Description
a project on share market
STOCK MARKET TRENDS IN INDIA CHAPTER I – SECURITIES MARKET IN INDIA ? AN OUTLINE A. INTRODUCTION
1
A
fter the securities are issued in the primary market, they are traded in the secondary market by the investors. The stock exchanges along with a host of other intermediaries provide the
necessary platform for trading in secondary market and also for clearing and settlement. The securities are traded, cleared and settled within the regulatory framework prescribed by the Exchanges and the SEBI. Till recently, it was mandatory for the companies to list their securities on the regional stock exchange nearest to their registered office, in order to provide an opportunity to investors to invest/trade in the securities of local companies. However, following the withdrawal of this restriction, the companies have an option to choose from any one of the existing stock exchanges in India to list their securities. Due to the earlier regulation requiring companies to get listed first at the regional stock exchange, there are in all 23 exchanges operating today in the country. With the increased application of information technology, the trading platforms of all the stock exchanges are accessible from anywhere in the country through their trading terminals. However, the trading platform of NSE is also accessible through internet and mobile devices. In a geographically widespread country like India, this has significantly expanded the reach of the exchanges to the homes of ordinary investors and assuaged the aspirations of people to have exchanges in their vicinity. As a result of the reforms/initiatives taken by the Government and the Regulators, the market microstructure has been refined and
STOCK MARKET TRENDS IN INDIA
2
modernized. The investment choices for the investors have also broadened. The securities market moved from T+3 settlement periods to T+2 rolling settlement with effect from April 1, 2003. Further, straight through processing has been made mandatory for all institutional trades executed on the stock exchange. Real time gross settlement has also been introduced by RBI to settle inter-bank transactions online at real time mode. These developments in the securities market provide the necessary impetus for growth and development, and thereby strengthen the emerging market economy in India. B. PRODUCTS AND PARTICIPANTS
M
obilization of savings from surplus savers to deficit savers is most efficiently carried out by the securities market through a range of complex products called “securities”. The definition
of securities as per the SCRA, 1956 includes shares, bonds, scrips, stocks or other marketable securities of like nature in or of any incorporate company or body corporate, government securities, derivatives of securities, units of collective investment scheme, interest and rights in securities, security receipt or any other instruments so declared by the central government. The securities market has essentially three categories of participants, viz., the issuer of securities, investors in securities and the intermediaries. The issuers are the borrowers or deficit savers, who issue securities to raise funds. The investors, who are surplus savers, deploy their savings by subscribing to these securities. The intermediaries are the agents who match the needs of users and suppliers of funds for a commission. These intermediaries pack and unpack securities to help both the issuers and investors to achieve their respective goals. There are a large variety and number of intermediaries providing various services in the Indian securities market (Table 1-1). This process of mobilization of resources
STOCK MARKET TRENDS IN INDIA
3
is carried out under the supervision and overview of the regulators. The regulators develop fair market practices and regulate the conduct of issuers of securities and the intermediaries. They are also in charge of protecting the interests of the investors. The regulator ensures a high service standard from the intermediaries and supply of quality securities and non-manipulated demand for them in the market.
C. MARKET SEGMENTS
T
he securities market has two interdependent segments: the primary and the secondary market. The primary market is the channel for creation of new securities. These securities are
issued by public limited companies or by government agencies. In the primary market the resources are mobilized either through the public
STOCK MARKET TRENDS IN INDIA
4
issue or through private placement route. It is a public issue if anybody and everybody can subscribe for it, whereas if the issue is made available to a selected group of persons it is termed as private placement. There are two major types of issuers of securities, the corporate entities who issue mainly debt and equity instruments and the government (central as well as state) who issue debt securities. These new securities issued in the primary market are traded in the secondary market. The secondary market enables participants who hold securities to adjust their holdings in response to changes in their assessment of risks and returns. The secondary market operates through two mediums, namely, the over-the-counter (OTC) market and the exchange-traded market. OTC markets are informal markets where trades are negotiated. Most of the trades in the government securities are in the OTC market. All the spot trades where securities are traded for immediate delivery and payment take place in the OTC market. The other option is to trade using the infrastructure provided by the stock exchanges. There are 23 exchanges in India and all of them follow a systematic settlement period. All the trades taking place over a trading cycle (day=T) are settled together after a certain time (T+2 day). The trades executed on the National Stock Exchange (NSE) are cleared and settled by a clearing corporation. The clearing corporation acts as a counterparty and guarantees settlement. Nearly 100% of the trades in capital market segment are settled through demat delivery. NSE also provides a formal trading platform for trading of a wide range of debt securities, including government securities. A variant of the secondary market is the forward market, where securities are traded for future delivery and payment. A variant of the forward market is Futures and Options market. Presently only two exchanges viz., NSE and Stock Exchange, Mumbai (BSE) provides trading in the derivatives of securities.
STOCK MARKET TRENDS IN INDIA
5
D. SECONDARY MARKET
C
orporate Securities - There are 23 exchanges in the country, which offer screen based trading system. The trading system is connected using the VSAT technology from over 357 cities.
There were 9,368 trading members registered with SEBI as at end March 2004 (Table 1-10). The market capitalization has grown over the period indicating more companies using the trading platform of the stock exchange. The all India market capitalization is estimated at Rs. 13,187,953 million at the end of March 2004. The market capitalization ratio defined as the value of listed stocks divided by GDP is used as a measure of stock market size. It is of economic significance since market is positively correlated with the ability to mobilize capital and diversify risk. It increased sharply to 52.3% in 2003-04 against 28.5% in the previous year. The trading volumes on exchanges have been witnessing phenomenal growth over the past decade. The trading volume, which peaked at Rs. 28,809,900 million in 2000-01, fell substantially to Rs. 9,689,093 million in 2002-03. However, the year 2003-04 saw a turnaround in the total trading volumes on the exchanges. It registered a volume of Rs. 16,204,977 million. The turnover ratio, which reflects the volume of trading in relation to the size of the market, has been increasing by leaps and bounds after the advent of screen based trading system by the NSE. The turnover ratio for the year 2003-04 accounted at 122.9%. The relative importance of various stock exchanges in the market has undergone dramatic change during this decade. The increase in turnover took place mostly at the big exchanges. The NSE yet again registered as the
STOCK MARKET TRENDS IN INDIA
6
market leader with more 85% of total turnover (volumes on all segments) in 2003-04. Top 5 stock exchanges accounted for 99.88% of turnover, while the rest 18 exchange for less than 0.12% during 2003-04 (Table 1-11). About ten exchanges reported nil trading volume during the year.
The movement of the S&P CNX Nifty, the most widely used indicator of the market, is presented in Chart 1-1. The index movement has been responding to changes in the government’s economic policies, the increase in FIIs inflows, etc. However, the year 2003-04 witnessed a favorable movement in the Nifty, wherein it registered its all time high in January 2004 of 2014.65. The point-to-point return of Nifty was 80.14% for 2003-04.
STOCK MARKET TRENDS IN INDIA
7
G
overnment Securities - The trading in government securities exceeded the combined trading in equity segments of all the exchanges in the country during 2003-04. The aggregate
trading in central and state government dated securities, including treasury bills, increased by manifold over a period of time. During 200304 it reached a level of Rs. 26,792,090 million. The share of WDM segment of NSE in total turnover for government securities decreased marginally from 52% in 2002-03 to 47.6% in 2003-04. However, the share of WDM segment of NSE in the total of Non-repo government securities increased marginally from 74.01% in 2002-03 to 74.89% in 2003-04 (Table 1-10).
END OF CHAPTER I
STOCK MARKET TRENDS IN INDIA
8
CHAPTER II - REGULATORY FRAMEWORK The four main legislations governing the securities market are (a) The SEBI Act, 1992 (b) The Companies Act, 1956 (c) The Securities Contracts (Regulation) Act, 1956, and (d) The Depositories Act, 1996 A brief about these legislations are as given below:
S
EBI Act, 1992: The SEBI Act, 1992 was enacted to empower SEBI with statutory powers for (a) protecting the interests of investors in securities, (b) promoting the development of the
securities market, and (c) regulating the securities market. Its regulatory jurisdiction extends over corporates in the issuing capital and all intermediaries and persons associated with securities market. It can conduct enquiries, audits and inspection of all concerned participants and adjudicate offences under this Act. It has powers to register and regulate all the market intermediaries. Further it can also penalize them in case of violations of the provisions of the Act, Rules and Regulations made there under. SEBI has full autonomy and authority to regulate and develop an orderly securities market.
STOCK MARKET TRENDS IN INDIA
9
S
ecurities Contracts (Regulation) Act, 1956: It provides for direct and indirect control of virtually all aspects of the securities trading including the running of stock exchanges with
an aim to prevent undesirable transactions in securities. It gives the Central Government regulatory jurisdiction over (a) stock exchanges through a process of recognition and continued supervision, (b) contracts in securities, and (c) listing of securities on stock exchanges. As a condition of recognition, a stock exchange complies with the requirements prescribed by the Central Government. The stock exchanges frame their own listing regulations in consonance with the minimum listing criteria set out in the Rules.
D
public
epositories Act, 1996: The Depositories Act, 1996 provides for the establishment of depositories for securities to ensure transferability of securities with speed, accuracy and security. companies freely transferable subject to certain
For this, these provisions have been made: (a) making securities of limited exceptions; (b) dematerializing the securities in the depository mode; and (c) providing for maintenance of ownership records in a book entry form. In order to streamline the settlement process, the Act envisages transfer of ownership of securities electronically by book entry without moving the securities from persons to persons. The Act has made the securities of all public limited companies freely transferable, restricting the company’s right to use discretion in effecting the transfer of securities, and the transfer deed and other procedural requirements under the Companies Act have been dispensed with.
C
ompanies Act, 1956: It deals with issue, allotment and transfer of securities and various aspects relating to company management. It provides for standards of disclosure in the
public issues, particularly in the fields of company management and
STOCK MARKET TRENDS IN INDIA
10
projects, information about other listed companies under the same management, and management perception of risk factors. It also regulates underwriting, the use of premium and discounts on issues, rights and bonus issues, payment of interest and dividends, supply of annual report and other information. A. RULES, REGULATIONS & REGULATORS
T
he Government has framed rules under the SCRA, the SEBI Act and the Depositories Act. The SEBI has framed regulations under these acts for registration and regulation of the market
intermediaries and for prevention of unfair trade practices. Under these Acts, the Government and the SEBI issue notifications, guidelines and circulars, which the market participants comply with. The SROs like the stock exchanges have also laid down their rules and regulations. The regulator has to ensure that the market participants behave in a desired manner so that securities market continue to be a major source of finance for corporate and government while protecting the interest of investors. The responsibility for regulating the securities market is shared jointly by Department of Economic Affairs (DEA), Department of Company Affairs (DCA), Reserve Bank of India (RBI) and SEBI. The activities of all these agencies are coordinated by a High Level Committee on Capital Markets. Most of the powers under the SCRA are exercisable by DEA while a few others by SEBI and some are concurrently by them. The regulation of the contracts for sale and purchase of securities, gold related securities, money market securities and securities derived from these securities and ready forward contracts in debt securities are exercised concurrently with the RBI. The SEBI Act and the Depositories Act are mostly administered by SEBI. While the rules under the securities laws are framed by government, regulations are framed by SEBI. The powers under the Companies Act relating to
STOCK MARKET TRENDS IN INDIA
11
issue and transfer of securities and non-payment of dividend are administered by SEBI in case of listed public companies and public companies proposing to get their securities listed. The SROs ensure compliance of market participants with their own rules as well as with the rules relevant for them under the securities laws.
END OF CHAPTER II
CHAPTER III - REFORMS IN INDIAN SECURITIES MARKETS
A. Policy Developments
O
ver the last decade the Government and the market regulators have taken several policy measures to improve the operations of the stock exchanges and market intermediaries. The
measures are aimed at improving the market infrastructure and upgradation of risk containment, so as to protect the interest of the investors. The policy developments during April 2003 and June 2004 pertaining to trading of securities are enumerated below: Initiatives from Government I. Union Budget The Union Budget for 2004-05 proposed the following measures that have a bearing on the functioning of the secondary market: 1. An alternate trading platform for Small and Medium Enterprises (SME) have been proposed to be set up. This will help these enterprises in raising equity and debt from the Capital Market. 2. The procedure for registration and operation of FIIs is to be made simpler and quicker.
STOCK MARKET TRENDS IN INDIA
12
3. The investment ceiling for FIIs in debt funds have been raised to US$ 1.75 billion from US$ 1 billion. 4. Long-term capital gains tax on securities transaction has been abolished. The short term capital gains tax has been proposed to be at a flat rate of 10 percent. 5. Turnover taxes have also been imposed on delivery-based transaction at the rate of 0.15% and for non-delivery transactions at the rate of 0.015% for equities and 0.01% on trades on the derivatives segment. II. Pension System/Interim Pension Fund Regulator The Government has approved the basic features of the new pension system. A pension fund regulatory and development authority (PFRDA) in the interim is to be set up with the purpose to regulate and develop the pension market. In this system, there would be three different choices for investments e.g. Option A, B and C. The option A would imply predominant investments in fixed income instruments with some investments in equity. Option B with greater investments in equity and Option C would carry equal investment in fixed income and equity. The pension fund managers would be free to make investments in international markets subject to regulatory restrictions. III. Amendment to Securities Contracts (Regulation) Act, 1957 As per the recommendations of a Committee constituted by the SEBI under the chairmanship of Shri K. R. Ramamoorthy, the Securities Contracts (Regulation) Rules, 1957 have been amended. They are called the Securities Contracts (Regulation) Amendment Rules, 2003. It states that a member is permitted to conduct business in commodity derivatives only by setting up a separate company. It is required that the company should comply with the regulatory requirements in terms of net worth, capital adequacy, margins and exposure norms as maybe specified by the Forward Market Commission.
