I
Theme
of the week:
Derivatives Market in India*
Concerns About the Structure
Background
In
1969, the central government had prohibited all forward trading in
securities in order to curb certain unhealthy trends that had developed in
the securities market at that time and to prevent undesirable speculation.
However, in the changed financial environment in the post-liberalisation
period, the relevance of this prohibition had vastly reduced. Despite the
withdrawal of prohibition on derivatives by the Securities Laws
(Amendment) Act, 1995, the market for derivatives did not takeoff for some
years, as there was no regulatory framework to govern trading in
derivatives.
The
pros and cons of introducing derivatives trading were debated intensely in
the mid-1990s. The lack of transparency and inadequate infrastructure of
the Indian stock markets were cited as reasons to avoid derivatives
trading. Derivatives were also considered risky for retail investors
because of their poor knowledge about intricacies of such trading.
However, in spite of the opposition, the path for derivatives trading was
cleared by the authorities.
In
December 1999, the Securities Contract (Regulation) Act [SC(R)A] was
amended to include derivatives within the ambit of ‘securities’ and a
regulatory framework was developed for governing the trading in
derivatives. Derivatives were formally defined to include: (a) a security
derived from a debt instrument, share, loan whether secured or unsecured,
risk instrument or contract for differences or any other form of security,
and (b) a contract which derives its value from the prices, or index of
prices, or underlying securities. The Act also made it clear that
derivatives are legal and valid, but only if such contracts are traded on
a recognised stock exchange. The Government also rescinded in March 2000
the three-decade old notification, which prohibited forward trading in
securities.
Earlier,
SEBI has set up a 24-member Committee under the Chairmanship of Dr. L. C.
Gupta on 18 November 1996 to develop an appropriate regulatory framework
for derivatives trading in
India
. The Committee submitted its report on March 17, 1998. The introduction
of derivatives was delayed for some more time as the infrastructure for it
had to be set up. Derivatives trading required a computer-based trading
system, a depository and a clearinghouse facility. In addition, problems
such as low market capitalisation of the Indian stock markets, the small
number of institutional players and the absence of a regulatory framework
caused further delays. Derivatives trading eventually started in June
2000.
On
June 9, 2000, the Bombay Stock Exchange (BSE) introduced
India
's first derivative instrument - the BSE- (Sensex) index futures. It was
introduced with three-month trading cycle - the near month (one), the next
month (two) and the far month (three). The National Stock Exchange (NSE)
followed a few days later, by launching the S&P CNX Nifty index
futures on June 12, 2000.
A
brief status report on derivatives
Derivative
trading is permitted only on two exchanges, viz.,
BSE and NSE. While turnover in interest rate derivatives is miniscule,
the bulk of the volume is in equity-based derivatives. The total
derivatives turnover has increased from Rs 103,847 crore in 2001-2 to Rs
2,563,165 crore in 2004-05. In the financial year 2005-06 so far, the
total turnover has risen from Rs 195,972 crore in April 2005 to Rs 308,166
crore in July 2005 (Table 1)
Table 1: Trade Details of Derivative Market
|
(Amount in Rs. crore)
|
Year
|
BSE
|
NSE
|
Total
|
|
Total
Turnover
|
Open
Interest at the end of the
|
Total
Turnover
|
Open
Interest at the end of the
|
Total
Turnover
|
Open
Interest at the end of the
|
Jun00-Mar01
|
1673
|
NA
|
2365
|
NA
|
4038
|
-
|
2001-02
|
1922
|
NA
|
101925
|
2150
|
103847
|
-
|
2002-03
|
2478
|
7
|
439854
|
2194
|
442332
|
2201
|
2003-04
|
12452
|
1
|
2130649
|
7188
|
2143101
|
7189
|
2004-05
|
16112
|
0
|
2547053
|
21052
|
2563165
|
21052
|
Apr-05
|
3.2
|
0
|
195969
|
12243
|
195972.2
|
12243
|
May-05
|
0
|
0
|
208380
|
15863
|
208380
|
15863
|
Jun-05
|
0
|
0
|
271246
|
24545
|
271246
|
24545
|
Jul-05
|
0
|
0
|
308166
|
27198
|
308166
|
27198
|
Note: NA stands for not available
Source:
Sebi Bulletin
|
As
shown in Table 1, BSE has not been able to sustain the investors’
interest despite making various efforts, while the derivatives segment has
grown exponentially on NSE.
Product-wise
distribution of turnover
Though
the trading in derivatives began on NSE in June 2000 with the introduction
of index futures followed by index options in June 2001 and stock options
in July 2001, the total
derivatives turnover ranged between Rs 35 crore and Rs 5,477 crore until
the introduction of stock
futures in November 2001.
Thereafter,
there has been a quantum jump in NSE's derivatives trading to Rs 101,925
crore in 2001-02 (daily average of Rs 410 crore) with stock futures
accounting for Rs 51,515 crore or 50 per cent (Chart 1). The total
derivatives turnover has increased thereafter manifold over the years; in
2004-05 it has touched Rs 25,46,986 crore (Rs 10,107 crore of daily
average) with stock futures trading for Rs 14,84,056 crore or 58.3 per
cent. As compared to the trading in stock futures in April –August 2004
at Rs. 485,664 crore, has shot up to Rs 816,557 crore in the comparable
period this year - a rise of over 68 per cent. Among the five derivative
instruments traded on NSE, stock futures have been the most popular since
its inception. It accounts for almost 60 per cent of the total turnover
followed by index futures which have ranged between 10 per cent to 30 per
cent except in 2000-01 when it was the only derivative instrument traded
on the exchange. Except for a brief period in 2003-04, interest rate
derivatives have not been traded.
Role
of retail investors
The
profile of participants operating in the derivatives markets shows that
the participation of retail investors is much more than that of
institutional investors. As per the data published by NSE, among the
different classes of investors, the bulk of trading is done by retail
traders. They account for about 60 per cent of gross traded value followed
by proprietary trades and by institutional investors (Table 2). In case of
futures, an investor is required to pay an up-front margin on the basis of
exposure taken. As a result, they can hold large position and manage large
exposures.
The
mix of hedging and speculative demand is critical for a successful market.
