Advantage BSE in block deals

The Bombay Stock Exchange (BSE) has widened its lead over the National Stock Exchange (NSE) in the block deal segment.
In 2008, the volume of block deals on BSE was Rs 16,377 crore, compared with NSE’s Rs 4,754 crore. The corresponding numbers for the previous year were Rs 15,180 crore and Rs 8,509 crore, respectively.
A block deal is a trade with a minimum quantity of 500,000 shares, or with a minimum value of Rs 5 crore through a single transaction window on the bourses.
Market experts attribute the high volume of block deals on BSE to low trading volumes in the cash market. This leads to more execution of block deals. BSE sees an average daily trading volume of Rs 3,000 crore in the cash market compared to Rs 7,000-8,000 crore on NSE.
Jagannadham Thunuguntla, chief executive officer of SMC Capitals, said since BSE in general has lower trading volumes than NSE, chances of spillover of a block deal are much less. This means deals can go through faster on BSE.
“On NSE where trading volumes are much higher, trading is done on a first-come-first-serve basis. So lesser number of trades gets entirely executed at one time,” added Thunuguntla.
However, things could be improving for NSE. Since January 2009, there have been six block deals on the exchange with a total volume of Rs 232 crore compared to four deals with Rs 56 crore volumes on BSE.
The situation is almost the same in case of bulk deals. While transaction in the bulk deal segment of BSE amounted to Rs 70, 657 crore in 2008, it was Rs 65,752 crore on NSE. A bulk deal takes place when 0.05 per cent of equity shares of a company listed in the exchange is transacted.
In aggregate terms, block deals have seen a dip of 11 per cent in 2008, compared to 2007. Even the number of trades has dropped 30 per cent. That is, there were 411 block deal trades in 2008, as against 589 in 2007.
Analysts said that high net worth individuals, foreign institutional investors and other big corporate investors have stayed away from large-sized deals last year, leading to the fall.
There could be a lull in the coming year as well. Siddharth Bhamre, fund manager (derivatives and equities), Angel Broking, said that the number of deals this year could either be lesser or just the same as last year.

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How to get out of the squeeze

Will the world come to a spectacular and disastrous financial end? Credit markets across the globe, which were flush with liquidity not too long ago, are in a limbo as inter-bank borrowing stands frozen after a series of prominent write-downs, insolvencies and collapses.Suddenly, it’s clear that everyone and everything is connected. This connection is due to the frictionless flow of capital across the globe. But while a crisis in leading economies can spill over to the rest of the world, the bubble itself cannot be attributed to this ‘connectedness’. What the bubble truly needed to ‘inflate’ beyond all expectations was the age-old artificial booster of purchasing power: leverage. And it is this leverage that lies at the root of most of the evils that threaten to disrupt the global financial system.In many ways, India presented the globally leveraged punters with a near-perfect investment story. Here was a nation of a billion people. A nation that was always brimming with talent but had somehow not managed to find its place in the sun. A cheap and seemingly unlimited supply of talented labour, a huge hinterland and mega-cities hungry for the creation of physical and digital infrastructure. A consuming class larger than the population of the United States.

