The future of its Indian arm, MF Global Sify Securities, is also at stake. MF Global had overextended itself beyond futures trade—its credit rating has now been downgraded to junk by major ratings agencies, its stock is plummeting
MF Global Holdings’ credit rating has been cut to junk status. It has resulted in its equity value plunging 60% since Monday. What will its impact be on MF
Global Sify Securities, which is a subsidiary of MF Global Holdings?
MF Global Holdings, a leading global broker of exchange-listed futures & options, suffered a series of blows this week. The firm, headed by former CEO of Goldman Sachs, Jon Corzine, underwent a downgrade on Monday by Moody’s to a grade just above ‘junk’ status. After reporting a loss on Tuesday, Standard and Poor’s suggested a possible downgrade for the firm the following day. On Thursday, Fitch Ratings downgraded the brokerage firm’s credit rating to junk status.
There have been further reports that the firm is planning to sell a part of its operations. However, a few reports have indicated that the probability of MF Global striking a deal with a buyer was low. A number of firms have indicated interest in a possible deal, but there is absolutely no concrete buyout plan so far.
This has resulted in the stock of the firm plummeting nearly 60% since Monday which included a 16% decline on Thursday before finally closing at $1.43.
A major reason for the downgrade is that the firm has taken on substantial risk in the form of its exposure to European sovereign debt amounting to about $6.30 billion as a part of an effort to transform itself into an investment bank that did more than just place trades for clients on futures exchanges.
MF Global Sify Securities is a joint venture between MF Global and Sify, which offers online and offline equity and derivatives trading for retail customers as well as execution and clearing services for financial institutions. Chances are that the Indian subsidiary would be affected by the global crisis as well. The big question is what will be the impact on its clients?
The brokerage firm has been through such situations before. In 2005, the parent company Refco LLC, collapsed under allegations of securities fraud and was then taken over by Man Financial, which later changed its name to MF Global. In 2008, rogue trading cost MF Global $141 million resulting in its shares plunging 90%.
In both the cases the firm was able to pull itself out of the crisis. But this time it will have a tough task ahead. A few global reports have indicated that regulatory permission for any possible buyout deal might be difficult to come about, given the current mood in Wall Street.
Nifty may find support at 5,265
The Indian market settled nearly 3% up on news of a settlement reached by European leaders to defuse the debt crisis plaguing the region. In our Tuesday closing report, we had mentioned that the Nifty would reach the level of 5,220 and then to 5,320. Today the index opened above the second level and traded higher throughout the session. Although the gain was on a large volume of 72.83 crore shares, we may now see the market pausing for breath with the support being at 5,265.
The market started the day on a firm footing, extending the gains accrued in the last three trading sessions of the holiday-shortened week. Positive cues from the global markets on reports that European policymakers had reached an agreement to help contain the continent’s two-year debt crisis also supported the gains. The Nifty opened at 5,342, a surge of 140 points and the Sensex jumped 383 points to resume trade at 17,672.
The indices hit their intraday highs in the initial minutes of trade with the Nifty rising to 5,400 and the Sensex scaling 17,908. The market was range-bound in subsequent trade in the absence of any domestic trigger.
The Nifty fell to its intraday low in the noon session with the index at 5,323 while the intraday low for the Sensex was its opening figure. Trading sideways during the entire day, the market settled in the green for the fourth day in a row. At close, the Nifty was 159 points higher at 5,361 and the Sensex climbed 516 points to settle at 17,805.
The advance-decline ratio on the National Stock Exchange (NSE) was a positive 962:483.
Among the broader indices, the BSE Mid-cap index advanced 1.51% and the BSE Small-cap index rose 0.88%.
All sectoral indices settled in the green. The top gainers were BSE Metal (up 6.34%), BSE Realty (up 5.34%), BSE Bankex (up 3.73%), BSE Capital Goods (up 3.56%) and BSE Auto (up 2.87%).
Hindalco Industries (up 10.88%), Sterlite Industries (up 8.80%), DLF (up 7.95%), Jaiprakash Associates (up 7.90%) and Jindal Steel (up 7.53%) were the top performers on the Sensex. Maruti Suzuki (down 1.99%), Bharti Airtel (down 0.25%) and Bajaj Auto (down 0.11%) were the losers on the index.
Among Nifty stocks, Hindalco Ind (up 10.72%), DLF (up 8.23%), JP Associates (up 8.04%), Reliance Infrastructure (8.03%) and Sterlite Ind (up 8.02%) were the top gainers while BPCL (down 3.15%), Maruti Suzuki (down 1.63%), GAIL (down 0.65%), Bharti Airtel (down 0.52%) and Sesa Goa (down 0.49%) were the major losers.
Markets in Asia settled higher as hope of a settlement to rein in the European debt crisis boosted investor interest in riskier assets like stocks. The gains were also supported by a 2.5% annual rise in US gross domestic product (GDP) growth in the third quarter, which was announced on Thursday.
