The stock exchanges have quickly acted on the approval of the Securities and Exchange Board of India (Sebi) to introduce mini derivatives contracts on equity indices. The National Stock Exchange (NSE) launched the mini-Nifty, while the Bombay Stock Exchange (BSE) launched the ‘Chota Sensex,’ within three working days of Sebi’s circular allowing such contracts.
While contracts worth Rs116 crore were traded on the latter, the mini-Nifty managed trades worth Rs66 crore. These numbers aren’t exciting for two reasons. First, they’re a fraction of the volumes on the largest index futures contract—the near-month Nifty futures, which clocked trades worth more than Rs10,000 crore. Secondly, volumes on the first day are often artificial in nature, propped up by friendly brokers to give an impression that the newly introduced contract is liquid.
When NSE had introduced futures and options trading on the Nifty Junior and the CNX 100, each managed trades worth about Rs100 crore in the the near-month futures contract. On Tuesday, trades on Nifty Junior futures amounted to just Rs8.6 crore and just two futures contracts for Rs6 lakh were traded on the CNX 100.
Similarly, when the exchange had launched interest rate futures, trades on the first day were encouraging, but these contracts haven’t traded for a long time now.
The future of the mini derivatives contracts will not be as bad. On NSE, they are based on the Nifty, already very popular in both the futures and options segments.
This will lead to arbitrage opportunities which will ensure the survival of the product. Besides, investors would be able to hedge their portfolios more accurately with the mini contracts. For instance, hedging a Rs5 lakh portfolio completely with the normal Nifty series isn’t possible, given that the minimum contract size is around Rs3 lakh—buying two contracts would mean an over-hedged position. The mini contracts trade in lots worth about Rs1 lakh, making it possible to accurately hedge such portfolios. Trading in Sensex futures, too, has picked up lately—the turnover was more than Rs1,000 crore on Tuesday. As a result, the ‘Chota Sensex’ series would also benefit from arbitrage opportunities.
It’s interesting that the average trade size on the mini-series was Rs7.4 lakh on BSE, clearly showing that the interest on the first day of trade wasn’t from small retail investors, who were the ones supposed to benefit from the new product.
This isn’t really surprising —even the size of the normal series weren’t prohibitively high. While the contract size on the Nifty is about Rs3 lakh, the initial margin payable is only 8-9%, which works out to about Rs25,000.
The trickle-down effect
It’s common knowledge that corporate India has been having a rollicking time in the last few years, although growth is slowing from its earlier robust pace.
But have the good times trickled down to the smallest members of corporate India?
That’s the question we’ve tried to answer by studying the results of 443 manufacturing companies with net turnover ranging from Rs1 crore to Rs25 crore culled from Capitaline Databases.
(The minimum of Rs1 crore is purely for purposes of statistical convenience, to eliminate the extremely small companies that show huge variations in growth).
The chart alongside shows that these companies have been big beneficiaries of the boom of the last few years, with improvement in the debt:equity ratio, in the interest cover, and in the debtors turnover ratio.
Return on capital employed (RoCE) and operating profit margins too have improved greatly in the last two years. A comparison with the BSE 500 manufacturing companies reveals the wide difference between the very small companies and the larger ones. For instance, interest cover for the companies in the Rs1-25 crore sample was 2.25 times, compared with 8.78 for companies in the BSE 500.
Though their financial position has improved, the smaller companies remain more vulnerable to interest rate increases. Again, the RoCE for smaller companies was 7.36 in fiscal 2007, compared with 19.84 for the BSE 500 firms. A lower return on capital and a higher cost of funds has hit their profitability harder in the current fiscal. And since small companies account for the bulk of employment in the sector, that should have an impact on consumer demand.
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