Brokers May Be Forced To Raise Capital

Mumbai: The Securities and Exchange Board of India (SEBI) says its move to margin institutional trades in the cash market on a T+1 basis from April 21 is to create a level playing field.

Subsequently, with effect from June 16, 2008, the collection of margins would move to an upfront basis.

“But upfront margin will also spawn front-running because it is a de facto disclosure of buy or sell orders. Foreign institutional investors will not be comfortable about this, and it can increase volatility,” said Gaurav Dua, head, research of broking house Sharekhan.

The move is altruistic in principle as it is aimed at creating safeguards to avoid a payment crisis such as the one seen in January.

And institutions anyway keep the money with their custodian. “Earlier the custodian would enjoy the float. Now they will have to make the early pay-in,” points out a fund manager who does not wish to be named.

Manish Sonthalia, equity strategist at Motilal Oswal, sees it as an attempt by SEBI to ensure a level playing field.

“Earlier, only retail investors needed to pay the margins. Now with the institutional short-selling being introduced, the regulator wants a level-playing field. There could be some procedural difficulties, but the principle is good for the market in the long run,” Sonthalia said.

Some observers said life would certainly turn difficult for brokers, as their ability to finance trades may be reduced considerably.

According to risk management procedures prescribed by SEBI, brokers are required to deposit sufficient liquid assets with the exchange to cover upfront value at risk or VaR margins, extreme loss margin, MTM (mark to market losses) and the prescribed basic minimum capital or BMC.

Any shortage in these funds would reduce the member’s gross exposure limit (the maximum exposure a trading member is allowed) proportionately.

Hitherto, institutional trades handled by brokers were not considered for calculating the margin requirements. Now with the new circular this would also be considered, which will substantially increase the margin requirements.

R Balakrishnan, executive director, Centrum Stock Broking, said one area where more clarity is needed is the exposure limits of brokers.

“At present, the institutional trades are exempted from the calculation of the margin requirement and capital adequacy calculations of the brokers. If institutional trades are included for these calculations many small brokers will need to raise fresh capital to meet their statutory requirements. This will lead to consolidation in the industry,” he said.

The dice is certainly loaded against brokers: they’d have to ensure bank guarantees, and make other provisions which may be required as the rule gets implemented.

Banks are not very forthcoming when lending to brokerages since they do not enjoy an “industry” status and are perceived to be a high risk business.

Another problem is the archaic banking system in which a cheque deposited by a client takes three days clear. “The stock exchange does not wait for that long. It demands immediate pay-ins,” says a sub-broker.

Bhave Opts Out Of All NSDL Probes

NEW DELHI: CB Bhave, whose appointment as the new SEBI chief was formally announced on Friday, has recused himself from all proceedings initiated by the market regulator against National Securities Depository Ltd, the agency he headed since its inception in 1996.

In a statement, the finance ministry said that the government has accepted Bhave's request and has asked the Sebi board to allow a team of part-time members, who were not party to the initiation or processing of such proceedings, to deal with these issues.

"Neither Bhave who was heading NSDL nor the nominee of the ministry of finance on the SEBI board will be involved in this special arrangement. These proceedings will be overseen by a three member team comprised of part time members of the board. The team will associate an eminent legal expert for professional advice," the finance ministry press release said.

Bhave, who has been given a three-year term from the date he assumes office, ran into trouble with SEBI almost two years ago after the infamous IPO scam involving Roopalben Panchal surfaced.

Panchal and her associates had managed to corner large chunks of IDFC and Yes Bank shares by opening multiple demat accounts using photographs of large number of people. On listing, the shares were sold at a premium to the issue price.

Subsequently, SEBI, in a disgorgement order, 10 entities, including NSDL, to return around Rs 116 crore to those who did not get shares.

The order was quashed by Securities Appellate Tribunal. In April 2006, SEBI had accused NSDL of "contributory negligence towards opening of fictitious demat accounts and lack of oversight over its depository participants".

SEBI For 25% Price Band On IPOs Up To Rs 250 cr

MUMBAI: Stock market regulator SEBI has proposed a 25% first-day price band for IPOs up to Rs 250 crore, to enable “steady and sustained price discovery over a period of time”.

Once enforced, a price-band will put off several punters and leveraged investors who borrow money to pocket the listing premium by selling the shares soon after trading begins, a practice that’s known as ‘first day first show’ in Dalal Street.

Some forthcoming IPOs raising less than Rs 250 cr
The move has evoked a mixed response. “Why single out the smaller players... abnormal price movements have been witnessed in larger issues as well in the past,” said Prime Database MD Prithvi Haldea. “What needs to be addressed first, is the price discovery mechanism in IPOs.

Second it is imperative that the free float is increased,” he adds. “If 75-85% of the market cap is effectively in large companies, why penalise small companies. What of the significant rise in DLF post its listing?” said an investment banker. SEBI has invited public comments on the imposition of circuit filters on the first day of listing of shares.

At present, stock exchanges do not impose price bands on the day of listing of IPOs. The price fixed by the company , in consultation with its lead managers, is left open to price discovery. And, after the day of listing, there is a regular price band of 20%. This, however, would not apply to stocks which get relisted.

For IPO issue sizes that are greater than Rs 500 crore, price bands are not imposed even after the day of listing, if such scrips are available for trading on the derivative segment. It may be recalled that the SEBI chairman had suggested a price band in April 2007 on the grounds that it would check any irregular movements in stocks.

In the same month SEBI had banned seven brokerages from debut trading in newly-listed shares for their alleged role in huge price movements recorded in stocks like Cambridge Technology, Mindtree and Pyramid Saimira Theatre on their first day of trading. Some of these stocks witnessed unprecedented jump in their share prices immediately after the listing.

In a note on Thursday, SEBI said it has been noticed that there are significant price and volume spikes/volatility on the day of listing of IPOs. This was particularly true of IPOs which were below Rs 250 crore.

For several such IPOs where the stock is available for trading in the hands of public, after excluding shares of promoters and others that face a lock in period, is 25-30% of the equity capital of the company, the price may not sustain on subsequent days. This may disappoint long-term investors, said SEBI.