business standard updates 17-4-2012

Double whammy forBSE

PALAKSHAH Mumbai, 16 April The future appears bleak for the Bombay Stock Exchange, the oldest in Asia. The exit of Wall-Streetreturned Madhu Kannan, after three-odd years as managing director and chief executive is only one reason for this. Shareholders of BSE said the Securities and Exchange Board of India’s (Sebi) new regulatory regime, announced earlier this month, has put a spanner in BSE’s turnaround drive. Listen to Thomas Caldwell, Toronto-based chief executive officer (CEO) of Caldwell Securities, which owns five per cent in BSE: “The shifting sands of regulation will make it difficult for exchange executives to operate and execute plans. Support for BSE could have come from top global exchanges like Deutsche Borse, a shareholder, but new regulations do not make it interesting enough and are pro-monopoly.’ Others said BSE was already in a fragile state and the new regulations would make the situation worse. Cash market volumes are down to just ~2,000-~3,000 crore due to lack of trading interest in small and mid-cap stocks. While activity in the derivative segment has picked up, it is anybody’s guess whether this will continue after the market-making scheme. Currently, futures and options in excess of ~10,000 crore are traded daily. Although the details are awaited, Sebi has broadly said exchanges would have to transfer 25 per cent of profit to asettlement guarantee fund (SGF) of clearing corporations (CCs). However, an exchange cannot have more than 51 per cent stake in clearing corporations, which should have a ~300-crore net worth criteria. This is a double whammy for BSE. Apart from transferring profit, it will have to infuse more capital in clearing corporations to meet the net worth criteria. The impact of this will be seen on its bottom line. Going by last year’s profit, BSE would transfer around ~50 crore to the SGF, which already has ~5,000 crore in its kitty. “This is a money grab. We would not have taken two seconds to decide against investing in BSE if we knew Sebi will come up with such rules,” said Caldwell. Already, BSE faces a direct threat from a new competitor if Sebi decides to clear the decks for MCX-SX. According to Sandeep Parekh of Fincec Law Advisors, which advises MCX-SX, BSE’s future hangs in balance. “My crystal ball shows a dire future for BSE, unless the stars align differently than they currently do,” he said. Parekh believes a limit on ownership by any single shareholder is a problem for BSE. Another executive from a leading global exchange, which owns five per cent stake in BSE, said: “Among the shareholders of BSE and NSE are some of the world’s richest institutions. What kind of strategic partner will be interested in helping BSE revive with a 15 per cent stake as mentioned by Sebi? Initially, we had been told the regulator would consider allowing a foreign stock exchange to buy at least 26 per cent stake.” Global investors had taken note of some of the measures taken by BSE in the past couple of years under Madhu Kannan. US hedge fund legend Geroge Soros and philanthropist George Kaiser picked up five per cent stake in the exchange. Kannan and his team’s strategy was to project BSE as a complete solutions provider. For this, they were consolidating the clearing and settlement, depository, technology and other ancillary businesses to bring cost rationalisation. BSE acquired a back-office trading solution provider, Market Place Technologies, raised stake in Central Depository Services Ltd (CDSL) to 54 per cent and launched a separate clearing house as its 100 per cent subsidiary. Both BSE and NSE had inked exclusive global alliances with leading exchanges in the US, Europe and Asia. Until now, a little over 80 per cent of BSE and NSE’s revenues came from trading charges, but both were seeking to change their revenue mix. The new BSE chief will have to undo most of this and focus on bringing down stake in clearing corporations to 51 per cent and in CDSL to 26 per cent. Spurred by competition, exchanges in Eurpoe and the US are consolidating their business to provide end-to-end solutions. The London Stock Exchange recently bought 60 per cent stake in LCH Clearnet, an independent clearinghouse. NYSE Euronext launched its own full service derivative clearing house in Europe. The depository business is going the same way and providing solutions to everything related to the stock market business. That was the only way for BSE to move ahead of rival NSE. This, experts said, would not be possible now. Sebi’s new regulations and managing director’s exit make shareholders see red Month Derivatives Mkt Share Cash Mkt Share ~crore in % ~ crore in % Jan 3,109.8 3.0 2,385.3 18.2 Feb 21,721.0 14.1 3,494.4 17.7 Mar 10,395.1 7.1 2,845.1 18.9 Apr 15,269.4 14.4 2,214.0 18.0 Source: BSE; Data compiled by BS Research Bureau; Remaining market share belongs to the National Stock Exchange CCH HAALLLLE ENNG GE ESS F FO OR RT TH HE ENNE EW WCCE EO O| Keep momentum going in F&Os, attract FIIs |Revive equity cash and currency segments |Get the exchange listed |Implement pending strategies in terms of product innovation, technology, distribution and competitive issues that will dominate the next decade in Indian capital markets |Cut stake in clearing corporations (CC) &depositories. Infuse capital in CC COUNTING CASH BSEaverage dailyturnover (month-wise) “This is a moneygrab. We would not have taken two seconds to decide against investing in BSE, if we knewSebi will come up with such rules” THOMASCALDWELL CEO of Caldwell Securities, which owns 5% in BSE “Mycrystal ball shows adire future forBSE, unless the stars align differentlythan they currentlydo” SANDEEP PAREKH Fincec Law Advisors

