a cap of 2.5% on expenses including operations and management fees for each scheme floated by an asset management firm. Sebi to strengthen role of AMC trustees

BESIDES creating a level-playing field between Ulips and equity mutual funds, other reforms being planned by Sebi will focus on strengthening the role of trustees of asset management companies (AMCs), besides putting in place a mechanism to value floating-rate bonds.

Amfi, which represents the interests of fund houses, along with credit rating agency Crisil, will soon submit its final report to Sebi on valuation of floating-rate bonds. Sebi has already held preliminary rounds of discussions with Amfi and Crisil on the bond-valuer methodology.

Industry officials said there will be a uniform pricing methodology for floating-rate bonds (floaters). This implies that the same principle that is applied for fixed coupon bonds will be also applicable for floaters, by using the discount cash flow (DCF) methodology, to arrive at the yield to maturity (YTM).

However, this is likely to be implemented in different phases so that it does not lead to any major disruption in the current system, the officials said. The underlying methodology will be the same for all the floaters, irrespective of fund houses holding different bonds in their books. The Indian MF industry manages assets aggregating over Rs 3,50,000 crore in just fixed-income schemes out of total assets of over Rs 5,30,000 crore.

Currently, there is no fair discovery of the value of floaters. Although the corporate debt market is illiquid with very few large issues, people involved in the process reckon that within the current constraints it could be possible to implement this methodology.

However, some of the fund managers in the industry differ on this as they feel that since floaters are complex products it should be left to the market to determine the price. Because each and every floating rate bond is different from the other with different benchmarks and spreads.

For a decade, the current Crisil bond matrix is being used by the MF industry, which later got picked up by banks as well. This uniform methodology got evolved with the support of market practitioners and the regulator over a period of time.

Sebi has also called for a meeting of trustees of asset management companies next week to discuss issues relating to governance. In India, the trustee committee consists of individuals (and they rely largely on the compliance officer) unlike globally, where AMCs can also appoint corporate trustees.

Stock markets are like supermarkets

2008-08-13T22:29:00.001+05:30

Through his columns, Kanu Doshi will give you smart tips on sound investing.

IF there was one question that I know people would pay a million bucks upfront in cash to have the answer to, it would be -- How do I get rich? The answer is really obvious -- if you have a million to spare then why waste it on a foolish question, invest it sharply and over the years you'll surely get your millions.

But that's not the answer they are looking for. Surely there has got to be something more to it -- some deep insights, some invaluable pearls of wisdom, some magic! But not really, it's often just simple common sense. Like Robert Kiyosaki's best selling book Rich Dad, poor Dad that should be made the Bible of the financial world. Here are four points from there on how you can do it:

1. The value of learning

Go back to your earliest memory. When you wanted to ride a bike on your street, the first thing you had to do was learn how to ride. Or when you wanted to pass your Maths exam, you had to learn your tables. Then why is it that when we want to make money, do we not understand that we have to learn good investing?

Instead we tend to just pick up the phone, speak to our stockbroker, buy a stock and start dreaming of becoming rich. That's exactly what rich investors don't do.

Instead, they 'learn' to 'invest'. They learn all there is to know about the art of investing in stocks. All about the stocks they wish to buy and only then do they take the plunge. Above all, they keep practicing what they have learnt. They keep sharpening their saw. This single factor of learning before hand separates the rich investors from the poor investors,

2. Shop at a discount

Another bit of common sense -- What do you do when your neighborhood super market announces a SALE? You flock into the stores and buy up every little item and build up at home piles of grocery, soaps, etc. But when Stock Markets reduce the prices of shares and announce a 'crash' every investor rushes in to 'sell' and runs away from the market.

Again, conversely, when Super Markets raise their prices, customers shy away and refrain from buying till the next 'sale'; but when Stock Markets announce rising prices, every investor rushes in to 'buy'.

This is not the way rich investors behave. They follow the same principle of buying at the super market. They buy stocks only when the stock markets crash. Ask Warren Buffet!

3. Define asset

If you own it, it's an asset. If you owe it, it's not. The rich never keep their wealth in the form of liquid money in a bank account. They always keep acquiring assets while the poor acquire liabilities, which they mistakenly believe are their assets.

A house bought on a loan is not an asset, it's a liability. The same goes for paying for groceries through credit card. So you need to learn the difference.

