Brokerage houses insist on a demat account for derivatives trading

Although a demat account has nothing to do with the derivatives segment, some brokers like MF Global are insisting on this requirement

A derivatives trading account has nothing to with a demat account. A demat account is needed to transact in shares in the cash segment where deliveries of shares have to be received and given. A derivatives account allows one to trade in the futures and options segment where no deliveries are possible. An investor dealing in derivatives can pay the margin by cheque and transact to the extent his account balance allows him to. The only time demat and derivatives can get linked is when an investor prefers to offer his stocks as margin for derivatives trading.

Even then, it would not be mandatory to open a demat account with the same broker where derivatives trading is done. However, some brokerage firms are insisting on a demat account even for opening an account in the derivatives segment.

Recently, MF Global India Private Ltd, a leading brokerage house providing exchange and over-the-counter derivatives services, refused to open a client’s account because he only wanted to trade in the derivatives segment. The client’s application was refused on the grounds that it is mandatory to open a demat account with MF Global even when the client has no intention to buy and sell shares.

“It is not mandatory to open a demat account to trade only in the derivatives segment. It is not our internal policy to compulsorily open demat accounts for our trading clients,” said Sandeep Gupta, compliance officer, MF Global, in an email sent to Moneylife. On the specific issue cited above, Mr Gupta could not be reached for his comments today.

“They ask you to open the demat account in advance in case if you trade in the cash segment in the future. If a client only wants to deal in derivatives, then it is not mandatory,” said Ketan Malkan, senior vice president, India Infoline Ltd.

“One can open as many demat accounts as one wants. We insist on having a demat account because the derivatives segment is a big game compared to the cash segment. If the market crashes or client loses we can use the stocks as collateral,” said a top official of a Mumbai-based brokerage house.

“Currently, it’s not necessary, but it may become mandatory in the future if investors have an option of physical settlement of derivatives trade,” said Alok Churiwala of Churiwala Securities Ltd.

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    10 years ago

    It seems slowly, the client is going to have all doors closed and will be prey for the so called stock brokers.
    While opening the new account everybody gives high hopes to the client and at end no body knows what happens to the clients money when they trade and booked losses with broker's calls.

    God can only save

    FCCBs may hold the key in battle for Fame India

    The FCCB issued by Fame India in 2006 and the stake owned by some inconspicuous parties could tilt the balance in either Inox's or RML's favour

    The fierce battle between Reliance Mediaworks Ltd (RML) and Inox Leisure Ltd (Inox) to buy Fame India Ltd has turned the multiplex industry into a battleground. Although RML has said that its open offer to buy additional 52.72% stake in Fame has been delayed pending approval from market regulator Securities and Exchange Board of India (SEBI), there are some other aspects that could impact the final outcome of the deal.

    One issue relates to the foreign currency convertible bonds (FCCBs) issued by Fame in 2006 and the second issue is the stake owned by some inconspicuous parties, which could turn the balance either towards Inox or RML.

    At present, three companies of the Anil Dhirubhai Ambani Group (ADAG)—RML, Reliance Capital Ltd and Reliance Capital Partners—hold a combined 13.79% stake in Fame. Inox holds 50.48% stake in Fame, including the 43.3% share that it had bought from South Yarra Holdings for Rs67 crore. As of end-December 2009, Gulshan Investment Co Ltd (Gulshan) and Shail Investments Pvt Ltd (Shail) held 6.54% and 5.26% stake, respectively, in Fame. On 25 March 2010, Religare Securities Ltd (Religare) increased its stake to 5.82% from 0.7% in Fame. Since Religare is a broker, shares are held in the ordinary course of business towards margin or collateral on behalf of clients.

    In April 2006, Fame issued two series of FCCBs, the 12,000 ‘Series A Bonds’ and 8,000 ‘Series B Bonds’, of face value of $1,000 each, aggregating to $20 million. The FCCBs are convertible at any time up to 12 April 2011 at the option of the holders into newly issued shares with a face value of Rs10 per share at an initial conversion price of Rs90 per share for ‘Series A Bonds’ and Rs107 per share for ‘Series B Bonds’.

    The only condition before these FCCBs get converted into shares is that the stock price has to be higher that the conversion price. During 2007-08, out of the total $20 million FCCBs issued, about 3,000 ‘Series A Bonds’ and 4,000 ‘Series B Bonds’—together worth $7 million—have already been converted into shares. That leaves FCCBs worth $13 million which are outstanding, which may hold the key to Fame for both RML and Inox.

    In case Fame’s share price goes above Rs90 and Rs107, then it will lead to conversion of FCCBs—from both series—into shares and reduce Inox's stake in Fame to 42.67%. Upon conversion, FCCB holders may have around 15.07% stake in Fame. This together with the stake of Gulshan, Shail and Religare will play a crucial role in determining the winner in this race.

