SEBI Issues New Guidelines for SME Exchange

SEBI has come up with new guidelines for SME exchange. SEBI has set a post-issue upper limit of Rs 25 cr capital at face value for the companies that wish to get listed on such exchanges. If the company reaches this upper limit it wouldn’t be allowed any follow up issues, any follow-up issue has would only be permissible if new capital doesn’t not exceed Rs 25 cr.

In case companies listed on SME platform exceeds the Rs 25 cr limit, the company will be compulsorily shifted to the main board of the exchange. SEBI has absolved SME companies on SME exchange of requirement of submitting quarterly number, but they can do it on half yearly basis. Such companies are also will have privilege of forgoing the need to publish their results instead they can put their result on website.

SEBI Sets Guidelines for Market Makers on SME Exchanges

After allowing exchanges to set up separate trading platform for small and medium size companies, the Securities and Exchange Board of India (Sebi) has issued guidelines for SME (small and medium enterprises) exchanges with respect to market making activity. Sebi has now made market making process mandatory for SME scripts and has laid down terms for members of the exchange who will be willing to engage in market making activity.

The market makers would bring in more liquidity and continuity in buy/sell activity on the exchange. Market makers would be required to provide 2-way quote for 75% of the time in a day. The minimum depth of the quote shall be Rs 1 lakh. However, investors with holdings of value less than Rs 1 lakh shall be allowed to offer their holding to the market maker in that scrip, provided that he sells his entire holding in that scrip in one lot to the selling broker.

The new Sebi guidelines also limit the number of market makers for a particular script; it has been set to five market makers. Sebi has also set several qualifying criteiras for becoming market maker.

"The Worst Predictions About 2008"

"Just about everybody got wrong-footed by 2008, but some people's mistakes were truly spectacular. Here are some of the worst predictions that were made about 2008. Savor them—a crop like this doesn't come along every year.

1. "A very powerful and durable rally is in the works. But it may need another couple of days to lift off. Hold the fort and keep the faith!" —Richard Band, editor, Profitable Investing Letter, Mar. 27, 2008
At the time of the prediction, the Dow Jones industrial average was at 12,300. By late December it was at 8,500.

2. AIG (AIG) "could have huge gains in the second quarter." —Bijan Moazami, analyst, Friedman, Billings, Ramsey, May 9, 2008
AIG wound up losing $5 billion in that quarter and $25 billion in the next. It was taken over in September by the U.S. government, which will spend or lend $150 billion to keep it afloat.

3. "I think this is a case where Freddie Mac (FRE) and Fannie Mae (FNM) are fundamentally sound. They're not in danger of going under…I think they are in good shape going forward." —Barney Frank (D-Mass.), House Financial Services Committee chairman, July 14, 2008
Two months later, the government forced the mortgage giants into conservatorships and pledged to invest up to $100 billion in each.

4. "The market is in the process of correcting itself." —President George W. Bush, in a Mar. 14, 2008 speech
For the rest of the year, the market kept correcting…and correcting…and correcting.

5. "No! No! No! Bear Stearns is not in trouble." —Jim Cramer, CNBC commentator, Mar. 11, 2008
Five days later, JPMorgan Chase (JPM) took over Bear Stearns with government help, nearly wiping out shareholders.

6. "Existing-Home Sales to Trend Up in 2008" —Headline of a National Association of Realtors press release, Dec. 9, 2007
On Dec. 23, 2008, the group said November sales were running at an annual rate of 4.5 million—down 11% from a year earlier—in the worst housing slump since the Depression.

7. "I think you'll see [oil prices at] $150 a barrel by the end of the year" —T. Boone Pickens, June 20, 2008
Oil was then around $135 a barrel. By late December it was below $40.

8. "I expect there will be some failures. … I don't anticipate any serious problems of that sort among the large internationally active banks that make up a very substantial part of our banking system." —Ben Bernanke, Federal Reserve chairman, Feb. 28, 2008
In September, Washington Mutual became the largest financial institution in U.S. history to fail. Citigroup (C) needed an even bigger rescue in November.

9. "In today's regulatory environment, it's virtually impossible to violate rules." —Bernard Madoff, money manager, Oct. 20, 2007
About a year later, Madoff—who once headed the Nasdaq Stock Market—told investigators he had cost his investors $50 billion in an alleged Ponzi scheme.

10. A Bound Man: Why We Are Excited About Obama and Why He Can't Win, the title of a book by conservative commentator Shelby Steele, published on Dec. 4, 2007.
Mr. Steele, meet President-elect Barack Obama.