In life what is important is not how much money you 'make' but how much of that money you succeed in 'keeping' and 'multiplying'. The rich know how to keep it because they know how to invest it. Money well invested is money well kept. Good investing is often more rewarding than good earning.

4. Make real money

Real money is made when you 'buy' an asset and not when you sell that asset is yet another gem from the author. Be careful of the price you pay when investing in an asset. Don't rush into buying any investment at any price. Wait till the prices come down the way. The 'price' of the asset when you buy is the sole determinant of your profit on that asset when sold. If you buy that asset cheap, your profit on sale is obviously larger.

All these four seems rather straightforward now that you think about it. We known all this instinctively and we only have to apply it to the stock markets -- it's really common sense. The only problem is that common sense isn't really all that common!

How a nimbu paani owner conquered the markets

2008-08-13T22:22:00.001+05:30

Yogesh Chabria is one of the founders of GSIFS.com. He spends substantial part of his time educating and spreading awareness about the capital markets. Yogesh shares with you his ideas on investing in a fun, simple and easy to understand manner.

IT's amazing how many people believe that the stock market is an extremely complicated, boring and difficult to understand monster.

Of course, they are the ones who have never invested in the markets.

You, however, don't need to know alien terms to understand the stock market. I believe in keeping things simple.

In fact, I often try to make sense of what some analysts are saying on business television!

Let me tell you what I often tell some of my first-timer clients. It is about my first venture, The Indian Lemonade Company. I initiated it when I was at school in the Middle East.

I was 12 years old then. My school had organised a fair, where students could take a stall on rent and sell whatever they liked.

I liked the idea -- I could make money from it. A few days later, I was sipping nimbu paani, thinking what to do. That is when I got the idea of setting up a nimbu paani stall.

Read more great start up ideas: She prefers chocolates to a 9-to-5 job!

To rent the stall, including purchasing ingredients, I needed around Rs 1,000 (I have converted the currency to Indian Rupees to simplify it).

With Rs 1,000, I could make 1,000 glasses of nimbu paani. Each glass would be sold for Rs 5. So if I sold all the glasses, I would easily make Rs 5,000. But I didn't have the cash to start off. I had Rs 100. So I approached my dad with my plan. He liked the idea, but suggested sharing it with my friends and getting money from them. He said if my plan was so good, anybody would give me money.

I went to my friends, excited, and showed them a roughly written plan on a piece of paper (a prospectus in the real world). I told them the Indian Lemonade Company was raising money (or making a public offer). It was issuing the stock at Rs 100. Every Rs 100 invested by them would be Rs 500 if I sold all the glasses of nimbu paani.

The plan looked something like this:
The Indian Lemonade Company - Drink Nimbu Paani to become rich.

The Indian Lemonade Company, started by Yogesh Chabria, is giving you an exciting chance to multiply your money without even working. It needs Rs 1,000 in all to start a stall for the school fair, where it will sell 1,000 glasses of lemonade. If all the glasses are sold, the Rs 1,000 will be multiplied to Rs 5,000. Each glass of lemonade costs Rs 1 but will be sold for Rs 5.

Many of my friends liked the idea and gave me money. In fact, more people wanted to invest (in the real stock markets it is called over-subscription), but I couldn't accept every investor so I let only my close friends invest.

I gave them a piece of paper with my signature along with the details of their investment (what used to be share certificates earlier are now dematerialised shares). This paper was proof that they had invested in my company. They were the shares of my company.

With the money collected from my friends, I started the Indian Lemonade Company and sold all the glasses. The Rs 1,000 did become Rs 5,000.

All my friends made profits of 500 per cent (every Rs 100 invested had become Rs 500), on their investment. They didn't have to work at all. They just had to invest in my company and I took care of the rest.

This is exactly how the stock market works. A company or entrepreneur who knows how to run the business raises money from people by issuing stock. They can put as little or as much as they want. If the entrepreneur makes money they, too, benefit in the ratio of which they have invested. It helps people without the time and skill to make money.

A stock makes you part owner of the company. Just like the people who invested in the Indian Lemonade Company, you too will benefit if you invest in a company which is growing and making profits.

Over the last 100 years, stock markets have been known to give more returns than any other investment tool. It will continue to do so, according to me.

All you need to do is drink nimbu paani, invest and watch your wealth grow!

What stock brokers don't tell you

2008-08-13T22:13:00.003+05:30

Author : Kanu Doshi

DO you find yourself quoting proverbs or famous last words when teaching a child something important? You would rather fall back on their instinctive sense and the shared universal meaning.

