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Fortnightly Market View: Bull on the Rampage
I mentioned last fortnight, that the euphoria is cooling off a bit, but the market proved me wrong by shooting up on two events. Late on Friday, 7th July, the Securities and Exchange Board of India announced that foreign portfolio investors cannot have exposure to participatory notes where the underlying asset is a derivative. Participatory notes, where the derivative is underlying, can be...
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The Buck Really Stops at SEBI and Not the NSE
The panic triggered by the malfunction of the National Stock Exchange (NSE) on 10th July, when its prices were not updating and the Exchange was forced to remain shut for nearly three hours was, by no means, a ‘black swan’ event, as chairman Ashok Chawla described it. His statement not only trivialises the meaning of ‘black swan’ but also suggests that the NSE has been working flawlessly since its inception over 23 years ago. This is not true either of the NSE or any of the top exchanges in the world; even the Bombay Stock Exchange (BSE) faced an issue in 2014. Stock market glitches, that bring trading to a halt, have occurred at many top exchanges around the world. In the past five years, there have been issues at NASDAQ (in July 2017 and 2013); New York Stock Exchange (in 2016, 2015 and 2012); Intercontinental Stock Exchange (2015); Singapore Stock Exchange (2014); Chicago Mercantile Exchange and Tokyo Stock Exchange in 2012 and others. There is nothing ‘black swan’ here. 
 
The fact is, in the past, the NSE has always used its enormous clout with the finance ministry, under P Chidambaram, to bypass the rules, bury issues or ram through solutions that were even contrary to the laid down policy of the Securities and Exchange Board of India (SEBI). Its advertising muscle and haughty attitude towards the media ensured that there was very little discussion in the public domain until 2015, after Moneylife broke the algo scam and the NSE’s attempt to gag us through a defamation suit failed. This time, with a new board of directors, the NSE has done well to show humility and ‘deeply apologise’ for the breakdown. 
 
Contrast this with May 2012, when a wrong order punched by a dealer of Emkay Global, caused a 900-point drop in the NSE Nifty (16%). The NSE tried to whitewash the episode by blaming brokers; it was never openly asked to explain why its market-wide circuit filters failed. Instead, such was NSE’s clout that it could have SEBI’s April 2012 guidelines set aside and reopen the cash market without the mandatory cooling period; the derivatives segment wasn’t closed at all. SEBI also ordered the BSE to fall in line. The NSE got away with a mere warning.
 
At the time of writing this column, we understand that SEBI’s surveillance department as well as its technical advisory committee (TAC) will be looking into the issue of 10th July. Tata Consultancy Ltd, which provided the trading software, has been asked for an explanation. There will also be some inquiry into other rumours floating around, including cyber-attack (already overruled by SEBI), internal sabotage, problems with Chinese equipment (according to a newspaper report, the home ministry is looking into this possibility), etc. 
 
NSE’s malfunction on 10th July, although quickly contained, is really a red-alert for the government. Media reports say that SEBI plans to review trading systems, back-up arrangements and disaster recovery plans of all stock exchanges, including vulnerability to cyber, or ransomware, attacks. That is all very well; but the regulator needs to show some speed in ending management uncertainty at the NSE first. 
 
SEBI, even under chairman Ajay Tyagi, seems to imagine that its slow approach in asking NSE to conduct its own internal investigation and pin responsibility for the algo-trading scam is less destabilising for the bourse. In fact, it is causing more harm. What is the point in piling pressure on the same set of executives for the 10th July glitch, without fixing their role in the algo-trading scam first? Here are some issues that SEBI needs to address, and quickly. 
 
Several senior executives, who have been served a show-cause notice by SEBI in May 2017 for the algo scam, continue to run the bourse from critical technical positions. One of them, Ravi Varanasi, chief of business development, was the spokesperson for the Exchange on 10th July. SEBI is now questioning him and others for the 10th July malfunction as well. This only leads to confusion over reporting and accountability in an institution of national importance.
 
