Saturday, September 25, 2010

Delisting of Satyam Computers from NYSE

Mahindra Satyam was down 25 % on 24 , Sep 2010 because Tech Mahindra will delist the stock from NYSE from 14th October. The company has said that they are delisting the stock from NYSE as they may not be able to meet regulatory guidelines in declaring results with US regulator SEC.

From 15th October, Mahindra Satyam will be traded in US on OTC desk. 

The question is how would Satyam react on Monday on Indian Bourse. 

Please understand the facts before you decide.

a) ADR are traded on American stock Exchange and American investors can participate in the company. 

By buying ADR the investors are not required to follow SEBI and Indian government guidelines and law. Also they are not exposed to Exchange rate risk of currency.  Also it's easy for them to trade in that stocks.

Because of such reasons ADR are always quoted at a premium to price at which they are traded in their country (Satyam ADR and Satyam price on NSE). This is true for most of the ADR and the same was true for Satyam.

That's the reason we have seen few sponsored ADR like Infosys Tech.

b) ADR of Indian stocks are two way fungible, it means that ADR can be converted in Equity any time if Equity price is more than ADR conversion price. Also Equity shares can be converted into ADR if ADR is quoting at a premium to Equity price , subject to maximum of the issue size of ADR.

c) The price of Satyam ADR was 6.12 $ before the notice of delisting. At price of 6.12 $ , The rupee value (Conversion value at 45.50) of ADR was Rs 278.50. Each Satyam ADR is equal to 2 Shares of Satyam. So the value of Satyam should be 139.25. which is at 39 % premium to Equity price at Rs 100.25.

d) Satyam ADR closed at 4.67 $ recovering from 4.38 $. The rupee value of Satyam ADR would be (Conversion value at Rs 45.50) Rs 212.50. Each Satyam ADR is equal to 2 Shares of Satyam. So the traded value of Satyam is 106.25.

Does it mean that Satyam stock will open sharply lower on NSE on Monday , because the ADR was down by 25% ? I doubt about the free fall. 

The fact as I can infer is that Satyam ADR was quoting at a premium to spot price to the tune of approx 40%, but with delisting of ADR from Stock  Exchange, it has to lose its premium which it was commanding as a listed ADR, but now it would be traded on OTC desk making it illiquid stock and again that will compel investors to quote lesser ADR premium. The fact that Satyam ADR made a low of 4.38 $ at which the conversion value comes to 99.50 per share and than it bounced back. 

Also the fact is that the Satyam ADR volume was around 2.17 crores shares on NYSE, it seems huge quantity of shares have changed hands and there are contrarian bets.

I agree that with fall in ADR price, there will be pressure on Satyam stock but it should be looked sentimental fall and nothing has changed in company for us.

The Satyam ADR was commanding a premium on Satyam stock as it was listed in NYSE. With delisting of Satyam ADR from NYSE has shranked is on the premium on ADR and there is no fundamental change in value of company.

We can look forward to results of the company before taking a Investment decision.

Friday, September 17, 2010

Listing of Share in Trade to Trade Segment

There is a always a huge volatility on the first day of listing of stocks. Most of the times it has happened that trades have taken place at very high or low price before the price settles. This is true for shares listed because of mergers, De-mergers, suspension or any other corporate action in the company.

Stocks listed after Corporate actions are volatile and trade takes place at outlier price because

a) There is no price band on first day of listing.
b) Most of the Investors are not aware about the true valuations of the company.
c) Speculative elements enter to trade in such stocks as they will have action because of volatility.
d) You can square off you position booking profit or losses.
e) The companies are also not transparent about the valuation of the company

To curb excessive volatility of stock on day of listing SEBI came out with the proposal to list stocks in T2T segment of the exchange, the salient features of the circulars are

a) All stock listed / Re listed after corporate actions would be traded on T2T segment of the exchange.
b) All such stocks would be traded in T2T segment for 2 weeks (10 trading day), then they can be moved back to EQ segment.
c) There will be no circuit limit on first day of listing.
d) The scenarios in which shares would be traded in T2T segment are Merger, De merger, Capital reduction, capital consolidation, Scheme of arrangement, CDR packages etc. Also if the Shares are allowed to traded in permitted to trade category and if the shares are Re-listed after 1 year.
e) Such rule wont be applicable on stocks which are traded in derivative segment, of are part of Index which is traded on Exchange (Nifty, Bank Nifty, IT index and Bank Nifty)
f) There was a write up "that settlement of the trades will not be done by exchange", it was a mis - understanding, The truth is trades will be cleared by exchange but under he rules of T2T segment.