It is much the same for stock markets. To learn the fundamentals of the market, the easiest approach would be to use often used maxims from our everyday life.

So here are 11 of them. The knowledge behind each is gained from several excellent books on the vast, fascinating subject of stock market investment such as Peter Lynch's One Up On Wall Street and Beating The Street; Zulu Principle by Jim Slater; and Robert Hagstrom Jr's The Warren Buffet Way.

The application, however, is entirely mine.

1. No pain without gain
This is the base level fundamental of equity investing. There is a close direct relationship between risk and reward. The higher the reward, the greater the risk. Fairly simple to understand, but it is most difficult to live by.

Where there is profit, there is always risk. The greater the opportunity of profit, greater the possibility of loss.

2. Slow and steady doesn't always win the race
Gentlemen who prefer bonds don't know what they are missing! On bonds, there is no return on money; there is only return of money.

Bonds being debt instruments, unlike equity, yield only fixed return. And, with inflation and income tax factored in, there is often no return at all.

(INFLATION METER: Did you know that your expense of Rs 10,000 today will be equal to Rs 46,609 in 2028? That's because inflation is at 8% today! Use our 'cost of living ' tool to find out how inflation will affect your budgets!)

3. United we stand
Investing in equity shares of companies is risk related because returns are linked to the company's profits unlike investing in bank deposits or bonds or debentures where the returns are fixed and accrue to investors regardless of the company's profits.

In the stock market, you are tying yourself to the company's fortune.

4. It takes all kinds to make the world
Stock market behaviour is not unpredictable as it is commonly believed. It simply depends on human behaviour which, as we know, can never be predicted with any reasonable accuracy.

Hence, we have fluctuations in prices of commodities, things and stocks based on greed, emotions, hopes, fantasies, fear and dreams of millions of people, resulting in opportunities of making money out of such fluctuations!

Find out how one investor lost Rs 35 lakh in the stock markets !

5. Common sense isn't all that common
Not all common stocks are common. Though equity shares as an investment class is one, each company has a distinct identity and performs differently and, therefore, rewards its investors differently.

6. Ignorance is bliss
Investing is nothing but an arbitrage of ignorance. Investing is basically profiting from pricing and difference in market perception of a given product at a given point of time.

Stock market is one place where the buyer and the seller both think that they are smart in their decision.

7. Elephants don't gallop, zebras do
Stock prices of big companies with large capitalisations move up or down rather slowly compared to smaller companies because there is not much market ignorance on big companies to capitalise on.

Hence, smaller companies tend to reward its investors more handsomely.

8. Be a braveheart
You need 'cash' and 'courage' to be an equity investor. If you are prone to panic at losses, remain invested in fixed deposits with banks and government bonds.

If you don’t know who you are, the stock market is too expensive a place to find it out!

9. If you throw peanuts, you get monkeys
Investors make the mistake of not buying good stocks at high prices as also buying bad stocks at low prices. A lay investor tends to buy unsound companies at cheap prices instead of solid companies at high prices.

10. Lose the battle, win the war
Equity investment cannot maximise your income, but it can maximise your wealth. The actual yield by way of dividends on equity shares with reference to their market value is often as low as one per cent on investment.

But capital appreciation in equity values can be insanely high. Ask the initial investors of Infosys or Pantaloons.

11. As you sow, so shall you reap
Saving for investment is not a punishment. Investing is making conscious choices about how you will use your money. It is not about choosing to live rich or die rich.

It is about how you want you and your dear ones to live during your lifetime and thereafter.

Here are a few more pointers.
i. There is no 'high' price or 'low' price of a stock. There is only the 'market' price.

ii. Absolute price of a stock is not relevant. What is important is whether it is underpriced or overpriced.

iii. You can't control the market but you can control your reaction to the market.

iv. Intelligent investing is knowing 'what' to buy; smart investing is knowing 'when' to buy.

v. Your profit is determined by your purchase price and not your sale price.

vi. Don't ask the price of the stock, ask the worth of the company.

You are ready to go and need to search for a broker. Keep these in mind.
a. Don't expect your broker to help you to earn 'for' you. He is there to earn 'from' you.

b. The sub-broker makes money. The main broker makes money. Two out of three making money in a single transaction is not a bad bargain.

c. Never ask a broker whether you should buy a particular stock. It is like asking a barber if you need a haircut!