STOCK MARKET TRENDS IN INDIA
13
IV. Revised ECB Guidelines The Government notified the liberal External Commercial Borrowing (ECB) policy on January 19, 2004. Listed below are the new policies: (i) Removal of end-use restrictions: ECBs are allowed for corporate investments in industrial sector especially infrastructure sector for acquisition of shares under the Governments disinvestment programme of PSU shares up to US$ 500 million having minimum average maturity of 5 years under the automatic route. The usual restriction on ECB for investment in capital market or in the real estate is to continue. (ii) Eligibility: All corporates, except banks, NBFCs and FIs are eligible to borrow through the ECB route. However, those banks and FIs, who have participated in the Textile or Steel sector restructuring package of the Government/RBI, are permitted, but only to the extent of their investment in the package. (iii) Interest Rate Spreads: All ECBs are subject to the following revised maximum spreads, over six month LIBOR or the applicable benchmark(s), as the case may be (a) Average maturity of 3-5 years -200 basis points and (b) More than 5 years of average maturity - 350 basis points. (iv) Guarantee: Banks, FIs, NBFCs are not permitted to provide guarantee/letter of comfort. (v) Procedure: All ECBs satisfying the above criteria will be under the auto route up to US$ 20 million for ECBs between 3-5 years of average maturity and up to US$ 500 million for ECBs having average maturity of more than 5 years. All cases, which fall outside the purview of the autoroute in the new liberalized ECB policy, should be subject to the approval by the Empowered Committee of the RBI. On similar lines, guidelines for Foreign Currency Convertible Bonds (FCCBs) have been liberalized.
STOCK MARKET TRENDS IN INDIA
14
V. Companies (Issue of Indian Depository Rules) 2004 Ministry of Finance (MoF) has notified the Companies (Issue of Indian Depository Rules), 2004, applicable to those companies incorporated outside India desiring to raise resources through Indian securities markets. The issuer company can issue Indian Depository Receipts (IDRs) only against its underlying equity shares. The rules require that the issuer company’s pre-issue paid up capital and average turnover should be US$ 100 millions and US$ 500 millions, respectively. The company should also be making profits for at least 5 years preceding the issue and must have declared dividend of at least 10% during the period and has a pre-issue debt equity ratio of 2:1. The issuer company has to obtain prior permission from the SEBI and the necessary approvals/exemptions from the country of its incorporation (where required) for making the issue. Following the approval, issuer should appoint a number of intermediaries such as overseas custodian bank, domestic depository, and a merchant banker. The issuer company should also take in-principle listing approval from one or more stock exchanges having nation wide trading terminals in India. The IDRs should be denominated in Indian Rupees and not exceed 15% of the total paid-up capital and free reserves of the company. Redemptions are to be subject to FEMA and other laws and cannot be made within one year of their issue. In case of redemption, the underlying equity shares may be released to the IDR holder or may be sold directly by him. Initiatives from SEBI I. SEBI (Listing Authority) Regulations, 2003 To bring about uniformity in scrutinizing listing applications across the stock exchanges and to strengthen the listing agreement, SEBI has established the Central Listing Authority (CLA) under the SEBI (Central
STOCK MARKET TRENDS IN INDIA
15
Listing Authority) Regulations, 2003. The important features of these regulations are as follows: (i) The Central Listing Authority (CLA) is to be constituted by SEBI and should consist of a President and a maximum of ten other members, of which at least four members should be representatives of the stock exchanges. The SEBI Board shall appoint the President and the members from amongst persons having integrity and outstanding ability from judiciary, lawyers, academicians, financial experts etc. (ii) The authority should discharge the following functions viz., processing the application made for listing by any body corporate, MF or CIS, issuing the letter of recommendations, reviewing listing norms and any other functions as may be specified by the Board from time to time. (iii) Prior to applying for listing to any stock exchange, a body corporate, MF or CIS should obtain a letter of recommendations to list from the CLA. (iv)Any exchange should not consider any listing application, unless it is accompanied by a letter of recommendation issued by the CLA. (v) In case, the CLA refuses to issue letter of recommendation in accordance with the procedure laid down in the Regulations, the aggrieved party may approach SEBI within 10 days of receipt of the refusal. If the SEBI is not satisfied with the reason, SEBI may direct the CLA to issue a letter of recommendation within 15 days of receipt of such representation. (vi) If the exchange refuses listing to the body corporate, MF or CIS, it may appeal to the Securities Appellate Tribunal (SAT) as provided in the Securities Contracts (Regulation) Act, 1956. (vii) The CLA should also constitute a ‘Fund’ to be called the Central Listing Authority Fund, which should be constituted basically from the processing fees charged and received by the Authority. II. Amendments to Listing Agreement
STOCK MARKET TRENDS IN INDIA
16
SEBI advised the Stock Exchanges to initiate action against the listed companies, who have not complied with the various requirements of the listing agreements. It has been clarified that Section 23(2) of the SC(R)A, 1956 prescribes punishment for violation and non compliance of the provisions of listing agreement. Further, in order to ensure that listed companies do not in anyway violate or override or circumscribe the provisions of securities laws or the stock exchange requirements, SEBI amended the clause 24 of the listing agreement. The amended clauses are as given below: (a) The company should file with the stock exchange for approval any scheme/petition proposed to be filed before any court or tribunal at least a month before it is presented to the Court/tribunal. (b) The company should ensure that any scheme of arrangement/amalgamation/merger/reconstruction/reduction of capital, etc., to be presented to any Court or Tribunal does not in any way violate, override or circumscribe the provisions of securities laws or the stock exchange requirements. Securities law here means the SCRA 1956, the SEBI Act, 1992, the Depositories Act 1996 and the provisions of Companies Act 1956 and the other rules, regulations, guidelines etc. made under these Acts, and the Listing Agreement. III. Margin Trading With a view to improve liquidity in the equity market, SEBI initiated steps to introduce margin trading w.e.f. April 1, 2004. The securities, eligible for margin trading, should have an average impact cost of less than or equal to 1 and should be traded on at least 80% (+/-5%) of the days for the previous eighteen months. Only corporate brokers with net worth of at least Rs. 3 crore are eligible to offer this facility. They may use their own or borrowed funds, however, their total indebtedness should not exceed 5 times their net worth. The initial and maintenance margin is to be paid in cash and have to be a minimum of 50% and 40%,
STOCK MARKET TRENDS IN INDIA
17
respectively. While providing the margin trading facility, the broker should be prudent and ensure that there is no concentration on any single client. The arbitration mechanism of the exchange is not available for grievances arising out of this facility. IV. Eligibility of a Sub-broker to Trade through the Subsidiary Company The Stock Exchanges had been allowed to set up subsidiary company to acquire membership rights of other stock exchanges subject to certain conditions prescribed by SEBI. As per the conditions stated in the SEBI directive, the subsidiary company could register only the members of the parent stock exchange as sub-brokers of the subsidiary company. However, it was noticed that the necessary changes have not been made in the rules, bye-laws and the regulations of all the stock exchanges which have set up subsidiaries and Memorandum/Articles of Association of the subsidiary company. Therefore, all the stock exchanges, which have set up subsidiaries were directed to make the necessary provisions in their rules, regulations and the bye-laws as well as in the Memoranda/Articles of Associations to this effect. V. Listing Fees It has been decided by SEBI, that the stock exchanges should have the freedom to charge listing fees without seeking prior approval from the SEBI. Accordingly, the exchanges have been directed to make necessary amendments to the bye-laws, rules and regulations/listing agreement. VI. Mark-up in respect of debentures and bonds traded on the Stock Exchange Through a circular issued by SEBI on December 09, 1996, it has been stipulated that the mark-up for the close out should be 20% above the
STOCK MARKET TRENDS IN INDIA
18
official closing price for equities as well as debentures and bonds. However, based on the recommendations of the Advisory Committee on Derivatives and Market Risk Management it has now been decided that in case of debentures and bonds with a credit rating AAA and above, close out mark-up of 5% should be applied. In cases where the credit rating is below AAA, then the existing close out mark-up of 20% should be applicable. VII. Fair Practices and Code of Conduct A code of conduct for public representatives/SEBI nominee directors has been notified to ensure that the affairs of the stock exchanges are conducted on the healthy lines with the highest standards of professional conduct, business ethics and morality. Also the guidelines enumerating • fair practices have been notified. The public representatives/SEBI nominee directors should: endeavor to attend all the board meetings. They should be liable to vacate their office if they remain absent for three consecutive meetings of the Board of Directors or do not attend 75% of the total meetings of the Board in a calendar year. • not participate in the discussion on subjects, which may involve any conflict of interest or give rise to. If in case it happens then the same should be disclosed and recorded in the minutes of the meeting; however, during the meeting the agenda papers should not be circulated, unless circumstances requires. • • meet at least once in 6 months separately, if necessary, to exchange views on critical issues. offer their comments on the draft minutes and ensure that the same are incorporated in the final minutes. It should be ensured that the minutes of the previous meeting are placed for approval in the subsequent meeting.
STOCK MARKET TRENDS IN INDIA •
19
endeavor to have the date of next meeting fixed at each Board Meeting itself in consultation with other members of the Governing Board. In case, all the items of the agenda of a meeting are not covered, then next meeting is to be held within 15 days.
•
participate in the formulation and execution of various strategies by being pro-active in decision making in the Board meetings, so that the exchanges benefits from their experience and expertise.
•
endeavor to ensure that the Exchange abides by all the provisions of the SEBI Act, Securities Contracts (Regulation) Act, Rules, Regulations framed there under and the circulars, directions issued by the Government/SEBI.
•
endeavour to make the regulatory system foolproof by ensuring compliance at all levels of hierarchy in the Exchange. They should also ensure that the Exchange honors the time limit prescribed by SEBI for corrective actions.
•
not support any decision of the Board, which may adversely affect the interest of investors. They should report forthwith any such decision to SEBI.
•
make sure that the arbitral award is given within the period stipulated in the Bye-Laws, Rules or Regulations of the Exchange and in any case, the award is to be delivered within 15 days after the final meeting.
•
priorities redressing of investor grievances by encouraging fair trade practice. They should also make use of every opportunity to enhance and improve their level of knowledge, so that they are able to resolve various issues arising in the operations of the exchange with professional competence, fairness, impartiality, efficiency and effectiveness.
STOCK MARKET TRENDS IN INDIA •
20
submit the necessary disclosures/statement of holdings/dealings in securities as required by the Exchange as per their Rules or Articles of Association.
•
maintain confidentiality about any information obtained in the discharge of their duty unless otherwise required by law. Further, they should not use the confidential information for their personal gains.
• •
avoid any interest or activity which is in conflict with the conduct of their official duties. not engage in any act involving moral turpitude, dishonesty, fraud, deceit, or misrepresentation or any other act prejudicial to the administration of the exchange.
VIII. Corporate Governance in Listed Companies Clause 49 of the listing agreement has been amended to include the recommendations as prescribed by the committee on corporate governance set up under the chairmanship of Shri N. R. Narayana Murthy: Composition of Board: The board of directors of a company should have an optimum combination of executive and non-executive directors. However, the non-executive directors should not be less than 50% of the directors. The number of independent directors should be determined on the basis of the post held by the Chairman; in case of a non-executive chairman, at least 1/3rd of board should comprise of independent directors and if he is an executive chairman, then at least half of Board should comprise of independent directors. Non-Executive Directors’ Compensation and Disclosures: All the compensation paid to non-executive directors should be fixed by the
STOCK MARKET TRENDS IN INDIA
21
Board and should be approved by shareholders in general meeting. A limit should be placed for the maximum number of stock options that can be granted to them in any financial year and in aggregate. In its annual report, the company should publish its compensation philosophy, statement of entitled compensation in respect of non-executive directors and the details of shares held by non-executive directors. Independent Director: Independent Director should periodically review the company’s legal compliance reports as well as the steps taken by the company. In the event of any legal proceedings against an independent director in connection with the affairs of the company, the defence would not be permitted on the ground that he was unaware of his responsibility. Board Procedure: The Board should meet at least four times a year, with a maximum time gap of four months between any two meetings. A director should not be a member in more than 10 committees or act as Chairman of more than five committees across all companies in which he is a director. Furthermore, it should be mandatory for all the directors to inform the company about the positions they occupy in other companies every year and also notify changes as and when they take place. Code of Conduct: It is obligatory for the Board to lay down the code of conduct for all its members and the senior management of the company, which should be posted on the company’s website. On an annual basis, all the members of the Board and senior management personnel should affirm compliance with the code. In addition, the annual report should contain a declaration to this effect signed by the CEO and COO. Term of Office of Non-executive directors: A person would be eligible for the office of non-executive director so long as his term in the office has not exceeded nine years in three terms of three years each, running continuously.