It is relatively easy to stimulate speculative demand – practically all
markets have a natural class of intermediaries whose main purpose is
short-term trading and who are interested in expanding the range of
products for speculative trading. It has been observed that natural
hedging demand in developing markets is subdued, because many developing
markets do not have the institutional investors whose businesses require
them to invest for the long-term and manage their risk in the meantime.
Given
the fact that most of the retail trading is of speculative in nature, this
may raise long-term risks if genuine long-term institutions do not emerge
with hedging demands. Also, this raises questions about the role the
present derivatives market performance in terms of supporting speculative
motives rather than hedging activities, which is the basic rationale for
the existence of derivatives market.
Nevertheless,
in terms of building the market infrastructure, retailers' involvement has
supported the growth. But, for serving a more meaningful role, it is
pertinent that institutions are using them to hedge their positions.
Recently, Sebi has relaxed the restrictions on mutual funds to trade in
derivatives on par with those for FIIs
Table
2: Institutional, Retail and Proprietary Investors- Turnover
Analysis.
|
Month
|
Institutional Investors
|
Retail
|
Proprietary
|
|
Gross
Traded Value (Rs crore)
|
Percentage
Contribution
|
Gross
Traded Value (Rs crore)
|
Percentage
Contribution
|
Gross
Traded Value (Rs crore)
|
Percentage
Contribution
|
January-05
|
32291
|
6.09
|
299577
|
56.46
|
198711
|
37.45
|
February-05
|
28223
|
5.56
|
297562
|
58.68
|
181318
|
35.76
|
March-05
|
37690
|
6.31
|
355192
|
59.43
|
204832
|
34.27
|
April-05
|
34866
|
8.9
|
221668
|
56.56
|
135404
|
34.55
|
May-05
|
35828
|
8.6
|
239104
|
57.37
|
141828
|
34.03
|
June-05
|
40513
|
7.47
|
321575
|
59.28
|
180404
|
33.25
|
July-05
|
43284
|
7.02
|
377532
|
61.25
|
195517
|
31.73
|
August-05
|
56075
|
7.53
|
450526
|
60.51
|
238014
|
31.96
|
Source:
www.nseindia.com
|
Indian
financial markets are already considered to be speculative, as the
percentage of deliveries to the total cash turnover has hovered around 20
per cent. However, recently, the percentage seems to be rising to around
25 per cent. In addition, the leveraged nature of the futures market makes
stock futures very attractive for speculators. The most probable reason
cited for the success of stock futures in
India
and huge retail participation in it, lies in the similarity between the
trading of stock futures and the time-worn badla system. In fact, stock
futures are better than badla as the returns on the latter are decided on
a weekly basis and were prone to adjustments. But, in case of stock
futures, cost of carry is known to both the buyers and sellers, at the
time of entering into the contract.
Unusual
dominance of stock futures
As
per the 2004 IOMA[1]
Derivatives Market Survey conducted by the World Federation of Exchanges,
stock futures are a new development and few exchanges offer them; National
Stock Exchange (NSE) of
India
has been particularly successful in offering stock futures and its
notional value represents nearly 4/5th of the aggregate global
stock futures as of 2003. The survey further notes that even in 2004,
stock futures are available for trading on only a few exchanges. The two
big exchanges, namely, NSE and Russian Trading System (RTS) account for 62
per cent of global volumes. In 2004, NSE had overtaken RTS, making it the
largest exchange for trading stock futures. The larger underlying contract
value of the Indian stock futures means that the Indian exchange makes up
74 per cent of the notional value of stock futures trading. Also, NSE has
accounted for 95 per cent of transaction volumes in stock futures in
India
. US markets have been slow to adopt stock futures, and the two exchanges
that do trade them saw mixed fortunes in 2004 - OneChicago2 volumes increased, and NQLX2
volumes fell. In the European time zone, all exchanges that trade stock
options, with the exception of Eurex, have introduced stock futures. They
saw mixed results in 2004, with Euronext, JSE South Africa, Borsa Italiana
and OMX Stockholm recording significant increases.
The
same survey states that the global derivatives volume has increased from
7.9 billion contracts in 2003 to 8.6 billion contracts in 2004 , 3.2
billion contacts in futures and 5.4 billion contracts in options (Chart
2).
Merits
of Physical Settlement
Physical
delivery has its obvious advantages - traders, being wary about the fact
that a trade may end in delivery, would exercise more caution especially
while taking a short position. In other words, there would be more trading
discipline. Besides, it acts as a safeguard against short-term price
movements in the underlying asset. For instance, taking physical delivery
will guard a market player from any manipulative movement in the stock
price just before the expiry of the futures contract.
However,
currently all derivative contracts are cash settled. Total settlement
value as a percentage of total derivatives turnover has been less than one
per cent except in 2000-01. Also, the size of mark-to-market (MTM) exceeds
that of final settlement for futures and in case of options, premium
settlement exceeds exercise settlement (Table 3).
Table 3: Settlement Statistics in derivatives
Segment of NSE.
|
(In Rs.million)
|
Month/Year
|
Index/
Stock Futures
|
Index/
Stock Options
|
Total
|
Total
Turnover of F & O Segment
|
(2)
as a percentage of (1)
|
MTM
Settlement
|
Final
Settlement
|
Premium
Settlement
|
Exercise
Settlement
|
|
|
|
|
|
(1)
|
(2)
|
|
2000-01
|
840.84
|
19.29
|
-
|
-
|
860.13
|
23650
|
3.64
|
2001-02
|
5052.49
|
219.25
|
1647.58
|
939.46
|
7858.79
|
1019254
|
0.77
|
2002-03
|
17379.02
|
457.6
|
3312.11
|
1958.83
|
23108.56
|
4398548
|
0.53
|
2003-04
|
108220
|
1389
|
8589
|
4761
|
122959.81
|
21306482
|
0.58
|
2004-05
|
130241.79
|
2275.02
|
9410.64
|
4558.7
|
146486.15
|
25470526
|
0.58
|
Apr-July 05
|
53439.1
|
1465.6
|
3413.9
|
2054.4
|
60373
|
9837616
|
0.61
|
Source:
NSE NEWS
|
|
|
Physical
delivery will take place only for open positions on the expiry of the
contract. Any market participant who has taken a future position and
squares off, then any delivery process does not impact him. So speculators
are not much affected.
