Sunday, August 29, 2010

Mid Day Multi Media (Two shares at the price of one)

New developments 

Midday has sold its print business to Jagran Prakashan. The pay off is in form of Shares of Jagran prakashan. The Ratio of Shares to be issued is 2 shares of Jagran for every 7 Shares of Mid - Day. Along with that the share holder will own shares of Mid -day which will have is Radio business & License.

There is an opportunity to be made in this deal. The shares holders of Midday will get 2 shares of Jagran for every 7 shares along with shareholding in midday. The residual value of Midday after demerger of it Print business should be not less than 10 Rs. It is worthy to buy midday at this price for a better gain.

The valuation of the deal is as follows

CMP of Mid day             37.10        cost of 7sh   = 259.70
CMP of Jagran              125.00        cost of 2sh   = 250.00

Net pay off  for 7 residual share                                   9.70

Residual value of Midday   10.00         Price of 7sh = 9.70

Value of Residual value of Midday(9.70 / 7)            = 1.40
Net Pay off Per Share (10 - 1.40)                           = 8.60 (23% appreciation) 

It means if we buy Mid day today , the net payoff is Rs 8.60 per share if we value residual share of Midday at Rs 10 /-. (This is the minimum price, if look at Capex - Debt, The valuation is above Rs 18 )

Also Radio stock like RBN, ENIL have moved up because of Re - Ratings. (We can expect the same for Mid day 94.30)

If you are bullish on jagran , there is more compelling reason to buy Mid-day. Also there is a natural hedge in case of fall in price of Jagran.

The Caveats to this opportunity are
a) The Deal may take up to 3 months to conclude because of getting different approvals from government agencies.
b) There is a risk that price of Jagran will fall, as well as opportunity that it will go up.
c) Radio business of Midday is loss making and it requires huge capex.

If we go by valuations, It is a good bet and there is a money to be made in Demerger. Also the downside is limited because Jagran Prakashan is not expected to fall substantially, New Investor have entered in stock at 118 /-

Friday, August 27, 2010

Smart Order Routing : Endevour for Optimum Liquidity and Best Price

Smart order Routing refers to completing the orders using multiple exchanges in such a way that clients get its order completed at best price at a given time. It means client can get best price and liquidity using Smart Order Routing (SOR). 

SOR is an algorithm which takes into account 

a) Price of the Stock on All Stock Exchanges
b) Available liquidity available in stock on all stock Exchanges
c) Impact on price, liquidity  upon such order
d) Cost consideration for execution on particular stock Exchange (maybe different Charges, Rebates on particular stock Exchange, Brokerages, Statutory Cost ). Some may be true for India (Like Stamp Charges, Exchange Transaction cost)
e) It may also take into account different settlement modes (DVP, Counter Party, Spot, Dark Pools) and Settlement Conditions (T2T, Auctions)
f) Probability on likely execution (Price and Quantity) which may result in distribution of Orders.
g) Size of Order, Order conditions (Limit Order, VWAP, TWAP, IOC, GTC)
h) It may also look in some complex calculation of timing in case the broker has co-location in particular exchange.

After taking in account, the above mentioned points, it will release orders in exchanges in such a way that the client gets best price , grabs the required liquidity and volumes.

SEBI has allowed smart order Routing on Indian Exchange. This a natural extension of Algorithm Trading for Buy Side clients. This was expected from SEBI as Indian exchanges are liquid and has required  IT infrastructure to incorporate this facility.

