A good number of non-banking financial companies (NBFCs) belonging to big brokerages are keeping themselves from announcing a one-time hit by losses arising out of margin funding following the market meltdown in the early part of this calendar.
Instead, the broking houses are carrying forward these huge losses as loans under recovery, and announcing only minuscule bad debts.
Through this move, say experts, these broking firms can avoid making huge provisions for losses and, to a great extent, neutralise a possible negative impact on their share prices. Stock prices normally take a hit if a company's provisioning or writedowns is huge, they say.
"It's surprising to know that provisioning and losses announced by brokerage houses do not form even 1 per cent of the entire margin funding business. And, this is at a time when the market has fallen so drastically and the liquidity crisis is still looming large over the system," says investment advisor S P Tulsian.
Chartered accountants say brokerages can carry forward their losses for six to eight quarters, after which they will have to show it on their books. However, they can avoid mention of any loan as loss, even after two years, if the matter is sub judice.
"Typically, what most of them would do is make small provisions for NPAs every quarter, so the loss amount does not seem to be too big. Eventually, they would also try and offset these losses with their profits in the coming quarters," says an accountant.
In the last three years when the share prices were shooting up, the NBFCs of top broking houses made a killing by lending money to investors at an interest rate as high as 18-25 per cent.
While the NBFCs earned high interest rates, their broking arms benefited from commissions earned from the share transactions. Conservative estimates put the size of the margin-funding market at Rs 10,000 crore during the market peak of 20,000-plus levels.
The funding reached unparalleled proportions as brokers aggressively pushed for loans to small retail clients too. Investors typically bring in some portion of the money to purchase shares, while the broking outfits (through their NBFCs) finance the remaining amount. The shares are then kept in the name of the NBFC.
In a rising market, when an investor chooses to book profits, he gets his portion of the contribution and the gains. The broking firm takes home its funds and the interest amount.
This led to a bubble-like situation as investors were seduced into paying more for a stock than its fundamental value. Margin-funding trades were also responsible for the huge volumes generated in recent times.
"However, when the market crashed, the entire system collapsed like a pack of cards, leaving the broking houses with piles of bad debts," explains a dealer, while stressing that the margin-funding business is now down by over 60 per cent.
Currently, the brokerages have huge NPAs and bad debts. They're now moving the courts. "Such cases drag on for years, and it will not be surprising if the brokerages do not announce any writedowns in some cases on the pretext that they are still in the court of law," says the accountant.
