Sebi curbs fail to slow down markets

Sebi curbs fail to slow down markets

Mumbai: Indian stock markets shrugged off concerns of a short-term slowdown in foreign fund inflows, with the Bombay Stock Exchange’s (BSE) benchmark index closing at a new high, and fund managers saying that this was due to continuing inflows from foreign institutional investors (FIIs) and renewed interest from domestic institutions, including mutual fund (MF) houses.

The BSE Sensex added more than 472 points on Friday, belying fears of a steep fall after stock market regulator Securities and Exchange Board of India (Sebi) on Thursday confirmed it was going ahead with curbs on participatory notes (PNs), an investment instrument preferred by some foreign funds, in an effort to staunch inflow of huge sums of anonymous money into the country.


“The buying interest from FIIs have resurfaced, while the domestic mutual funds have also begun to buy," says Jignesh Desai, head of institutional sales at SBI Capital Ltd, the securities arm of India’s largest bank.

FIIs had bought Indian shares worth more than $52 million (Rs205 crore) on Thursday. And domestic MFs were net buyers of more than Rs712 crore worth of stocks in the cash market on the same day.

Not everyone shares Desai’s point of view on FIIs. “Sebi’s curbs will definitely slow down international fund flow into India, at least for several weeks," says Alok Sama, founder of London-based Baer Capital Partners, which plans to start an India-dedicated hedge fund late this year after listing as an FII. “However, this may not necessarily slow down the index growth. The Sensex could have shot up all the way to 25,000 levels, with half-a-billion dollars coming from FIIs every day. Sebi’s measures have given space to domestic investors to step into the market," he adds.

Sameer Narayan, head of portfolio management services at ABN Amro Asset Management India, says domestic institutional investors other than MFs were also strongly buying in the market.

“Many structured products offered by non-banking financial companies (NBFCs) and wealth managers are actively buying in the market apart from insurance firms," he says. Most wealth managers offer structured products that play on stock arbitrages in the spot and futures market for their clients; this serves as an effective risk management technique.

However, despite the rise of the Sensex and the Nifty, the National Stock Exchange’s benchmark index (this rose 2.4% to close at 5,702.30, an all-time high), trading volumes remained low. Trading volumes in the futures and options (F&O) market?dropped?from Rs1,03,930 crore and Rs1,07,495 crore, respectively in the past two days to Rs73,836 crore on Friday. Derivatives are financial instruments that derive value from an underlying asset (stock).

Trading volumes recorded in the cash market were also low, under Rs9,000 crore on BSE.

“Most PN holders have taken long positions on stock derivatives, this has created a lack of sellers in the derivative market bringing the volumes down," says Manish Sunthalia, vice-president of equities research at listed Mumbai-based Motilal Oswal Securities Ltd. A long position indicates that the investor expects the price of the derivative to appreciate.

“As a result, stock derivatives could trade at a discount to the cash market prices for some time," Sunthalia adds.

The derivatives contracts for October expired on Thursday. As per data from market tracker Capitaline, the rollover of derivative positions from the October 2007 series to the November 2007 series was 84%, while the Nifty rollover was 71%, in line with the trend in previous months. A rollover means investors chose to continue their existing positions.

However, stock valuations, particularly that of frontline stocks, are getting highly expensive, says Narayan. Sunthalia of Motilal Oswal and Desai of SBI Capital agree with him. “We have left the valuations long behind. However, the short-term outlook is very strong, with sustained cash flow into the market," says Sunthalia. “The chance of an immediate downturn or a correction in the short-term is very low," he adds.