The Salient features of SEBI circular on SOR are
a) This facility is available for all categories of Investors and not only Institutional Investors.
b) Any broker can offer this facility after taking relevant permissions from Exchanges.
c) Broker cannot be biased towards certain Exchange for order routing , and they have to be neutral.
d) Broker - Client Agreement has to specify use of SOR , along with its features, rights and obligations.
e) Brokers will have to maintain Audit Trail for SOR.
f) If client do not intend to use SOR and entering in contract it has to be documented. (To avoid future litigation)
g) SOR can only be used for recognised Stock Exchanges (To avoid Dark pools, trade by broker as counter party, Dabba trading)
h) Broker has to put proper Risk Management in Place
i) In case of any disruption in trading through SOR, broker will have provide its clients alternate trading mechanism.
j) This facility can be given through CTCL facility 

It is a right step for best execution of clients, but we would need clarity on below mentioned query 

It means Clients now need not specify the exchange it wants to trade in , but has to give order for quantity and price and SOR will decide the exchange to trade, which will fetch him best price for entire order.

The SOR is available to all client, including HNI and Retail Investors. Such investors do not mandatorily  take delivery on all positions and they may close their position intra day, What would be SOR guideline for such cases.

Monday, August 23, 2010

Ban on Mutual Funds to Sell options.

SEBI has banned all mutual Funds from Selling options. The takeaways of the circulars are

a) Any Asset Management Companies (AMC) or Mutual Funds cannot sell Options.

b) They cannot take positions more than its Net Assets even by buying options

c) Position taken in Derivatives segments, if hedge will lead to computation of Exposure for both sides (Eg. If a Fund is long on Futures and long on its put, both would be taken as different positions and not a hedging position

d) It expects AMC to give detailed six monthly reports on outstanding position held in derivatives position

SEBI came out with the order without taking any feedback from the Industry. There are several repercussions of the above order.

a) SEBI has bought these order as part of Risk Management of Mutual funds, but denying the opportunity to sell options completely is very harsh, there could have been limits, checks and additional margins to check excessive positions. 

b) The mandate of Mutual funds are Optimisation, The tools for optimisation, Leverage and Hedging is Derivatives. These tools are there in the market but unfortunately these tools are denied to specific class of Professionals thus denying opportunity to big class of investors who have kept their money in mutual funds and faith in the Professionalism of Fund Managers.

c) We all agree that trading in options needs Professional skill and Institutional players knows the Risks involved in taking positions in options(There is unlimited  loss in writing options) , whereas Individual players trading in options are more likely to have lesser or no knowledge of option trading . But still SEBI has deprived Mutual funds who are professionals. Individuals are allowed to trade in options after signing RDD (Risk Disclosure Documents) which says they are aware of risks of trading in derivatives.

d) The major players in option markets are Prop Desk, Mutual Funds and FII. (Insurance companies cannot trade). They provide liquidity and helps in price discovery process. With Mutual funds withdrawing  from selling options , FII would be in full charge of option positions (As Prop Desk are more involved in Delta Hedging and Arbitrage trade, also they have much lesser financial might compared to FII ) . It may also reduce liquidity in market in short run.

e) This ruling will be advantageous to FII, as they will be able to capture the market vacated by mutual funds, and they have natural advantage of taking positions and Hedging in overseas market (SGX, CME).

f) Instead of bringing  in complete ban SEBI should have come out with the names of mutual funds, whom they felt is taking risky bets by writing options and could have let the Investors in mutual funds decide about the risk.

g) SEBI is expecting Mutual funds to declare all their open position in their six monthly report as a measure of transparency, which in turn is also a threat to disclosing their open positions to the market, which can be disadvantageous and disastrous.

i) The points 7(d) and 9 are contradictory and needs clarity. 7(d) say you cannot hedge more quantity in underlying for position in Derivatives market and point 9 says excess quantity of position in derivatives market compared to cash market should be calculated for computation of Exposure. ( What about Delta hedge and Beta Hedge where the quantities would vary)

This order  is definitely against the Industry on the whole, Mutual funds are perceived to be professionals and SEBI wants to define them Rash and incapable. (Then should the Investors ever put money in mutual funds ? ), it is only paving way for bigger market share of FII and last but not the least it is a blow to investors of mutual funds and they are denied opportunity to optimise their returns on investments.

