Has Sebi's P-Note move really worked?

It's been a phenomenal year for the Indian stock markets. Nearly 16 billion dollars have flown into India till December and the Sensex has scaled the 20,000 mark. But from a market regulation standpoint, the year 2007 would be remembered for Sebi’s restrictions on participatory notes or P-Notes. This move was to moderate capital flows and deal with the issue of anonymous investors. But has it really worked? CNBC-TV18’s Abhijit Neogy finds the answer...

The bulls have been on a rampage through the year and the dollar inflows become a deluge by October this year. While the unrelenting rally pleased the investor community and made for eye-catching headlines, the government was getting uncomfortable with each passing day.

Apart from the pressure it exerted on the rupee, there were fears that PNotes were being used a vehicle to bring in illegitimate funds from abroad. In a defensive move, the government finally intervened-their argument to moderate capital flows. Soon after the Finance Minister’s statement, market regulator SEBI stunned the markets with what are now being viewed as landmark proposals to regulate PN route and force foreign investors to use the front door.

As per the new regulations, PNotes with stocks as underlying could be issued by FIIs subject to a maximum of 40% of overall assets under custody. SEBI also proposed that where PNotes have equity derivates as underlying, these instruments cannot be issued anymore

Such existing positions would have to be wound up over the next 18 months.

Incase a FII wants to increase the share of PNotes in his assets under custody, the FII can raise the share of PNotes to the extent of 5% at a time this caused confusion and even temporary panic. The markets tanked, hitting the 10% lower circuit-trading had to be halted for about an hour. Finance Minister Chidambaram was then forced to step out to calm the markets and lift investor sentiment

P Chidambaram, Finance Minister, said, “We have not banned PNotes. In the recent months, fund flows had become copious; the idea is to moderate these flows.”

In the past the RBI had come out in favour of banning PNs altogether but this is a view that had not found favour with the Finance Ministry for fear of hurting investor sentiment.

Chidambaram said, “We are not against anybody investing in our markets. But we want everybody through the front door.”

The question that begged an answer- what was the real motive behind the p-note controls? Was it a means to control capital flows or was it apprehension over the identity of the ultimate beneficiary in the case of a PNote.

I don't think that we have said that it's only the anonymity that has been bothering SEBI or anyone else. What we have spoken about are a number of issues that have come up in the inter-regulatory consultative process over a period of time and during examinations within SEBI itself. There is clearly a question of flows coming in that the Finance Minister described as copious inflows into the Indian market. There were also issues that we have had with what we need to do to tweak the regulations regarding ODI.

M Damodaran, Chairman, SEBI, said, “I don't think that it’s just the anonymity issue which concerns us. This is the outcome of a lot of deliberations; there is clearly a question of flows coming into the market as the FM has described; there have also been issues regarding the tweaking of ODI guidelines which we wanted to look at.”

Analysts say hedge funds may not be too keen to register with the market regulator though at least 20 sub-accounts had applied for FII status. But despite all the controversy surrounding the new PN regulations, the dollar inflows haven't really stopped. Till December, FIIs had pumped in a whopping 16 billion dollars into India and the markets have since breached the psychological 20000 mark. This may make the government become cagey again but investors are not complaining.

Wipro Gains Most Since May 2004 After Report on Cap Gemini Bid

Dec. 24 (Bloomberg) -- Wipro Ltd., the second-worst technology stock on India's benchmark Sensitive Index this year, gained the most since May 2004 on a report it may bid for Europe's largest computer services company Cap Gemini SA.

Wipro gained 8.9 percent to 535.3 rupees at the close of trading on the Bombay Stock Exchange today. Wipro and rival Infosys Technologies Ltd. were also helped by news that U.S. consumer spending increased last month, easing worries about a slowdown in the computer services providers' biggest market.

Indian software companies are seeking acquisitions overseas to enter new markets and diversify away from the U.S. market.

Wipro, which has spent more money on acquisitions abroad than any other Indian computer services company, completed buying Infocrossing Inc. for $600 million in September, which added $6.4 million in second-quarter revenue.

``Strategically it is a sound buy, it is a question of how well we execute,'' Sudip Nandy, Wipro's next head of the telecommunications business unit, said in an interview Dec. 21, referring to Infocrossing. ``It has opened up a whole market.''

Nandy, who will become president of the unit Jan. 18, is a senior vice president and chief strategy officer for Wipro.

The stock-market gains may be short-lived as ``bad things are still to come,'' said Religare Securities Ltd. analyst Harshad Deshpande.