STOCK MARKET TRENDS IN INDIA
22
Qualified and Independent Audit Committee: A qualified and independent audit committee with a minimum of three members comprising of a chairman and members shall be set up. Wherein the chairman should be an independent director and majority of members should be independent directors. It is required that all the members of audit committee should be financially literate and at least one of them should have accounting or related financial management expertise. The Chairman should be present at Annual General Meeting to answer the queries of the shareholders. The audit committee should invite executives, as it considers appropriate (and particularly the head of the finance function) to be present at the meetings, but on occasions it may also meet without the presence of any executives. Audit Committee: The audit committee should meet at least thrice a year, but once every six months; at least one meeting should be held before finalization of annual accounts. The quorum for the meeting should be either two members or one third of the total members; whichever is higher and minimum of two independent directors. The committee is empowered to (i) investigate any activity within its terms of reference (ii) seek information from any employee (iii) obtain outside legal or other professional advice (iv) secure attendance of outsiders with relevant expertise, if it considers necessary. Role of Audit Committee: The role of the audit committee should be to (a) oversees the company’s financial reporting process and the disclosure made in the financial statement and ascertains its accuracy, sufficiency and credibility (b) recommend the appointment and removal of external auditor, fixation of audit fee and also approve payment for any other services (c) review the adequacy of internal audit function, including the structure of the internal audit department, its staff, officials heading the department, reporting structure coverage and frequency of internal audit. Further, the committee should discuss with internal auditors any significant
STOCK MARKET TRENDS IN INDIA
23
findings and follow them up (d) review the findings of any internal investigations into matters of a suspected fraud or irregularity or a failure of internal control systems of a material nature and reporting the matter to the board. Also, the committee should discuss with external auditors before the audit commences about nature and scope of audit. Post-audit the committee should ascertain any area of concern regarding company’s financial and risk management policies. The Audit Committee should also compulsorily review information related to (i) financial statements and draft audit report, including quarterly/halfyearly financial information; (ii) management discussion and analysis of financial condition and results of operations; (iii) reports relating to compliance with laws and to risk management; and (iv) management letters/letters of internal control weaknesses issued by statutory/internal auditors.
IX. Listing of Further Issue of Capital Following the withdrawal of compulsory listing of companies on regional stock exchange, it has been decided by the SEBI that a company should be listed on any of the stock exchanges, which have a nationwide trading terminals. If the company is not listed on any stock exchange having nationwide trading terminals, then it should continue to obtain ‘in-principle’ approval from all the exchanges where it is listed. The listing agreement states: “The Company agrees to obtain ‘in-principle’ approval for listing from the exchanges having nationwide trading terminals where it is listed, before issuing further shares or securities. Where the company is not listed on any exchange having nationwide trading terminals, it agrees to obtain such ‘in-principle’ approval from all the exchanges in which it is listed before issuing further shares or securities.”
STOCK MARKET TRENDS IN INDIA
24
X. Amendment to SEBI (Depositories and Participants) (Second Amendment) Regulations 2003 SEBI amended the SEBI (Depositories and Participants) Regulations 1996 to include the clauses regarding the manner of handling the share registry work, redressal of investor grievances and maintenance of audit reports. All matters relating to transfer of securities, maintenance of records of holders of securities, handling of physical securities should be handled and maintained at a single point by establishing connectivity with the depositories i.e. either in-house by the issuer or by a Share Transfer Agent (STA) registered with the SEBI. Every issuer or its agent or any person who is registered as an intermediary under this act, should redress the grievances of beneficial owners within thirty days of the receipt of the complaint. Simultaneously, the depository should also be informed about the number and nature of grievances redressed by it and number of grievances pending before it. The issuers should submit the audit report on a quarterly basis, starting from September 30, 2003 to the concerned stock exchanges audited by a qualified Chartered Accountant or a practicing Company Secretary. XI. Amendment to SEBI (FII) (Second Amendment) Regulations 2003 The SEBI (Foreign Institutional Investors) Regulations has been amended by the SEBI to include the new clauses as stated herewith. The FIIs should fully disclose information concerning the terms of and parties to off-shore derivative instruments such as Participatory Notes (P-Notes), Equity Linked Notes (ELN) or any other such instruments listed or proposed to be listed. The code of conduct has also been specified which states that (a) a FII and its key personnel should observe high standards of integrity, fairness and professionalism in all their
STOCK MARKET TRENDS IN INDIA dealings render with high intermediaries, standards of regulatory and other due
25 government and
authorities in the Indian securities market. They should, at all times, service; exercise diligence independent professional judgment (b) a FII should ensure and maintain confidentiality in respect of trades done on its own behalf and/or on behalf of its sub-accounts/clients. There should be clear segregation of its own money/securities and sub-accounts’ money/securities; arms length relationship should be maintained between its business of fund management/investment and its other business (c) a FII should maintain an appropriate level of knowledge and competency and abide by the provisions of the Act, regulations made there under and the circulars and guidelines applicable and relevant to them. Every FII should also comply with award of the Ombudsman and decision of the Board under SEBI (Ombudsman) Regulations, 2003 (d) a FII should not make any untrue statement or suppress any material fact in any documents, reports or information furnished to the Board (e) they should ensure that good corporate policies and corporate governance are observed and do not engage in fraudulent and manipulative transactions in the securities listed in any stock exchange in India (f) a FII and/or any of its affiliates should not indulge in any insider trading, should not be a party to or instrumental for creation of false market in securities listed or proposed to be listed in any stock exchange in India. They should not be involved in price rigging or manipulation of prices of securities listed or proposed to be listed in any stock exchange in India. XII. SEBI (Central Database of Market Participants) Regulations 2003 The SEBI (Central Database of Market Participants) Regulations, 2003 intends to develop an inventory of Market Participants and Investors and also set up standards for client code. It places a mandatory obligation on all entities under the jurisdiction of SEBI and specified investors to
STOCK MARKET TRENDS IN INDIA
26
obtain unique identification number under MAPI database. The main features of this regulation are as cited: (a) every investor, listed company, company intending to get its securities listed, intermediary and other entities should make applications for allotment of unique identification numbers (UINs) for itself and for its related persons (b) the application made by a specified intermediary or any other entity should be in a specified form. On receipt of an application, the designated service provider should allot to the applicant a UIN. In case of any defect, the designated service provider should give the applicant an opportunity to rectify it within a period of 15 days from the date of the intimation or within the period approved by the Board. If the defect is not rectified within the allotted time period, then the designated service provider should refer the application to the SEBI board (c) if unique identification number was obtained through fraud or misrepresentation or was allotted to a person by mistake, the Board may, after giving him an opportunity of making representations, revoke the UIN allotted to him or to the related persons. Once the UIN is revoked, the person will be treated as if no UIN was allotted to him. In case a person issues any security or buys, sells or deals in any securities in contravention of these regulations, they would be liable for suspension from trading or may be debarred from dealing in the securities market, or any other action as may be deemed appropriate by the Board. XIII. Disclosure of Proprietary Trading by Brokers to Client To increase the transparency in the dealings between the broker and the client, it has been decided that every broker should disclose to his client whether he does client based business or proprietary trading as well. This should be disclosed to all his existing clients and also to his new clients at the time of entering into the ‘Know Your Client’ agreement. In case of a broker who at present does not trade on
STOCK MARKET TRENDS IN INDIA
27
proprietary account, chooses to do so at a later date, he is required to disclose this to his clients before carrying out any proprietary trading. XIV. Trading by Members/Sub-brokers Since certain members/sub-brokers deal through a large number of other stock brokers/sub-brokers on the same exchange/other exchanges for their proprietary trades as well as trades on behalf of their clients, SEBI has prohibited these transactions, except with the prior permission of the exchange. After the stock exchange considers the reason stated by the broker-sub-broker for such transactions and carry out due diligence, it should permit such deals with only one broker/sub-broker registered with it. The stock broker/sub-broker of an exchange can deal with only one broker/sub-broker of another exchange for proprietary trading after intimating the names of such stock broker/sub-broker to his parent stock exchange XV. Disclosure of Trade Details of Bulk Deals SEBI has decided to bring about greater disclosure in the nature of the bulk deals. All transactions in scrip where total quantity of shares bought/sold is more than 0.5% of the outstanding equity shares of that company are considered to be bulk deals. The brokers should disclose to the stock exchange the name of the scrip, name of the client, quantity of shares bought/sold and the traded price. Immediately after executing the trade, the brokers should intimate the exchange and the stock exchange, in turn, should disseminate the aforesaid information on the same day after the market hours to the general public. XVI. Changes in the Name of the Listed Companies All listed companies, which decide to change their names, are required to comply with certain provisions: (i) They have to maintain a time
STOCK MARKET TRENDS IN INDIA
28
period of at least one year before the last name change (ii) At least 50% of its total revenue in the preceding one year period should have been accounted for by the new activity suggested by the new name (iii) The new name along with the old name should be disclosed through web sites of the respective stock exchange/s where the company is listed and also through EDIFAR web site for a continuous period of one year from the date of last name change. XVII. Reduction in Notice Period for Fixing the Book
Closure/Record Date On receiving representations from various quarters and in view of the major structural changes/developments in the secondary markets, SEBI decided to reduce the notice period which the listed companies have to give to the stock exchanges before their book-closure/record date. In the first phase, the said notice period has been reduced to 15 calendar days from 30 days in case of dematerialized scrips and from 42 days to 21 calendar days in case of physical scrips.
Initiatives from RBI I. FIs Trading in GOI Securities With a view to facilitate participation of the financial institutions (FIs) for trading in government securities on the stock exchanges, the FIs have to follow the procedure mentioned below: 1. FIs should open demat accounts with the Depository Participant (DP) of either NSDL/CDSL, in addition to their SGL Accounts with RBI.
STOCK MARKET TRENDS IN INDIA
29
2. Value free transfer, (i.e. transfer of the GOI securities from the SGL/CSGL account to the demat account of the same party) of securities between SGL/CSGL and demat accounts should be enabled subject to operational guidelines. 3. FIs should also ensure: (a) to obtain specific approval from their Board of Directors to enable them to trade in Government securities on the stock exchanges, (b) they should put in place necessary infrastructure, risk management systems and appropriate internal control systems for trading/settlement of Government securities on stock exchanges (c) their transactions through any single broker should be subjected to the extant guidelines on dealings through brokers (d) all their trades should be settled either directly with clearing corporation/clearing house or else through clearing member custodians (e) at the time of trade, securities should be available with the FIs either in their SGL account with RBI or in demat account with depositories (f) the purchase transactions by the FIs should be subject to availability of clear funds in their settlement accounts at the time of pay-in, (g) all pay-out of funds should invariably be out of clear funds, i.e. the pay out must not be contingent upon the outcome of any clearing to be conducted on that day. 4. Any settlement failure on account of non-delivery of securities/nonavailability of clear funds should be treated as SGL bouncing and the penalties in respect of SGL bouncing should be applicable. 5. All the details of transaction in Government securities, on aggregate basis, undertaken on the stock exchanges and particulars of any “closed out” should be reported to the audit committee of the Board. In the mid-term review of the monetary and credit policy, RBI has permitted sale of Government security already contracted for purchase subject to two conditions: (a) the purchase contract is confined prior to the sale, is guaranteed by CCIL or the security is contracted for purchase from the RBI; (b) the sale transaction settles either in the same settlement cycle as the preceding purchase contract so that the
STOCK MARKET TRENDS IN INDIA
30
delivery obligation under the sale contract is met by the securities acquired under the purchase contract. II. De-recognition of Overseas Corporate Bodies as an Investor Class RBI in consultation with the Government have de-recognized Overseas Corporate Bodies (OCBs) in India as an eligible ‘class of investor’ under various routes/schemes available under extant Foreign Exchange Management Regulations. In addition, following measures have also been initiated (i) an unincorporated entity also should not be allowed to make fresh investments under the Foreign Direct Investment scheme including the automatic route. However, the unincorporated entities and OCBs may continue to hold shares and convertible debentures till they are sold/redeemed (ii) they should also not undertake purchase of Government dated securities or treasury bills or units of domestic MFs or units of Money Market Mutual Funds (MMMFs) in India or National Plan/Savings Certificates both on repatriation and no repatriation basis. However, they may continue to hold these securities till they are sold/matured (iii) a person resident outside India including OCBs should not transfer by way of sale or gift, the shares or convertible debentures held by them to another OCB (iv) OCBs should not purchase equity or preference shares or convertible debentures offered on right basis by an Indian company. A person resident in India should also not borrow in foreign currency from OCBs (v) an Indian company should not borrow in rupees on repatriation and non-repatriation basis from OCBs by way of investment in Non-Convertible Debentures(NCDs) (vi) an Indian company, a proprietorship concern or a firm in India should not accept deposits from OCBs on non-repatriation basis (vii) OCBs should not open and maintain Non-Resident (External) Rupee Account (NRE), Foreign Currency (Non-Resident) Account (Banks)[FCNR(B)] Accounts and NonResident Ordinary Rupee (NRO) Deposit Account with Authorized
STOCK MARKET TRENDS IN INDIA
31
Dealers in India. (viii) no new NRE/FCNR/NRO Accounts in the name of OCBs should be opened and no renewal of deposits should be made. As regards with investment on repatriation basis, authorized dealers (ADs) may allow repatriation as authorized. For investment on non-repatriation basis, ADs should arrange to obtain requests for disposal of funds from their OCB clients and seek the specific approval for each case from the RBI. The ban imposed on OCBs under PIS vide a circular issued earlier shall continue. However, they are allowed to hold the shares and convertible debentures purchased under PIS till such time these are sold on Stock Exchange in India. It has also been clarified that the derecognition of OCBs as a separate category of investor meant withdrawal of special facilities made available to them. However, the overseas entities owned by NRIs remain unaffected of the same. III. Bank Financing of Equities and Investments in Shares As per the RBI directive, banks were required to apply a uniform margin of 40% on all advances against shares/financing of IPO’s/issue of guarantees. A minimum cash margin of 20 per cent (within the margin of 40%) is also to be applied in respect of guarantees issued by the banks. This has been reviewed and it has been raised to a uniform margin of 50% to all fresh advances/guarantees issued. A minimum cash margin of 25% (within the margin of 50%) should be maintained in respect of guarantees issued by banks for capital market operations. The existing advances/guarantees issued may continue at the earlier margins until they come up for renewal.
