According to SAT, if trades are executed due to negligence or breach of duty they cannot be considered material mistake and therefore not qualify for annulment
Holding on to the sanctity of trades on the exchanges, the Securities Appellate Tribunal (SAT) on Thursday upheld National Stock Exchange (NSE)'s decision to refuse Emkay Global Financial Services plea for annulment of erroneous trades executed in October 2012.
At the same time, SAT has asked NSE to review trades executed by Emkay with two brokers - Inventure Growth and Securities and Prakash K Shah Shares and Securities.
The case relates to orders entered by a dealer of Emkay on 5 October 2012, that had led to a flash-crash of over 900 points (fall of 15.5%) in the NSE's benchmark index Nifty, forcing the bourse to temporarily halt trading.
Emkay had approached SAT after NSE refused to accept its request for annulment of the erroneous trades.
In a final ruling dated 26th August, SAT has upheld NSE's contention that norms related to trades on exchange should be inviolable "to ensure sanctity of dealings on the exchange".
"If trades are executed due to negligence or breach of duty they cannot be considered material mistake and therefore not qualify for annulment," SAT said.
As per the tribunal, 'material mistake in the trade' would be attributable to unforeseen circumstances, which vitiate sanctity of the trades executed on exchange.
"Breach of duty/negligence would not be unforeseen circumstance that can be said to vitiate the trades executed on the exchange," SAT said.
Among others, SAT noted that Emkay had not installed a "validation mechanism" before entering sell orders and was also negligent in transmitting erroneous trades from the dealer's terminal to the NSE's server by ignoring four to five level checks that were available in the system.
Moreover, SAT also rejected Emkay's contention that NSE's trading system was faulty and in violation of market norms on grounds that the matter was pending before Sebi and it "would not be proper" for the tribunal to comment on the same.
However, SAT noted that while Emkay Global during the trades had incurred losses of Rs51 crore on account of sell orders, two counter-parties - Inventure Growth and Securities and Prakash K Shah Shares and Securities - had made huge profits running into several crores of rupees.
According to SAT, violations committed by - Inventure Growth and Prakash K Shah Shares - "were serious violations" and NSE should have considered that the trades were "vitiated" on account of such violations by the two brokers.
Accordingly, the matter in this regard has been remanded back to NSE for fresh consideration.
Even though growth in revenues was marginal, quarterly results declared by 266 mid-caps on Moneylife’s database reported much higher profitability
Companies classified by Moneylife as mid-cap (market-cap between Rs500 crore and Rs2,000 crore) reported an aggregate growth in revenues of just 2% for the quarter ended June 2014. However, operating income of these companies grew substantially by 40% during this period. Moneylife tracks a database of 1,294 companies, of which 1,222 companies have declared their results for the June 2014 quarter. Of these 1,222 companies, 266 are mid-caps. Aggregate revenues of the mid-caps form a share of 8.39% of the total revenues of the 1,222 companies.
Over the one year period ended 26 August 2014, the market-cap of these mid-cap companies have nearly doubled, thanks to improving performance and hopes of higher economic growth following a change in government. During the quarter ended June 2014, the aggregate market-cap of the 266 companies has increased by 47%. Valuation, as defined as market-cap to operating profit, had increased by 40.79% over the year.
As many as 42 companies registered a loss in the June 2014 quarter. While the number of companies that have declared a net-loss in the period have remained the same, the quantum of the loss registered has come down by 32% from the June 2013 quarter. A little over half the mid-cap sample or 139 mid-cap companies have reported a double digit growth in sales and 128 companies reported a double digit growth in net profits. Even 16 loss-making companies of the June 2013 quarter have made a turnaround in the latest quarter.
Profitability margins have improved in the latest June quarter, compared to the quarter a year ago. The aggregate operating profit margin has increased to 8.88% for the June 2014 quarter, up from 6.45% in the June 2013 quarter. As many as 149 or 56% of the companies have reported an increase in operating margins, while, 138 or 52% of the companies have reported an increase in net profit margins.
Coming to valuation, the mid-caps as a whole are quoting at a market-cap to operating profit (MC/OP) of 6.9 times. Large-caps are quoting an MC/OP of 8.5, while Mega-caps are quoting an MC/OP of 12.8 times.
Out of the mid-cap sample, the market-cap of 252 or 95% of the companies has risen over the one-year period ended 26 August 2014. As many as 232 or 87% of the mid-cap companies are quoting a higher valuation compared to the period a year ago.
Nifty has to stay above 7,900 for the upmove to continue
We had mentioned in Wednesday’s closing report that the current upmove on the NSE's CNX Nifty may continue if it sustains above the level of 7,900. On Thursday again, the market managed to make a new opening high, after which it continued to move sideways. Volatility was higher towards the end of the session on account of the expiry of August futures and options.