`Hold'

Deshpande rates Wipro a ``hold'' because ``we haven't yet taken a call on how big the impact of a U.S. recession will be.'' Comments from Wipro and Infosys in April at the start of the next fiscal year will reveal their outlook, he said.

Indian software companies had been ``touching their bottom valuation, what it had been in 2003, so this could be a kind of short-term bounce back,'' Deshpande said.

Infosys, India's second-biggest software exporter, rose 6.6 percent to 1,810.90, while larger rival Tata Consultancy Services Ltd., added 6.1 percent, to 1,108.70. The two stocks had their biggest gain in more than 17 months. Indian software companies get more than half their sales from the U.S.

Wipro for its part may not embark on a transaction that would see the company be forced to take on debt, Deshpande said.

Cap Gemini is ``almost four times the size of the Indian player,'' Deshpande said.

Sebi must allow short selling in all scrips: Ex-Sebi Member

Former Sebi Member, J R Varma in an exclusive interview to CNBC-TV18 said they can look at a timeline of a few weeks for Securities Lending and Borrowing (SLB) mechanism. He further added that position limits need to be enhanced in line with F&O market and Sebi should allow short selling in all scrips.

Excerpts from CNBC-TV18’s exclusive interview with J R Varma:

Q: What have you made of the broad framework set, both for short selling, stock lending and borrowing?

A: It is a very good idea that we are at last making progress on short selling. There are some parts of proposals, which are still very restrictive, primarily on position limits are too low. For example- the position limits at the client level is really says 1% of the marketwide limit, which means 0.1% of the free float that I think is extremely low.

Similarly, at the member level, it says 10% or 50 crore, whichever is lower. Now, on a company, which has Rs 1 lakh crore of marketcap, 50 crore is 0.05% or something.

So, some of those position limits have to be reviewed, especially those are extremely low. Of course, the document says to begin with, for example, it is limited currently to stocks, which are on the derivative segment. Hopefully, that would also get widened as we get along. But it is good to see that there is some progress in the end.

Q: Could you tell us about stock lending and borrowing mechanism as it stands currently, because the market really seems to be wanting to know more about the time it would take to settle contracts and the margins on which these contracts would be laid?

A: On that there is no clarity. It only says that there should be adequate risk management system. But I guess the exchanges have a lot of experience in margining derivative contracts. There are a lot of software, which can be readily reused for them. So, if the exchanges and the regulators want to make this happen, we should be looking at the timeline of maybe a couple of weeks or maybe three weeks. Within that timeframe, everything should be ready.

I think short sellers, the world over, are accustomed to pay stiff margin and the interest on the collateral deposited. So, that is not an issue, but it is now up to the exchanges to get out securities lending products.

Q: What is taking this process so long because we have been talking about it for a year and a half now?

A: I have always believed that in India much of the market manipulation takes place by the company promoters and by company managements themselves. For them, short selling is the most undesirable thing in the world.

So, I am sure that there is an enormous lobbying by corporate managements and corporate promoters to stop short selling and to make it as weak and restrictive as possible. Perhaps, the regulator is feeling that pressure as well. So, we need to keep the pressure up on the regulator, to ensure that they do not succumb to pressure from unscrupulous company managements, to make short selling unduly restrictive.

Q: What kind of a re-look do you think the position limits would require?

A: The position limit needs to be significantly enhanced, maybe something closer on the lines with what we have in the derivatives market and so on. We need significantly wider position limits.

Q: If this decision has to be implemented, do you think the timing at this point is most apt?

A: I am always of the view that the regulatory measures should not be tied to market timing. One cannot say that I will do the short selling, but the markets are going up or coming down and so on. These regulatory processes have a logic of their own. You are doing that not because one wants to change the direction in which the markets are going, but because one wants to improve price discovery in the market. Short selling is a mechanism through which one improves price discovery and anytime is a good time to do that.

Q: Currently, short selling is talking about addressing stocks in the F&O space. How would you read into an extension of this into the segments, which essentially comprise of non F&O stocks as well?

A: We should go there so long as you have proper risk containment that the short seller has to deposit appropriate margins. You should allow short selling in all scrips.

If somebody is bold enough to short and if the person is willing to deposit appropriate margins, I do not think the regulator should come in and say that you cannot short.

Short-selling provides much needed discipline to the market and much needed price discount discovery. In some ways, it is the less liquid stocks, where promoters rig up prices. It is there where the short seller’s power is even more useful. So, we should extend short selling across the board. But if the regulator wants to start with the derivative segment and then extend it, that is fine. But I would want to see short-selling on maybe a couple of 1,000 stocks within 3-6 months.

