Sebi: Regulatory imperative

Sebi should help develop the securities lending and borrowing market, and not just put in place a system.

The Securities and Exchange Board of India (Sebi), according to reports, is trying to put in a new securities lending and borrowing mechanism.

But given the number of false starts already on this front, merely in putting in place a securities lending and borrowing system may not be the answer.

Under the existing system, the market for the borrowing and lending of securities is run by a few approved intermediaries. But due to prohibitively high interest rates and other practical problems, the system hasn't taken off. The lack of a robust securities lending and borrowing mechanism poses a few problems.

For instance, a trader with an outstanding short position and with no securities to deliver pays a huge penalty when the securities are acquired through an auction. True, many traders now use the derivatives market to go short, but only around 50 stocks trade in this segment.

These stocks may account for around 80 per cent of the total market capitalisation, but for a big chunk of stocks the risk (and therefore the cost) of going short is very high.

Besides, physical delivery in the derivatives market will not be feasible unless borrowing and lending of securities is easily available. Apparently, this is the reason Sebi is keen to revive the securities lending and borrowing market.

But developing a robust securities lending and borrowing mechanism in India is easier said than done. While the rate of interest is prohibitively high, another reason is that securities (that are available for lending) lie in the name of shareholders, unlike international norms where they lie with brokers.

This could mean that a broker would have to take permission every time there's a requirement to borrow stocks. But leaving brokers in India with a hoard of stocks wouldn't be a great idea either.

Further, with Sebi also pushing for a T+1 settlement, it could be tough for a trader to meet the settlement deadline if he's using the securities borrowing mechanism.

Needless to say, the new system should address all these problems. More importantly, given the number of false starts till now, it's imperative that the regulator is involved in the development of the securities lending and borrowing market, and not merely in putting in place a securities lending and borrowing system.

Aluminium

Aluminium prices have gained around 11 per cent till date in CY04 and are expected to rise even in the next year. The reason for this is that Chinese demand is expected to remain buoyant in CY05 and that should result in a gap in demand and supply of an estimated 2,37,000 tonne next year.

Both the leading Indian aluminium players Hindalco and Nalco are already one of the lowest cost producers in the world due to captive resources of key inputs like alumina and power. Hence higher aluminium prices next year should result in improved sales realisations in FY 06 for both companies.

However, Hindalco is expected to see profits rise at a higher rate compared with the London Metal Exchange prices since it has been increasing the share of value added products in its total sales.

Also, the buoyant price environment is causing these companies to raise capacity "" Nalco's second phase of expansion includes increasing smelter capacity to 460,000 tonne and captive power generation capacity to 1200 MW while Hindalco is increasing its alumina capacity by 700, 000 tonne to 1.8 million tonne.

Better still, Hindalco is also expected to benefit from an upturn in its copper business due to improved TC / RC rates.

Capital expenditure boom

The investment boom appears to have been started as early as last fiscal, if data from the Reserve Bank of India are any guide. Bank loans for financing project cost of companies was as high as Rs 1804 crore in FY04, compared to a minuscule Rs 18 crore in FY03.

As a matter of fact, bank loans for financing corporate projects last fiscal was the highest in a decade. The last year in which bank loans for projects was higher was FY95 when the amount was Rs 3326 crore.

Interestingly, the data shows that, except for 1994-95, bank loans for financing companies' projects was the highest in 2003-04, which speaks volumes about the momentum behind the investment drive.

But if last year was such a great time for financing capex, how come there's been so little fanfare about it? The reason is simple "" only 13 companies financed their projects last year, against 800 in 1994-95. Also, although bank financing for projects was so high, the other sources of project finance were not tapped.

That's the reason why the total amount of project finance, at Rs 3,228 crore in FY04, was much lower than 1994-95's Rs 19,391 crore or 1993-94's Rs 14,543 crore. In FY95, apart from bank finance, total share capital raised for projects was Rs 7,199 crore while IDBI funded another Rs 701 crore and other sources including foreign ones, funded Rs 3,679 crore.

In 2003-04, in contrast, capital raised for projects was a mere Rs 1,246 crore, while other sources of finance were practically non-existent. This year should be much better, with equity finance and external commercial borrowings being much larger.

With contributions by Mobis Philipose and Amriteshwar Mathur