For
others, in the cash settlement-based environment, these positions are
either rolled forward (squaring off near month future and selling of next
month future) or squared off by buying the future and selling the
cash-market holding. This leads to additional cost for the arbitrageurs at
the time of squaring off. If the settlement is through physical delivery,
the arbitrageurs will tender their stock for settlement of the futures
position and thus save the cost of squaring off.
Also,
if the cash market is directional and the stock is showing a big move in
either direction, the futures price will adjust itself with the expected
closing price of the cash market as this will be the settlement price for
the futures positions. However, in the physical settlement scenario, this
price will lose its relevance for the settlement of derivatives positions
and the cash and futures price will move exactly in tandem. If not, there
will be an arbitrage opportunity emerging. On the whole, it will reduce
volatility in the market during the last half-an-hour of the market on the
expiry day.
In
case of options, for instance, a call option writer who has to give
delivery of shares if the option is exercised with physical settlement, he
would prefer writing a covered call rather than rely on the other option
of acquiring shares once the option is exercised. So, in essence, there
would be fewer uncovered calls being written. There is also the option of
borrowing shares for the delivery, but then something needs to be done to
make the borrowing and lending mechanism more efficient. The availability
of stock lenders and financiers would be imperative for the success of the
market in the deliverable environment
The
finance ministry has approved physical settlement of derivatives
contracts. With physical delivery, the linkages between derivatives and
cash markets become stronger, so it makes sense to introduce it now, since
the derivatives markets are more mature and liquid.
However,
Sebi and NSE have some serious concerns. They worry that physical
settlements increase the possibility of a bear squeeze, especially in
scrips where the floating stock is low. In a bull market, the floating
stock available on a daily basis shrinks rapidly even though trading
volumes on the bourses appear high. More
importantly, the entire point about introducing derivatives trading was to
take the speculative element out of the cash segment and separate cash
from speculative trades- the arbitrage between cash and derivatives keeps
prices true and correct.
The
traditional badla trading often led to problems because it was an
amalgmation of cash and settlement. The argument that one cannot
effectively hedge trades without physical settlement is largely incorrect.
Ironically, FIIs who hold large chunks of stocks are probably best placed
to take advantage of physical settlement in derivatives. Physical
settlement can be introduced only if there is an efficient securities
lending and borrowing system.
In
the absence of physical delivery, the system simply flushes out all trades
at the end of the month when the contract expires. There is no logical
conclusion to the futures trade. The continuous balancing of buy and sell
does not happen and the populist view gets further propagated, as the
buyer does not have any obligation to take delivery.
This implies that there is a support
for unidirectional movement of the market. However, experts argue that the
deliveries in the derivatives markets are only in the 2- 5 per cent range.
It must be understood that this is the result of delivery after the open
positions have been squared; hence 98 per cent are countertrades. If we do
not provide for these countertrades, there will then be no balancing
factor in the market. For those who want to manipulate the market, it is
easy to maintain the last day prices so that the square off rates are
high/low as desired. If all trades have to logically close, then such
manipulations have no place in the market.
The
fact that futures prices are at a discount shows that the underlying cash
and the futures markets are not in sync and operate in their own orbits.
It is well known that the derivatives market has been used to heavily
short sell when the going was not good in banking and PSU stocks.
A
critique of Cash Settlement
The
L. C. Gupta Committee had advocated that stock futures should be
introduced only after a system for lending and borrowing of shares was in
place. It, therefore, visualised physical exchange of shares for settling
the trades executed in the futures market for individual stock futures.
Instead of introducing the lending and borrowing system, a detour was
adopted and cash settlement insisted upon even for individual stock
futures.
Table
4:Turnover on Derivative Segment of NSE as a percentage of its Cash
Segment.
|
|
F
& O Segment
|
Cash
Segment
|
|
Year
|
No.
of Contracts Traded
|
Turnover
(Rs.million)
|
Turnover
(Rs.million)
|
(1)
as a per cent of (2)
|
|
|
(1)
|
(2)
|
|
2000-01
|
90580
|
23650
|
13395102
|
0.2
|
2001-02
|
4196873
|
1019254
|
5131674
|
19.9
|
2002-03
|
16768909
|
4398548
|
6179886
|
71.2
|
2003-04
|
56886776
|
21306482
|
10995339
|
193.8
|
2004-05
|
77017185
|
25470526
|
11400720
|
223.4
|
Apr-05
|
8628497
|
1959690
|
827183
|
236.9
|
May-05
|
9137619
|
2083803
|
868020
|
240.1
|
Jun-05
|
10653067
|
2712461
|
1113970
|
243.5
|
Jul-05
|
11198617
|
3081662
|
1230080
|
250.5
|
Apr-Jul05
|
39617800
|
9837616
|
4039253
|
243.6
|
Source:
NSE NEWS
|
The
earlier Committee on Secondary Market believed that introducing a share
lending and borrowing mechanism would amount to badla. It, therefore,
advocated that if stock futures are introduced, they should be cash
settled; no lending and borrowing mechanism was thought necessary in such
a model.
Here,
it is worth noting that Deena Mehta, former President of BSE, has
attributed the sharp surge in stock indices partly to the structure of the
derivatives market, wherein the absence of physical settlement is allowing
investors to hold large positions and rollover the same at the time of
deliveries. She further says that the country takes great pride in
following international best practices, but the cash settled system is an
anachronism. In all developed countries, derivative trades are delivery
settled. The danger of a cash settled system is highlighted above. After
the experience of five years in the derivatives market, the regulator must
look at the issue on hand objectively. The size of derivatives market
being bigger than the cash market, we cannot
afford a structurally weak system.
The
importance is also emphasized by the growth of derivatives market, which
has grown exponentially over the years. The total derivatives turnover as
a percentage of cash segment has shot up sharply from 0.2 per cent in
2000-01 to 194 per cent in 2003-04 and further to 223 per cent in 2004-05.
In 2005-06, it has risen to a high of 251 per cent in July 2005 (Table 4).
References
Business
line (2001) “Volumes soar as single stock ‘futures’ mimic
‘badla’ November 30
Business
line (2005): “Is the derivatives market model a weak link?” August 3
World
Federation of Exchanges (2005): “2004 IOMA Derivative Market Survey”
May
(2004):“Equity
Derivatives and cash trading”, December
NSE:
“NSENEWS” Various issues
Gupta.
