The rally would be laboured and likely to be aborted abruptly
The market, which was down 1% on Wednesday, recovered all losses today on positive global sentiments. The Sensex shut at 17,651, up 180 points (1%) and the Nifty ended at 5,296, up 55 points (1%). The indices started the day with a sharp gain, taking cues from Asian markets. Trading was range-bound till early afternoon. The market came off its high in the late afternoon session, ending the day with a modest gain.
Asian stocks were up on Thursday as US retail sales grew at their fastest pace in four years. Key benchmarks in Hong Kong, Indonesia, Taiwan, Singapore, Japan and South Korea were up by 0.5% to 2.7%. However, China's Shanghai Composite bucked the trend and was down 0.2%. The Chinese central bank said that it will keep a loose monetary policy; however, it will use different policy tools as required.
Wall Street was up on Wednesday on a forecast from financial company State Street Corp, igniting optimism about the coming earnings season and helped the S&P 500 break above a major resistance level. The Dow rose 275 points (up 2.82%) to 10,018. The S&P 500 gained 32.2 points (3.1%) to 1,060.3. The Nasdaq advanced 65.6 points (3.1%) to 2,159.
Back home, annual food inflation eased to 12.63% for the week ended 26th June from 12.92% in the previous week, but fuel inflation shot up to 18.02% after the hike in rates of petroleum products.
Fuel inflation for the week under review rose sharply to 18.02% (from 12.90% in the previous week) after the impact of the fuel price hike. Prices of petrol and diesel were raised by up to Rs3.50 a litre, while that of liquefied petroleum gas (LPG) and kerosene were hiked by Rs35 per cylinder and Rs3 a litre respectively.
Industrial output is forecast to grow at 16% in May this year from a year earlier, lower than the annual growth of 17.6% in April.
India's car sales may go up by 12%-13% in 2010-11 to 1.7 million units as estimated by the Society of Indian Automobile Manufacturers (SIAM). In June this year, 1,41,184 cars were sold compared with 107,948 units a year ago, lower than the record 1,48,481 units sold in May. Sales of trucks and buses rose 44% to 52,211 units in June, while motorcycle sales rose by 30% to 715,985 units.
The Securities and Exchange Board of India (SEBI) on Wednesday relaxed the exposure margin requirement for stock derivatives, based on the feedback received from market participants.
Foreign institutional investors were net sellers of Rs49 crore in the equities market on Wednesday. Domestic institutional investors were net buyers of stocks worth Rs134 crore.
L&T Infrastructure Finance Company, a subsidiary of Larsen & Toubro Ltd (up 1.8%), has received the status of 'Infrastructure Finance Company' from the Reserve Bank of India (RBI) within the overall classification of a Non-Banking Finance Company.
KEC International (up 0.6%) has won orders in the transmission and cables space to the tune of Rs610 crore. In the transmission segment, the company has won total orders of Rs487 crore for turnkey transmission lines in Georgia, South Africa, Zambia, the Philippines and UAE. In cables, the company has won orders for supply of low tension, high tension and extra high voltage power cables worth Rs123 crore from various customers.
The board of Samyak International (up 4.8%) has approved increase in its authorised share capital from Rs3.50 crore to Rs7 crore; issue of 30,00,000 equity shares of Rs10 each to strategic investors at a price of Rs40 per share (Rs10 face value plus Rs30 premium) on a preferential basis.
Reliance Power (down 0.3%) has announced the financial closure of its 4,000 MW Krishnapatnam ultra mega power project (UMPP) being developed by Coastal Andhra Power Ltd, its wholly-owned subsidiary. The company executed financing agreements for the imported coal-fired UMPP located at Krishnapatnam, Andhra Pradesh.
The capital market regulator’s move to cut exposure margins in equity derivatives is a revisit to the pre-crisis days of leveraging and speculation
In a throwback to the pre-crisis period of 2007-08, when excessive leveraging and speculative activities were at their peak, market watchdog Securities and Exchange Board of India (SEBI) has once again sought to encourage risk-taking even by retail participants in the equity derivatives segment. In order to give a leg-up to the falling volumes in this segment, the regulator has slashed the exposure margin requirement on futures and options (F&O) trading by half.
SEBI has been forced to take this step as the recent uncertainty and volatility in the stock markets has seen investors shunning over-exposure to equities and seeking a safe haven in money-market instruments and debt-oriented funds. Intraday volumes of derivatives contracts on bourses have taken a beating as investors prefer to stay away from the see-sawing markets. With the markets moving in a tight range for a while, traders are also finding it difficult to exit their positions quickly. For the month of June 2010, the total number of contracts in futures and options on the largest stock exchange, the National Stock Exchange (NSE) was 77,078,089. Comparatively, the volumes were better during the month of May, which saw 80,960,515 contracts being traded. Average daily turnover has also reduced from Rs101,166 crore to Rs92,527 crore during this period. Since April 2010, a total of 216,269,174 F&O contracts have been traded on the NSE.
