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home (www.natant.org) Stories written for Business World April-June 2008 |
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April 2008 The domestic mutual funds and insurance companies, and foreign institutional investors, as institutional clients of brokers of National Stock Exchange (NSE) and Bombay Stock Exchange (BSE), have something to cheer about in the subdued market conditions. The Securities and Exchange Board of India (Sebi) recently gave the green signal to stock exchanges to allow their brokers to offer direct market access (DMA) to their clients – institutional clients only to begin with. With this an institutional investor can have the trading terminal (or terminals) of its chosen broker (or brokers) installed directly in their offices and can enter their orders directly in it. Currently all orders in a stock exchange's trading system had to be routed through the trading terminals of brokers and Sebi-registered sub-brokers registered with them. In DMA the broker's infrastructure is bypassed. But the trade and settlement obligations—and risk management compliance involving payment of margins and exposure limits—arising from the orders and trades in the DMA terminal will continue to apply to the broker. The DMA offers so many benefits that in the next few weeks and months many institutional investors are likely to make their NSE or BSE brokers authorise them to install DMA terminals. "We can execute our trades through the DMA and nobody can front run," says Sanjiv Shah, executive director of Benchmark Asset Management. "Brokers can track our trades while it is happening but their trading desk will not be privy to the trades before execution." But the paradigm shift is going to be in algorithmic trading that the DMA opens the doors for. More than two-thirds of the trading turnover of the New York Stock Exchange and the Chicago Board Options Exchange in the US comes from algorithmic trading. The DMA workstation can take trading data feeds coming from the stock exchange and run it through back-end computers that contain historical prices. Human-built programs then trigger off trades in the DMA. Last year's report of the high powered expert committee on 'Making Mumbai an International Finance Centre (MIFC)' had elaborated on what algorithmic trading can do, "At their simplest, algorithms can scan the spot market and the futures market simultaneously.... (and respond) to mispricing within milliseconds." Says Benchmark's Shah, "Algorithmic trading is great for the options market because otherwise there are so many strike prices per stock or index that it is physically impossible to manually monitor arbitrage or hedging opportunities on a real-time basis." For instance, options market offers a chance to make profit from volatility through straddle or strangle strategies. In a strangle, you buy a call and a put of different strike prices to make profit from extreme volatility at the lowest premiums possible. Manually no one scan the scores of options contracts of different strike prices. Algorithms built into the DMA can do this and enable near-perfect implementation of the volatility trading strategy. The NSE, where equity derivatives trading is concentrated, has available for trading at any given point in time, more than 9,000 options contracts. The MIFC report was confident that "the human manager with such an auto-quote system (algorithmic) infuses liquidity into a vast array of options and... the overall risk of the (options) book is then laid off using the futures market using delta-hedging or other dynamic trading schemes." The DMA is among the first few major and bold steps taken by the new Sebi chairman, C.B. Bhave. An earlier step had the institutional investors grumbling about having margins imposed on them on their trades in the cash market. The DMA now gives them something to feel good about. But if you are an individual high-networth wanting your own DMA from your broker you will have to wait a while. Sebi has yet to give a green signal for non-institutional investors to opt for DMA. ________________________________________________________________________________________________________ May 2008 In
the hot afternoon sun of 11 April, the steady summer breeze was swaying
about 180 trees in Krishna Prakash's five acres of coconut palm orchard
in Mandya district in southern Karnataka. At that exact moment, a
bright orange-coloured truck carrying about 6,000 tender coconuts was
nearing The truck reached Beeravunni at In
the morning the 30 retailers came to their outlets and sold 60-90 per
cent of their tender coconuts by late evening. The sweltering humid
heat of BW takes a look at the business of tender coconuts in the country. Due to their concentrated populations the cities are the largest market for tender coconuts. Green coconuts of Kerala and Tamil Nadu are best suited for extracting oil while that of Karnataka are tender and has more water content. There are 45-50 tender coconut wholesalers in The dynamics. "The last few years have not seen much growth in income but it has been steady," says Beeravunni. "The business has been recovering from a slump two years ago when a pest attack caused extensive damage to the coconut palms in Mandya and other places." Mandya APMC's figures bear this out – 49,560 metric tonnes were transported out in 2005 while it was lower at 43,003 in 2006. It picked up only last year at 56,568 metric tonnes. The
Mandya district's hundreds of acres of coconut palm orchards not only
grow the most number of tender coconuts in the country but also figure