That NSE is headless at the time of a technical crisis is also at SEBI’s door. After Chitra Ramakrishna controversially quit as NSE’s managing director on 2 December 2016 (her close associate, group operation officer Subramanian Anand also quit in October 2016), SEBI has been in no hurry to push the NSE to fill up the vacancy, or to ensure a proper management clean up and succession plan. Vikram Limaye was selected as NSE’s managing director in February 2017, but SEBI did not clear his appointment for several months. He is expected to take charge sometime next month after completing his assignment with the Board of Cricket Control of India (BCCI). Were there really no suitable candidates available to take charge of the crisis-hit NSE immediately? What does it say about the selection committee that SEBI put together to decide this important appointment?
 
Remember, Mr Limaye neither has experience of running a complex, technology-intensive bourse, nor has he ever been in a regulatory function (since the NSE is also a first-level regulator). We don’t know if the selection committee considered this factor or decided that experience was not relevant for the managing director’s post, even though Mr Limaye will be taking over in very difficult circumstances. After all, the three previous incumbents were all part of NSE’s founding team, had helped build the Exchange from scratch and were around for 23 years. Since NSE’s tech team is already under a cloud, does it have plans for lateral appointments with experience in technology, surveillance, etc?
 
After a series of whistleblowers’ letters pointed to the complete breakdown in NSE’s human resources (HR) and recruitment policies, irregular senior appointments with lavish perks, misreporting to SEBI, lack of transparency as well as the power enjoyed by ‘consultants’ close to the top management, the NSE had assured SEBI of a clean-up by absorbing those who were eligible and letting others go. This has been implemented only partly. Meanwhile, the HR head has also been asked to leave.
 
NSE’s original capital came from a set of government-owned entities—banks, insurance companies and development finance institutions. Over the years, it has sold shares to foreign institutional investors (FIIs), two venture capital funds, corporate bodies, individuals and foreign direct investors, at steep valuations. The process has been opaque; but even they have been pushing the NSE to list the bourse. These investors are also left in limbo by SEBI’s failure to get the Exchange back on its feet. 
 
Two letters by a whistleblower, who claims to be an ex-employee (and calls himself Jamie Jones), have levelled some serious charges about conflict of interest between top employees of the NSE, consultants and firms who signed up for algo trading. These charges have been the subject of open speculation among market players. SEBI has the ability to call for information, check documents and establish whether any of these allegations is true and act on them. Key issues raised by the letters are about NSE’s consultants having profit-sharing consultancy agreements with brokerage firms that benefited from the algo scam and royalty paid on the NSE indices to some academics/consultants. Has SEBI bothered to investigate?
 
Meanwhile, following SEBI’s last board meeting, chairman Ajay Tyagi described NSE’s co-location issue as a ‘serious matter’. He said that it was for the bourse to decide whether they need to file a revised prospectus for the initial public offering (IPO). Now that there is another investigation into the technical glitch on 10th July, the IPO begins to look even more distant. Clearly, this state of limbo cannot continue. The onus on ensuring a full and proper investigation and swift action is on SEBI. In fact, it is the regulator who is on test here.

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COMMENTS

R Balakrishnan

2 months ago

NSE is in the clutches of a mafia type gang from within the govt cadre. The present appointment is part of that crony club. Otherwise there is no reason to explain why this gentleman should have been chosen. And everyone will do their best to keep things buried and carry on with what they feel like.

Nifty, Sensex in consolidation mode – Weekly closing report

We had mentioned in last Friday’s closing report that Nifty, Sensex closed on a flat note. Indian shares entered into consolidation mode after a four-day rally that took benchmark indices to record highs. The trends of the major indices in the course of the week’s trading are given in the table below:

Positive global cues and buying in banking, IT (information technology) and capital goods stocks pushed the Indian equity markets to fresh highs during the mid-afternoon trade session on Monday. Equity benchmarks started-off on a strong note with both equity benchmark indices hitting record highs. Global cues and buying support aided in the markets' rise, pointed out market analysts.

 

Full-fledged trading resumed on the National Stock Exchange of India (NSE) during the mid-afternoon session on Monday after a technical glitch impacted trading during an early-morning session. The stock exchange said that the technical glitch impacted trading on its Cash and Future and Option (F&O) segment during the early-morning trade session, and that the glitch has been resolved. The NSE said that all its market segments were operational as of 12.30 p.m.