The Shanghai Composite gained 1.55%; the Hang Seng advanced 1.68%; the Jakarta Composite rose 0.44%; the KLSE Composite climbed 0.74%; the Nikkei 225 surged 1.39%; the Straits Times jumped 2.04%; the Seoul Composite rose 0.39% and the Taiwan Weighted settled 0.67% higher.
Back home, foreign institutional investors (FIIs) were net sellers of stocks worth Rs68.95 crore during the short muhurat session on Wednesday. On the other hand, domestic institutional investors (DIIs) were net buyers of equities worth Rs36.25 crore. On Tuesday, FIIs were net buyers of stocks worth Rs444.76 crore, while DIIs were net sellers of shares worth Rs879.46 crore.
State-owned explorer Oil and Natural Gas Corporation (ONGC) plans to take up to 49% stake in one of the five proposed nuclear power plants of Nuclear Power Corporation of India (NPCIL). The joint venture would build, own and operate nuclear power plants for energy generation at mutually agreed locations. It would be managed by a board of directors made up of nominees from both the companies. ONGC gained 2.69% to close at Rs284 on the NSE today.
Shree Ganesh Jewellery House has entered into a joint venture with Italy-based SALP SPA. The 50:50 joint venture company will set up a gold jewellery manufacturing unit and sell light weight gold jewellery under the brand Oroitalia Sales, according to a top company official. The stock declined 1.06% at Rs154.25 on the NSE.
Pharma major Lupin’s US subsidiary, Lupin Pharmaceuticals Inc, has received final approval from the US health regulator to sell its generic version of ‘LoSeasonique’ tablets, an oral contraceptive drug, in the American market with 180 days of marketing exclusivity.
The USFDA nod is for Levonorgestrel and Ethinyl Estradiol tablets in strengths of 0.1 mg and 0.02 mg and for Ethinyl Estradiol tablets of 0.01 mg. Lupin fell 1.52% to settle at Rs475 on the NSE.
Giving freedom to banks to fix their own interest rates on saving bank deposits in the present juncture may create more problems for the common man, who may have to face higher service charges and more restrictive practices
The Reserve Bank of India (RBI) has always been known to be like a proverbial mother-in-law, who would not like to pass on the baton to the daughter-in-law in one go, but empower the latter only in small bits and pieces. Because either the RBI does not wish to give away power easily to the banks to decide what is best for them, or does not feel confident that the banks have come of age to take their own decisions.
The present announcement to deregulate savings bank deposit rates is coupled with two conditions, which only show that when the RBI gives up its powers, it does not do so wholeheartedly, but with reservations, despite having all the powers at its command to penalise recalcitrant banks.
The policy announcement firstly says that each bank will have to offer a uniform interest rate on savings bank deposits up to Rs1 lakh, irrespective of the amount in the account within this limit. Secondly, for savings bank deposits over Rs1 lakh, a bank may provide differential rates of interest if it so chooses. However, there should not be any discrimination from customer to customer on interest rate for similar amount of deposit.
This artificial divide created by RBI is contrary to its own avowed objective of financial inclusion, which would have been better served, if this discrimination was not practiced at the instance of the apex bank. The objective of liberalisation would have been best achieved if the RBI had only stated that uniform interest rate should be paid by each bank to its savings bank account holders irrespective of the amount in the account.
The RBI has only created discrimination between the lower middle class and the upper middle class by allowing the banks to quote differential rates for balances below and above Rs1 lakh.
Obviously, this will, in all probability, result in banks quoting higher rates for depositors keeping balances above Rs1 lakh, which will only serve to pamper the rich to the disadvantage of the middle class. In fact, those keeping balances above Rs1 lakh belong to the category of high net-worth individuals (HNIs), who are better informed about alternate investment opportunities and might keep higher balances only as a stop-gap arrangement, till the excess funds are profitably deployed.
The middle class and the lower middle class on the other hand are those who are ill-informed about the banking practices due to their poor financial literary, which NGOs like Moneylife Foundation, are trying their best to improve by constantly holding free seminars at different centres across the country. It is they who need to be rewarded with a higher interest rate, as they are to be encouraged to keep all their surplus cash with banks, without hoarding them at home. Besides, they are the people who are hardest hit by galloping inflation, which is eating into their savings, and any minor relief like higher returns on their savings bank accounts would have benefitted the largest number of people in our country.
But the present discrimination encouraged by RBI will only serve to negate this objective.
In short, the steps initiated by RBI by giving freedom to banks to fix their own interest rates on saving bank deposits in the present juncture may create more problems for the common man, who may have to face higher service charges and more restrictive practices expected to be introduced by banks to protect their own profitability, which is likely to be hit due to the higher cost of funds and increasing competition in the marketplace, in the wake of the deregulation of interest rates on savings bank deposits.
It is only to be hoped that the RBI will ensure that the interest of the common man are protected when it comes out with detailed guidelines with regard to this subject, as indicated in the midterm policy review announced on 25th of this month.
(The author is a banking & financial consultant. He writes for Moneylife under the pen name ‘Gurpur’).