END OF CHAPTER III
STOCK MARKET TRENDS IN INDIA
32
CHAPTER IV - STOCK MARKET DESIGN – FACTS AND FIGURES
A
t the end of March 2004, there were 23 operative stock exchanges with 9,368 registered brokers and 12,815 registered sub-broker trading on them (Annexure 4-1). The stock
exchanges need to be recognized under the Securities Contracts (Regulation) Act, 1956. Of the 23 recognized stock exchanges, only 3 exchanges (Mumbai, Ahmedabad, and Madhya Pradesh) are organized in the form of “Association of Persons”, while the rest are organized as limited companies. Except NSE, all exchanges are not-for-profit making organizations. Realizing the problems of a non-demutualised set up, a committee under the chairmanship of Chief Justice M. H. Kania was set
STOCK MARKET TRENDS IN INDIA
33
up (i) to review the present structures of stock exchanges (ii) to examine the legal, financial and fiscal issues involved to corporatise and demutualise the stock exchanges, and recommend the specific steps that need for demutualisation, and (iii) to advise on the consolidation and merger of the stock exchanges. The committee recommended a uniform model of demutualisation and corporatisation and advised the stock exchanges to initiate the process of getting demutualised. As on date only two exchanges viz., NSE and OTCEI are demutualised and others are in the process of getting demutualised. A. Functions of stock exchanges
S
tock exchanges provide liquidity to the listed companies. By giving quotations to the listed companies, they help trading and raising funds from the market. Savings of investors flow into
public loans and to joint-stock enterprises because of this ready marketability and unequalled facility for transfer of ownership of stocks, shares and securities provided by the recognized stock exchanges. As a result, over the hundred and twenty years during which the stock exchanges have existed in this country and through their medium, the Central and State governments have raised crores of rupees by floating public loans ; Municipal corporations, Improvement trusts Local Bodies and State Finance Corporations have obtained from the public their financial requirements, and industry , trade and commerce-the backbone of country’s economy –have secured capital of crores of rupees through issue of stocks, shares and debentures for financing their day to day requirements, organizing new ventures and completing projects of expansion , diversification and modernization. By obtaining the listing and trading facilities, public investment is increased and companies were able to raise more funds. The quoted companies with
STOCK MARKET TRENDS IN INDIA
34
wide public interest have enjoyed some benefits and asset valuation has become easier for tax and other purposes. In line with the growth in the new issues market during the eighties, the secondary market also expanded fast during this period. The number of stock exchanges has increased from 8 in 1980 to a total 24 in 1996. The membership of the stock exchanges has also increased substantially over the years. The number of listed companies has also increased and the market capitalization has also shown a substantial increase. The volume of daily turnover of trade and the number of dealings per day have gone up sharply. B. Membership
T
he trading platform of a stock exchange is accessible only to brokers. They play a significant role in the secondary market by bringing together the buyers and sellers. The brokers input
buy/sell orders either on his own account or on behalf of clients. The clients may place their orders either with them directly or through a sub-broker indirectly. Thus, as these buy and sell order matches, the trades are executed. The exchange can admit a broker as its member only on the basis of the terms specified in the Securities Contracts (Regulation) Act, 1956, the SEBI Act 1992, the rules, circulars, notifications, guidelines, and the byelaws, rules and regulations of the concerned exchange. No stock broker or sub-broker is allowed to buy, sell or deal in securities, unless he or she holds a certificate of registration from the SEBI. The stock exchanges, however, are free to stipulate stricter requirements than those stipulated by the SEBI. The minimum standards stipulated by NSE are in excess of those laid down by the SEBI. The NSE admits members based on factors, such as, corporate structure, capital adequacy, track record, education, and
STOCK MARKET TRENDS IN INDIA
35
experience (Table 4-2). This reflects a conscious decision of NSE to ensure quality broking services. The authorities have been encouraging corporatisation of the broking industry. As a result, a number of brokersproprietor firms and partnership firms have converted themselves into corporates. As at end-March 2004, there were brokers 9,368 (including multiple registrations) registered with SEBI as compared to 9,519 brokers as at end-March 2003. As of end-March 2004, 3,787 brokers, accounting for nearly 40% of total have become corporate entities. Amongst those registered with NSE around 88.97% of them were corporatised, followed by OTCEI with 77.85% corporate brokers. As at end-March 2004, there were 12,815 sub-brokers registered with SEBI, as compared with 13,291 sub-brokers as at end of previous year. There were a total of 141 additions of members during the year 2003-04, whereas 292 were membership cases of reconciliation/ cancellation/surrender. NSE and BSE together constituted 88.29% of the total sub-brokers.
STOCK MARKET TRENDS IN INDIA C. Listing of Securities
36
L
isting means formal admission of a security to the trading platform of a stock exchange. Listing of securities on the domestic stock exchanges is governed by the provisions in the
Companies Act, 1956, the Securities Contracts (Regulation) Act, 1956 (SC(R)A), the Securities Contracts (Regulation) Rules (SC(R)R), 1957, the circulars/guidelines issued by Central Government and SEBI. In addition, they are also governed by the rules, bye-laws and regulations of the concerned stock exchange and by the listing agreement entered into by the issuer and the stock exchange. Some of the key provisions are enumerated below: 1. The Companies Act, 1956 requires a company intending to issue securities to the public should seek a permission from one or more recognized stock exchanges for its listing. If the permission is not granted by all the stock exchanges before the expiry of 10 weeks from the closure of the issue, then the allotment of securities would be void. Also, a company may prefer to appeal against refusal of a stock exchange to list its securities to the Securities Appellate Tribunal (SAT). The prospectus should state the names of the stock exchanges, where the securities are proposed to be listed. 2. The bye-laws of the exchanges stipulate norms for the listing of securities. All listed companies are under obligation to comply with the conditions of listing agreement with the stock exchange where their securities are listed. If they fail to comply with them, then they are punishable with a fine up to Rs. 1,000. 3. The SC(R)R prescribe requirements with respect to the listing of securities on a recognized stock exchange and empowers SEBI to waive or relax the strict enforcement of any or all of them. 4. The listing agreement states that the issuer should agree to adhere to the agreement of listing, except for a written permission from the SEBI.
STOCK MARKET TRENDS IN INDIA
37
As a precondition for the security to remain listed, an issuer should comply with the conditions as may be prescribed by the Exchange. Further, the securities are listed on the Exchange at its discretion, as the Exchange has the right to suspend or remove from the list the said securities at any time and for any reason, which it considers appropriate. 5. A SEBI circular asserts that the basic norms of listing on the stock exchanges should be uniform across the exchanges. However, the stock exchanges can prescribe additional norms over and above the minimum, which should be part of their bye-laws. SEBI has been issuing guidelines/circulars prescribing certain norms to be included in the listing agreement and to be complied by the companies. 6. The stock exchanges levy listing fees on the companies, whose securities are listed with them. The listing fee has two componentsinitial fee and annual fee. While, initial fee is a fixed amount, the annual fee varies depending upon the size of the company. NSE charges Rs. 7,500 as initial fees. For companies with a paid-up share and/or debenture capital of less than or equal to Rs. 1 crore annual listing fees is Rs. 4,200. For companies with a paid-up share and/or debenture capital of more than Rs. 50 crore, the annual listing fees is Rs. 70,000 plus Rs. 1,400 for every additional Rs. 5 crore or part thereof. A number of requirements, under the SC(R)R, the bye-laws, the listing agreement have to be continuously complied with by the issuers to ensure continuous listing of its securities. The listing agreement also stipulates the disclosures that have to be made by the companies. In addition, the corporate governance practices enumerated in the agreement have to be followed. The Exchange is required to monitor the compliance with requirements. In case a company fails to comply with the requirements, then trading of its security would be suspended for a specified period, or withdrawal/delisting, in addition to penalty as prescribed in the SC(R)A.
STOCK MARKET TRENDS IN INDIA D. Trading Mechanism
38
N
SE was the first stock exchange in the country to provide nation-wide, anonymous, order driven, screen-based trading system, known as the National Exchange for Automated
Trading (NEAT) system. The member inputs, in the NEAT system, the details of his order such as the quantities and prices of securities at which he desires to transact. The transaction is executed as soon as it finds a matching sale or buys order from a counter party. All the orders are electronically matched on a price/time priority basis. This has resulted in a considerable reduction in time spent, cost and risk of error, as well as frauds, resulting in improved operational efficiency. It allows for faster incorporation of price sensitive information into prevailing prices, as the market participants can see the full market on real time basis. This increases informational efficiency and makes the market more transparent. Further, the system allows a large number of participants, irrespective of their geographical locations, to trade with one another simultaneously, improving the depth and liquidity of the market. A single consolidated order book for each stock displays, on a real time basis, buy and sell orders originating from all over the country. The book stores only limit orders, which are orders to buy or sell shares at a stated quantity and stated price, are executed only if the price quantity conditions match. Thus, the NEAT system provides an Open Electronic Consolidated Limit Order Book (OECLOB), which ensures full anonymity by accepting orders, big or small, from members without revealing their identity. Thus, provides equal access to all the investors. A perfect audit trail, which helps to resolve disputes by logging in the trade execution process in entirety, is also provided. The trading platform of the CM segment of NSE is accessed not only from the computer terminals, but also from the personal computers of the investors through the Internet and from the hand-held devices through
STOCK MARKET TRENDS IN INDIA
39
WAP. SEBI has allowed the use of internet as an order routing system for communicating investors’ orders to the exchanges through the registered brokers. These brokers should obtain the permission from their respective stock exchanges. In February 2000, NSE became the first exchange in the country to provide web-based access to investors to trade directly on the Exchange followed by BSE in March 2001. The orders originating from the PCs of investors are routed through the internet to the trading terminals of the designated brokers with whom they have relations and further to the exchange. After these orders are matched, the transaction is executed and the investors get the confirmation directly on their PCs. SEBI has also allowed trading through wireless medium or Wireless Application Protocol (WAP) platform. NSE is the only exchange to provide access to its order book through the hand held devices, which use WAP technology. This particularly helps those retail investors, who are mobile and want to trade from any place. E. Technology
W
technology
ith the developments in communication and network technologies, there has been a paradigm shifts in the operations of the securities market across the globe.
Technology has enabled organizations to build new sources of competitive advantage, bring about innovations in products and services, and provide new business opportunities. Stock exchanges all over the world have realized the potential of IT and have moved over to electronic trading systems, which have wider reach and provide a better mechanism for trade and post trade execution. Given the importance of in shaping the securities industry, NSE has been emphasizing on innovations and sustained investments in technology. NSE is the first exchange in the world to use satellite communication technology for trading and also has the largest VSAT-based trading
STOCK MARKET TRENDS IN INDIA
40
network in the world and largest VSAT network for any purpose in the Asia Pacific region. It uses satellite communication technology to energize participation from more than 2,800 VSATs from approximately 365 cities spread all over the country. It has been continuously undertaking capacity enhancement measures so as to effectively meet the requirements of increased users and associated trading loads. NSE’s trading system called the National Exchange for Automated Trading (NEAT), is a state of-the-art client server based application. At the server’s end all the trading information is stored in an in-memory database to achieve a minimum response time and maximum systems availability for users. It has uptime records of 99.7%. The system also ensures data integrity with past record of single error in 10 million bits. For all trades entered into the NEAT system, there is uniform response time of less than 1.5 seconds. NSE has also put in place NIBIS (NSE’s internet Based Information System) for on-line real-time dissemination of trading information through its website. As part of its business continuity plan, NSE has established a disaster back-up site at Chennai along with its entire infrastructure, including the satellite earth station. This site at Chennai is a mirror replica of the complete production environment at Mumbai. The link between the two is through a highspeed optical fiber and the transaction data is backed up on near real time basis from the main site to the disaster back-up site to keep both the sites synchronized with each other all the time. F. Trading Rules
I
nsider Trading: Insider trading is considered an offence and is hence prohibited. The SEBI (Prohibition of Insider Trading) Regulations, 1992 prohibits an insider from dealing (on his own price sensitive information’. It also prohibits
behalf or on behalf of others) in listed securities on the basis of ‘unpublished
STOCK MARKET TRENDS IN INDIA
41
communicating, counseling or procuring such information from any other person to deal in securities of any company on the basis of such information. Price sensitive information for a security is any information, which if published, is likely to affect its price. It includes information regarding the financial results of the company, intended declaration of dividends, issue of securities or buy back of securities, amalgamation, mergers, takeovers, and any major policy changes. SEBI, on the basis of any complaint or otherwise, is empowered to investigate/inspect these allegation of insider trading. If a person is found prima facie guilty of insider trading, then SEBI may prosecute persons in an appropriate court or pass such orders as it may deem fit. In order to strengthen insider trading regulations, SEBI has mandated a code of conduct for listed companies, its employees, analysts, market intermediaries and professional firms. The insider trading regulations require initial and continuous disclosure of shareholding by directors, officers and major shareholders to price (holding more than 5% shares/voting rumors, rights). reporting The of companies are also mandated to adopt a code of disclosure with regards sensitive information, market shareholding/ownership, etc.
U
nfair Trade Practices: The SEBI (Prohibition of Fraudulent and Unfair Trade Practices in relation to the Securities Market) Regulations, 1995 empowers SEBI to investigate into cases of
market manipulation, fraudulent and unfair trade practices. The regulations define frauds as acts committed by a party of the contract or by his agent, with intent to deceive another party or his agent or to induce him to enter into the contract. The regulations specifically prohibit market manipulation, misleading statements to induce sale or purchase of securities, and unfair trade practices relating to securities. Under these regulations, SEBI can investigate into violations committed by any person, including an investor, issuer or an intermediary, suo
STOCK MARKET TRENDS IN INDIA
42
moto or upon information received by it. Based on the report of the investigating officer, SEBI can initiate action for suspension or cancellation of registration of an intermediary.