A good compilation for Forecasters."

Reliance Money Plans to Start Stock Exchange with FTIL

Anil Dhirubhai Ambani Group firm Reliance Money has set its eyes on giving competition to the two premier stock exchanges in the country, viz. Bombay Stock Exchange (BSE) and the National Stock Exchange (NSE). Reliance Money in collaboration with Financial Technologies India Ltd (FTIL) plans to start its own stock exchange.

Reliance Money has the monetary backing of R-ADAG group; it is also a prominent player in commodity market after picking 10% stake in the National Multi Commodity Exchange (NMCE). The company wants to increase its holding to 26% in near future. Reliance Money’s spot exchange for agriculture commodities is also expected to early 2009. The FTIL group has interests in a currency futures exchange, commodity futures, power exchange and spot exchange for agricultural commodities and plans to set up an exchange for SMEs. It has also set up exchanges overseas.

There is tremendous scope for equity stock exchange in the country that has only 5% of its households investing in equities compared to the global average of around 50%. The equity derivative segment has the biggest scope, with the NSE enjoying a virtual monopoly in the segment with an average daily volume of around Rs 40,000 cr. The spot equity market average turnover doesn’t even match up to half of the NSE derivate average, with the BSE having a daily average volume of Rs 4,000 cr and the NSE having daily average volumes at Rs 10,000 crore in the spot segment.

Any aspirant in the stock exchange segment will however need approval from the Reserve Bank of India (RBI). For FTIL, the equity exchange would be an extension of MCX-SX, its currency trading exchange, which was launched under a subsidiary. Reliance Money will have to set up a new company. Another issue could be equity holding, SEBI has recently decided to allow a single shareholder to hold a maximum of 15% in stock exchanges, but has not notified this yet. The aspirant companies’ track record will also be key factor in getting regulatory approval. If approved, this will be the first stock exchange after 1994, when the NSE was set up

Even though both sources have not confirmed the development, both are eyeing the possibility of an exchange for small and medium-sized (SME) enterprises, an area which is beleaguered with several failed attempts. Earlier ventures such as the Indo Next under the BSE trading platform, Over the Counter Exchange of India (OTCEI) and Inter-Connected Stock Exchange of India had failed to take off.

Worldwide SME exchanges are flourishing. LSE's Alternative Investment Market (AIM) was established in 1995 to nourish young entrepreneurial British firms. AIM is home to over 1,500 firms of which close to 250 are listings of firms based outside Britain. Obviously, one of the attractions for overseas firms is the laidback regulatory regime.

LIC to bolster Indian Equity Market with its Investment Plan

India’s largest life insurer and also the largest domestic investment institution, Life Insurance Corporation of India (LIC) plans to invest Rs 31,000 cr in equities and corporate bonds in the next four months. Out of the total amount, LIC would invest Rs 11,000 cr in stocks and Rs 20,000 cr in non-convertible debentures. LIC could bolster the equity markets, especially at a time when FIIs are selling off causing huge declines in the market. Even the insurer has been affected by the slump in the equity markets, with it seeing a fall in unit-linked policies, even though traditional policies such as endowment policies appear to be staging a comeback. LIC may invest a total of Rs 40,000 cr in equities during the current fiscal, although it is still awaiting a reply from IRDA on its request to hike the cap on investment in an individual company.

The company plans to use mobilisation from its new scheme, Jeevan Aastha, which guarantees benefits on maturity and death, to invest in debt instruments as returns are guaranteed. Of the Rs 25,000 cr it has targeted from the new scheme, 50% will be invested in government bonds while the balance will be invested in other debt instruments. The company this year has seen a definite increase in the number of corporates approaching it for investment especially in NCDs and rated papers.

Until, November this year, LIC has invested Rs 1,02,476 cr compared with Rs 97,738 cr a year ago. This break-up includes Rs 36,311 cr in government bonds, Rs 23,190 cr in debentures and bonds, Rs 12,372 cr in infrastructure, Rs 1,342 cr as project loans, Rs 164 cr in IPOs ( a relatively small amount reflection the mood of the IPO market in the country) and Rs 29,000 cr in equities (secondary market).

DLF enters Asset Management Business

DLF Pramerica, a JV between India’s largest realty firm DLF and Prudential Financial Inc (PFI) of the US, that got an in-principle approval to set up an asset management company (AMC) from the SEBI, expects to break even within three to five years in the business.