L.C (1998): “L C Gupta Committee report on Derivatives”
(*
This note has been prepared by Ms. PIYUSHA HUKERI)
Highlights of Current Economic Scene
AGRICULTURE
The
Ministry of Textiles plans to set up 25 integrated textile parks within a
span of 2 years. The scheme has been introduced in place of the existing
schemes, viz.
Apparel
Park
for Exports (APE) and the Textile Cluster Infrastructure Development
Scheme (TCIDS). The government is ready to pay 40 per cent of the project
cost or up to Rs 40 crore; whichever is less, excluding the cost of the
plant and machinery. Once fully operational, the park will facilitate
investment worth Rs 7500 crore in sector. The production is expected to
touch Rs 20,000 crore per annum. The primary objective of the scheme is to
provide world-class production facilities to the players.
The
government has asked the states to help in implementation of Rs.
14,839-crore rehabilitation package for ailing rural co-operative banks.
The National Commission for Farmers has suggested a paradigm shift from
micro finance to livelihood finance. The panel headed by agricultural
scientist Dr MS Swaminathan, in its second report formulated a new
livelihood concept and called for its implementation through a proposed
multi-crore budget. The major recommendations of the panel include:
Setting
up of state level farers’ commission to conduct censes of farmers’
suicides, finding out the reasons behind it.
Taking
into account newer forms of credit, indebtedness in the debt survey.
Revival
of all lapsed insurance policies of farmers and setting up of an agri risk
fund to cover such calamities.
Strengthening
the primary agriculture co-operative societies, which deliver credit
ultimately to farmers and offering an incentive to farmers for timely
repayment of loans, converting of short-term loans into term-loans as per
the need, to improve the recovery of such loans.
A
specialised mandi only for trading in onions is being constructed in
Rajasthan’s Alwar district. Alwar and its surrounding area is well known
for high quality onions. The market will provide huge electronic screens
that will flash the live prices of onions across the country’s major
markets. The project will cost a total of Rs 25 million. Around 75 shops
will be constructed within the market complex.
The
Farm Ministry, along with public sector seed institutions and the private
sector seed industry, is working on a National Seed Plan. The plan is
likely to be ready by the Rabi season this year, however it can be
implemented from the next kharif Season. The plan is aiming at a radical
change in the Seed Replacement Ratio (SRR) for major crops and oilseeds by
improving the genetic quality of existing seeds. The private sector has
suggested controlling the prices of seeds since the farmers cannot afford
high priced seed varieties.
According
to Tobacco Board, tobacco exports, in the first quarter of the fiscal year
2005-06 have been recorded at 39,345 tonne worth Rs 313.56 crore. The
export includes 35, 030 tonne of unmanufactured tobacco (Rs. 245.01 crore)
and 4,315 tonne of tobacco products (Rs. 68.55 crore). Tobacco exports for
the fiscal year 2004-2005 stood at 162,933 tonne worth Rs. 1, 362.18 crore.
According
to Cashew Export Promotion Council of India (CEPCI), total production of
raw cashew nuts in
India
has augmented by only 9,000 tonne during 2004-05. The total production in
2004-05 was 544,000 tonne, as compared to 535,000 tonne in 2003-04. During
2004-05, total exports of cashew kernels and other cashew-based products
stood at 126,667 tonne, valued at Rs 2717.15 crore compared to the total
exports to the tune of 126,667 tonne, valued at Rs. 2709.24 crore. This
implies an increase of 25.63 per cent in quantity and 50.14 per cent in
value.
INDUSTRY
Pharmaceuticals
National
Pharmaceutical Pricing Authority (NPPA) has announced up to 36 per cent
cut in prices of 15 scheduled bulk drugs, which will make available
hundreds of popular medicines including multi-vitamin brands,
anti-asthmatics, antibiotics, anti-ulcerants, anti-malarials, and skin
preparations at a lower cost. In a few days, NPPA is also expected to
reduce prices of formulations containing these ingredients, hitting the
bottomline of drug companies. Retail ceiling prices of 308 formulations
have as well been either cut or fixed for the first time.
The
pharma task force appointed by the prime minister has proposed that the
government determine ceiling price for all but 40 of the 354 essential
drugs on the basis of a weighted average of the top three brands by value.
It suggests essentiality of drug to be the sole criteria for price control
and hence argues for no control on prices of bulk drugs and unbranded
formulations and also compulsory price negotiation for patented drugs
before they are approved for marketing. The report supports halving of
excise duty on all drugs from 16 per cent to 8 per cent. The report also
proposes a dual regulatory system for pricing and quality of drugs and
encouraging R&D by a favourable fiscal regime rather than tampering
with the price system.
SSI
The
government has increased the ceiling on loans for small-scale industries
to Rs 1 crore from Rs 40 lakhs and the subsidy rates to 15 per cent from
12 per cent, following amendments to the Credit Linked Capital Subsidy
Scheme (CLCSS), in an attempt to encourage SSI units to modernise and
upgrade technology so as to remain competitive.
INFRASTRUCTURE
Finance
ministry plans to do away with the annual borrowing ceiling for SPV
proposed for funding infrastructure projects and allow it to borrow sans
any limit, provided it does so on the strength of its own credit
worthiness i.e. the government will not guarantee such borrowings. The
ministry is simultaneously considering limiting direct lending by the SPV
for any single project to Rs 500 crore. Along with the ceiling is a
stipulation that the lending by the SPV, including refinancing, would not
exceed 20 per cent of the total cost of any single project.
Energy
Assuming
ethanol-blending programme will be implemented in nine states and four
union territories originally envisaged, demand for ethanol would be around
750 million litres at 5 per cent blending level with petrol and its double
at 10 per cent blending level in 2009-10. Also demand for ethanol by
industrial alcohol based chemical manufacturers, potable alcohol
manufacturers and such other users is expected to be around 1570 million
litres by 2009-10. Thus, a total demand of 2300 million litres at 5 per
cent blending level or 3100 million litres at 10 per cent blending level
is projected for ethanol by 2009-10.
Petroleum
and Petroleum Products
The
government is weighing the option of permitting ONGC, IOC and GAIL to sell
their cross-holdings through public offers. IOC holds a 9.6 per cent stake
in ONGC, which, in turn, has a 9.1 per cent stake in IOC; GAIL has a 22.4
per cent stake in ONGC, while ONGC and IOC own 4.8 per cent each in GAIL.