Disclaimer:While we have made efforts to ensure the accuracy of our content (consisting of articles and information), neither this website nor the author shall be held responsible for any losses/ incidents suffered by people accessing, using or is supplied with the content.

Are you making your broker a rich man?

2008-08-13T22:07:00.001+05:30

Author :Sanjay Matai

IN my many years of advisory experience, I have found that most investors believe that to make money, they should buy and sell stocks frequently. This, sadly, is far from the truth!

Here's why:

1. Profits come from discipline
Most investors do not follow the recommended strategy of staying invested in the market for the long- term. Churning portfolio without a good reason to do so, is a very risky practice. For instance, buying and selling shares on the basis of tips and recommendations, without knowing about the fundamentals of a company, is merely speculation, and can be risky.

2. Patience pays
Do you call up the broker endlessly to engage in quick trading? Do you check your portfolio on web sites or look at the ticker on television channels, continuously? And, if there are no significant gains you switch to other stocks. Remember: fortunes made in any business, do not happen overnight. So, it is unreasonable to expect your investments to double in a short span of time.

3. Wrong advice
If you have been buying and selling a mutual fund scheme, just because your broker is telling you to do so, you may want to think again. More often than not, brokers do this purely for commissions that they make. For every investment you make, the broker gets a commission. And this commission comes out of your money in the form of an entry load.

So the more you churn, the poorer you get. Your broker of course, just gets richer!

When it's okay to churn:

Too much portfolio churning is counterproductive, as it adds to your costs without any proportionate benefit. This kills your overall profit. But sell if you find yourself in the following situations:

- Your funds or shares have been underperforming leading benchmarks for long periods of time

- The company whose shares you have bought has been delivering poor results as compared with it's peers.

Make sure you book profits and cut losses at an appropriate time, and based on sound reason. Striking a balance is key.

Disclaimer: While efforts have been made to ensure the accuracy of the information provided in the content, the web site or the author shall not be held responsible for any loss caused to any person whatsoever who accesses or uses or is supplied with the content (consisting of articles and information).

IPO issues: Sebi can do nothing

2008-08-13T20:34:00.001+05:30

CNBC-TV18s Research Analyst, Haresh Soneji

It�s not because two brave CNBC TV18 journalists traded the thin line and went about unearthing the not-so-transparent areas of IPO subscription. The issues were always for the taking, just that the regulator (read Sebi) did nothing. It�s fool-hardy to think that Sebi doesn�t know about it. It is well aware and well fed through its various sources. Being a well informed regulator, it knows exactly who the people are behind the QIBs that vet the IPO in times of crises. But, if you thought that Sebi can do something about these QIBs, you may be in for a shocker. Sebi can do nothing. Yes you read it right. Sebi can�t do anything. Having made such a strong statement, allow me to explain.

For starters, QIB allotments were made on an ad hoc basis till recently when it was corrected to proportionate basis. This brought into picture the own QIB angle. QIBs controlled by companies itself or through a set of individuals who would apply in the IPO at a pre-decided price. Eventually, as the case may be, the company through its corporate bodies, would own more stock than shown in the promoters quota. This has been the case for sometime now. Making QIBs shell 100% on application is not the cue. Perhaps, a better way is to let QIBs own only a percentage of the total available QIBs quantity. Much like how MFs cant invest more than 10% of their assets in any one stock. This would at least force some issues to dig deeper ground and make it all the more difficult to make the issue successful. And Sebi, if it wants, can do that very easily. It would make some of these QIBs jittery, but protecting small retail investors� interest is of utmost importance.

Second, QIBs filling up applications is not illegal. Both Sebi and the concerned QIBs know about it. If Sebi was concerned about protecting small retail investors, it should have mandated that retail portion should be subscribed by small retail investors only and any under-subscription on that front should lead to the issue being called off. If not that, the underwriters to the issue should have a one-year holding period. But, that�s not the case. QIBs can fill in the vacuum of the retail investor category to get the issue fully subscribed. That�s a give away because getting a company listed is an important element of the value chain. Once listed, the borrowed monies could be paid back officially through the effective stock market channel at very little cost. How it is channelised is another spurious factor in itself?

