Mumbai: A primary dealer-turned non-banking finance company, Securities Trading Corp. of India Ltd, or STCI, has hired management consulting firm A.T. Kearney Inc. to prepare a business diversification plan as it seeks to venture into more profitable financial services.
Started by the banking regulator Reserve Bank of India, or RBI, in 1994 for buying and selling government bonds, STCI spun off its primary dealership into a separate company, STCI Primary Dealer Ltd, in June 2007. It then started focusing on activities such as commodities trading and lending against shares.
“We plan to venture into new areas and would be looking for new opportunities in the financial space,” said an STCI executive who did not wish to be named. “A.T. Kearney will guide us on this.”
STCI managing director P. Sanyal declined to comment.
The business of buying and selling government bonds is not profitable in a rising interest rate regime, prompting STCI to look to other business avenues. The yield on 10-year government bonds had dipped to 4.97% in October 2003. Yields move in opposite direction to bond prices. By July 2006, the yield had risen to 8.37%. Now, it is around 9.1%. RBI’s policy rate, which was was 6% in October 2003, rose to 7.5% by 2006 and is 9% now.
Primary dealerships turned unviable after 2004-05 when the interest rates cycle changed and yields on government bonds started rising and prices falling. RBI then allowed banks to merge their primary dealership business with themselves and independent primary dealers to diversify.
A.T. Kearney is expected to submit its report in two months.
“There are many areas where a non-banking finance firm can enter,” said a person familiar with the development who didn’t want his or his company’s identity to be disclosed. “For instance, it can get into private equity, brokerage, etc., and even pick up stakes in commodity exchanges. The consultant will evaluate all possibilities and identify the new areas of business.”
STCI and Discount and Finance House of India Ltd, or DFHI, were the two independent primary dealers started by RBI to widen and develop the secondary market for government securities.
The rest of the primary dealerships have largely been handled by commercial banks that wanted to take advantage of a boom in the government securities business when interest rates had started dropping amid ample liquidity in the financial system.
STCI, which is owned by more than 30 banks and financial institutions, has Bank of India as the majority shareholder, holding a 29% stake. State Bank of India and its associates hold 10.5%, followed by Infrastructure Development Finance Corporation with 10%. Private sector banks and financial institutions, including ICICI Bank Ltd, hold about 17%.
RBI does not own any stake in the company, which does not take any public deposits. STCI has been using its capital to build loan assets, and is present in merchant banking, lead management and book running for initial public offers, debt and equity broking, portfolio management services, debt origination, syndication and distribution and online equity trading, in addition to offering loans to high net worth individuals.
It bought UTI Securities Ltd, a broking firm, from Specified Undertaking of the Unit Trust of India in January 2006 but later sold its 49% stake to Standard Chartered Bank Plc. of the UK, which also has the option to fully own the company by August 2010. The commodities trading arm of UTI Securites, now called STCI Commodities Ltd, remains with STCI. Under the country’s banking law, banks are not allowed to participate in commodities trading.