The sale of cross holdings will provide relief to oil majors, especially
IOC, to lighten their burden of under-recoveries on account of their
inability to raise product prices in the domestic market, in line with
international crude oil prices.
The
11-member OPEC will offer its spare production capacity of 2 million
barrels a day in world oil markets from October 1, for 3 months in order
to reassure consumer countries about energy supply security. The pact
leaves the group’s official output limit unchanged at 28 million barrels
a day since it is claimed that global refining capacity is at full stretch
and unable to process more crude.
Cement
As
per figures by Cement Manufacturers’ Association, for the period
April-August 2005 cement production and consumption in the four southern
states have risen by 15 per cent and 19 per cent respectively as against
the national average of 10 per cent and 9 per cent respectively, on the
back of increased construction activity. Andhra Pradesh leads the pack
with a 33 per cent growth in consumption mainly due to infrastructure
projects, while the housing sector boom drove the 12 per cent growth in
Karnataka. It is pointed that this could be the result of a low base in
the previous year.
INFLATION
The
annual point-to-point inflation rate based on wholesale price index has
gone up to 3.53 per cent during the week ended September 10, 2005 from
3.16 per cent registered during the previous week. The inflation rate was
at 8.15 per cent in the corresponding week last year.
The
WPI in the week under review has risen by 0.4 per cent to 196.4 from the
previous week’s level of 195.7 (Base: 1993-94=100). The index of primary
articles’ group has increased by 0.4 per cent to 195.4 from the previous
week’s level of 194.7, due to a considerable increase in the price
indices of food articles. The higher prices of food articles have been
evident due to the higher prices of fruits and vegetables, eggs, fish-
marine, fish-inland, ragi and gram. The index of fuel, power, light and
lubricants group has also risen substantially by 1.8 per cent to 313.9
from the previous week’s level of 308.3, mainly due to higher prices of
petrol rising by 8 per cent and high speed diesel oil and light diesel oil
prices rising by 7 per cent each. The heavy-weighted manufactured
products’ group constituting 63.7 per cent of total weight, has declined
by 0.2 per cent to 170.6 from 170.9 of the previous week’s level,
primarily due to decline in the index of textiles by 1.4 per cent.
The
latest final index of WPI for the week ended July 16, 2005 has been
revised upwards; as a result both, the absolute index and the implied
inflation rate moved up to 194.9 and 4.45 per cent instead of the
provisional levels of 194.4 and 4.18 per cent, respectively.
The
inflation rate has started moving up due to the fading impact of high base
effect. The recent hike in the prices of petroleum products by the
government, which has been effective from September 6th, and its
consequent spiralling effects on the related sectors like transport, has
also been instrumental in stimulating inflationary pressures on the
economy.
BANKING
British
financial services company Dawnay Day is launching a complete suit of
wealth management services in
India
. Its
India
subsidiary Dawnay Day AV Financial Services (DDAV) is recruiting about 75
relationship managers and DDAV’s stock broking arm is in the process of
opening 20 branches in the metropolitan cities. DDAV also plans to set up
a non-banking finance company (NBFC) for lending and borrowing purposes.
DDAV will target customers with net worth of over Rs.1 crore for its
wealth management services and those with net worth of over Rs.10 lakh for
its portfolio management services. It will also establish a web-based
trading platform. The relationship managers and DDAV Securities’
branches will be based in
New Delhi
, Mumbai,
Bangalore
, Chennai and
Ludhiana
.
PUBLIC
FINANCE
In
an attempt to improve transparency in government finances, the Finance
ministry is planning to introduce some new elements in the budget papers.
The ministry is working on a detailed reckoning of the Centre’s assets
that will become a part of the budget papers. In addition, a proposal to
disclose the break-up of tax and non-tax arrears along with a statement on
the guarantees extended by the government has also been made. Further
capex purchases of over Rs. 2 lakh and above is also likely to be
included.
The
income tax collections rose marginally by 4.5 per cent to Rs. 16,311 crore,
during April-September 15. While, the direct tax collections rose by 26
per cent to Rs. 34,300 crore during the same period. Corporate tax
collections touched Rs. 18,000 crore up to the said period, as compared to
Rs. 11,600 crore in the corresponding period in the previous year, an
increase of nearly 55 per cent.
The
Planning Commission has set up a committee to take a look at the
relationship between research, entrepreneurship and financial markets. The
committee, to be chaired by Mr. Nitin Desai, will also examine the policy
environment for venture capital and make recommendations, which will led
to the basic industrial research and development being converted into new
ventures. The committee will submit a report by December 31.
FINANCIAL
MARKET
Financial
Market Developments
Capital
Markets
Primary
Market
The
amendments to Sebi’s DIP guidelines to include changes in the book
building process such as allocation of 5 per cent of the issue to mutual
funds, 10 per cent margin applicable for all the bids tendered by the QIBs
and others are to be applicable to all the public issues through
book-building process whose draft offer’s are filed with Sebi on or
after September 19.
AURIONPRO
Solutions is tapping the market to raise Rs 10.5 crore by issuing 30 lakh
equity shares of Rs 10 each in a price band of Rs 81-90.
Secondary
Market
The
markets snapped the gaining spree of three week`s and lost 158.37 points
this week on the BSE to close at 8222.59. The markets rallied on Monday
and Tuesday gaining 63.88 points and 55.44 points respectively. On
Wednesday the Sensex lost 239.28 points intraday but recovered towards the
close. On Thursday the index witnessed sharp correction and lost 265.50
points on TV reports that Income tax officers raided stock and real estate
brokers for possible violation of rules. However, after the Finance
Minister said that the volatility in the stock market in the last few
weeks was not a result of any scam, buoyed the market sentiments.
Almost
852 shares accounting for 33 per cent of the traded stocks declined to
one-month low level on Thursday as the BSE sensex posted the biggest
single day fall after May 17, 2004.
Among
the sectoral indices of BSE, except BSE FMC, all other indices have fallen
during the week. While BSE sensex fell by 1.89 per cent, BSE small cap
fell by a whooping 11.19 per cent and BSE mid-cap by 6.54 per cent.