T
• • •
akeovers: The restructuring of companies through takeover is governed by the SEBI (Substantial Acquisition of Shares and Takeovers) Regulations, 1997. The Regulations were formulated
so that the process of acquisitions and takeovers is carried out in a welldefined and orderly manner following the principles of fairness and transparency. As per the regulations, the mandatory public offer is triggered on: crossing the threshold limit of 15%, crossing the creeping acquisition limit of 15% or more but less than 75% of shares or voting rights of a target company, Attempts by persons having 75% or more to acquire more shares. The regulations give enough scope for existing shareholders to consolidate and also cover the scenario of indirect acquisition of control. The applications for takeovers are scrutinized by the Takeover Panel constituted by the SEBI.
B
and
uy Back: Buy back is done by the company with the purpose to improve liquidity in its shares and enhance the shareholders’ wealth. Under the SEBI (Buy Back of Securities)
Regulations, 1998, a company is permitted to buy back its shares from: (a) existing shareholders on a proportionate basis through the offer document; (b) open market through stock exchanges using book building process; (c) shareholders holding odd lot shares.
STOCK MARKET TRENDS IN INDIA
43
The company has to disclose the pre and post-buy back holdings of the promoters. To ensure completion of the buy back process speedily, the regulations have stipulated time limit for each step. For example, in the cases of purchases through stock exchanges, an offer for buy back should not remain open for more than 30 days. The verification of shares received in buy back has to be completed within 15 days of the closure of the offer. The payments for accepted securities has to be made within 7 days of the completion of verification and bought back shares have to be extinguished and physically destroyed within 7 days of the date of the payment. Further, the company making an offer for buy back will have to open an escrow account on the same lines as provided in takeover regulations.
C
ircuit Breakers: Volatility in stock prices is a cause of concern for both the policy makers and the investors. To curb excessive volatility, SEBI has prescribed a system of circuit breakers. The
circuit breakers bring about a nation-wide coordinated halt in trading on all the equity and equity derivatives markets. An index based marketwide circuit breaker system applies at three stages of the index movement either way at 10%, 15% and 20%. The breakers are triggered by movement of either S&P CNX Nifty or Sensex, whichever is breached earlier. Further, the NSE views entries of non-genuine orders with utmost seriousness as this has market-wide repercussion. It may suomoto cancel the orders in the absence of any immediate confirmation from the members that these orders are genuine or for any other reason as it may deem fit. As an additional measure of safety, individual scripwise price bands have been fixed as below: • • Daily price bands of 2% (either way) on a set of specified securities, Daily price bands of 5% (either way) on a set of specified securities,
STOCK MARKET TRENDS IN INDIA • •
44
Daily price bands of 10% (either way) on another set of specified securities, Price bands of 20% (either way) on all remaining securities (including debentures, warrants, preference shares etc. which are traded on CM segment of NSE),
•
No price bands are applicable on scrips on which derivative products are available or on scrips included in indices on which derivatives products are available.
For auction market the price bands of 20% are applicable. In order to prevent members from entering orders at non-genuine prices in these securities, the Exchange has fixed operating range of 20% for such securities.
D
emat
Trading:
A
depository
holds
securities
in
dematerialised form. It maintains ownership records of securities in a book entry form, and also effects transfer of
ownership through book entry. Though, the investors have a right to hold securities in either physical or demat form, SEBI has made it compulsory that trading in securities should be only in dematerialised form. This was initially introduced for institutional investors and was later extended to all investors. The companies, which fail to establish connectivity with both the depositories on the scheduled date as announced by SEBI, their securities are traded on the ‘trade for trade’ settlement window of the exchanges. At the end of March 2004, the number of companies connected to NSDL and CDSL were 5,212 and 4,720, respectively. The number of dematerialised securities have increased from 76.9 billion at the end of March 2003 to 97.7 billion at the end of March 2004. During the same period the value of dematerialised securities has increased from Rs. 5,875 billion to Rs. 10,701 billion. Since the introduction of the depository system,
STOCK MARKET TRENDS IN INDIA
45
dematerialization has progressed at a fast pace and has gained acceptance amongst the market participants. All actively traded scrips are held, traded and settled in demat form. G. Charges for Services
A
s per SEBI Regulations, every stockbroker, on the basis of his total turnover, is required to pay annual turnover charges, which are to be collected by the stock exchanges. In order to
share the benefits of efficiency, NSE has been reducing the transaction charges over a period of time. At present a trading member is required to pay the exchange transaction charges @0.004% (Rs. 4 per Rs.1 lakh) of the turnover. The maximum brokerage chargeable by a broker is fixed at 2.5% of the contract price, exclusive of statutory levies like, SEBI turnover fee, service tax, and stamp duty. This is inclusive of the brokerage charged by the sub-broker, which should not exceed 1.5% of contract price. However, the brokerage charged varies from clients to clients. There are instances wherein brokerage as low as 0.15% has been charged. Stamp duties are payable as per the rates prescribed by the relevant states. In Maharashtra, it is charged @ Re. 1 for every Rs. 10,000 or part thereof (i.e. 0.01%) of the value of security at the time of its purchase/sale as the case may be. However, if the securities are not delivered, it is levied @ 20 paise for every Rs. 10,000 or part there of (0.002%). The depositories provide depository services to investors through depository participants (DPs). They do not charge the investors directly, but charge their DPs who are free to have their own free structure for their clients. The depositories, however, have been reducing their charges from DPs over a period of time. The charges levied on DPs by NSDL and CDSL are presented in Table 4-4b.
STOCK MARKET TRENDS IN INDIA
46
H. Institutional Trades
T
rades by Mutual Funds and Foreign Institutional Investors are termed as Institutional trades, Transactions by MFs in the secondary market are governed by SEBI (Mutual Funds)
Regulations, 1996. A MF under all its schemes is not allowed to own more than 10% of any company’s paid-up capital. They are allowed to do only ‘delivery-based’ transactions. A MF cannot invest more than 10% of the NAV of a particular scheme in the equity shares or equity related instruments of a single company. The investments by FIIs are governed by the rules and regulations of the RBI and the SEBI. As per the RBI guidelines, each FII can invest up to 10% of the paid-up capital of a company; however, the total FII investment should not exceed 24%. This can, however, be increased up to the sectoral cap/statutory ceiling, as applicable, provided the Indian company’s board of directors and also its general body approve it. As per the SEBI guidelines, all FII transactions are to be routed through a registered member of a recognized stock exchange in India. FIIs have to necessarily give and take delivery of securities sold and bought.
STOCK MARKET TRENDS IN INDIA
47
I. Index Services
A
stock index consists of a set of stocks that are representative of
either the whole market, or a specified sector. It helps to measure the change in overall behaviour of the markets or
sector over a period of time. NSE and CRISIL, in technical partnership with Standard & Poor’s, have jointly promoted the India Index Services & Products Limited (IISL). The IISL provides stock index services by developing and maintaining an array of indices for stock prices. IISL is the only specialized organization of this type in the country. IISL maintains a number of equity indices comprising broad-based benchmark indices, sectoral indices and customized indices. The most popular index is the S&P CNX Nifty, followed by the CNX Nifty Junior, S&P CNX Defty, S&P CNX 500, CNX Midcap 200, S&P CNX Industry indices (for 73 industries) and CNX IT Index. These indices are monitored and updated dynamically and are reviewed regularly. These are maintained professionally to ensure that it continues to be a consistent benchmark of the equity markets, which involves inclusion and exclusion of stocks in the index, day-to-day tracking and giving effect to corporate actions on individual stocks. S&P CNX Nifty is a well diversified 50 stock index accounting for 24 sectors of the economy. It accounted for 56.97% of total market capitalization of CM segment of NSE as at end-March 2004. The total traded value of all Nifty stocks is approximately 77% of the traded value of all the stocks on the NSE. CNX Nifty Junior accounts for 11.6% of the market capitalization in NSE. After carrying out a number of iterations, it was felt that Indian stock market had comfortable liquidity at around 50 stocks. Beyond 50, the liquidity levels became increasingly lower. Hence the index set size of 50 stocks was chosen. The stocks included in the Nifty index are selected on the basis of their impact cost, liquidity and market capitalization. The
STOCK MARKET TRENDS IN INDIA
48
composition of Nifty is reviewed at every quarter. The index is calculated afresh every time a trade takes place in any of the index stock. It is calculated on-line and disseminated over trading terminals across the country. Annexure 4-2 to 4-5 present the market capitalization, weightage, beta and monthly returns of the S&P CNX Nifty stocks for the period April 2003-March 2004. S&P CNX Nifty was introduced considering the fact that it would not only be used for reflecting the stock market behavior accurately, but also for modern applications such as index funds and index derivatives. It has become the most popular and widely used stock market indicator in the country. Index futures and options have been launched based on S&P CNX Nifty index and on CNX IT Index. Futures contracts based on S&P CNX Nifty have also been launched at the derivative exchange at Singapore. It is the only Indian index-based derivative product traded on a foreign exchange. J. Market Outcome
T
urnover – Growth and Distribution: Trading volumes in the equity segments of the stock exchanges have witnessed phenomenal growth over the last few years. While it has
increased from Rs. 10,233,820 million in 1998-99 to Rs. 28,809,900 million in 2000-01, it witnessed a slump during 2001-02 registering volumes of only Rs. 8,958,180 million. The traits of recovery in the market are visibly seen for the last two years. The volumes have risen to Rs. 9,689,093 million in 2002-03 and further to Rs. 16,204,977 million in 2003-04. In percentage terms there has been a growth of 67.29% in 2003-04 over the previous year’s volume (Table 4-5). The monthly trading value of the CM segment on NSE increased from Rs. 489,713 million in April 2003 to Rs. 1,048,765 million in March 2004 (Table 4-6). The daily turnover on NSE
STOCK MARKET TRENDS IN INDIA
49
averaged around Rs. 43,289 million in this year. Most of the exchanges saw large scale declines in their trading volumes in the year 2003-04 with nine exchanges viz., Calcutta, Uttar Pradesh, Ahmedabad, Delhi, Pune, ICSE, Hyderabad, Vadodara and Magadh observing the highest decline. Five exchanges viz., NSE, BSE, Bangalore, Madras and OTCEI were the only ones showing growth trends in this period. NSE consolidated its position further as the market leader by contributing about 67.8% of the total turnover. Since its inception in 1994, NSE has emerged as the favored exchange among trading members. The consistent increase in popularity of NSE is clearly evident from Annexure 4-6, which presents business growth of CM segment of NSE. NSE now reports higher turnover from its trading terminals in most of the cities than their corresponding regional exchanges. The comparative picture of turnover of regional stock exchanges and turnover of NSE terminals at different cities is presented in Table 4-7. Not only in the national arena, but also in the international markets, NSE has been successful in creating a niche for itself. According to reports of FIBV, in the calendar year 2003, in terms of trading intensity NSE ranked 3rd next only to NASDAQ and NYSE.
ATTN: TABLE ON NEXT PAGE
STOCK MARKET TRENDS IN INDIA
50
STOCK MARKET TRENDS IN INDIA
51
The sectoral distribution of turnover has undergone significant change over last few years. Table 4-8 presents the share of top ‘50’ companies at NSE, classified according to different sectors, in turnover and market capitalization. The share of manufacturing companies in trading volume of top ‘50’ companies, which was nearly more than 23% in 1998-99, witnessed a sharp decline to 2.03% 2002 -03. Further, in 2003 -04, their share has risen sharply to 37.66%. The share of information technology (IT) companies in trading volume has fallen from 74.71% in 2002 - 03 to only 31.04% in 2003 - 04.
ATTN: TABLE ON NEXT PAGE
STOCK MARKET TRENDS IN INDIA
52
The share of top ‘5’ securities in turnover has been on a declining trend since the past few years from 52.2% in 2000-01 to 31.04% in 2003-04 (Table 4-9). Trading in top ‘100’ securities also has witnessed a decline from 97.5% to 91.03% over the same period. Member-wise distribution of turnover indicates increasing diffusion of trades among a larger number of trading members over the years. During 2003-04, top ‘5’ members accounted for only 11.6% of turnover, while top ‘100’ members accounted for 61.4% of total turnover. Turnover in India seems to be more concentrated in comparison to that in other comparable markets (international) as may be seen from Table 4 -10. Ten most active index securities accounted for 44.2% of turnover in India and top ten index securities in terms of equity base accounted for 36.5% of market capitalization at the end of December 2003.
STOCK MARKET TRENDS IN INDIA
53
At the end of March 2004, NSE has permitted 70 members on its CM segment the web based access to its trading system. These members in turn have registered 413,454 clients for web based access. About 235 lakh
STOCK MARKET TRENDS IN INDIA
54
trades for Rs. 379,451 million constituting 3.45% of the total trading volume were routed and executed through the internet. NEATiXS a product of the NSE.IT helps brokerage firms to conduct internet trading, which can be accessed easily using standard browsers. It provides real time on-line market information including stock quotes and order screens, allowing investors to place orders from their personal computers. The success of internet trading in India, however, will depend on expansion of internet bandwidth, which is necessary for faster execution of trades. K. Market Capitalization
T
he market capitalization for securities available for trading on the equity segment of NSE and BSE witnessed enormous growth over the previous years (Table 4-6). The market capitalization of
NSE and BSE as at end March 2004 amounted to Rs. 11,209,760 million and Rs. 12,012,068 million respectively. A sharp change in the shares of different sectors in market capitalization is observed over the years (Table 4-8). Sectors like manufacturing, which used to dominate in terms of market capitalization with more than 35% in the year 1998-99, have shown declines in 2001-02 and 2002-03. However, they witnessed a turnaround in 2003-04 having registered 31.13% share in market capitalization of the top 50 companies. L. Prices
T
he year 2003-04 proved to be good for all the major indices in the world. The S&P CNX Nifty index, which remained subdued for the early part of 2003, rose sharply from August 2003 onwards
to reach a peak of 2014.65 in January 2004. The index rose by 81.14%
STOCK MARKET TRENDS IN INDIA
55
in 2003-04 as compared to its previous years close (Table 4-11). Similarly BSE also gave returns to the tune of 83.38% in the said period.