PFI is the majority shareholder in the JV with 61%, while DLF will own the remaining 39.5%. Pramerica is the brand name used by PFI in India and other select countries. The asset management business will have a capital base of $45 mn and will be based in Mumbai. DLF Pramerica Mutual Fund is a sub-brand under the umbrella brand of DLF Pramerica. The fund venture, DLF Pramerica Asset Managers Pvt Ltd, is headed by Vijay Mantri, who joined in April from the Indian fund unit of Deutsche Bank.

The AMC will provide full range of mutual fund and investment products, including domestic and international mutual funds to customers. Prudential Financial has assets under management of around $602 bn as on 30 September, 2008 and has operations in US, Asia, Europe and Latin America.

DLF Pramerica joins more than 20 firms looking to break into the Indian fund industry, which saw its assets grow more than four-fold to Rs 5.5 trillion rupees in five year ending 2007. According to a recent McKinsey report, the total AUM of the Indian mutual fund industry could grow to $350-440 bn by 2012, expanding 33% annually. While the revenue and profit (PAT) pools of Indian AMCs are pegged at $542 mn and $220 mn respectively, it is at par with fund houses in developed economies. Operating profits for AMCs in India, as a percentage of average assets under management, were at 32 basis points in 2006-07, while the number was 12 bps in UK, 17 bps in Germany and 18 bps in the US, in the same time frame, the McKinsey report said.

Even though many players are entering the mutual fund space, the space itself is seeing lots of turmoil. Assets have shrunk 28% to Rs 3.9 trillion this year due to a stunning 51.5% slump in India's benchmark index and outflows from fixed income funds. The mutual fund industry in India, in recent times, has seen a wave of redemptions especially in the debt schemes.

The sector is also seeing consolidation, recently Religare-Aegon AMC, which had recently started operations, acquired Lotus India AMC. The latter has begun operations in 2005. Even DLF Pramerica, has made its intentions clears, saying that it would also look at the inorganic growth route also in addition to the organic route, especially when there there were AMCs for sale available in the market.

Montek and Chidambaram mock India’s Economic Scenario

Montek Singh and Mr. Chidambaram for past few days have been giving some really exaggerating statements about the economy. They continue to assert that Indian economy will grow at 8%. Now, how that suppose to happen. The global credit lending is expected to come down drastically during next year and India desperately needs it to continue its infrastructure and capex. Indian companies were already raising debt for international market as credit rates in India were high. How are Indian companies expected to grow at same rate in this inconducive economic environment? Plus they were quick to add how fundamentally strong Indian economy is.

How come economy be fundamentally strong where commodities are playing havoc to the economy, crude prices have endangered the aviation sector and is pushing inflation, housing boom is about to go bust with high credit rates and our exports are threatened due to global slowdown. They were not done yet, they made another comment on liquidity situation.

Yes there is liquidity problem, there are not many ready to lend to consumers and corporates are finding it hard to credit at lower rate (which is next to impossible). There is credit problem in the economy, but what about the money that FIIs have brought into the market by selling share and converting them into dollars! The problem, we don’t think is of liquidity in the capital markets but of leveraging and speculation on cheaply borrowed money. Now that it is difficult to leverage and get cheap credit there aren’t many players to do so in the stock markets. So, we have more and more selling and less numbers of buyers.

Is P-Notes revision aimed at Realty stocks and Politico’s investment confidence?

P-Notes are back. After government cracked down on P-Notes last year to tame the bull-run, now government has revised it guidelines to enable foreign institutional investors to issue Participatory Notes where underlying asset is derivative. SEBI has also struck down the rule which limited the FIIs capacity to issue P-Notes only up to 40% of the value of assets held by a foreign fund.

Is the present move by government to remove restrictions on P-Notes aimed largely at Realty companies? Realty stock index on BSE has declined by 77% since the beginning of the year. It is the biggest decline amongst the sectoral indices on BSE. Last year’s favourite sectors i.e. Realty, Banks and Metals and Capital Goods all have been thrashed in the market this year.

Realty stocks gained prominence in last two years when large number of companies came out with IPOs and soon they were reports of politicians and their families having stakes in these real estate companies. Also, a number of politicians parked their money through hawala channels, which entered the market through P-Notes. Ever since the restrictions were imposed on Realty index has continued to slide. Financial crisis in the US took the shine off from FII and Hedge Funds, which had invested heavily in the real estate companies. P-Notes restriction took the toll of real estate stocks and they started falling like house of cards.

