A recent seminar on securities lending organized by Dun and Bradstreet brought out two things clearly. First, market participants are keenly waiting for the introduction of securities lending and short sales in India. Second, few expect the system to take off in the current format.
The launch of the securities lending and borrowing (SLB) platform, slated for 1 February, has got delayed, as stock exchanges are awaiting clarity on whether securities transaction tax (STT) will apply on SLB trades. But whenever trading kicks off, the response will be lukewarm. The main concern voiced by some delegates at the seminar was the rigidity of having a tenor of seven days for the stock borrower.
To start with, someone daring to short sell a stock would need a lot more than just seven trading sessions for his strategy to turn profitable. Even for an arbitrageur trading between the cash and futures segments, a fixed seven-day tenure is limiting. As a result, borrower interest is expected to be very low.
The Securities and Exchange Board of India (Sebi) could take a leaf out of the book of the Brazilian model, which is exchange-based and yet has some features of the OTC (over the counter) model. According to a report by International Securities Finance Magazine, the Brazilian clearing corporation acts as a central counterparty for all securities lending transactions and holds the collateral paid by the stock borrower, which is similar to the current Indian model. But the online trading system operates very differently from what Sebi has envisaged.
The magazine report says that all the stock available for lending is displayed on-line, and when the borrower searches for a share, he sees the share value and the amount available, the maximum period the lender will lend for and the fee. Moreover, if a broker doesn’t see a stock available for lending, it can check with another intermediary, who, if interested, can put the lendable stock on the online system such that it is visible only to the specific broker. Both lenders and borrowers have the freedom to close the position ahead of maturity. These features have caused the Brazilian securities lending market to thrive although it doesn’t follow the OTC model practised world over.
For securities lending to take off in the Indian market, it has to offer borrowers such flexibility, or at least longer tenors to start with. Well, Sebi can take heart from the fact that Brazilian authorities have regularly tweaked the lending platform it first launched in 1996, based on market feedback. It’ll be unfortunate if the Indian regulator sticks to its ground and remains inflexible.
The Deepak Fertilisers and Petrochemicals Corp. Ltd stock was locked at the upper circuit on Wednesday as news came in that it has signed a pact for a joint venture (JV) with Yara International ASA, a global leader in ammonia, specialty and bulk fertilizers, and ammonium nitrate. The JV, 51% of which will be held by Deepak Fertilisers, will manufacture specialty fertilizers such as bio-fertilizers and water-soluble fertilizers and ammonium nitrate, used as an explosive in the mining industry.
For Deepak Fertilisers , the JV will give it access to technology, which Yara has in specialty fertilizers. In exchange, Yara will get a foothold in the Indian market. Market sources say the due diligence should be through by April and the plant should be set up in the second half of FY09. Details about the JV haven’t been announced, but Deepak had around Rs120 crore worth of liquid investments in its books at the end of FY07 and a very comfortable debt-equity ratio of 0.5, so it probably won’t need to dilute equity for its investments in the JV.
The JV should, in two to three years’ time, give Deepak Fertilisers a large market share in specialty fertilizers, most of which are imported at the moment. Pricing, too, is free for this category. But we’ll have to wait for the management to give an indication of the impact on future earnings.
Before Wednesday’s 20% jump, the stock had corrected sharply after analysts were disappointed with earnings growth for the December quarter, with net profit lower compared to the year-ago period. Rental income from the company’s Ishanya mall has started coming in from the third quarter and it will get larger during the current quarter. However, the availability of gas remains a problem and it’s not expected to be remedied soon. Fertilizer production will also continue to be constrained because of the unavailability of phosphoric acid. And finally, methanol prices have started falling again.
In short, while the signing of the JV will undoubtedly be a source of growth in future, the company’s present condition is not something to be euphoric about.
The Bombay Stock Exchange has always lagged the National Stock Exchange in the derivatives segment; so it was surprising to see its mini index futures contract, Chota Sensex, garner higher volumes than the mini-Nifty for nearly three weeks into the launch of the new product. But as this column had noted on the day of the product’s launch, initial volumes could be artificial trades by friendly brokers to give a false impression of liquidity.
Well, the ploy gave way after the markets crashed on 22 January. Since then, the daily turnover of BSE’s mini-futures contracts has averaged Rs7.4 crore a day, 97% lower than the average of Rs254.8 crore in the first 15 trading sessions. Brokers would have been busy looking after their own positions and those of their clients after the cash, with little time left to indulge in artificial trades. In NSE’s case, volumes have fallen just 7.6% to an average of Rs236.7 crore since 22 January.
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