Wednesday, August 11, 2010

Release of Discussion Paper " Entry of New Bank in Private Sector" by RBI

Today RBI (Reserve Bank of India) released \discussion paper pertaining to issuing Banking license to Corporates/ Companies / NBFC..
This discussion paper is released by RBI to get feedback and suggestions from Industry, Corporates, Investors and Consumers. RBI intends to have feedback on

a) Capital Requirements of the bank
b) Shareholding structure of new banks (Promoters, Foreign Banks, Cap on shareholding etc)
c) Should Corporates and Industrial houses be given banking license
d) Can NBFC covert in bank or Promote bank
e) Business models of Banks.

We can say it intend to have feedback on ownership and guidelines of banks.
The Salient features of this paper is as follows

a) RBI feels the need for more banks in India and it feels that there will be ample business and space for all banks also after issuing new license but RBI is focused on financial Inclusion and inclusive economic growth.
b) RBI found that licenses issued in past had some lessons to learn. GTB became bankrupt, Centurion bank was merged. Yes bank was sold off by promoter. There were governance issues with Bank of Rajastan also small banks and local banks struggling to grow.

b) It feels that "Only those banks that had adequate experience in broad financial sector, financial resources, trustworthy people, strong and competent managerial support could withstand the rigorous demands of promoting and managing a bank."

c) Several committees have suggested Investment by corporates and Foreign banks be hiked from 10% to 15%

c) RBI is prepared to issue banking license to corporates, Industrial houses and NBFC to promote banks.

d) Dr Raghuram Rajan has suggested there need strict regime of Related party transactions, Lending in Group companies and concentration of Loans

e) RBI is wary of recent financial crisis and it want to avert any future crisis of such nature, it wants to avoid cascading and spill over effect of crisis of one bank to another and one corporate into a system.

f) It also gave banking scenarios in other geographies, broadly there is no restriction on percentage of shareholding by promoter (USA, UK, FRANCE, Japan and European union) or may need regulatory approvals.

g) The promoters of the new bank will have to mandatory list shares of the bank.

There are some issues for considerations which are

a) RBI is not clear on allowing banking license to Residuary Non banking company (RNBC), They may also ask for it (They are well networked) and they can boast of financial inclusion because they have penetration in Interiors and low earning groups .(Sahara and Peerless: I perceive they may also want a license)

b) India gives only full banking license, hence the business model will be universal banking and profit motivated but RBI can put restriction on percentage of urban branches and some control on lending

c) Promoters holding should be at satisfactory level to make them interested in business models and returns, 40% stake is an acceptable answers with lock - in , they should be allowed to buy shares to maintain stake holding in case of equity dilution. ( I am sure promoters would try to reduce stake in long run to capitalise the gains made on stocks

d) Only Corporates or NBFC be given license and not to any individual or group of Individuals who may have required domain and capital.. If Licenses are given to corporates, they should not have past issues in corporate governance (Not only the company, but whole group companies should be included)

I agree that banking licenses should be given to corporates and they should get same treatment and with other banks.

Now let us understand , How many companies are there in fray who have directly or indirectly said that they are eligible for a banking license or The markets perceive them to be a contender

a) IFCI 
b) Lic Housing Finance
c) Gic Housing Finance
d) Reliance Capital Limited
e) Shriram Transport Finance
f) M& M Financial Services
g) L&T Finance
h) Aditya Birla Nuvo
i) Srei Infra Fin
j) Religare Enterprise
The Capital Requirement of Rs 300 crores is very less and we will see the list getting bigger.

The hype build on share prices of such stocks should be looked it with pinch of salt because 

a) Getting a banking license will take another 6 months at least

b) Banking license will not assure good returns and there will be big gestation period

c) There will only be few license but the queue may very big (Beware there may be many who will just talk)

b) There will be many players in the fray (as with Telecom license) and Corporates / NBFC  may need capital, Expertise, Good background and political blessings.