A
Business Standard study shows that trading volume of 60 penny stocks have
jumped from around 100 –1000 shares a day in 2004 to over 10,000 –
15,000 shares a day in last four months (June – September), while their
prices have jumped by 500 to 3,100 per cent during the same period. Also,
their stellar performance has been matched by decent corporate results.
Crude
oil prices eased below $66/bbl on Friday as Hurricane Rita lost some
intensity and hopes built that
Texas
refineries would escape catastrophic damage. Crude oil had jumped to
$68/bbl on Thursday when hurricane Rita had hit the coast of
Texas
.
With the aim to reduce the high volatility in the bull market, the stock
exchanges have decided to apply circuit filters on derivatives from
September 22. Even the
Clearing Corporation has made it mandatory for investors to pay 100 per
cent upfront margin rates (VaR margin + Exterem Loss Margin) for 30 scrips
from September 26.
Federal reserve hiked interest rates by a quarter-percentage point to 3.75
per cent for the 11th consecutive time.
During
the period between September 1 and 23, the FIIs have been net buyers of
equities to the extent of Rs 4570 crore with purchases of Rs 19542 crore
and sales of Rs14972 crore. Mutual Funds have also been net buyers of
equities during the said period of Rs 2092.45 crore with purchases of Rs
6987.09 crore and sales of Rs 4894.64 crore.
As
per a study by Economic Times, FII investments in penny stocks has varied
over the years and their investments continue to remain largely miniscule.
The
journey of BSE sensex from 8000 points to 8500 points has been the fastest
ever rally which has happened in just 8 days. However, the addition to the
market capitalization has been the lowest at 1.08 lakh crore.
Derivatives
National
Securities Clearing Corporation (NSCCL) has disallowed banks with
immediate effect from issuing guarantees on the basis of any arrangement
with or counter-guarantees of other banks. NSCCL sets guarantee limits for
banks based on the balance sheet size of the respective banks. The trend
among large banks was to misuse smaller banks in the old private sector to
provide serives to the brokers. The other set of banks affected by
NSCCL’s regulation are smaller private sector banks active in stock
markets.
Sebi
is planning to remove restrictions on derivatives trading and is
considering allowing investors to short sell the shares.
Government
Securities Market
Primary
Market
As
per the indicative calendar for dated securities issuances, the government
is to borrow Rs 58,000 crore between October 1 and March 31, 2006.
In addition, the government is to mop up Rs 32,500 crore in the
third quarter under MSS.
Secondary
Market
Incidentally,
the RBI has announced that there would not be outright trading on Saturday
with effect from October 8. All the trades executed on Friday for T+1
settlement will be settled on Monday and in case if Monday is holiday then
the next subsequent working day.
The
call money rates during the week ruled higher due to outflows on account
of advance tax payments. Also, the subscriptions under the reverse repo
have fallen sharply from around Rs 40,000 crore per day to around Rs
14,000 crore.
As
the international crude oil prices eased, the yields eased during the week
but as domestic inflation rate hardened the yields have hardened. The
weighted average YTM on 8.07 per cent 2017 has risen from 7.12 per cent on
September 16 to 7.15 per cent on September 23.
Bond
Market
IDFC
and Canara Bank have tapped the market during the week to mobilise an
aggregate amount of Rs 750 crore.
Foreign
Exchange Market
The
concern over the impact of Hurricane Rita on international crude oil
prices led to the depreciation
of the rupee against the dollar from Rs 43.87 on September 16 to Rs 43.93
on September 23. During the same period, the rupee has appreciated against
the euro, yen and pound sterling.
Commodities
Futures derivatives
The
gap between spot and futures prices of black peper has widened to Rs 300
per quintal due to the fact that the amount of peper stock held in CWC’s
warehouses are more than one year old, the corporation has declined to
further renew the warehouse receipts for that stock. The compulsion of
making physical delivery of that amount within next three weeks has put
pressure in the futures markets, which are now desperate to carry forward
the October futures contract for another 3-4 months.
NCDEX
has dismissed the rumors that the pulses with the exchange are of inferior
quality and that they were not fit for delivery in September as the stocks
were of those harvested in December – January (2005) and of February –
March shipment. The exchange has said that they have not allowed old crop
after April contract. Thus, the idea that old crop is being used for
September delivery is not true.
The
market sentiments in commodities market has been weak as the pattern of
rainfall has been irregular and there is expectation that there would be
crop damage either due to excess rainfall or vice-versa.
According
to Assocham, trading in commodities has risen by 341 per cent in financial
year 2005 to Rs 5.71 trillion as compared to previous year. It is expected
to double its size within the next five years.
INSURANCE
The
Life Insurance Corporation of India (LIC) has identified
Australia
,
New Zealand
and
Egypt
for expanding its overseas services operations, armed with the Rs.270
crore corpus the government has provided for foreign forays.
The
Insurance Regulatory and Development Authority (Irda) has allowed LIC
another two years to meet its required solvency margin (RSM). Insurance
companies are required to maintain a 150 per cent RSM on a continuous
basis on the risks it underwrites. LIC has reached RSM of 130 per cent
based on the risks it underwrote till March 31, 2005. LIC also has another
issue to tackle as it mobilises the solvency margin, it had to pay income
tax of around Rs.3,500 crore against the amount that was set aside for
meeting the solvency margin. The income tax department has said the amount
provided for solvency margin cannot be treated as an expense.
CREDIT
RATINGS
Icra
has assigned an ‘LAA+’ rating to a fresh Rs. 2 billion non-convertible
debentures programme of Gruh Finance Limited (GFL). The ‘MAA+’ rating
assigned to its fixed deposit programme has also been reaffirmed. These
ratings take into account GFL’s strong parentage, its established
retail network in the semi urban and rural areas of
Western India
, the consolidation in its asset quality and its diversified funding
profile.
Icra
has retained the medium term rating assigned to the fixed deposit
programme of Transport Corporation of India Limited (TCI) at ‘
MA+
’. The agency has also assigned an ‘A1+’ rating to the Rs. 400
million commercial paper programme (enhanced from Rs. 350 million) of TCI.
The reaffirmation of rating takes into account TCI’s continuing strong
position in the organised segment of the road transportation industry and
its adequate debt protection measures.
In
an another exercise, Icra has withdrawn the ‘LA’ rating assigned to
the long-term bond programme of Steel Authority of India Limited, as the
instrument has been fully redeemed.
