Mumbai: Primary dealer-turned-non-banking finance company (NBFC) Securities Trading Corp. of India Ltd (STCI) is extending the scope of its lending business to areas such as initial public offerings (IPOs), loans against promoter shares and commodities, a top official said.
The firm will also focus on fee-based activities such as arranging loan syndication and selling insurance products, apart from venturing into depository custodianship and trusteeship business, STCI managing director P. Sanyal said on Thursday.
The overhaul comes after STCI, which was set up by the Reserve Bank of India (RBI) in 1994 to develop a secondary market for government bonds, reported profits in the past two years. STCI reported net earnings of Rs73.30 crore in fiscal 2009, up from Rs29.77 crore in the previous fiscal. The firm had incurred a loss in the year before.
STCI became an NBFC in 2004-05 after RBI allowed banks to merge their primary dealership businesses with themselves and independent primary dealers to diversify.
Primary dealership, or the business of underwriting government bonds in auctions, had turned unviable at that time as the interest rate cycle had changed and yields on government bonds had been rising while prices were falling. The yields on 10-year government bonds had increased to 7% in 2004 from 5% in the previous year.
Although STCI has been operating its loan business after becoming an NBFC, it is considered more of a trader in government securities.
In June, the firm turned to management consultancy A.T. Kearney “to gauge whether we should carry on as an NBFC, (and) if so, how should we go about it to become a big player in the market”, said Sanyal.
A.T. Kearney gave its recommendations in September but STCI did not want to start its expansion at the time because of the financial slowdown.
Now that the equity market is recovering, STCI has started offering its products to investors, Sanyal said.
STCI expects to be able to compete with players such as Indiabulls Group, Birla Global Finance Co. Ltd, and Sundaram Finance Group within five years, but for now, it prefers some caution. “We cannot afford to misstep at the initial stage,” said Sanyal.
The firm’s initial loan disbursals are on average Rs15-20 crore. It eventually plans to venture into asset management and private equity business, and is scouting for about 300 employees, including at the management level, to add to its 30-member staff.
The diversification means STCI will end up competing with its parent companies, and with greater flexibility. The firm has 36 shareholders, almost all of them banks. State-owned Bank of India is its largest shareholder, with a stake of around 30%.
“There are certain areas where banks cannot go. A bank’s capital market exposure cannot exceed Rs20 lakh for a single borrower. NBFCs don’t have that restriction,” said K.V. Ramakrishnan, general manager, STCI, who is in charge of the firm’s transformation. “For us, the minimum lot will be Rs5 crore.”
STCI’s current net worth is Rs775 crore and it plans to buy back 7.5% of its shares sometime this year. The firm’s capital, expected to be around Rs380 crore after the buy-back, together with its accumulated reserves of Rs453.75 crore, would be enough to fund its lending operations, said Sanyal