    ADAG companies are shopping for Fame’s shares through open market deals, thereby increasing the group’s stake to 13.79% as of 8th March from the level of 4.65% before 5th February.

    However, even after the FCCB conversion, Inox would hold about 42.67% and thus can easily buy additional 8% stake in Fame from the markets.

    With Fame share prices now touching Rs90 and above, purchase of even a single share of Fame will considerably hike the Inox offer price. This may also lead to a situation like that of the Great Offshore Ltd (GOL) takeover battle, where ABG Shipyard Ltd sold its stake in GOL just one day prior to the open offer and made huge profits.

    Now, the moot question is, why are both Inox and ADAG fighting for Fame? The answer is simple. Fame owns 95 screens across 12 cities. ADAG wants to consolidate its position as the market leader in number of screens (to 337 screens from 242 screens). Similarly, after the acquisition, the number of screens for Inox would go up to 210 from 115, thus making it the second-largest player in the film-exhibition business.

    Apart from the rankings and consolidation, there is another crucial aspect to the acquisition of Fame. The acquisition doesn't just involve the film-exhibition business of Fame, but it brings along Fame's film distribution subsidiary, Shringar Films Ltd, and food courts and restaurant management subsidiary, Big Pictures Hospitality Services Pvt Ltd.

    Fame also holds a 50% stake in Headstrong Films Pvt Ltd (a film-production unit) and Swanston Multiplex Cinemas Pvt Ltd (primarily engaged in managing a multiplex in a Mumbai suburb), thus making the acquisition deal a complete package.

    With both the parties trying to become market leaders in this business, the battle is bound to heat up in the future. Amidst this scuffle, the debt of over Rs100 crore on Fame's account books seems to have taken a backseat.

    On Thursday, Fame India ended 0.06% down at Rs85; Inox surged 5.18% to Rs66.05 and RML shares inched up 1.04% to Rs218.40 on the Bombay Stock Exchange. The BSE 30-share Sensex closed 164.9 points up at 17,692.60 points.

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    12 US institutions interested in Indian tie-ups

    A number of leading American academic institutions are interested in collaboration and research alliances

    With a law on the anvil to allow operation of foreign education providers in India, a top consortium of research institutions from the US has evinced interest in collaborating with Indian universities.

    A delegation of the Committee on Institutional Cooperation (CIC), which represents America's top universities, visited India this week and met HRD minister Kapil Sibal to discuss areas of collaboration and institutional linkages, reports PTI.

    The CIC is a consortium comprising universities of Chicago, Illinois, Indiana, Iowa, Michigan, Michigan State University, Minnesota, North-western, Ohio State, Pennsylvania State, Purdue and Wisconsin-Madison.

    "We have come for discussion on collaboration on research and academic programmes. We are a consortium of research universities and we are together for over 50 years. We do lots of things together and we can collaborate with Indian institutions," said Karen Partlow, associate director, (Technology Collaboration), CIC.

    She said that the delegation was on a fact-finding mission to explore the areas of collaboration. This was the first meeting of the CIC delegation with Mr Sibal.

    "The minister is open to hear specific ideas like what sort of engagement we would like to have in India. We will prepare a detailed plan in this direction and come again," said Ms Partlow, who led the delegation.

    The CIC is known for quality research and its advanced research laboratories. Through collaboration, the CIC members increase teaching, learning and research opportunities.

    These universities conduct funded research of $6.40 billion every year while the funded research of Ivy League universities and the University of California are pegged at $3.27 billion and $4.38 billion respectively.

    “India is interested in institutional linkages between CIC institutions and universities here. This will help Indian universities take advantage of the high-quality research facilities of CIC member institutions,” an HRD ministry official said.
    The CIC universities enrol nearly three lakh under-graduate and 76,000 post-graduate students every year and deliver doctoral programmes in 147 areas of study.

    University of Illinois, a member of CIC, had earlier helped India set up IIT-Kharagpur and the GB Pant University of Agriculture and Technology. The visit of CIC comes at a time when the government is likely to introduce the Foreign Educational Institution (Regulation of Entry and Operation) Bill, 2010, in Parliament this month.

    The Cabinet has approved the Bill which lays down norms for allowing entry and operation of foreign education providers in India. Nearly 50 foreign institutions, including Boston, Yale and Duke University, have evinced interest in either setting up campuses or collaborate on research and academic programmes.

    The CIC delegation also met representatives of Aligarh Muslim University (AMU) and discussed facilitating more research students. The delegation evinced interest in sending students for pursuing studies in Persian, Arabic, Urdu, Hindi and other Indian languages.

    The delegation comprised Wolfgang Schloer from University of Illinois, Will Glover from University of Michigan, Molly Portz from University of Minnesota, Ken Shapiro and Aseem Ansari from University of Wisconsin-Madison, Terry Webb from Madison Area Technical College and Ms Partlow.

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