Care
has assigned ‘A’ rating to the proposed non-convertible issue of Shah
Alloys Limited (SAL) for an amount of Rs. 100 crore. The rating takes into
account SAL’s established market position in domestic stainless steel
industry, good track record and improved financial profile.
Care
has downgraded the rating assigned to the Rs. 1,484 crore non-convertible
issue of The Mysore Sugar Company Limited (MSCL) from ‘C (SO)’ with
credit watch to ‘D (SO)’. The downgradation takes into account the
non-payment of interest to debentures holders as well as the noninvocation
of guarantee by the trustees.
Crisil
has assigned ‘P1+’ rating to the Rs. 3 billion short-term debt
programme (enhanced from Rs. 1.5 billion) of Indiabulls Financial Services
Limited. The rating takes into account the company's high absolute net
worth levels and its strong market position in the retail equity broking
segment.
Crisil
has reaffirmed the ‘AAA (SO)’ rating assigned to the pass through
certificates issued under the securitisation programme of Mahindra and
Mahindra Financial Services Limited. The agency has also reaffirmed the
‘AAA/Stable’ rating assigned to the Rs. 880 million non-convertible
debenture issue of Citicorp Maruti Finance Limited.
Fitch
has assigned AAA (
ind
) rating to the HDFC Bank Limited’s Rs. 10 billion subordinated debt
programme. At the same time, the agency has also assigned the bank’s Rs.
30 billion certificate of deposits programme a rating of ‘F1+’ and has
affirmed the bank’s existing Rs. 4 billion subordinate debt at ‘ AAA (ind)’.
CORPORTE
SECTOR
Eveready
is planning to acquire BPL’s battery business, BPL Soft for Rs 67 crore.
Currently Eveready has a 47 per cent share in the batteries market, the
deal is expected to scale up its share to 56 per cent.
The
Indian farmers fertilisers cooperative has acquired Oswal’s fertiliser
unit at Paradip in Orissa for Rs 2,180 crore. This unit has two million
tonne capacity to produce diammonium phosphate (DAP), complex fertiliser
and phosphoric acid.
Bharat
Forge limited has acquired 100 per cent ownership interest in Imatra
Kilsta AB,
Sweden
along with its wholly owned subsidiary Scottish Stampings limited,
Scotland
. Imatra is one of the world’s leading forging group, the largest
manufacturer of front axle beams.
Larson
and Toubro, and the United Arab Emirates based Dubai Aluminium Company
limited have jointly presented the proposal to the Orissa government to
set up an integrated aluminium complex with an investment of approximately
Rs 15,000 crore.
Tata
Motors has signed a memorandum of understanding with Fiat SpA,
Italy
to jointly develop, manufacture and distribute produces and components in
the passenger car segment.
Bharti
Tele-Ventures limited will be investing Rs 250 crore in 2005-06 to expand
the Airtel network in Maharashtra and
Goa
for. The company has already invested Rs 120 crore so far and will make
additional investment in Maharashtra and
Goa
.
Tyre
major Ceat is
planning to raise Rs 53 crore through rights issue in the ratio of 3
shares for every 10 shares held. Ceat has also decided to merge all its
three wholly owned subsidiary companies with itself.
Rajesh
exports has got an order of Rs 12.4 crore of 22 carat jewellery from
Singapore
based jewellery manufacturer, Gold Star Jewellery. The order will be
executed at the company’s manufacturing factory in Banglore.
Hindustan
Petroleum Corporation Limited (HPCL) has decided to acquire 67 per cent
shares in Kenya Petroleum Refinery Limited (KPRL) in a deal valued at
around Rs 2,200 crore. Mombassa based KPRL has a refinery with a capacity
of 80,000 barrels per day. It supplies refined products to the Kenyan
market.
McDowell
and company, the flagship firm of the UB group will merge eight firms of
the group with itself. The firm to be merged are Phipson Distillery,
United Spirits Limited, Herbertsons, Triumph Distillers and Vintners,
McDowell International Brands, Shaw Wallace Distilleries, Baramati Grape
Industries and United Distillers India Limited.
Mumbai
based Advanced Enzyme Technologies Limited (AETL), the country’s second
largest natural enzyme manufacturers is planning to set up a base in China
by acquiring minority stocks in two Chinese technology companies. AETL has
assigned an investment of Rs 10 crore for the acquisition.
LABOUR
According
to the report released by the International Labour Organisation (ILO)
titled ‘Labour and Social Trends in
Asia
and the Pacific 2005’, the employment in Asia Pacific region between
2003 and 2004 has increased by only 1.6 per cent as against the backdrop
of a strong economic growth rate of over 7 per cent. The ILO emphasised
that the robust growth rate in this region has not accompanied adequate
creation of jobs. The number of total unemployed edged up by half a
million to touch 78 million. In addition to this, there is widespread
underemployment in this region in many forms; millions are working for
less than full time or are taking jobs below their qualifications or
skills. A disturbing trend brought out by the study is that the young
people aged between 15 to 24 are bearing the brunt of this employment
deficit accounting for a disproportionate 49.1 per cent of the total
jobless in this region, although they make up only 20.8 per cent of the
labour force. Moreover, the ILO has pointed out that youth unemployment
has ironically co-existed with child labour in this region. Finally,
according to ILO estimates, halving youth unemployment would increase GDP
by up to 2.5 per cent in East Asia, by up to 6.7 per cent in South Asia
and up to 7.4 per cent in
Southeast Asia
.
The
Pension Fund Regulatory and Development Authority (PFRDA) might consider
insurance cover for pension funds in line with the structure prevailing in
the
United States
. According to the chairman of PFRDA, insuring certain amount of pension
funds is one of the options to minimise risk, as fund managers would be
investing in equities. He added that investors would have to bear high
burden of premium if it is introduced initially before the pension fund
market matures. However, over the time and with expanding investor base,
this could be a viable option.
SOCIAL
SECTOR
Education
The
government has announced free education for every single girl child from
class VI to XII from the current financial year in a Central Board for
Secondary Education (CBSE) school. If there are only two girls in a
family, both will be entitled to 50 per cent fee concession. In addition
to this, it has also planned scholarships for girls at both under-graduate
and post-graduate levels. The
University Grants Commission (UGC) will allot scholarships of Rs. 2000 per
month to 2400 girls to pursue post-graduate education in any recognised
institution. In addition to this, the Central Board for Secondary
Education would offer 550 scholarships to girls based on class XII
results, for pursuing under-graduate education in non-medical and
non-engineering courses in recognised colleges. The scheme would apply to
all government-aided or affiliated schools or colleges in the country.