 

India's steel consumption grew by 4.6% to nearly 21 million tonne in the first quarter of the current fiscal over the same period in 2016, while the country's steel exports jumped by nearly 66% in the April-June period, a Ministry report said. "India's consumption of total finished steel saw a growth of 4.6% in April-June 2017 at 20.999 mt (million tonne) over same period of last year, under the influence of a rising production for sale," the report said. The Ministry's study also pointed out overall consumption at 7.204 mt in June was down by four per cent over the previous month (May 2017) and was up by 5.3% over corresponding month (June 2016) last year. "Export of total finished steel was up by 65.9% in April-June 2017 at 1.387 mt over same period of last year. Overall exports in June 2017 at 0.648 mt was up by 0.9% over May 2017 but was up by 20.2 per cent over June 2016," said the report of Joint Plant Committee. However, the import of total finished steel at 1.715 mt in June quarter declined by 6.4% over same period in 2016. Overall imports at 0.653 mt in June was up by 17% over May and increased year-on-year by 3.2% over same month last year (June 2016). India was a net exporter of total finished steel in April-June 2017, the report said.

 

After a huge fall in sugar production 2016-17, that forced the import of 500,000 tonnes, official and industry circles expect the upcoming "sugar year" to be sweeter, thanks to a good monsoon and signals of better yield from the field. According to the officials in the Agriculture Ministry and organisations representing private and cooperative sugar factories, output in 2017-18 (the "sugar year" starts from October) is to cross 25 million tonnes, almost 25% higher than in 2016-17.

 

The major indices of the Indian stock markets were range-bound on Tuesday and closed with minor gains over Monday’s close. Positive global cues and buying in automobile, capital goods and IT (information technology) stocks pushed the Indian equity markets to fresh highs during the mid-afternoon trade session on Tuesday. Equity benchmarks extended Monday's gain and is trading positive due to global market. Sugar stocks made gains on the back of government's decision to increase import duty in sugar, pointed out market analysts. State Bank of India shares gained more than 1% intraday after the central board of directors approved dilution of bank's stake in its life insurance subsidiary.

 

The major indices of the Indian stock markets were range-bound on Wednesday and closed with small gains over Tuesday’s close. Expectations of robust quarterly results, along with buying in energy sector stocks pushed the Indian equity markets higher on Wednesday. According to market observers, gains were capped due to investors' reluctance to further invest in expensive market conditions and caution over the upcoming macro-economic inflation and industrial production data points.

 

The major indices of the Indian stock markets rallied on Thursday and closed with gains over Wednesday’s close. The key domestic equity indices S&P BSE Sensex and NSE Nifty on Thursday scaled record highs on the back of positive global cues and hopes of an easing of the monetary policy. Global equities traded higher after US Federal Reserve Chair Janet Yellen, hinted at more gradual tapering programme at her testimony before the US Congress, pointed out market analysts. India's retail inflation hit a record low of 1.54% in June, lowest since 1999, raising hopes of an interest rate cut by RBI (Reserve Bank of India) ahead of monetary policy next month (in August).

 

After lowering the Immediate Payment Service (IMPS) charges, the State Bank of India (SBI) on Thursday reduced charges for National Electronic Funds Transfer (NEFT) and Real Time Gross Settlement (RTGS) transactions up to 75% effective July 15. The reduced charges will be applicable on the transactions done through internet banking and mobile banking services offered by the bank, the bank said in an official statement here on Thursday.

 

With the retail inflation easing to a record low of 1.54% in June, the government's Chief Economic Adviser Arvind Subramanian on Wednesday said it reflects a paradigm shift in the process to low levels of inflation, which has been missed in the large systematic inflation forecasts made. As per the Central Statistics Office (CSO) data on Consumer Price Index (CPI), retail inflation was dragged lower to 1.54% in June due to a sharp fall in the prices of food items like pulses, vegetables, and other perishables. The current inflation rate is the lowest since the series began in 2012. With low inflation, interest rates are likely to soften, giving a boost to business and stock markets in India.

 

Indian shares entered into consolidation mode after a four-day rally that took benchmark indices to record highs. The S&P BSE Sensex index fell almost 90 points from the highest point of the day but managed to hold on to the 32,000 mark, ending at 30,020. The NSE Nifty-50 index recovered nearly 40 points from the lowest point of the day to end at 9,886, a shade lower than the record closing high of 9,891 which it posted on Thursday.

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