Income expansion, capital expenditure, infrastructure creation and the resultant consumption boost were the themes driving the ‘India story’ over 2003-7. Mutual funds garnered record inflows, even as the FDIs and portfolio investments by foreign investors soared. The result wasn’t difficult to predict: an overvalued stock market, which, by January 2008, was assuming several years of future growth as if it was assured.The only saving grace is that India’s economy, as well as its financial markets, are not as hopelessly overleveraged as those of the West. Capital adequacies at most banks are in double digits, and many leading corporates are actually cash rich rather than debt burdened. The ones that are ‘leveraged’ (prime examples would be debt-heavy real estate companies, or investors with ‘naked’ derivative positions in the stock market) would, of course, be susceptible to disproportionate losses in any downturn.While there is no denying the fact that an unprecedented phase of economic growth has been initiated, stock markets can take a long time to recover from the shock of largescale selling by FIIs and hedge funds. This is because Indian stock markets have, for some time now, relied more on foreign investors than on local institutions for emotional anchoring. The ‘main street’ might continue to struggle forward somehow, but the ‘financial street’ will find the going tough as overseas risk appetite refuses to reappear.The BSE Sensex has crashed through the psychologically important 10,000 floor and is down more than 55% from its January 2008 peak. Corporate earnings are being downgraded almost on a daily basis, while sustained FII outflows take the wind out of every rebound. Worse, GDP growth downgrades are beginning to happen almost every week now. Interest rates are refusing to fall back, reducing the consumers’ appetite to buy assets such as homes, vehicles and appliances. Capital spending by companies and development spending by government is slowing down and the job market is awash with supply.So, who exactly are these overleveraged players? Start with the sub-prime American home-owner, who ‘leveraged’ by taking on a mort-gage that he could not normally service, in the hope of home prices rising forever. Investment banks then packaged these mortgages into collateralised debt obligations (CDOs) bundles and helped banks trade them out, so they could go back and create even more mortgages. In turn, this drove up the bank leverage and home prices in a self-fulfilling virtuous cycle.The smarter investment bankers set up hedge funds and leveraged their funds using cheap yen loans to buy (and re-sell) more CDOs. Even smarter bankers then created contracts (credit default swaps—CDS— another sophisticated example of the leveraging effect of derivatives) that would guarantee such loans so that buyers could buy and sell them even more recklessly. Result: the CDS market is over $50 trillion today, which is over 3.5 times the annual US economic output and roughly equal to the global economy.American householders, already on steroids with seemingly perpetual home-price surges, merrily increased consumption by taking on more and more credit. The goods and services they consumed were provided by the factories of China, India and other Asian tigers. In turn, these economies experienced a multi-factor boom.

All this propelled the world into a commodity bull run it had not seen for decades. Oil rose from under $20 to over $140 per barrel in five years or so, resulting in a transfer of wealth from commodity importer countries to exporters. Most commodities have had spectacular bull runs aided by leveraged hedge funds that took deep positions, and rolled over their contracts month after month, while increasing consumption in the physical world kept demand sufficiently high to justify such prices.

The tipping point came when the first defaults and write-downs were reported in the sub-prime CDO bundles that were being traded with wanton zest by investment and other banks. Soon enough, the writedowns began to affect prices (and trading volumes) across the CDO market. Prices of CDOs crashed and trading volumes dried up, aggravating an already painful situation. Soon, the write-downs on CDOs pushed investment and commercial banks into a dangerous situation where their capital was no longer enough to back even a small fraction of the risks on their books.

And,in a perverse response to this information, the short-term money market dried up. No bank would lend to another. The virtuous cycle turned vicious. Credit markets froze in a matter of days. Bond values crashed and write-downs drove several investment banks and hedge funds into MTM losses that proved larger than their shareholder funds. The result: bankruptcy and rival (or government) takeovers in some of the largest names in the business. Bear Stearns, Lehman Brothers, Wachovia and AIG fell one by one, in a bizarre domino-like sequence that left global financial markets gasping.

The evaporation of risk appetite took its toll on the hitherto rocking but ‘connected’ stock markets of China, India, Brazil and Hong Kong, with FIIs and hedge funds adopting the ‘rush home’ policy in response to their own liquidity problems. Currencies fell in response to this outflow, further exacerbating the pain for those who had chosen to stay invested. Local investors and funds, again with leveraged positions in the futures and ‘funded’ segments, were caught napping and suffered enormous losses. Their margin calls triggered further sales, driving down markets even more.

