Shooting In The Dark
The Securities and Exchange Board of India's (Sebi) decision to consider imposition of a flat margin on institutional investors like mutual funds, financial institutional and foreign institutional investors (FIIs) is a good move. Currently, these players do not pay any margins. But it is not clear if the margins are part of the Sebi's armoury to cool down the markets.
The move will not lead to any change in trading patterns or volumes. Putting up a small margin when these institutions are compulsorily required to settle trades at the end of the settlement period should not prove to be a restraining factor in trading decisions.
Indeed, Sebi is using the wrong tool. Margins are to ensure that even if the customer fails to meet obligations, the broker has enough money of the client's money at hand to cover his losses. Margins were never supposed to be leveraging instruments for influencing trading volumes or sentiment.
Since institutions are prohibited by Sebi guidelines from making short sales, a margin on the sell side makes no sense. There is no question of default. On the buy side, no one doubts institutions will ever fall short of cash on pay-in day. In any case, brokers are more than willing to put up the required cash as margin on their institutional client's behalf.
The carrying cost of the cash margin will, however, dent the institutions' profits to a very minor extent. But there is another angle to the issue.
Imposition of margins on institutions will bring them at par with retail investors. Levelling the playing field is a desirable objective.
Let us see how big is the advantage to FIIs in the Indian market. Take for instance, 100,000 shares of ITC at the price of Rs 1,000 per share.
(a) FIIs/ FI/ MFs sell on the first trading day of a settlement 100,000 shares of ITC at the rate of Rs 1,000. The margins in this case are nil. This transaction is through custodian and this supposed to be routed through clearing house.
(b) FII/ Mutual Fund/private banks not utilising service of custodian enters same trade as a delivery-vs-payment transaction. The value of transaction is Rs 10 crore and the margin to be paid is still nil.
(c) OCB/NRI clients utilising custodial services, pay a margin of Rs 3 crore on the transaction of Rs 10 crore.
(d) Ordinary clients entering the same transaction will also have pay a margin of Rs 3 crore.
In the above case, (a) and (b) are exempted from making margin payment. They are allowed to put both buy and sell transaction in the same settlement and are not required as their custodian obligation or money statement show a nil position if the transactions are squared off in the same settlement. While (c) and (d) are subject to margin payment and their exposure limits are blocked for such transactions since stock exchange trading systems are not equipped to mark delivery-based transaction on a gross basis.
Brokers say this is a serious differential treatment which should be sorted out.
Thumbs down
IFCI's Rs 352 crore rights issue has had to be extended for a second time. Reports indicate the financial institution has not been able to get more than a 10 per cent subscription. As matters stand, the institutional promoters will have to chip with the balance funds.
There is no way IFCI will bounce back in the next two years. Chairman P V Narasimhan is making a valiant attempt at cleaning up the FI's books, but he has a long way to go. For the other institutions, this means putting more good money after bad.
The rights issue was expected to shore up IFCI's capital adequacy ratio from the March 1999 level of 8.37 per cent to around 9 per cent. Reserve Bank of India guidelines mandate that all banks and financial institutions have a minimum CAR of 9 per cent by March 2000. The rights issue was therefore a last ditch effort at avoiding a default.
There are three specific issues involved.
First, a hike in stakes could be the proverbial millstone in IDBI's, the principal promoter's, own plans. Specifically, IFCI may have to be accounted as a IDBI subsidiary, at least according to US GAAP norms. The latter's plans for an international listing will go for a toss. After years of benign neglect, IDBI has only recently started taking itself seriously, with a well thought out plan of action.
Secondly, the government would be sending out a very wrong signal by forcing the other institutions to bail out IFCI. Indeed, this will the second instance after UTI where the government will be forcing institutions to bail out a beleaguered financial entity.
Indeed, as a financial sector analyst pointed out, if the government wants to recap IFCI, it should provide funds out of the budget as in the case of weak banks. However, if it argues that IFCI being a corporate entity is not eligible for budget doles, there is no case for arm twisting government-owned institutions do fill the void.
Thirdly, the problem is not of a one-shot support for the FI's CAR. RBI has already said it intends to raise CAR to 10 per cent. IFCI will need money capital in the future. Unless IFCI is completely restructured at this time, there is no escape for existing shareholders.