in the top growing regions in "Nine
out of every 10 trucks during December to June come from Mandya and the
one remaining truck comes from Mangrol in Junagadh district in western The
water inside, however, does not spoil. "But consumers think the
black-skinned ones are spoilt and don't buy them and so we shift our
purchases to Conscious
tender coconut water drinkers can notice the difference in taste – the
ones from Mandya are sweet and contains more of tender milky kernel (or
malai) while the Mongrol ones are mildly salty and has much less malai
content. It is not surprising because Mandya district in central
Karnataka far away from the coast while Mongrol is right along the
Porbandar coast of the But
some factors are secular in nature. A severe pest attack in 2005 and
2006 on tender coconut palms was from an airborne pest and it coconut
palms across the states of Kerala, Karnataka, Mongrol is about 1,000 kms away from The economics. At the coconut palm orchardist's end the cost-dynamics are noteworthy. Each tree in Krishna Prakash over 180 fruit-bearing trees in his five acre orchard in Mandya yields fruit three times in the year. "In this region, one coconut palm seedling takes seven years to grow into a proper fruit-bearing tree," says Prakash. One seedling costs Rs 100. The costs an orchardist like Prakash incurs during these years are on manure (organic at times and chemical at times) and labour, and these can add up to Rs 250 per month. The cost of fertile land would vary across states but most orchardists like Prakash own their land since the last 30-40 years at the least. "From a matured tree I get 50-70 tender coconuts in every fruitation," says Prakash. "The highest I have ever got from the local APMC agent who comes to collect the tender coconuts directly from my land is Rs 3.50 per fruit." Prakash's 180-odd trees yields fruits three times a year but there are orchardists whose trees gives yield upto six times a year. A big-sized tender coconut costs the
The largest margins in the tender coconut business are made by the APMC agents some of whom, depending on the state and the district, are also politically connected. This is partly because they receive their APMC agent licenses from the state government. That is also the reason why no one hears the orchardists' plea with the state governments to hike the government-determined minimum prices at the various mandis. There are 15-20 agents in Maddur APMC and about 20-25 agents in Mongrol that make up for more than 75 per cent of all tender coconut trades in the country. The
relationship between APMC agents and the orchardists vary depending on
size and need of the latter. If an orchardist is small having one acre
or less and in need of advance money for personal expenditure or a
marriage in the family then a APMC agent would pay him a lumpsum of Rs
1-10 lakh and fix in advance the rate at which he will buy future
harvests of the orchardist. This rate is invariably a low rate and
worse, the orchardist gets the same lower rate for 3-7 years, depending
on the original agreement, even if the rate to the The next powerful element in the business chain is the city wholesaler who also needs to have strong local contacts, some of them political or municipal, to survive in the business. They took make a neat packet from the business although the growth in income has not been much for them either in the last few years. Streetside retailers take their relevant cut too in the chain, but are generally not as well placed as the wholesalers. "Even on the hottest days when there is a rush of people to drink the tender coconut water, there is a limit to how much I can earn," says Anna, a retailer in Kandivli who, interestingly, puts 50-70 tender coconuts on his bicycle at a time and roams from area to area to sell. "The cutting of the hard nut and then fleshing out the malai takes a fixed amount of time." The cash-flow management is interesting. At times the city wholesaler has to pay the APMC agent upfront for the produce that is loaded by the agent in the trucks. At other times credit is offered for 1-2 months and is usually a continuous rolling process. The wholesalers, in turn, collect payment from the retailers days, sometimes weeks, after a delivery. No books of accounts are prepared except for some loose sheets of papers in which the wholesaler details the number of tender coconuts supplied to each retailer at different days. The payments made are in cash, except in the case of some wholesaler-APMC agent dealings where the wholesaler deposits cash directly in the bank account of the APMC agent. "Most of us have been in this business for around 30 years and the trust between all of us is good," says Beeravunni. The good and the not-so-good. In the end, the tender coconut water business is among the most dynamic in the un-organised sector. It is also the only trade in fruits where the end-produce is in liquid form. The end-consumer does not have to do anything to extract the juice out of the fruit. The juice is in ready form ready to be drunk. Tender coconut is also perhaps the only fruit that is recommended the most by nutritionists and doctors, and one of the major factors in the large consumption demand in the ailing populations of cities. But there is a flip side. The weight of the water and the malai inside the tender coconut is less than a quarter of the weight of the outer shell. These heavy shells, in millions of quantity, go to the cities' garbage dumps and add to the problem of land requirement for those dumps. The government nor the private industry has