The biggest advantage of such move is that only serious players will come to trade in the stock, which will reduce volatility in stock and gradually lead to price discovery. The price manipulation cannot be done on first day as the speculator will have to give delivery and take delivery and it is perceived that investor will get right price.

But We have to look at this circular critically also , there are disadvantages and there are better ways to handle such situations.

a) We have seen that price of stock falls if it is shifted to T2T segment, because of such reason price discovery process will be flawed as most players will be ready to trade at discounted rate because of market micro structure.
b) There can be serious price manipulation as traders will not participate and the manipulator can rig or suppress the price as per his interests , thereby sending wrong signals to investors.
c) There is no clarity whether original stock would also be traded on T2T segment on EX date ?
d) I perceive that price discovery will be flawed as investor/ speculator would sell the stocks or wouldn't buy the stocks before the EX date as they may get struck with position in T2T segment, even institution wont prefer such positions.
e) There are better ways to deal with such situation, Companies gives details of Swap ratios and salient features. but most investors are not aware about the valuations. They are not aware about the true position of companies, their assets and liabilities. they may not even have balance sheets or they are vague. The Investors are not aware about assets and liabilities the companies have in case of Mergers, De-mergers, scheme of arrangements or re listing.

The companies are not mandated by listing guidelines of the exchange to give such in depth details, most of the time you would get is salient features and swap ratio.

SEBI can make it mandatory under listing guidelines about the valuations of the companies, its balance sheet at the time of listing and any other material information which can impact the price of the stock.

I am sure , if Investors have such data they are competent to price the stock and trade, and price discovery will be smooth.

f) SEBI can make mandatory listing of all stock in specified time in case of merger/ De-merger or scheme of arrangements to avoid change in position and developments of companies which can change valuations.
g) It is also found that no data is available to investors in case of Re-listing and permitted to trade, There is no data on balance sheet and other facts of the company (Sometimes we only know the name). SEBI can make it mandatory for Exchange to collect latest balance sheet, and other data including latest share holding before they are listed or allowed to trade.

I am sure such measure would be a better precursor to price discovery process rather than shifting the stock in T2T segment.

Thursday, September 2, 2010

SEBI clarification of signing Power of Attorney for Demat Accounts

Most of the brokers expect their retail clients to have demat with them and also provide Power of Attorney (POA) to brokers for Direct Pay - In and sometimes POA is also issued for Bank transfers. It is advisable and helpful for logistical purpose. 

The advantages of POA are 
a) Client need not worry about the pay in as Direct pay In can be done.
b) Client can have direct pay- out in account (Else Brokers will check Debits in accounts and then transfer the shares as most of the time clear Payments from client is received in T+2)
c) Brokers can give leverage to clients based on his portfolio.
d) Clients can always track their portfolio from statements

But such POA issued by clients were also mis - used by Brokers (In some cases) , they were
a) Brokers used to take blanket POA for Demat accounts and they are irrevocable.
b) Such POA were misused in case of some issues between client and Broker (When Clients used to make losses and Clients would say we are not aware of such trades )
c) Brokers used to withdraw shares abruptly from demat accounts under the pretext of Margins and margins shortfall.
d) Brokers used to transfer shares in pool accounts without pay in.
e) Brokers used to sell shares of clients to meet its pay In.

To overcome such flaws and misuse, SEBI came with revised circular pertaining to POA to be issued to brokers for Demat accounts. The features of the circulars are

a) It is not mandatory for clients to issue POA to brokers except in case of Internet Trading.
b)The POA should used to meet pay In and Margin requirements only.
c) The POA should be issued on Brokers firm name (SEBI Registration name) and not on name of any authorised person / employees of firm.
d) The POA can be issued for applying in IPO, Open offers, Right and Mutual funds
e) The POA should mention the account numbers and Name, where the shares / Funds can be transferred (Pool account for Demat and Client account for Funds)
f) The brokers have to maintain Audit trail for such transactions.
g) POA should not provide the authority to transfer the rights in favour of any assignees.
h) POA should contain a clause that any erroneous transfers from clients would be returned.
i) POA should be revocable any time.
j) POA should not facilitate off- market transfers 
k) POA should not give rights to open accounts with brokers or Depository.
l) POA cannot prohibit client from operating that account
m) POA cannot allow transfer of funds in family accounts to offset debits.
n) Duplicate/ Certified true copy of POA should be given to client.

To Download SEBI circulars 

Circular Circular I