In San Francisco suburbs, falling home prices are pushing distressed borrowers into penury. Local banks from California to Massachusetts are on the verge of financial collapse as the frozen short-term money market refuses to thaw in response to the government-sponsored $800 billion bailout. The biggest investment banks, insurance companies and mortgage lenders are either dead or are being desperately revived from a coma. Along with spectacular hedge fund losses (largely arising out of the sub-prime mess), Americans have lost trillions of dollars of stock market wealth.Even after the hastily announced (but welcome) relief measures across Europe and the US, credit markets (the lifeblood of trade and commerce) refused to open up, pushing these economies closer to not only a recession, but financial breakdown. As we go to press, we can only worry about whether this is only the surface of a greater financial gridlock. Or whether the infusion of capital, loan funds and deposit insurance by governments will ease the pain.As credit shrinks around the world (most of it is due to de-leveraging and winding down on the ‘financial street’), a lot of good credit (related to the ‘main street’ business) will contract and disappear along with ‘bad’ credit (which was a contributor to pure financial leverage). Many innocents will be run over in this purging, putting the world economy on the backburner for quite some time. It was a great party, while it lasted. It’s time now to clear the mess. Will regulators use this as a final opportunity to control and tame leverage, that perennial enemy of discretion? If not, this is only the beginning of the end.We’ve already seen how this can affect us in India. So, as a small investor, what should you do now? It’s time for value, rather than growth, to be the yardstick for stock picking. As it is for keeping equity at modest levels (as opposed to aggressive) in your overall asset allocation. For those who are already heavy on equity, it may not make sense to withdraw this late; so park incremental wealth away from the stock market. And take some harsh switch decisions on existing portfolios.

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Expect fireworks only by next Diwali, say market players

Few market participants will stick their neck out to give a target for the Sensex during Samvat 2065, a stark change from the last year, which reflects the overall mood in the Indian equity markets.
Indian markets have been reeling from the impact of the global financial crisis, which has so far led to the closure of nearly 50 banks in the US, sounding the death knell for the investment banking industry.
Since hitting a peak of 21,000 in January, the BSE Sensex has fallen continuously.

"One can't predict the index levels, but definitely the sentiment would change by the next Diwali as our economy has not been impacted as much as the US and other European economies," said Samir Arora, a fund manager at Singapore-based Helios Capital.
Enam Securities is the only brokerage in the pack that has given a Sensex call this time. Enam says the Sensex should touch 15,000 by the next Diwali. Most traders believe that markets will recover by the next Diwali, even though fundamentals of the Indian economy may worsen slightly with elections looming large.
Prabhudas Lilladher managing director Amisha Vora said there would be some recovery in the markets over the next 12 months, but for the economy, things would get worse. Companies generating cash and debt-free companies will be preferred stocks.
For investors with a time horizon of two years, equity remains a strong asset class. On the other hand, investors should wait till the middle of the next year to get into real estate, Vora added.
According to Citigroup, economies such as China and India, with either larger domestic markets or greater policy flexibility, are more likely to maintain relatively strong growth.
Nandan Chakraborty and Sachidanand Shukla of Enam Securities say there will be three phases - the agony of October-December 2008, the apathy of January-July 2009 and the stirrings of ecstasy, post-August 2009.
Emerging economies such as India will attract foreign institutional investor inflows once the global risk aversion subsides.
"We continue to believe that Indian markets offer strong medium- to long-term potential on the back of relatively-higher economic growth. Once the global risk aversion subsides and investors start looking for growth opportunities, strong economies like India should attract flows," said Sukumar Rajah, chief investment officer (equity), Franklin Templeton Investments India.
So far in 2008, FIIs sold equities in excess of $12 billion in the Indian markets. Domestic institutional investors, including mutual funds and insurance companies, bought equities worth $13.51 billion. Market participants feel that the next year will be active in terms of policy interventions.