As the politicians lost most of their investments in stock market and the value of their real estate stocks came down to one-third of the investments, the government suddenly felt the need to bring back P-Notes, which it had describes as ‘Hot Money’ that created volatility in the markets. The much despised instrument, which was blamed for the skewed investment trend, is now the rescue measure to resurrect the market in same old way that had led to irrational exuberance in the market. Every one in the government is gung-ho that it will restore the “investors’ confidence”, it is really matter of concern for the individual investors that which ‘Investor’s’ confidence government wants to restore now.

Will commodities cool-off as Indian markets go bottom fishing?

The Indian markets are again in the mode of bottom-fishing, FIIs, predominantly i-banks and hedge funds are in process of liquidating their portfolios to keep themselves alive with cash flows. This new round of sell-off is more likely to impact the companies which makeup the portfolio of those US firms which are now in trouble with their financial exposure.

The present eruption of year long financial crisis has casted a bigger shadow not only on the Indian markets but also on the companies. The fresh bout is expected to impact US investment banks’ investments in corporate India, which sooner or later will be liquidated. Though people are expect such liquidation from Merrill Lynch and Lehman but the fact remains that Citigroup for long (since last year) has been contemplating selling its stake in HDFC. It implies that India will see more stake sale by big US banks, though most of it may not come to the market, but will definitely impact the markets.

But, the good new may come from the commodity side, which since last year has risen tremendously on back of speculation. Now that interest rates are high, credit is further going to be squeezed out of the market and economic cycle on downhill is going to reduce the demand, speculators would prefer booking their profits and leave the markets for sometime. Commodities, especially the energy related, will see some cool-off now. This may come as good news for India, which is fighting high crude and steel prices.

S&P launches India specific Index for global investors

Though India’s stock markets have been underperforming in recent months but, the Sensex as well as the Nifty has given more than 40% annualized returns in the past five years to 2007. Similarly, since 1998, net foreign investment into India has quadrupled. Gauging by the above parameters, the country continues to be one of the most attractive markets in the world. To give global investors better and comprehensive information to make investments decision in India, global rating major Standard & Poor has launched S&P India Select Index. The index will give global investor with tradable exposure information and exposure to the largest and most liquid companies listed on the National Stock Exchange (NSE).

The index includes 60 major Indian companies that meet its parameters which includes size, liquidity and tradability requirements. Also, there is no single stock representing a weight of more than 10% in the index. On a whole the index is float-adjusted and stock weights are determined by what is legally and practically available to foreign investors.

Telecommunications, consumer staples, utilities, financials, energy, materials, industrials, information technology and healthcare are among the sectors included in the index. The top ten holdings by percentage of index weight are Infosys, Bharti Airtel, ONGC, Reliance Communications, HDFC, RIL, ICICI Bank, HUL, BHEL, and L&T. For inclusion in the index, the companies must already be a constituent of the S&P/IFCI India Index with a float-adjusted market capitalization above $500 mn at each annual rebalancing and a six-month average daily trading value above $1 mn. The index uses an evolutionary algorithm-driven optimization to maximize index basket liquidity at each rebalancing which occurs annually in January.

This is the third such move in the past one year by global financial companies to launch indices based on India, last August, Dow Jones had launched Dow Jones India Titans, a stock index tracking 30 most liquid stocks on the BSE and the NSE, while in February, finance firm Atherstone Capital Markets launched two indices dedicated to Indian primary markets.

Government Gives Private Pension Funds Freedom to Increase Stock Market Exposure

Coming close on heels of ending the monopoly of SBI in managing EPF accounts, the government has now allowed private provident, pension and gratuity funds to invest up to 15% of their investible funds in the stock markets, one of the new financial sector reforms by the government.

This move is aimed at making the massive cash balances that provident funds sit on every December-January, in the absence of central government securities to park them in, history. In 2007-08, the EPFO had kept more than Rs 10,000 cr idle, as per a recent audit report. Incidentally, EPF’s earnings for 2007-08 are, therefore, only enough to pay 8.25% interest compared to 8.5% paid in the year before. The finance ministry’s new investment guidelines, that will become operational from April 1, 2009, can rectify this, going forward. The guidelines leave no room for provident fund managers to cite investment restrictions put in by government for lack of returns on the money put in by the 40 million organised sector workers as their retirement savings.

As per the new guidelines, the funds can soon directly invest in shares of companies on which derivatives are available in the Bombay Stock Exchange (BSE) or National Stock Exchange (NSE). Currently, about 228 single stock futures are traded in the futures and options segment of NSE, with about 39 more to be added from the last week of August.