Third, what�s wrong about selling on Day 1 of listing? You can�t pull up QIBs or small retail investors for selling on listing. In fact, there are mutual funds in India whose mandate is to subscribe to the issue and sell on Day 1 of listing irrespective of target prices. If your question is why Sebi allows this, the answer probably is because it�s fair business. As an entity, it�s not an unfair trade practice to book profits whenever.

The more important question is definitely who is buying on listing. A two to four times trading of the equity capital of the company on listing day surely means circular trading by those who create a market where no market exists. On a delivery volume of 8-10%, this means some 20%or more paid up equity has changed hands on Day1 of listing. Who has bought is important? This is common sense. Once listed the allocations among QIBs and small retail investors get skewed towards small retail investors. Forget shady issues, even big ones such as Reliance Power�s latest shareholding pattern suggests how QIBs have sold to unsavvy, uneducated, and gullible small retail investors.

Fourth, Sebi has an issue at hand. It can�t recognize the source of foreign monies in IPOs or otherwise. It is helpless in this situation. For many an issue, QIB monies routed on the IPO is more often than not, monies of Indian origin. These are passed on through multi layered instruments and are managed by persons of Indian origin outside India. The KYC exists but only to a certain layer. If you think that�s a failure, here is a small cue � even the US equity market regulator, Securities & Exchange Commission (SEC) has failed to rope in the faces behind hedge funds. And the hedge fund is a $3 tn industry. That�s way too big to go unnoticed. Being a part of IOSCO (an international regulatory body), the task seemingly every year is to get these biggies under the belt. But no much luck till date.

Fifth, only a fraction of trading on Day1 is recognized in India. The rest comes in bits and pieces or is not part of the system altogether. Here is a small case in point. A few years back, a money manager invited me over to talk about his investment style. I always fancied his style because at any given point in time his positions were delta neutral (delta neutral means a strategy where the sum of the deltas sum to zero, you make money either way the market moves). Talking over a drink he opened up freely and his conversations zapped me. Back in office the next day, I researched only to learn that he was mostly correct. The Indian official system recorded only some part of the exposures, the rest were taken on the brokerage books in USA through their tax heaven routes. There were enough loop holes that allowed FIIs to play around with very little expenses. A Tier4 derivative cost him nothing when you considered leverage. This created enough liquidity in the system. This created a premium on valuations. This created profits on multiplier. And his firms managed to get away with hefty performance fees and he with fat bonuses.

Sixth, Sebi can ban small retail investors from entering into IPOs directly. That requires lots of commitment. It will only make people think Sebi to be an archaic body. But, it would be doing a world of good for these small retail investors. Several small retail investors forum have concluded that most of these investors are not versatile investors. They invest more on hear say than proper research. Since IPO these days are not offered at par, but with hefty premiums, investing in several of them requires a lot of understanding of financial statements.

These are hard issues requiring tough committed decisions. Fines on merchant bankers for mis-pricing issues, or changing book building norms, among other things are softer ways that will not have the much needed impact. Sebi has to act tough and Sebi has to be real. This would mean certain bashing from vested corners, but at the end of the day fair play will be the name of the game. Till tough steps are not taken, Sebi can do nothing.

Disclosure: The author is not permitted to trade and/or invest into the equity market directly or indirectly, apart from investing (long only) in mutual fund products. His equity exposure is only to the extent of ESOPs granted by the employer

Hitching a free ride may prove costly

2008-08-13T11:42:00.000+05:30

Some equity investors may think it is wise to follow investment patterns of expert fund managers. But there are many reasons why this may turn out to be a bad idea, says

THOSE who invest in shares use different methods to pick stocks. These methods vary greatly. A large number of investors rely on tips from friends and insiders, some pore over balance sheets of companies, while others scrutinise share price charts for a ‘head and shoulder’ pattern. But there is yet another category of investors who try to be clever and mirror the investment actions of mutual funds. After all, mutual funds have all the expertise, they have access to extensive research and they hold discussions with senior management of companies.

Hitching a free ride like this may provide the investor with a feeling that he is saving time, money and resources. But there are many reasons why this may turn out to be a bad idea. There is no guarantee that a scheme that has beaten all equity indices may show the same results in the future. Stock picking involves subjectivity. Investors have to track the fund management team of the fund house at a time when fund managers change jobs with a regularity. Though, it is easy to track the moves of fund managers, it is difficult to track research professionals sitting at various fund houses that serve as the backbone of the stock picking process.