FIIs reduce stake in 50% of BSE-500

So far, FIIs have withdrawn $11 billion (Rs53,240 crore) from the Indian equities market, the first time in a decade when they have been net sellers
At least one in two companies in the BSE-500 index, comprising the top 500 firms listed on the Bombay Stock Exchange that account for 93% of India’s market capitalization, appear to have seen a decline in holdings by foreign institutional investors (FIIs) since January, the peak of the Indian bull market rally.
This conclusion is based on a Mint analysis of 173 stocks that have already disclosed changes in their stock ownership for the quarter ended September. Most analysts expect this number will rapidly grow as more companies report this data during the ongoing earnings results season.
So far, FIIs have withdrawn $11 billion (Rs53,240 crore) from the Indian equities market, the first time in a decade when they have been net sellers. Last year, they had pumped in $17.8 billion, which had boosted the market to its highest ever levels in January.
The flight underscores the extent of foreign capital that has fled from India—and other emerging markets—in the midst of a global liquidity crisis that has seen the collapse of iconic institutions, such as Lehman Brothers Holdings Inc., and a government-led bailout of insurance and banking firms.
Others, such as Amitabh Chakraborty, president (equity) at Religare Securities Ltd, say the FII pull-out from Indian firms reflects an emerging downturn. “Economic growth (projections) have fallen to 7.5%, next it will be 7%,” he says. “Markets are always forward-looking...”
About 105 of the 173 stocks that have released their data so far have seen their FII holdings fall in the last three quarters. This fall has largely been broad-based, with foreign investors withdrawing money across large- and mid-cap stocks. About 14 of the 30 stocks that make the Sensex, India’s most widely tracked index, and 23 of the 50 Nifty index stocks, are also in the same situation.
“Because of the global liquidity crunch, local arms (of FIIs) have been forced to liquidate their holdings in India,” notes Nitin A. Khandkar, vice-president at Keynote Capital Ltd, a Mumbai brokerage.
“As far as the equity markets are concerned, the crisis is not of growth, but it’s a credit market crisis,” says the head of research at a foreign brokerage, who didn’t want to be identified as he is not authorized to talk to the media. “Today, the issue is whether companies can borrow, can they grow? The pie is shrinking and shrinking fast.” The list of firms that have been hit by the FII pull-out is dominated by 14 banks and seven information technology stocks.
Meanwhile, the Indian economy expanded 7.9% in the first quarter of the current fiscal year—the lowest since the third quarter of 2004-05—compared with 9.2% a year ago. With inflation hovering at a 13-year high, as prices of commodities and crude oil soared earlier this year, and due to the tight monetary conditions, experts continue to pare their gross domestic product growth predictions for the country.
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Should short-selling be banned?

A ban on futures would lower liquidity and make the markets more volatile. In any case, the recent US experience shows such bans don't stop markets from falling.
Surjit Bhalla, MD, Oxus Research and Investments
"The stocks in which short sales were banned in the US fell the most! Investors who want to get out, will do so through the cash market if need be"
The reason why short sales shouldn't be banned is a simple one - the ban won't achieve anything, it cannot. The US banned short sales of certain financial stocks (like Goldman Sachs, for instance) - it announced a freeze on such sales for a certain period, not an outright ban -but these stocks collapsed the most!
Where do you have the possibility of short sales? First, you can borrow stocks, in return for a fee/interest income to the owner of these stocks, and then sell them. We've tried to introduce this in the market since a measure that increases volumes is, in principle, a market-stabilising measure.
But this kind of stock-lending hasn't really taken off since there are a host of irritating regulations governing it. The short point, though, is that we don't have short sales via this measure in India as yet.
The other way to sell shares you don't own is through the futures market. To stop this, however, will mean you have to bring the F&O market to a halt. That means the price discovery process that takes place through the F&O market which has much greater volumes (since it allows greater leverage) than the cash market will no longer take place.
And by virtue of the depth F&O provides, the market automatically gets more stable. The authorities, of course, can take a decision to crash the F&O market by banning sales, but the question to ask is what impact this will have. If it has the impact you want (to halt a downward movement in the market), then that's a call you take.
We've seen that in the US where such bans were imposed, they didn't work and that's why the US lifted them. Once you understand the process, it's easy to see why a ban, if it is imposed, won't work. So let's say there are no futures markets and that a group of investors, generally seen as FIIs in today's environment, want to exit. So what do they do?
They sell in the cash market. So the market collapses anyway. But, the argument will be, the presence of circuit filters will prevent the cash market from a collapse. That's not true since all the filter does it to halt trade for a while to allow passions to cool. Once trading resumes, if people still want to get out, they will. All that the presence of filters does is to ensure the fall is limited in a particular period in time.
So maybe you can look at the possibility of keeping the futures market the way it is but introducing some kind of circuit filters here as well as a temporary measure. That'll ensure price movements, in any direction, are kept within a band. It will not, however, prevent the market from falling if that's where it is going. In any case, it's useful to keep in mind there are two parties to every transaction - if someone's selling, someone's buying at the same time.