The other changes made in the investment pattern include merger of Central Government Securities, State Government Securities and units of gilt Mutual Funds into a single category and allowing investment up to 55% of their corpus, providing a flexible ceiling for various category of instruments instead of fixed investment ceiling as at present; providing new category of instruments, such as rupee bonds of multilateral funding agencies, money market instruments and permitting investment in term deposit receipts of not less than one year duration issued by scheduled commercial banks.

The new investment pattern also recognises the fiduciary responsibility of the trustees and the need for exercise of due diligence by them. It gives them greater flexibility in terms of a wider variety of financial instruments as well as greater freedom to actively manage the portfolio. Moreover, the trustees will have freedom to exit from a rated financial instrument when their rating falls below investment grade as confirmed by one credit rating agency. The trustees have also been given freedom of trading in securities, subject to the turnover ratio (i.e., the value of securities traded in the year divided by average value of the portfolio at the beginning and end of the year) not exceeding two.

Significantly, the new guidelines have raised the cap on equity investments from 5% to 15%. Although when the draft guidelines for such a move were made in September last year, the finance ministry had suggested doubling their capital market exposure from 5% to 10% while reducing their exposure to government securities from 40% to 35%.

Interestingly, very few of the funds allowed to invest in equities have even utilised their cap of 5% present currently. Even the funds, which do invest in equities, have an exposure of only 1-2%. Further, with the recent spike in bond yields, government securities as well as corporate bonds have been giving returns of over 9%. This is well above the returns of 8.5% which these funds are supposed to guarantee.

While the bouquet of investment options has been expanded, trustees have been made more explicitly responsible for investment decisions. However, sections feel since India is yet to get professional trustee companies in place, the new options may remain unused as existing trustees may shy away from taking hard decisions. While market participants have welcomed this proposal, the general perception is that a number of other regulations need to change to make equity investments viable. The main bone of contention is that of the guaranteed returns of 8.5%. In case the fund fails to throw up an 8.5% return, the employers are expected to provide for the rest.

Hence only time will tell, how many of the funds will take the risk to increase their exposure to equity, given the current volatility in the markets and the history of investments by such funds in the stock markets. However if they do invest, it will provide a much needed fillip for the stock markets.

Exchange traded currency futures to finally hit India

The RBI after month of deliberation finally unveiled norms for trading in currency futures. Banks will need RBI nod to participate in forex futures. It also stipulated that banks should have a minimum net worth of Rs 500 cr, a capital adequacy ratio of at least 10%. They should have made a net profit for the last three years to qualify for trading in currency futures on exchanges. Banks will also be required to get the approval of their board of directors in case they qualify. The RBI has further clarified that banks which do not meet these requirements (including urban co-operative banks) can participate only as clients, and that too after securing a regulatory nod. The currency futures market will be allowed in stock exchanges or new exchanges recognised by SEBI and would be bound by the guidelines issued by the RBI and SEBI.

To start with, RBI has allowed only resident Indians or locals to participate in currency futures, thus effectively keeping out foreign investors such as portfolio investors and hedge funds besides NRI’s for now. Initially, trading contracts denominated in the US dollar and the Indian rupee will only be allowed. The size of the contract has been set at $1000 and the tenure at 12 months. The central bank has also specified that the contracts will be quoted and settled only in rupees. The trading of currency futures shall be subject to maintaining initial, extreme loss and calendar spread margins and the clearing houses of the exchanges will ensure maintenance of such margins as per capital market regulator’s guidelines issued from time to time. Trading members have been prescribed a position limit of $ 25 mn across all contracts. However, the gross open position of a trading member that is a bank, across all contracts, shall not exceed 15% of the total open interest or $100 mn, whichever is higher.

The RBI may from time to time modify the eligibility criteria for the participants, modify participant-wise position limits, prescribe margins and/or impose specific margins for identified participants, fix or modify any other prudential limits, or take such other actions as deemed necessary in public interest, in the interest of financial stability and orderly development and maintenance of foreign exchange market in India.
The norms have kept in mind that that excess speculation in the Indian currency is curbed as the norms are similar to the norms followed by banks in other segments. Rumors have it that BSE, NSE and MCX have already submitted a proposal to launch a platform for currency futures, and more entities are expected to submit applications to the regulators. On the banking front, most banks would be attracted to become members as it means captive business for them, but banks may prefer setting up a subsidiary for this business, as it is a relatively new activity.

What are currency futures?

Currency futures are standardised foreign exchange derivative contracts traded on a stock exchange to buy or sell one currency against another on a specified future date, at a price specified on the date of contract, but does not include a forward contract.