Of late, the market participants, analysts and investors have related the developments in domestic equity markets with the NASDAQ. NASDAQ index has come to symbolize the new economy or technology stocks. Chart 4-1 plots the daily movement in S&P CNX Nifty, Sensex and NASDAQ index. During most part of the year, the stock prices in India are synchronized with that in NASDAQ.
STOCK MARKET TRENDS IN INDIA
56
J. Volatility
T
he stock markets witnessed maximum volatility in January 2004 due to the fear of possible ban on the use of Participatory Notes (P-Notes), wherein it was 2.18% and 2.05% on Nifty and Sensex,
respectively (Table 4-12). However, in May 2003 lowest volatility was witnessed at 0.74% and 0.72% for S&P CNX Nifty and Sensex respectively. Chart 4-2 presents the volatility of S&P CNX Nifty, Sensex and NASDAQ. The volatility across different sectoral indices varied widely (Table 4 -13). For the month of April 2003, while the Nifty volatility was 1.38%, the volatility of CNX IT Index was 5.20%.
STOCK MARKET TRENDS IN INDIA
57
K. Returns in Indian Market
T
he performance of S&P CNX Nifty and various other indices over different periods of last one month to 12 months is presented in Table 4-14. It reveals that the indices have performed with
varying degrees over varying periods. A common phenomenon observed was that some of the indices provided substantial gains in the longer period of 6 months and one year, but did not give encouraging returns for the shorter periods of 1 month, 3 months. The investments made in
STOCK MARKET TRENDS IN INDIA
58
S&P CNX Nifty securities in February 2004 did not yield having positive returns, however the investments in the same a year back (March 2003) gave out positive returns of 81.14%. CNX Midcap 200 and CNX IT index proved to follow the same trend as of Nifty. The comparative performance of five major sectoral indices, viz. S&P CNX Petrochemicals Index, S&P CNX Finance Index, CNX FMCG Index, S&P CNX Pharma Index, and CNX IT Index, with that of S&P CNX Nifty Index for the year 2003-04 is presented in Chart 4-3. It is observed that during the entire period, CNX Finance Index, S&P CNX Petrochemicals Index and the S&P CNX Pharma Index out-performed the Nifty. The CNX IT Index, was the worst performer during the whole year. CNX FMCG Index though mirrored the movement of Nifty during the first half of the year. However, it under performed the benchmark index ‘Nifty’ during the later half. The monthly closing prices of these sectoral indices are presented in Table 4 -13.
STOCK MARKET TRENDS IN INDIA
59
L. Exchange Traded Funds
T
million.
he first ETF in India, the “Nifty BeES (Nifty Benchmark Exchange Traded Scheme) is based on S&P CNX Nifty. It was launched in December 2001 by Benchmark Mutual Fund. It is bought and
sold like any other stock on NSE and has all characteristics of an index fund. As on March end 2003, there were five ETFs launched on Nifty, Junior Nifty, CNX Bank Index namely, the Nifty BeES, Junior Nifty BeES, Bank BeES, Liquid BeES and SUNDER (S&P CNX Nifty UTI Notional Depository Receipts Scheme). Prudential ICICI launched an ETF based on BSE Sensex, namely SPICE (Sensex Prudential ICICI Exchange Traded Fund). During the month of March 2004, 637 trades involving 0.13 million Nifty BeES were transacted. The trading value was Rs. 22.42
M. Liquidity
M
any listed securities on stock exchanges are not traded actively. The percentage of companies traded on BSE was quite low at 35.93% as compared with 97.71% on NSE in
March 2004 (Table 4-15). Only 75.10% of companies traded on BSE
STOCK MARKET TRENDS IN INDIA
60
were traded for more than 100 days during 2003-04, while that on NSE, it has been 92.16% (Table 4-16). Trading took place for less than 100 days in case of 24.9% of companies traded at BSE during the year, and for less than 10 days in case of 5.6% of companies traded.
N. Institutional Transactions
STOCK MARKET TRENDS IN INDIA
61
T
hough the volume of trades done by FIIs is not very high as compared to other market participants, they are the driving force in determination of market sentiments and price trends.
This is so because, they do only delivery-based trades and they are perceived to be infallible in their assessment of the market. During 2003-04, the investments made by FIIs were a total turnaround compared to its performances in the earlier years. The strong risk adjusted returns of the Indian market have led FIIs to make more allocations to India. The FIIs registered a net investment of Rs. 457,645 million. The FIIs net investment was highest during the month of October 2003, when they made net purchases for a peak of Rs. 67,228 million (Table 4-17). The cumulative net FIIs investment touched US$ 25.75 billion by end- March 2004. As on end March 2004, the total number of FIIs registered with SEBI amounted to 540 against 502 in March 2003. During 2003-04, the MFs have invested more funds in the debt instruments than equity instruments (Table 4-18). In the equity market, MFs were net buyers to the tune of Rs. 13,157 million during 2003-04. The months of April 2003, June 2003, September 2003, October 2003 and February 2004 witnessed the MFs in a selling spree in the equity, whereas in the debt instruments only February 2004 witnessed the MFs in selling mode.
ATTN: TABLE ON NEXT PAGE
STOCK MARKET TRENDS IN INDIA
62
STOCK MARKET TRENDS IN INDIA O. ADR/GDR Prices
63
A
comparison of the price of ADR/GDR of a company with the
domestic price of its share gives an idea about the extent to which domestic price of the security is at premium/discount to
the international price. The extent of divergence between the prices of ADRs/GDRs and the domestic prices of the companies constituting the Instanex Skindia index is presented in Table 4-19. RBI permitted twoway fungibility for ADRs/GDRs, which meant that the investors (foreign institutional or domestic) in any company that has issued ADRs/GDRs could freely convert the ADRs/GDRs into underlying domestic shares. They could also reconvert the domestic shares into ADRs/GDRs, depending on the direction of price change in the stock
P. Takeovers
STOCK MARKET TRENDS IN INDIA
64
I
n 2003-04, there were 65 takeovers under open category involving Rs. 15,948 million as against Rs. 63,891 million during the preceding year (Table 4-20). However, there were 171 takeovers under
exempted category involving Rs. 14,357 million as against Rs. 24,284 million in the previous year.
Q. Performance of Brokers
A
s mentioned earlier, there were 9,368 trading members at the end of March 2004, however, the details of their performance are not readily available. A brief detail with respect to 799
members of NSE is presented in Table 4-21. It is observed that about 57% of the members had deployed a capital of less than Rs. 20 million at the end of March 2003, while 5% have deployed more than Rs. 100 million. Similarly about 52% of members had a turnover of less than Rs. 10,000 million during 2003-04, while about 6% had turnover of more than Rs. 10,000 crore.
STOCK MARKET TRENDS IN INDIA
65
END OF CHAPTER IV
CHAPTER V – TECHNICAL ANAYSIS IN THE STOCK MARKET
STOCK MARKET TRENDS IN INDIA
66
T
echnical analysis is simply the study of prices as reflected on price charts. Technical analysis assumes that current prices should represent all known information about the markets.
Prices not only reflect intrinsic facts, they also represent human emotion and the pervasive mass psychology and mood of the moment. Prices are, in the end, a function of supply and demand. However, on a moment to moment basis, human emotions…fear, greed, panic, hysteria, elation, etc. also dramatically effect prices. Markets may move based upon people’s expectations, not necessarily facts. A market "technician" attempts to disregard the emotional component of trading by making his decisions based upon chart formations, assuming that prices reflect both facts and emotion. A. STOCK CHARTS Stock charts gained popularity in the late 19th Century from the writings of Charles H. Dow in the Wall Street Journal. His comments, later known as "Dow Theory", alleged that markets move in all kinds of measurable trends and that these trends could be deciphered and predicted in the price movement seen on all charts. FUNDAMENTAL ANALYSIS seeks to determine future stock price by understanding and measuring the objective "value" of an equity. The study of stock charts, known as TECHNICAL ANALYSIS, believes that the past action of the market itself will determine the future course of prices. A stock chart is a simple two-axis (x-y) plotted graph of price and time. Each individual equity, market and index listed on a public exchange has a chart that illustrates this movement of price over time. Individual
STOCK MARKET TRENDS IN INDIA
67
data plots for charts can be made using the CLOSING price for each day. The plots are connected together in a single line, creating the graph. Also, a combination of the OPENING, CLOSING, HIGH and/or LOW prices for that market session can be used for the data plots. This second type of data is called a PRICE BAR. Individual price bars are then overlaid onto the graph, creating a dense visual display of stock movement. Stock charts can be created in many different time frames. Mutual fund holders use monthly charts in which each individual data plot consists of a single month of activity. Day traders use 1 minute and 5 minute stock charts to make quick buy and sell decisions. The most common type of stock chart is the daily plot, showing a single complete market session for each unit. Stock charts can be drawn in two different ways. An ARITHMETIC chart has equal vertical distances between each unit of price. A LOGARITHMIC chart is a percentage growth chart. It has equal vertical distances between the same percentages of price growth. For example, a price movement from 10 to 20 is a 100% move. A move from 20 to 40 is also a 100% move. For this reason, the vertical distance from 10 to 20 and the vertical distance from 20 to 40 will be identical on a logarithmic chart. Stock chart analysis can be applied equally to individual stocks and major indices. Analysts use their technical research on index charts to decide whether the current market is a BULL MARKET or a BEAR MARKET. On individual charts, investors and traders can learn the same thing about their favorite companies.
STOCK MARKET TRENDS IN INDIA B. TRENDS
68
Use the stock chart to identify the current trend. A trend reflects the average rate of change in a stock's price over time. Trends exist in all time frames and all markets. Day traders can establish the trend of their stocks to within minutes. Long term investors watch trends that persist for many years. Trends can be classified in three ways: UP, DOWN or RANGEBOUND. In an uptrend, a stock rallies often with intermediate periods of consolidation or movement against the trend. In doing so, it draws a series of higher highs and higher lows on the stock chart. In an uptrend, there will be a POSITIVE rate of price change over time. In a downtrend, a stock declines often with intermediate periods of consolidation or movement against the trend. In doing so, it draws a series of lower highs and lower lows on the stock chart. In a downtrend, there will be a NEGATIVE rate of price change over time.
STOCK MARKET TRENDS IN INDIA
69
Range bound price swings back and forth for long periods between easily seen upper and lower limits. There is no apparent direction to the price movement on the stock chart and there will be LITTLE or NO rate of price change. Trends tend to persist over time. A stock in an uptrend will continue to rise until some change in value or conditions occurs. Declining stocks will continue to fall until some change in value or conditions occurs. Chart readers try to locate TOPS and BOTTOMS, which are those points where a rally or a decline ends. Taking a position near a top or a bottom can be very profitable. Trends can be measured using TRENDLINES. Very often a straight line can be drawn UNDER three or more pullbacks from rallies or OVER pullbacks from declines. When price bars then return to that trend line, they tend to find SUPPORT or RESISTANCE and bounce off the line in the opposite direction. A famous quote about trends advises that "The trend is your friend". For traders and investors, this wisdom teaches that you will have more success taking stock positions in the direction of the prevailing trend than against it. C. Volume
STOCK MARKET TRENDS IN INDIA
70
Volume measures the participation of the crowd. Stock charts display volume through individual HISTOGRAMS below the price pane. Often these will show green bars for up days and red bars for down days. Investors and traders can measure buying and selling interest by watching how many up or down days in a row occur and how their volume compares with days in which price moves in the opposite direction. Stocks that are bought with greater interest than sold are said to be under ACCUMULATION. Stocks that are sold with great interest than bought are said to be under DISTRIBUTION. Accumulation and distribution often LEAD price movement. In other words, stocks under accumulation often will rise some time after the buying begins. Alternatively, stocks under distribution will often fall some time after selling begins. It takes volume for a stock to rise but it can fall of its own weight. Rallies require the enthusiastic participation of the crowd. When a rally runs out of new participants, a stock can easily fall. Investors and traders use indicators such as ON BALANCE VOLUME to see whether participation is lagging (behind) or leading (ahead) the price action. Stocks trade daily with an average volume that determines their LIQUIDITY. Liquid stocks are very easy for traders to buy and sell. Illiquid stocks require very high SPREADS (transaction costs) to buy or sell and often cannot be eliminated quickly from a portfolio. Stock chart analysis does not work well on illiquid stocks.
STOCK MARKET TRENDS IN INDIA
71
Breakouts accompanied by volume much higher than the average for that stock are healthy for the continuation of the price movement in that direction. But after long rallies or declines, stocks often have a day of very high volume known as a CLIMAX. During these days, the last of the buyers or sellers take positions. The stock then reverses as there are no longer enough participants to cause price to move in that direction. D. Patterns and Indicators
How can you organize the endless stream of stock chart data into a logical format that doesn't require rocket science to interpret? Charts allow investors and traders to look at past and present price action in order to make reasonable predictions and wise choices. It is a highly visual medium. This one fact separates it from the colder world of valuebased analysis. The stock chart activates both left-brain and right-brain functions of logic and creativity. So it's no surprise that over the last century two forms of analysis have developed that focus along these lines of critical examination.