Q: What has your own analysis thrown up on post the P-note episode and whether or not registration has actually happened in the way expected?

A: My position at that time was that the restrictions, as they were finally put in place, would not make too much of a difference. That is what has happened. It has not made too much of a difference.

Brokerages expect 15-20% returns in `08: Poll

After the third consecutive year of spectacular gains by the Indian stock markets, which saw the bellwether Sensex climbing nearly 39 per cent, investors can still expect returns of 15 to 20 per cent in 2008, according to a poll among top local and foreign brokerage houses.

Most of the 15 brokerages that participated in Business Standard’s poll also see no major impact in India due to a possible US slowdown, encouraging more and more foreign funds to invest in the Indian stock markets in the new year.

Two-thirds of the brokerages chose to play safe by predicting a 19,000 to 22,000 range for the Sensex in 2008. Two brokerage houses — SBI Capital Markets and Religare Securities — have forecast 25,000 for the index next year, which is a 30 per cent gain from the current levels.

ICICI Securities went a step further, predicting that the Sensex would be at 25,500 levels (a 33 per cent rise) at the end of next year.

Others such as Motilal Oswal Securities, Enam Securities and fund house Morgan Stanley decline to predict a Sensex target.

“The market will continue its secular upward trajectory, reflecting robust economic growth led by consumption-buoyed demand, favourable demographics and increasing infrastructure spends,” said Anil Advani, head of research at SBI Cap Securities.

“We expect the Indian economy to grow at 8 to 9 per cent in the next two years,” he added.

Religare Securities Ltd has set a conservative target of 18,000 for the year. But Amitabh Chakraborty, president (equity) said the brokerage believed “2008 will start off on a very positive note with the Sensex touching 22,500 early in the year with India attracting higher fund allocations from foreign investors”.

Kotak Securities has a conservative forecast of 19,000 to 22,000 in 2008.

“The liquidity pull-out, sustained high crude prices, negative international events (if any) may impact markets,” said Dipen Shah, vice-president (private client group) of Kotak Securities.

This year is the third successive stellar performance for the Sensex. In 2005, the index grew 42.33 per cent (from 6,602.69 to 9,397.93), followed by 46.07 per cent in 2006 (from 9,397.97 to 13,786.91) and 38 per cent (13,786.91 to 19,162.57) this year so far.

Major triggers that investors need to watch out for in 2008, according to broking firms, are elections, the Union Budget, corporate earnings figures, the value of the rupee vis-à-vis the dollar, US economic health and interest rate cuts by the US Federal Reserve.

“On the international front, the markets might expect a further cut in the Fed rate, which will see money flowing into the emerging markets,” said Seshadri Bharathan, director, stock broking of Dawnay Day AV Securities Private Ltd, which expects the Sensex to cross 22,000 in 2008.

Manish Sonthalia, vice-president (equity strategy) at Motilal Oswal Securities, which has chosen not to predict a 2008 Sensex target, said he believes the market will continue to be driven by strong earnings growth and high liquidity.

A spokesman for foreign brokerage HSBC, which has put a Sensex target of 23,000 for 2008-end, said “The Indian markets also will retain their appeal to global investors; it is an outstanding domestic story, led by consumption and capex, in an uncertain world.”

The correlation of Indian and US markets is low, which means that global investors can improve the risk-reward profile by adding Indian stocks, HSBC added.

RBI proposes lower fee on use of ATMs of other banks

Coming to the aid of bank customers who are charged an unreasonable fee, sometimes as high as Rs 57, for using ATMs of other banks, the Reserve Bank on Monday proposed a ceiling of Rs 20 on such transactions.

The RBI, in its draft notification, has also prohibited banks from charging any fee from customers for using ATMs of other banks for services like balance inquiry.

Presently, banks charge up to Rs 57 per transaction from customers who use ATMs of other banks for cash withdrawal and balance inquiry, the RBI said in its draft approach paper on Fair Pricing and Enhanced Access of Bank ATMs.

While prohibiting the banks from further increasing the ATM charges, the draft paper said that they would have to reduce the transaction fee to Rs 20 per transaction by the end of the current fiscal (March 31, 2008).

Also, the banks would be required to do away with charges for services like balance inquiry with effect from April 1, 2009, the draft added.

The central bank has invited comments from interested stakeholders by January 31 next year on its draft paper, which seeks to establish a fair and transparent framework for levy of service charges for bank ATMs.