thought it fit to manufacture from the husk of the empty tender coconut shells an end-product that can be used as soft wood. The transportation from more than 1,000 kms away by diesel trucks also leads to a high carbon footprint. However, it is still ok if one compares the carbon footprint of other nutritious fruits that too travel thousands of kms to reach the cties.. Let's drink tender coconut water to that! ________________________________________________________________________________________________________ May 2008 What attracts Maharashtra's politicians to the sugar-cane industry? Is it sweetness of the agro-product or sweet deals struck by the state government ministers and MLAs (members of legislative assembly) who are directly or indirectly involved in a majority of the sugar factories? These questions are important since it is generally believed that Maharashtra's sugar lobby receives the highest state funding and is among the most politicised in the country. It is estimated that the state's sugar factories – 202 co-operatives and 22 private as of March 2006 – contributes 36 per cent of the total production of sugar in India. Till last month, no authoritative particulars were available on Maharashtra's sugar factories – particularly the co-operatives that are processing societies under the Maharashtra Co-operative Societies Act, 1960 (MCS Act). But on 25 April, the Bombay office of Comptroller and Auditor General of India (CAG) released to the media a special audit report titled 'Performance audit of Management of Co-operative Sugar Factories in Maharashtra' CAG is a constitutional body that normally audits main accounts of the central government and the state government. Occasionally, it takes up special audits, and the Maharashtra sugar factories' audit is perhaps a unique one since it involved a highly politically-sensitive sector. At a press conference on 25 April, Malashri Prasad, the principal accountant general for Maharashtra said they couldn't but take seriously the fact that despite receiving large amount of state and central government assistance, of 139 CSFs whose working results were available, 116 co-operative sugar factories (CSFs) were incurring losses of which 74 CSFs registered negative net worth as of June 2006 and 31 CSFs had to be brought under liquidation during 1987-2006. The CAG audit was carried out between March and September 2007 on a sample of 32 CSFs for the period covering 2001 to 2006. In its sample list, 22 CSFs were fully working, 5 were under liquidation, 3 were under construction and 2 were 'deleted from pipeline'. The outstanding dues of the 22 working CSFs for 2005-06 were found to be quite high, Rs 2,658 crore, that included loans repayable to the state government, the central government's Sugar Development Fund and others, and also dues payable to suppliers and creditors. The state government's response was that the sugar industry was faced with various problems and the CSFs had not earned net surpluses. The CAG report listed several financial irregularities in the sample CSFs. Annual accounts of CSFs were not being finalised upto 19 months beyond the due dates. In 21 CSFs, the cost of converting sugar cane to sugar was more than the standard cost fixed by the state government's Commissioner of Sugar resulting in excess expenditure of Rs 1,103 crore during 2001-06. Loans that the state government gave CSFs raise were getting diverted. The CAG report states a total of Rs 319 crore of loans meant for payment of cane arrears for 2002-03 were used for clearing previous loans and other purposes all of which were in violation of the central government's rules. Funds borrowed from banks to make advance payment to harvesting and transport contractors were not recovered to the tune of Rs 23 crore as of March 2006 and a sum of Rs 92 crore that was recovered was not repaid to the banks. The statutory audit by the Commissioner of Sugar was in arrears in case of 61 CSFs for periods ranging upto 15 years. Mandated inspection of CSFs was also never carried out by the Commissioner. The state government stood as a guarantor to 172 CSFs' loans worth Rs 3,557 crore including interest. Banks had invoked Rs 147 crore worth of such loans and the CSFs owed the state government Rs 563 crore in guarantee fees including interest. The sugar audit report is not yet uploaded on CAG's website at www.cag.gov.in but when it is Maharashtra's tax-paying citizens can read the report in its entirety and also sift through the names of the political heavyweights like Gopinath Munde that appear in the first appendix on details of the 32 CSFs test-checked. ________________________________________________________________________________________________________ May 2008 It will be potentially hazardous for the unsuspecting poor pav (bread) consumers in rural Maharashtra if they eat the red wheat that the government sells of suspected rotten red wheat. In a 9 May general resolution the state government of Maharashtra has allowed its district collectors to issue tenders inviting wheat flour mills to purchase about 18,000 tonnes of red wheat that it claims is fit for human consumption but which others do not agree with. In the two years of 2006 and 2007 the government of India imported 73 lakh tonnes of wheat. In mid-last year, for three shipments comprising of 2.3 lakh tonnes, test samples taken from it had tested negative for human consumption but the deal had still through. A chunk of this lot that was to be distributed by Maharashtra government but court cases and judicial intervention halted the distribution and sale of 40,000 