STOCK MARKET TRENDS IN INDIA
72
The oldest form of interpreting charts is PATTERN ANALYSIS. This method gained popularity through both the writings of Charles Dow and Technical Analysis of Stock Trends, a classic book written on the subject just after World War II. The newer form of interpretation is INDICATOR ANALYSIS, a math-oriented examination in which the basic elements of price and volume are run through a series of calculations in order to predict where price will go next. Pattern analysis gains its power from the tendency of charts to repeat the same bar formations over and over again. These patterns have been categorized over the years as having a bullish or bearish bias. Some well-known ones include HEAD and SHOULDERS, TRIANGLES, RECTANGLES, DOUBLE TOPS, DOUBLE BOTTOMS and FLAGS. Also, chart landscape features such as GAPS and TRENDLINES are said to have great significance on the future course of price action. Indicator analysis uses math calculations to measure the relationship of current price to past price action. Almost all indicators can be categorized as TREND-FOLLOWING or OSCILLATORS. Popular trendfollowing indicators include MOVING AVERAGES, ON BALANCE VOLUME and MACD. Common oscillators include STOCHASTICS, RSI and RATE OF CHANGE. Trend-following indicators react much more slowly than oscillators. They look deeply into the rear view mirror to locate the future. Oscillators react very quickly to short-term changes in price, flipping back and forth between OVERBOUGHT and OVERSOLD levels. Both patterns and indicators measure market psychology. The core of investors and traders that make up the market each day tend to act with a herd mentality as price rises and falls. This "crowd" tends to develop known characteristics that repeat themselves over and over
STOCK MARKET TRENDS IN INDIA
73
again. Chart interpretation using these two important analysis tools uncovers growing stress within the crowd that should eventually translate into price change. E. Moving Averages
The most popular technical indicator for studying stock charts is the MOVING AVERAGE. This versatile tool has many important uses for investors and traders. Take the sum of any number of previous CLOSE prices and then divide it by that same number. This creates an average price for that stock in that period of time. A moving average can be
STOCK MARKET TRENDS IN INDIA
74
displayed by re-computing this result daily and plotting it in the same graphic pane as the price bars. Moving averages LAG price. In other words, if price starts to move sharply upward or downward, it will take some time for the moving average to "catch up". Plotting moving averages in stock charts reveals how well current price is behaving as compared to the past. The power of the moving average line comes from its direct interaction with the price bars. Current price will always be above or below any moving average computation. When it is above, conditions are "bullish". When below, conditions are "bearish". Additionally, moving averages will slope upward or downward over time. This adds another visual dimension to a stock analysis. Moving averages define STOCK TRENDS. They can be computed for any period of time. Investors and traders find them most helpful when they provide input about the SHORT-TERM, INTERMEDIATE and LONG-TERM trends. For this reason, using multiple moving averages that reflect these characteristics assist important decision making. Common moving average settings for daily stock charts are: 20 days for short-term, 50 days for intermediate and 200 days for long-term. One of the most common buy or sell signals in all chart analysis is the MOVING AVERAGE CROSSOVER. These occur when two moving averages representing different trends criss-cross. For example, when a short-term average crosses BELOW a long-term one, a SELL signal is generated. Conversely, when a short-term crosses ABOVE the long-term, a BUY signal is generated. Moving averages can be "speeded up" through the application of further math calculations. Common averages are known as SIMPLE or SMA. These tend to be very slow. By giving more weight to the current
STOCK MARKET TRENDS IN INDIA
75
changes in price rather than those many bars ago, a faster EXPONENTIAL or EMA moving average can be created. Many technicians favor the EMA over the SMA. Fortunately all common stock chart programs, online and offline do the difficult moving average calculations for you and plot price perfectly. F. Support and Resistance
The concept of SUPPORT AND RESISTANCE is essential to understanding and interpreting stock charts. Just as a ball bounces when it hits the floor or drops after being thrown to the ceiling, support and resistance define natural boundaries for rising and falling prices. Buyers and sellers are constantly in battle mode. Support defines that level where buyers are strong enough to keep price from falling further. Resistance defines that level where sellers are too strong to allow price to rise further. Support and resistance play different roles in uptrends and downtrends. In an uptrend, support is where a pullback from a rally should end. In a downtrend, resistance is where a pullback from a decline should end.
STOCK MARKET TRENDS IN INDIA
76
Support and resistance are created because price has memory. Those prices where significant buyers or sellers entered the market in the past will tend to generate a similar mix of participants when price again returns to that level. When price pushes above resistance, it becomes a new support level. When price falls below support, that level becomes resistance. When a level of support or resistance is penetrated, price tends to thrust forward sharply as the crowd notices the BREAKOUT and jumps in to buy or sell. When a level is penetrated but does not attract a crowd of buyers or sellers, it often falls back below the old support or resistance. This failure is known as a FALSE BREAKOUT. Support and resistance come in all varieties and strengths. They most often manifest as horizontal price levels. But trend lines at various angles represent support and resistance as well. The length of time that a support or resistance level exists determines the strength or weakness of that level. The strength or weakness determines how much buying or selling interest will be required to break the level. Also, the greater volume traded at any level, the stronger that level will be. Support and resistance exist in all time frames and all markets. Levels in longer time frames are stronger than those in shorter time frames. The ideas of Charles Dow, the first editor of the Wall Street Journal, form the basis of technical analysis today. Dow created the Industrial Average, of top blue chip stocks, and a second average of top railroad stocks (now the Transport Average). He believed that the behavior of the averages reflected the hopes and fears of the entire market. The behavior patterns that he observed apply to markets throughout the world.
STOCK MARKET TRENDS IN INDIA G. Dow Theory I. Three Movements Markets fluctuate in more than one time frame at the same time:
77
Nothing is more certain than that the market has three well defined movements which fit into each other.
•
The first is the daily variation due to local causes and the balance of buying and selling at that particular time (Ripple). The secondary movement covers a period ranging from days to weeks, averaging probably between six to eight weeks (Wave). The third move is the great swing covering anything from months to years, averaging between 6 to 48 months. (Tide).
•
•
•
Bull markets are broad upward movements of the market that may last several years, interrupted by secondary reactions. Bear markets are long declines interrupted by secondary rallies. These movements are referred to as the primary trend.
•
Secondary movements normally retrace from one third to two thirds of the primary trend since the previous secondary movement.
•
Daily fluctuations are important for short-term trading, but are unimportant in analysis of broad market movements.
STOCK MARKET TRENDS IN INDIA H. Dow Theory I. Primary Movements have Three Phases Look out for these general conditions in the market. Bull markets
•
78
Bull markets commence with reviving confidence as business conditions improve. Prices rise as the market responds to improved earnings Rampant speculation dominates the market and price advances are based on hopes and expectations rather than actual results.
• •
Bear markets
•
Bear markets
start with abandonment of
the hopes
and
expectations that sustained inflated prices.
• •
Prices decline in response to disappointing earnings. Distress selling follows as speculators attempt to close out their positions and securities are sold without regard to their true value.
Ranging Markets
•
A secondary reaction may take the form of a ‘line’ which may endure for several weeks. Price fluctuates within a narrow range of about five per cent.
•
STOCK MARKET TRENDS IN INDIA
79
Breakouts from a range can occur in either direction.
•
Advances above the upper limit of the line signal accumulation and higher prices; Declines below the lower limit indicate distribution and lower prices; Volume is used to confirm price breakouts.
•
•
I. Dow Theory I. Trends Bull Trend - A bull trend is identified by a series of rallies where each rally exceeds the highest point of the previous rally. The decline, between rallies, ends above the lowest point of the previous decline
STOCK MARKET TRENDS IN INDIA Successive higher highs and higher lows.
80
The start of an up trend is signaled when price makes a higher low (trough), followed by a rally above the previous high (peak): Start = higher Low + break above previous High. The end is signaled by a lower high (peak), followed by a decline below the previous low (trough): End = lower High + break below previous Low.
STOCK MARKET TRENDS IN INDIA
81
What if the series of higher Highs and higher Lows is first broken by a lower Low? There are two possible interpretations - see Large Corrections. Bear Trends - Each successive rally fails to penetrate the high point of the previous rally. Each decline terminates at a lower point than the preceding decline. Successive lower highs and lower lows.
STOCK MARKET TRENDS IN INDIA
82
A bear trend starts at the end of a bull trend: when a rally ends with a lower peak and then retreats below the previous low. The end of a bear trend is identical to the start of a bull trend. What if the series of lower Highs and lower Lows is first broken by a higher High? This is a gray area - see Large Corrections.
J. Dow Theory I. Large Corrections A large correction occurs when price falls below the previous low (during a bull trend where price rises above the previous high (in a bear trend).
STOCK MARKET TRENDS IN INDIA
83
Some purists argue that a trend ends if the sequence of higher highs and higher lows is broken. Others argue that a bear trend has not started until there is a lower High and Low nor has a bull trend started until there is a higher Low and High. For practical purposes: Only accept large corrections as trend changes in the primary trend:
• • •
A bull trend starts when price rallies above the previous high A bull trend ends when price declines below the previous low, A bear trend starts at the end of a bull trend (and vice versa).
K. An Introduction to Japanese Candlestick Charting
STOCK MARKET TRENDS IN INDIA
84
Standard bar charts are commonly used to convey price activity into an easily readable chart. Usually four elements make up a bar chart, the Open, High, Low, and Close for the trading session/time period. A price bar can represent any time frame the user wishes, from 1 minute to 1 month. The total vertical length/height of the bar represents the entire trading range for the period. The top of the bar represents the highest price of the period, and the bottom of the bar represents the lowest price of the period. The Open is represented by a small dash to the left of the bar, and the Close for the session is a small dash to the right of the bar. Below is a standard bar chart example.
Candlestick Charts Explained You may be asking yourself, "If I can already use bar charts to view prices, then why do I need another type of chart?" The answer to this question may not seem obvious, but after going through the following candlestick chart explanations and examples, you will surely see value in the different perspective candlesticks bring to the table. In my opinion, they are much more visually appealing, and convey the price information in a quicker, easier manner.
STOCK MARKET TRENDS IN INDIA History of Candlestick Charts
85
Candlestick charts are on record as being the oldest type of charts used for price prediction. They date back to the 1700's, when they were used for predicting rice prices. In fact, during this era in Japan, Munehisa Homma become a legendary rice trader and gained a huge fortune using candlestick analysis. He is said to have executed over 100 consecutive winning trades! The candlesticks themselves and the formations they shape were give colorful names by the Japanese traders. Due in part to the military environment of the Japanese feudal system during this era, candlestick formations developed names such as "counter attack lines" and the "advancing three soldiers". Just as skill, strategy, and psychology are important in battle, so too are they important elements when in the midst of trading battle. Candlestick charts are much more visually appealing than a standard two-dimensional bar chart. As in a standard bar chart, there are four elements necessary to construct a candlestick chart, the OPEN, HIGH, LOW and CLOSING price for a given time period. Below are examples of candlesticks and a definition for each candlestick component:
STOCK MARKET TRENDS IN INDIA
86
•
The body of the candlestick is called the real body,
and represents the range between the open and closing prices.
•
A black or filled-in body represents that the close
during that time period was lower than the open, (normally considered bearish) and when the body is open or white, that means the close was higher than the open (normally bullish).
STOCK MARKET TRENDS IN INDIA
•
87
The thin vertical line above and/or below the real
body is called the upper/lower shadow, representing the high/low price extremes for the period.
Bar Compared to Candlestick Charts Below is an example of the same price data conveyed in a standard bar chart and a candlestick chart? Notice how the candlestick chart appears 3-dimensional, as price data almost jumps out at you.
( 3a )
(3b) The long, dark, filled-in real bodies represent a weak (bearish) close ( 3a ), while a long open, light-colored real body represents a strong (bullish) close ( 3b ). It is important to note that Japanese candlestick analysts
STOCK MARKET TRENDS IN INDIA
88
traditionally view the open and closing prices as the most critical of the day. At a glance, notice how much easier it is with candlesticks to determine if the closing price was higher or lower than the opening price. Common Candlestick Terminology The following is a list of some individual candlestick terms. It is important to realize that many formations occur within the context of prior candlesticks. What follows is merely a definition of terms, not formations.
•
The Black Candlestick -- when the close is lower than
the open.
•
The White Candlestick -- when the close is higher
than the open.
STOCK MARKET TRENDS IN INDIA
89
•
The Shaven Head -- a candlestick with no upper
shadow.
•
The Shaven Bottom -- a candlestick with no lower
shadow.
STOCK MARKET TRENDS IN INDIA
•
90
Spinning Tops -- candlesticks with small real bodies,
and when appearing within a sideways choppy market, they represent equilibrium between the bulls and the bears. They can be either white or black.
•
Doji Lines -- have no real body, but instead have a
horizontal line. This represents when the Open and Close are the same or very close. The length of the shadow can vary.
Candlestick Reversal Patterns Just as many traders look to bar charts for double tops and bottoms, head-and-shoulders, and technical indicators for reversal signals, so too can candlestick formations be looked upon for the same purpose. A reversal does not always mean that the current uptrend/downtrend will
STOCK MARKET TRENDS IN INDIA
91
reverse direction, but merely that the current direction may end. The market may then decide to drift sideways. Candlestick reversal patterns must be viewed within the context of prior activity to be effective. In fact, identical candlesticks may have different meanings depending on where they occur within the context of prior trends and formations.
•
Hammer -- a candlestick with a long lower shadow
and small real body. The shadow should be at least twice the length of the real body, and there should be no or very little upper shadow. The body may be either black or white, but the key is that this candlestick must occur within the context of a downtrend to be considered a hammer. The market may be "hammering" out a bottom.
•
Hanging Man -- identical in appearance to the
hammer, but appears within the context of an uptrend.
STOCK MARKET TRENDS IN INDIA
92
•
Engulfing Patterns -- Bullish -- when a white, real
body totally covers, "engulfs" the prior day's real body. The market should be in a definable trend, not chopping around sideways. The shadows of the prior candlestick do not need to be engulfed.