Deven R Choksey, MD, KR Choksey Shares & Securities
"These are not normal times and the markets are falling due to short sales which create a downward pressure on prices. A ban is critical right now"
If we want investors to be protected from losing faith in the system and protect the rupee, the bear hammering has to be stopped till the market returns to normalcy. As world markets are crumbling due to continued short selling, we need to ban short selling in the cash and derivative markets simultaneously till the time global market stabilises.
At present, intra-day short selling is allowed and it is fuelling speculation as can be seen from the fact that only around 30 per cent of the average daily volumes in equity markets end up in delivery - this then leads to a massive fall in prices during the day and then an intra-day recovery under short-covering which then leads to huge volatility.
In abnormal times such as now, short selling is counter-productive and needs to be banned and it should be ensured that entire volume results in delivery in the cash market. After banning short sales, global regulators mysteriously lifted the ban last Friday, only to see mass-scale selloffs resuming.
If regulators restrict players from adding to their existing positions in the F&O markets, this will stop the selling spree. Once short selling via the derivatives market is stopped, this will prevent the market from collapsing further.
Unfortunately we continue to allow short selling in the derivatives markets and the market is yet to be delivery-settled. Regulators will take India's market to the next level of growth when they bring delivery-settled F&O markets; not only will this increase the volumes but it will also make place for investors in the F&O market which is currently driven by traders. The reason why global regulators don't want to ban short selling in the F&O market is because hedge funds operate out of these markets and don't wish to be regulated.
Another thing the regulators need to do is to ban P-note trading in India and the Nifty in Singapore as hot funds from global markets operating in these markets transmit a fear psychosis to bring down prices in our market. Curiously, however, regulators have relaxed P-note norms to increase FII inflows. Mark-to-market norms must also be kept in abeyance till after the liquidity situation becomes normal.
Regulators must act with full confidence on these issues as half hearted measures won't protect our economy. Our markets and investors need the confidence of regulators more than mere explanations and assurances.
Any inaction will ensure investors who've left the market will not return and a further fall in the market runs the risk of weakening the collateral kept with banks ... this, in turn, can weaken banks and, eventually, the economy. In other words, we need to understand the importance of keeping the stock markets healthy and take timely and appropriate action.

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Delivery-based trades on the rise

MUMBAI: Amid the pall of gloom, there seems to be some relief. Percnetage of delivery-based trades on the bourses has shown some improvement, and now accounts for over 30% of all trades. Yet, market observers feel it is hardly any cause for celebration. They attribute the trend to a sharp rise in selling by foreign institutional investors, and an overall decline in trading volumes. Real equity investments are becoming elusive even as over 60% of listed companies on the bourses are trading at record lows, and with most experts assuring strong fundamentals and assured future performance. While delivery-based trading has marginally increased in September, a good portion of it comes from FII sell-off, say market observers. Average delivery volumes during September stood at 32%, compared with 27% in June, 33% in March and 37% in January. “The marginal rise in delivery positions in September should not be seen as genuine buying. It could just be an effect of massive off-loading by foreign investors. Even volumes are on the lower side with market makers (jobbers and arbitrageurs) missing from the action,” said Ventura Securities’’ institutional sales head Bharat Shah. According to Mr Shah, there are not many positive triggers for the market. On almost all days since the beginning of this month (until Friday), the market ended lower while more delivery trades were logged. This is negative for the market as it highlights the presence of more sellers in the market. “In such markets, there is only 40% chance that you make money; there is a good 60% chance of making a huge loss. This explains for the absence of speculators in the market,” Mr Shah added. Experts opine that when the market is bullish, the presence of genuine investors increases the overall delivery ratio. Delivery-based volumes also have a negative correlation with the liquidity of a stock: in other words, higher the trading at a counter, lower are the deliveries taken by investors, dealers said. Delivery position of market heavyweights like Infosys (with 43% delivery trades), Reliance Industries (21%), ICICI Bank (19%), SBI (11%), ACC (28%) and ONGC (39%) reveals that deliveries as a proportion of the total number of shares traded have more or less remained at period low levels. Before the January crash, day-trading volume accounted almost 70% of the total traded volumes. But post the crash and the budgetary changes on securities transaction tax, speculators and jobbers are keeping away from the market. “Traditionally, retail investors never buy at lower levels. Many a time they just manage to catch a rally midway. Up till July, investors were expecting a bounce back in equities; pessimism has set in the markets now,” said Motilal Oswal Securities joint managing director Ramdeo Agarwal. “The market has become highly uncertain. Investors who are willing to take risk can buy companies with good fundamentals and sound track record. Only long-term equity investments are advised,” Mr Agarwal added.
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Just that our memories tend to be too short and our greed too much.