EXTERNAL
SECTOR
Exports
of power equipment and components from
India
are set to grow at more than 20 per cent with MNCs like Siemens, ABB,
Alstom and GE, who are facing intense competition from low cost
manufactures in the international market, planning to outsource these
products from their Indian subsidiaries. Currently, the $10 billion Indian
electrical equipment industry exports electrical equipment, primarily in
the transmission and distribution segment to the tune of $1 billion. The
products consigned for exports to the emerging markets like
Malaysia
,
Thailand
,
Brazil
,
Argentina
and the
Middle East
, comprise switchgears, transmission towers and transformers.
With
the Indian textile sector falling short by a huge margin of the required
investment target set by the ministry of textiles, the ministry is now
seeking foreign investments from countries like the US, Japan, Italy,
Turkey and Indonesia. While the textile ministry had envisaged Rs 40000
crore of investment every year for the next five years, to make the
industry industrially competitive in the post quota regime, it has been
able to attract investments only to the tune of Rs 20000 crore in the last
one year (2004-05).
Thailand
is looking at doubling bilateral trade with
India
in the next two years to $4 billion and is banking on pharmaceuticals, raw
materials and software contents as key drivers.
Thailand
is also projecting itself as an investment destination for Indian
companies and is urging hospitality majors like Tatas, Oberoi and Leela to
set up shop in the country.
Formal
trade figures between
India
and
Pakistan
have, for the first time, overtaken informal bilateral trade figures
between the two countries. Trade through formal channels stood at $800
million during 2004-05.
The
government is likely to raise the ceiling on foreign direct investment,
now at 20 per cent, for direct-to-home (DTH) ventures. The current policy
permits a total foreign investment of 49 per cent in DTH companies, of
which FDI can only be up to 20 per cent. The rest can be held by
non-resident Indians, overseas corporate bodies and foreign institutional
investors.
The
government expects investment worth Rs 50000 crore in special economic
zones, which would help generate 100000 additional jobs.
The
textile ministry is considering a plan to develop 20 new handicrafts
clusters and six handicrafts park within the next 2-5 years. This will
increase the number of handicraft clusters to 26 within the next five
years and boost
India
’s share of global handicraft export to 4 per cent at $9.1 billion by
2009-10. The world market for handicrafts is estimated at $235 billion,
while
India
’s export stands only at $2.98 billion.
Government
has approved Rs 675 crore Special Economic Zone by Finnish telecom major
Nokia near Chennai.
Government
of
India
proposes to put in place the special economic zone rules by middle of
October.
INFORMATION
TECHNOLOGY
Russia
’s National Depository Center (NDC) has signed an MoU
with TCS to customize and implement its eClearSettle for depository,
clearing and settlement services. The NDC is participating in establishing
a Central Securities Depository.
TELECOM
State-owned
telephony majors Bharat Sanchar Nigam Ltd. (BSNL) and Mahanagar Telephone
Nigam Ltd. (MTNL) have embarked on a hiring spree and are recruiting a
total of 3,400 staff this year. This is one of the largest recruitments in
the telecom sector. The move also gains importance as the sector is going
through a lull phase, with the private sector suspending recruitment for
the time being. BSNL is recruiting 3,000 junior telecom officers (JTOs)
and MTNL is planning to recruit 400 E-II grade, which comprises JTOs,
chartered accountants and other officials.
Reliance
Infocomm has paid Rs.130 crore to BSNL as part of its last payment due to
the PSU on account of the former’s alleged re-routing of international
calls. With this, the BSNL has recovered the entire amount due on access
deficit charges from Reliance Infocomm in the call re-routing case.
Table
1 : Index Numbers of Industrial Production (1993-94 =100)
|
Table
2 : Production in Infrastructure Industries (Physical Output Series)
|
Table
3: Procurment, Offtake and Stock of foodgrains
|
Table
4: Index Numbers of Wholesale Prices (1993-94 = 100)
|
Table
5 : Cost of Living Indices
|
Table
6 : Budgetary Position of Government of India
|
Table
7 : Government Borrowing Programmes and Performance
|
Table
8 : Scheduled Commercial Banks -
Business
in India
|
Table
9 : Money Stock : components and Sources
|
Table
10 : Reserve Money : Components and Sources
|
Table
11 : Average Daily Turnover in Call Money Market
|
Table
12 : Assistance Sanctioned and Disbursed by All-India Financial
Institutions
|
Table
13 : Capital Market
|
Table
14 : Foreign Trade
|
Table
15 : India's Overall Balance of Payments
|
Table
16 : Foreign Investment Inflows
|
Table
17 : Foreign Collaboration Approvals (Route-Wise)
|
Table
18 : Year-Wise (Route-Wise) Actual Inflows of Foreign Direct Investment
(FDI/NRI)
|
Table
19 : NRI Deposits - Outstandings
|
Table
20 : Foreign Exchange Reserves
|
Table
21 : Indices REER and NEER of the Indian Rupee
|
Table
22 : Turnover in Foreign Exchange Market
|
Table
23 : India's Template on International Reserves and Foreign Currency Liquidity [As reported under the IMFs special data dissemination standards
(SDDS)
|
Table
24 : Settlement Volume and Netting Factor for Government
Securities Transactions Settled at CCIL - Monthly, Quarterly and
Annual Basis.
|
Table
25 : Inter-Catasegory Distribution of All Types of Trade in
Government Securities Settled at CCIL (With Market Share in
Respective Trade Types)
|
Table
26 : Category-wise Market Share in Settlement Volume of
Government Securities Transactions (in Per Cent)
|
Table
27 : Settlement Volume and Netting Factor for Total Forex
Transactions Settled at CCIL - Monthly, Quarterly and Annual
Basis.
|
Table
28 : Inter-Category Distribution of Total Foreign Exchange
Transactions Settled at CCIL (With Market Share in Respective Trade
Types)
|

*These statistics and the
accompanying review are a product arising from the work undertaken under
the joint ICICI research centre.org-EPWRF Data Base Project.
|