tonnes (about 32,000 of which were lying in over 30 government godowns across different districts, about 4,000 tonnes were in PDS shops and about 4,000 tonnes in transit). Due to the judicial watch, in September and October last year, 682 samples from the 33,000 tonnes lying in godowns were sent for testing at the State Health Public Laboratory in Pune. Of these, 285 (42 per cent of total samples) were found unfit for human consumption as they contained uric acid or were heavily infected with insects. By the time testing was completed and reports prepared it was January 2008, and it is now that the government wants to sell what it says is the un-spoilt part, 58 per cent of 32,000 tonnes or about 18,000 tonnes, in the open market. The base price for this is Rs 6.70 per kg. "The state government that told the Bombay High Court in the petitions we have filed against them last year that it will not route any of the 40,000 tonnes of wheat through the public distribution system and other government schemes," says Kirit Somaiya, member of Bharatiya Janata Party's unit in Bombay. "If that wheat is unfit for sale directly to people then how can it be worthy of sale to flour mills who will make bread out of it and sell it to the poor unsuspecting people in remote Maharashtra." There are financial implications too. The imported wheat was purchased at Rs 18 per kg. Then, 18,000 tonnes costed Rs 32.40 crore to the government and now the same is being sold off at just Rs 12 crore. ________________________________________________________________________________________________________ In a historic first, Sebi has managed to get 12 out of 85 financiers in the 2004-05 IPO benami application scam to pay up their ill-gotten gains June 2008 There had to be a first time in the matter of implemented disgorgement of ill-gotten gains in the Indian stock market and it has taken place this month. But it is clearly different and more to-the-dot that what the previous chairman of the Securities and Exchange Board of India (Sebi), M. Damodaran, had envisaged. Damodaran had wanted the two depositories—National Securities Depository and Central Depository Services—to disgorge a sum of Rs 115 crore collectively in the 2004-05 IPO fictitious (benami) applications scam matter. That order was passed in November 2006 by Sebi but the two depositories had obtained a stay from the Securities Appellate Tribunal with the reasoning that disgorgement ought to take place from the actual illegal profiteers. The new Sebi dispensation, under chairman C.B. Bhave, seems to find merit in getting the illegal profiteers to pay. As a result, on 5 June, Sebi issued consent orders against 10 members of Dadia family and 2 companies (see 'Disgorged gains by the dozen' below) floated by them.
The Dadia group's 12 members were among a total of 85 persons and entities named in Sebi's 26 April 2006 interim order. These 85 financiers financed the scandalous benami applications operation of 24 executants or operators and then illegally profited by selling the allotted shares. Sebi is hearing the non-Dadia financiers too and many of them are also expected to pay up their amounts on consent terms determined by Sebi. In the case of the Dadias the executant was Dharmesh B Mehta who used, among other financiers' money, Dadias' money to apply for shares in the retail quota of the IPOs of IDFC, Shoppers Stop and Nectar Lifesciences IPO through the use of over 700 benami applicants, benami demat accounts and benami bank accounts. After allotment of shares, he got it transferred from the over 700 benami demat accounts to his demat account and then to the demat accounts of the Dadias who then purportedly sold it off in the market at a profit (difference between a higher market rate and a lower issue price) worth around Rs 60 lakh. The illegal profit made by the financiers in IDFC IPO was the highest at over Rs 45 crore. The profit was calculated by Sebi as being the difference in the listing date closing price and the issue price. The IDFC IPO saw over 50,000 benami allottees' demat accounts being used to carry out the transfers to the financiers. A vast majority of the benami demat accounts were with Karvy Stock Broking which was a depository participant on NSDL and CDSL. Having already received cheques worth about Rs 72 lakh from the Dadias out of which Rs 12 lakh is towards "settlement charges" and the balance about Rs 60 lakh can be distributed to investors in affected IPOs like IDFC, Yes Bank and 19 others who did not get allotment due to the benami allottees. "This is a major breakthrough as investors could for the first time get to see compensation on their losses," says Prithvi Haldea, managing director of Praxis Consulting. Haldea is on the primary market advisory committee of Sebi and has suggested to Sebi that a new basis of allotment be decided for the affected IPOs from which investors who did not get any allotment are paid the disgorged amount in cash as compensation for their losses. It will be hard work for Sebi to come up with an acceptable formula for distribution of the disgorged sum. Moreover, the sum is small now – only Rs 60 lakh. Only when more financiers given their approval to more consent orders will the balance of the Rs 100 crore odd amount be recovered. The disgorgement orders against NSDL and CDSL also needs to be taken by the special committee of Sebi members that excludes chairman Bhave because of his position as the head of NSDL when the IPO scam took place. It will be interesting to watch the developments unfold.
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