This may remind you the mistakes we commit while trading.An opinion expressed by CNBC-TV18's Executive Editor, Udayan Mukherjee after the Correction in January 2008.
The thing about life is that one makes mistakes. Many mistakes were made in the second half of 2007 and those sins have to be washed away by blood, such is the way of financial markets. Some participants will go down under and never be able to get back to the market again but most will survive. The pain will linger for many months, maybe years but lessons have to be learnt. Every such debacle has lessons for us and the sooner we forget them the more we suffer.
The first lesson is not to let stock price performance become the sole reason for buying, a mistake which was made in abundance in the last 3 months. What couldn't be explained by fundamentals was credited to liquidity. The present lost all relevance as people chose to focus on the distant future, perhaps simply because the present could never justify those ticker prices; only a hazy dream of the future could. Traders and investors had no time for fundamental analysts, in many cases they were labelled "cribbing fools". Chartists became the most celebrated tribe on the street as only they could see and predict the one way run to glory for many of the hot stocks even as fundamental watchers cringed at valuations....till the music stopped. Don't get me wrong, charts do work in trending markets but once stock prices veer away completely from fundamental value, people need to get careful. But they never are. Now that the blinkers are off, people should ask themselves why stocks like RNRL, Ispat, RPL, Essar oil and Nagarjuna fertilisers have lost 50-70% of their value. It is simply because their stock prices had snapped all connection with underlying business fundamentals, earnings and value. Their stock prices became the only reasons for buying them which works for a while but not forever.
The other big lesson, one which should have been driven in earlier in May 2006, is the danger of overextending oneself in the futures market. The lure of stock futures is easy to understand. Put in some margin, take a big exposure on a fast moving stock, make a killing when prices shoot up. Repeat exercise. Just that people forgot that prices may also come down and at a pace which no one can even imagine, maybe their friendly stockbrokers forgot to tell them that part of the story. The result : unbridled speculation that ran into lakhs of crores, excesses that we are paying for today. Even this fall will not cure investors of their love for futures speculation but if at least some amount of caution is injected it would have been a worthwhile learning. Futures are not toys for amateurs, they are time bombs in the hands of inexpert and inexperienced traders, it's only a matter of when the fuse runs out.
The other learning which I hope will play out in the future, as it has in the past, is that it pays to be brave in times of panic such as these. If I was allowed to invest myself , which I am not, I would have no hesitation in deploying serious money into the market today, knowing fully well that prices may fall more tomorrow. And I would be standing there tomorrow to buy more of the same, till my money ran out. India is going to be a terrific stock market story for many years to come, even an intermediate bearish patch cannot shake that conviction of mine. At best, one will have to wait a bit for the returns to follow. That's alright. You are happy to put money in a bank FD and then wait for one full year to collect that measly 8%, aren't you? Then why does the stock market need to give you 20% every month? In the last one year, I haven't seen so many good stocks trade at such mouth watering levels. Forget trading, avoid the duds which were fuelled up by operators, just go out and buy those blue chips. They will deliver, even if there is a global market meltdown for a while, and if you are a bit patient you will be rewarded. But do remember January 2008, as history will repeat itself again in the future. Just that our memories tend to be too short and our greed too much.