The monthly fund factsheet does not tell investors at what price a particular stock was bought and the price target for the stock. There are instances of stocks running up 25-30% in a matter of days as the news of a fund manager buying a counter enters the market. This is especially true in the case of mid- and small-cap stocks where there is a possibility of higher returns compared to broad markets. In such circumstances, there is a risk of buying at a higher price.

Though, fund houses are not involved in heavy trading and quick profit booking, there are cases where the price move makes it a case for profit booking. This is a normal phenomenon that holds good in the case of schemes that are actively managed for high returns.

Exit cannot be timed by an individual investor as the scheme’s sale details come out only by the end of the month. In the mean time, insiders would have exited bringing the stock under pressure. In the mid-cap and small-cap space, there are cases when investors have bought stocks at a higher price and sold at a lower price while tracking mutual funds. Mirroring the portfolio of a mutual fund scheme is something that leaves the investors with significantly h i g h e r costs compared to the costs incurred by the fund. Given the comparatively small corpus that an average individual investor has and the average fund holding of more than 30 stocks, the costs do not justify the activity. Instead it makes sense to invest the money in a mutual fund.

If you already are a mutual fund investor, there is no point investing in the stocks that are there in the scheme portfolio. It rather makes sense to pick up stocks that are not picked by a mutual fund scheme. Investors would be better off picking such stocks that are typically expected to get supernormal returns but are high-risk small-cap or where there is low floating stock and a fund house cannot find a suitable entry and exit.

Nikhil Walavalkar nikhil.walavalkar@timesgroup.com

IPO book-building may go

2008-08-13T11:38:00.000+05:30

No real price discovery seen under book-building process. Sebi may weigh an alternative system for IPO pricing

WHILE the dismal performance of IPOs is largely attributed to a sluggish market, it is time to raise a more fundamental question: do we need a relook at the book-building system that’s used to price new stock offerings?

A review of the present book-building norms should figure in Sebi’s agenda on the next round of primary market reforms. According to a source familiar with the subject, Sebi may soon examine whether the book-building process is the most efficient price-discovery mechanism.

“In fixed price issues, the promoter fixes a single price. In the book-building issues too, he sets the issue price, though within a 20% band. So in the true sense, the market is not discovering the price,” said Prime Database MD Prithvi Haldea.

A predominant number of book-build IPOs gets subscribed (often in multiples) at the upper price band. It’s a reflection that almost all IPOs are underpriced, and rarely rightly priced. Stock market circles who favour a change in the rules argue that a real price discovery is possible only when there is no price indication from the issuer, and the price is freely determined through an auction. In such a system, one can have a circuit filter on the day of listing, as the real price discovery has already happened through the auction process.

But the challenge in any new system would be taking care of the interest of retail investors. To ensure this, the QIB portion of 50% in an IPO could be sold through a closed book auction. “The auction should remain open for a day. An auction shall help the issuer get the best price for the shares from QIBs. And then, the lowest QIB bid should be the fixed price for retail investors,” added Mr Haldea.

The logic is since QIBs are sophisticated investors with a better understanding of valuations, they don’t need an indicative price range for an IPO. Some of the investment bankers also think that retail investors (who don’t really help in the price discovery system) should be brought in at a later stage. According to Kotak Mahindra Capital senior V-P Gesu Kaushal, “Over the last few years, many companies have successfully done IPOs through the book-building mechanism. We could consider having an indicative price band as a variation to the current book-building process given the volatile market conditions. And over the longer term, as the market matures further, we could consider the French auction process for QIBs with a common clearing price for retail investors.”

“Modifications are required on these counts. Also, in the extant process, the need of the hour is to reduce the time between deciding the price band and opening the issue for subscription,” said another senior i-banker. Mr Haldea felt there was also a problem when several QIBs did not get shares in an IPO despite their willingness to pay a higher price. “Even if a QIB sees a higher value in an IPO, it still has to bid within the price band and be subjected to a uniform proportionate allotment,” he said.

WHAT IS BOOK BUILDING?

Book building is the process by which a demand for the securities or shares proposed to be issued by a corporate body is elicited and built up and the price for such securities is then assessed for fixing the quantum of such securities to be issued. This can be done through a notice, circular, advertisement, document or information memoranda or offer document

Today, 50% of an equity offering is earmarked for qualified institutional buyers (QIBs), 35% to retail and 15% to non-institutional investors/HNIs. Companies have to offload a minimum of 10% of their equity to go public.

Deeptha Rajkumar MUMBAI