New Sebi norms reduce listing-day volatility

SAMIE MODAK Mumbai, 16 April Listing-day restrictions introduced recently by the Securities and Exchange Board of India (Sebi) have significantly reduced price volatility by curbing speculative trades. According to an analysis, the average fluctuation in share prices (difference between the highest and lowest prices on the day of listing) for companies that got listed last year was a little more than 100 per cent. The new rules have significantly reduced such volatility. While NBCC and MT Educare, which got listed last week, moved within a range of just five per cent, shares of MCX, which got listed in March, moved in a band of 11 per cent on listing day. Said Girish Nadkarni, executive director, Avendus Capital, “Since only delivery-based trades are allowed in smaller issues, volume and volatility will automatically come down as speculators won’t be able to participate.” Added Jagannadham Thunuguntla, strategist and head of research at SMC Global Securities, “It’s not just about the rules but also the quality of the issues and the pricing. Most companies that have entered the market after this year have been good quality issues, unlike last year, when we saw a lot of dubious companies get listed.” In January, Sebi had put in place a tight framework to curb the high volatility and price movements observed on the first day of trading. Many small-sized companies that were listed last year had seen unprecedented price fluctuations in the first few days of trading. For instance, Indo Thai Securities, which got listed on November 2, saw its share price move between ~18 and ~99 on the first day of trading. However, in what could be a negative for brokerages and stock exchanges, the new rules have significantly impacted first-day trading volumes. Broking houses and exchanges generate revenues from trading activity. The two initial public offerings (IPOs) that made their stock market debut last week saw a first-day trading volume of just a fraction of the issue size. Before the new rules came into play, companies making their debut clocked an average turnover of fourfive times the issue size. According to market participants, Sebi’s move to allow only ‘deliverybased trades’ for issues of less than ~250 crore for the first 10 days after listing, is the main reason for the thin trading volumes. Both NBCC and MT Educare clocked an unusually low trading turnover of ~21 crore each on both exchanges combined, just a fifth of their issue size. Some companies that got listed last year, including Indo Thai, Sanghvi Forging and Rushil Decor, had seen first-day volumes of more than 15 times their issue size. Under the new norms, the regulator has extended the pre-open call auction window to IPO companies for arriving at an ‘equilibrium price’. Further, it has introduced tight circuit filters of five per cent or 20 per cent, depending on the issue size. FIRST DAY, FIRST SHOW IPO Size Trading turnover (~ cr) MT Educare 99 21 NBCC 127 21 Olympic Cards 25 6 MCX 663 1,873 Source: Bloomberg Note: Trading turnover on first day of listing