Bond-bludgeoned primary dealers seek greener pastures

Having suffered heavy losses in the government securities market, Indian primary dealers (PDs) are exploring new business opportunities and shifting focus away from the bond markets.

Several applications are pending before the regulators to enter portfolio management services, equity and commodity broking, among other things. This is even as many foreign bond houses are planning to shut shop in India.

All PDs will post net losses in FY 2004-05 as interest rates have hardened. The yield on the benchmark 10-year paper during 2004-05 went up by 156 basis points (one basis point is one hundredth of a percentage point).

The prices on bond prices fall as interest rates rise. But many are confident of posting profits in the current fiscal as they focus their attention on new and/ or alternative businesses.

All bond houses were laughing their way to the bank as they posted windfall profits in FY 2003-04 when interest rates softened by 200 basis points and bond prices rose.

Said Sushil Muhnot, managing director, IDBI Caps, "On one hand, we have cut our government securities book size to one-third this year and on the other hand we have more than doubled our propreitary trading book in equities to over Rs 100 crore this year. We are confident of posting profits this year."

On the cards, is a big expansion of their institutional equity broking business.

IDBI Caps has been more fortunate like I-Sec, DSP Merrill Lynch and JP Morgan since their primary business was equity broking. Other PDs like SBI-DHFI, STCI, PNB Gilts and CorpBank Securities whose primary business is primary dealership have been less fortunate since they are still pleading with the Reserve Bank of India to get equity broking licences.

RBI's views on this are expected by end of June. Meanwhile, almost all bond houses are queueing up to enter into commodities and forex trading in an effort to diversify their businesses.

Said Manubhai K Parekh, managing director, BOB Capital Markets Ltd, "Since our treasury business is dull, we are going to focus on advisory and derivatives business. We see a great M&A advisory opportunity as PSU banks, co-operative banks and regional rural banks look to amalgamate. It also plans to set an equity broking subsidiary."

BOB Capital is also seeking to cut costs by relocating from rented premises to their own office space.

I D Singh , managing director, PNB Gilts, said: "We have applied for a portfolio management services. We are counting on being able to trade in equity and commodities."

SBI-DFHI seems to be in a spot as their officials said, "Entering the equity broking, the loan syndication market or the M&A advisory space would mean stepping on the toes of SBI Capital Markets."

SBI Capital Markets is the merchant banking and equity broking arm of the SBI group.

There is also a proposal before the RBI to merge primary dealerships with their sponsor banks.