Admitting that investor confidence is a bit shaky, Monal Desai, VP and head – institutional equities (derivatives), Prabhudas Lilladher, said that the markets need to stabilise for this move to work out. “It is a welcome step from the regulator. Exposure margin was over and above the SPAN margin. It was an exchange levy just to safeguard the bourses from any default scenario. But for this move to work, markets have to stabilise first. Markets have been see-sawing so badly that retail investors have been affected. Markets have to settle down and there has to be a clear direction as to where we are headed. Even institutional investors have been hurt by this market. Stocks which look good on one day, get crushed the next day. So the confidence level is pretty much shaken.”
Sandeep Singhal, co-head, institutional equities (derivatives), Emkay Global Financial Services, believes that this move will not enthuse retail investors too much. “The margin level never really affects investor participation too much when there is a money-making opportunity. So it won’t have a significant impact. What it will do is reduce the capital adequacy requirement for brokers. To that extent, capital will get released from the system.” Alex Mathews, head-research at Geojit BNP Paribas feels that this move will boost daily volumes by bringing more investors to this segment and enable them to take bigger positions. But at the same time, he believes that it won’t lead to an excessive leverage situation as the SPAN margin covers 16 different worst-market scenarios that can occur in one day.
The last time SEBI had revised exposure margins was in October 2008, in the middle of the financial crisis, when the regulator had to step in to calm down a highly volatile market. SEBI had then raised the exposure margin requirement on F&O trading from 5% to 10%, in an effort to clamp down on speculative trading and also to discourage investors from exposing themselves to this segment. “That was the time when the market needed safety. It was a prudent action on the part of the regulator when it increased the margin requirement as the systemic risk was much higher,” said Mr Singhal.
A little more than two-and-a-half years since, the regulator has brought the markets back to the earlier level and now wants investors to dabble a bit more in equity derivatives. Hopefully, the regulator would have learnt a lesson or two from the financial crisis and done its homework before encouraging higher exposure to derivatives.
“Actually it (the margin) was not required. They have put it unnecessarily but it’s a good step. Even 5% margin is not required. The brokers and client’s capital was getting blocked unnecessarily. So client’s capital will not be blocked now,” said Deena Mehta, managing director, Asit C Mehta Investment Intermediates.
More has received a stay order from the Andhra Pradesh High Court and Shoppers Stop has received the same from the Bombay High Court. Retailers plan to intensify their legal battle against the tax in coming months
We had earlier reported that retailers were approaching various High Courts to get a stay order on service tax on commercial properties (see: http://www.moneylife.in/article/8/5839.html). Recently, More, the retail chain of the Aditya Birla Group, got a stay order from the Andhra Pradesh (AP) High Court on the service tax on commercial rentals in June 2010. The service tax was imposed in this year’s Budget by finance minister Pranab Mukherjee.
Several other retailers like the Future Group, Shoppers Stop and Trent (the retail arm of the Tata Group) have approached the AP High Court for a stay order on service tax.
“We have approached the AP High Court and have got a stay order on service tax on commercial rentals. AP generates almost one-thirds of our supermarket revenues. Therefore, we had to approach this court. Several other retailers have approached the same court,” said Thomas Varghese, chief executive officer, More Retail.
In April 2010, Home Solutions Retail India Ltd approached the Delhi High Court and got a stay order on service tax. Shoppers Stop is also approaching various courts to get a stay order.
“We have filed a petition before the AP High Court two days back; we are yet to receive a decision. We got a stay order from the Bombay High Court on Tuesday. In the next 10 days, we are going to approach the High Courts in Karnataka, Tamil Nadu and West Bengal,” said Govind Shrikhande, president and chief executive officer, Shoppers Stop Ltd.
“In the current scenario, the industry is not ready to take this kind of enhancement in taxes. (The service tax of) 10% is a big number, because in the first place, we are struggling to meet revenue targets versus our expenses,” said DV Ram Kumar, vice president-Food and Agri, Spencer’s Retail Ltd.
The Retailers Association of India (RAI) is helping various retail players to file litigations. “RAI is helping its members to take the cases to court. The service tax impacts retail more than anyone else. Currently retailers pay 10%-12% of the turnover as rentals and the service tax is affecting them by 10.2%. On total turnover, the retailers might pay 1%-1.2% as service tax. Most retailers make a profit between 2%-4%. The government will take away half of the profit,” said Kumar Rajagopalan, chief executive officer, RAI.