•
Bearish -- when a black, real body totally covers,
"engulfs" the prior day's real body. The market should be in a definable trend, not chopping around sideways. The shadows of the prior candlestick do not need to be engulfed.
STOCK MARKET TRENDS IN INDIA
93
•
Dark-Cloud Cover (bearish) -- a top reversal
formation where the first day of the pattern consists of a strong white, real body. The second day's price opens above the top of the upper shadow of the prior candlestick, but the close is at or near the low of the day, and well into the prior white, real body.
•
Piercing Pattern (bullish) -- opposite of the darkcover. Occurs within a downtrend. The first
cloud
candlestick having a black, real body, and the second has a long, white, real body. The white day opens sharply lower,
STOCK MARKET TRENDS IN INDIA
94
under the low of the prior black day. Then, prices close above the 50% point of the prior day's black real body.
Stars These candlestick formations consist of a small real body that gaps away from the real body preceding it. The real body of the star should not overlap the prior real body. The color of the star is not too important, and they can occur at either tops or bottoms. Stars are the equivalent of gaps on standard bar charts.
STOCK MARKET TRENDS IN INDIA
95
Stars make up part of four separate reversal patterns: • • • • Morning Star Evening Star Doji Star Shooting Star (Inverted Hammer)
•
Morning Star -- this is a bullish bottom reversal pattern. The formation is comprised of 3 candlesticks. The first candlestick is a tall black real body followed by the second, a small real body, which gaps (opens), lower (a star pattern). The third candlestick is
STOCK MARKET TRENDS IN INDIA
96
a white real body that moves well into the first period's black real body. This is similar to an island pattern on standard bar charts.
•
E v e
ning Star -- a bearish top reversal pattern and counterpart to the Morning Star. Three candlesticks compose the evening star, the first being long and white. The second forms a star, followed by the third, which has a black real body that moves sharply into the first white candlestick.
•
Doji Stars -- When a Doji gaps above a real body in an uptrend, or gaps under a real body in a falling market, that particular Doji is called a Doji star. Two popular Doji stars are the evening star and the morning star.
STOCK MARKET TRENDS IN INDIA
97
•
Evening Doji Star -- a Doji star in an uptrend followed by a long, black real body that closed well into the prior white real body. If the candlestick after the Doji star is white and gapped higher, the bearishness of the Doji is invalidated.
•
Morning Doji Star -- a Doji star in a downtrend followed by a long, white real body that closes well into the prior black real
STOCK MARKET TRENDS IN INDIA
98
body. If the candlestick after the Doji star is black and gapped lower, the bullishness of the Doji is invalidated.
•
Shooting Star -- a small real body near the lower end of the trading range, with a long upper shadow. The color of the body is not critical. Not usually considered a major reversal sign, only a warning.
•
Inverted Hammer-- not really a star, but does look like a shooting star. When occurring within a downtrend, may be a turning signal. Body color is not critical.
STOCK MARKET TRENDS IN INDIA
99
END OF CHAPTER V
CHAPTER VI – SECTOR – WISE ANALYSIS
STOCK MARKET TRENDS IN INDIA A. Sectors and stocks used for the study
100
The following five sectors were considered for the purpose of study during the course of our project. • • • • • Telecom Steel Cement Pharma Software
The following stocks and their trends in the last one year (2004) were studied in the course of the project. • • • • • Bharti Televentures SAIL ACC Wockhardt Reliance
B. Analysis of the sector and the respective stocks in the year 2004 Telecom sector Introduction 2004 has been a momentous year for the Indian telecom sector. Explosive growth rate in the mobile telephony segment was almost counterbalanced by rapidly falling profitability due to regulatory pressures and pressure on tariffs. Increasing consolidation activity was also prominent throughout the year. The growth in the industry was
STOCK MARKET TRENDS IN INDIA
101
clearly reflected in the way major telecom players performed on the stock markets. Against the Sensex gains of 14%, the telecom index grew by an almost double 27% during 2004. Comparison between 2003 & 2004 The most important event of the year for the domestic telecom industry was the introduction of unified licensing regime (ULR). The main aim of this regime was to simply the licensing procedure and granting a unified license that enables services providers to provide all kinds of telecom services covering various geographical areas using any technology. Another big event in relation to the sector was the raising of FDI limits from 49% to 74%.
The strong growth witnessed in the cellular industry in 2004 was a result of combination of the following key factors – 1. Declining tariffs due to intensifying competition amongst existing players, 2. Aggressive pricing strategy adopted by service providers, and 3. Lowering of duties on handsets and equipments. Sector out performer: Bharti Tele
STOCK MARKET TRENDS IN INDIA
102
The growth in the industry was clearly reflected in the way major telecom players performed on the stock markets. Against the Sensex gains of 14%, the telecom index grew by an almost double 27% during 2004. The table below shows that Bharti Tele led the pack with a YoY gain of 99%. Strong performance of the stock, especially during the second-half of the year, mirrored the robust financial performance of the company. This growth was aided by a continued strong addition to the subscriber base. At the end of September 2004, Bharti had a base of 8.7m mobile subscribers, which was 20% of the Indian cellular (GSM+CDMA) market. This rapid addition to the base more than compensated for the pressure on ARPUs (average revenue per user) as the company improved upon its operating margins and profitability. Telecom: Key gainers in 2004
26-Dec- 27-Dec- % 03 BHARTI TELE VSNL TATA (MAH) MTNL ITI LTD 135 25 157 28 16.8% 13.1% 106 155 TESERV 23 04 212 234 34 Change 99.0% 50.4% 47.2%
The laggard: HFCL Apart from the gainers as mentioned above, there were just a couple of losers from the telecom sector in 2004 – HFCL (17%) and Krone Communications (21%). Expectation in 2005
STOCK MARKET TRENDS IN INDIA
103
In 2005, leading players are expected to make large-scale investments in technology and infrastructure (network expansion). This would be in line with their initiatives of tapping a wider customer base. A hike in the FDI limit has also increased the attractiveness of the sector for foreign telecom majors and consequently, there could be a large flow of capital into the sector. This will go a long way in improving the growth prospects of this sector. However, while the overall sector may paint a rosy picture, the story may be drastically different for individual players as they continue to grapple with falling ARPUs, regulatory pressures and defaulting customers. The ride for the telecom players may continue to be topsy-turvy in 2005. Also, since valuations of leading players seem stretched from the medium term perspective, stock prices might witness some volatility. Bharti Televentures Performance Summary India’s leading cellular services provider, Bharti Tele, has announced strong results for the quarter and nine-month period ending December 2004, reporting almost doubling of net profits on a YoY basis. Operating margins have also improved for both the periods. Bharti has crossed the 10 m customer mark in this quarter, cornering a share of over 26% of all-India GSM mobile subscriber base.
Consolidated snapshot…
financial
performance
(IFR
Standards):
A
STOCK MARKET TRENDS IN INDIA
104
Rs m Sales Expenditure Operating profit (EBDIT) Operating (%) Other income Interest Depreciation Profit before tax Miscellaneous (expenditure) Minority interest Tax Profit after tax/(loss) Net profit margin (%) No. of shares Diluted Earnings profit
3QFY0 3QFY0 Chang 9mFY 9mFY Chang 4 7,959 4,728 5 e 04 05 e 12,687 21,530 69.7% 34,492 57,174 65.8% 13,886 74.5% 23,110 36,540 58.1% 7,644 61.7% 11,382 20,633 81.3% 33.0% 36.1% 68.8% 105 -73.8% 2,067 35.3% 6,332 147.9 3,087 % income/ 300 (10) 103.4 % 6 219 1,913 51 768 3,726 801.8 10 % 250.3 220 % 94.8% 3,157 9.2% 0 2.3 10,025 217.5% 17.5% 0 7.2 29.1 15.1% 17.3% 1,853. 1,853. 0 per 4.1 0 8.0 1,505 584.0% 52 403.8% 300 (46) 115.2% 204 1,389 7,821 93.4% -32.8% 23.5%
margin 37.3% 35.5% 79 729 2,240 1,838 134 191 3,031 4,555
11,627 276.6%
1,853. 1,853.
share* (Rs) P/E ratio (x) (* annualized)
Company’s Profile
STOCK MARKET TRENDS IN INDIA
105
Bharti Televentures is one of the largest telecom service providers in the country. It is the largest mobile service provider in the country with an over 26% market share (nearly 9.8 m customers) in the all-India GSM mobile subscriber base in the country. The company also provides fixed line and long distance telephony services to its customers. 3QFY05 saw the company cross the 10 m customer mark. Bharti also provides other allied telecom services like voice and data services and integrated services to corporates. It is one of the fastest growing companies in the Indian telecom sector. Performance in 3QFY05 Mobile services lead topline growth Bharti’s mobile services segment (62% of consolidated revenues) has led the growth in topline in this quarter with a YoY growth of 73%. This has mainly been a result of a strong 79% YoY growth in the subscriber base. Bharti’s all-India GSM subscriber base stands at 9.8 m at the end of December 2004, which is over 26% of the all-India base. What’s more, the company has cornered around 30% of the net additions to the GSM base in the country in 3QFY05. Combining the mobile base with the broadband and telephone base, Bharti has crossed the 10 m subscriber base, which seems to have benefited the company in form of utilizing its pan-India network and thus achieving economies of scale. Average revenue per user (ARPU) for the company’s mobile services has declined by 6% YoY. But this has been more than compensated by a 15% YoY growth in average minutes per user. Lower tariffs, attractive offers and a growing usage of mobile services have led to this growth in the same. On the broadband and telephone front, Bharti’s subscriber base has grown by 41% YoY. ARPU for this segment has declined by 2% YoY.
STOCK MARKET TRENDS IN INDIA Segment-wise performance…
106
3QFY0 % 4 Mobile Revenue PBIT PBIT margin 8,581 3,164 36.9% total
of 3QFY0 % 5 total
of Chang e 72.8% 52.8%
60.8% 66.7%
14,826 61.6% 4,836 32.6% 61.5%
Broadband & Telephone Revenue PBIT PBIT margin Long Distance Revenue PBIT PBIT margin Enterprise Revenue PBIT PBIT margin Total Revenue PBIT PBIT margin * Excluding inter-segment adjustments 14,103 4,746 33.7% 24,081 7,861 32.6% 70.8% 65.6% 731 300 41.0% 5.2% 6.3% 1,407 681 48.4% 5.8% 8.7% 92.5% 127.2 % 2,733 885 32.4% 19.4% 18.6% 4,907 1,497 30.5% 20.4% 19.0% 79.5% 69.3% 2,058 398 19.3% 14.6% 8.4% 2,942 846 28.8% 12.2% 10.8% 42.9% 112.9 %
STOCK MARKET TRENDS IN INDIA Higher interconnect charges dent margins
107
Despite the strong growth in the topline, Bharti has reported a 180 basis points narrowing of its operating margins for 3QFY05. This has been mainly a result of a 170 basis points increase in access and interconnection charges. On the contrary, expenses under other major heads like employee costs and license fee have declined in the quarter. With the revised ADC (access deficit charge) guidelines, which are expected to reduce burden on mobile services providers by reducing their payment to BSNL and MTNL, we expect the pressure on account of interconnect charges is likely to decline for Bharti going forward. Lower interest outgo aids net profits Despite a contraction in operating margins, a higher other income and lower interest charges have helped net profits growth outpace the growth in topline. Even a significant growth in tax outgo has failed to restrict the superior net profit growth. Expectation At the current price of Rs 210, the stock is trading at a price to earnings multiple of 29.1 times annualized 9mFY05 earnings. Bharti has continued its dominance on the Indian GSM mobile market as has been clearly stated above. With a presence across 21 of the 23 circles in the country, including the recent additions of J&K, West Bengal, Orrisa, Bihar and Jharkhand, Bharti is expected to reap scale advantages going forward. Growing competition on the tariff front has failed to cast pressure on the company’s performance as it has been able to reach out to a wide subscriber base through its mobile and other value add services.
BHARTI TELEVENTURES
STOCK MARKET TRENDS IN INDIA
Live BSE Quotes Price (Rs) 225.45 % Change 1.03 Open (Rs) 225.15 Volume 464,502 Mar 11, 2005 ( Cl o s e ) High (Rs) Low 229.90 (Rs) 221.00 Value (Rs) 52104,225,904 Week H/L 240.70 / 115.00 Mar 11, 2005 ( Cl o s e ) High (Rs) Low 230.00 (Rs) 221.00 Value (Rs) 52472,046,304 Week H/L 250.00 / 114.00
108
Live NSE Quotes Price (Rs) 223.75 % Change 0.13 Open (Rs) 230.00 Volume 2,105,958
Market Cap (Rs m) 417,842.27 *Trailing 12 months earnings | BSE Sensex | S&P
Valuation EPS (Rs)* 7.05
P/E Ratio (x) 31.99
P/BV (x) 9.87
Steel Introduction
STOCK MARKET TRENDS IN INDIA
109
It was yet another year of gains for investors in the stock markets with the benchmark index – Sensex – having notched gains of about 14% during 2004. Similar to last year, practically all the sectors (barring FMCG this time) ended the year with significant gains, as reflected by their respective indices. The metals index (steel & aluminum) has also ended the year in the positive by registering gains of about 27% (calculated on a simple average basis of the stocks in the tables below, as the BSE Metals index was launched only in 2HCY04). We take a look at what led the continued optimism amongst investors towards the sector after the spectacular performance in 2004 and what is in store for 2005. As mentioned above, the metals index has risen by about 27% during the year. However, if we consider the steel and aluminum sectors in isolation, the steel index has registered an impressive growth of about 40% while the aluminum sector has closed the year on a negative note with about 2% fall, consequently affecting the overall performance of the metals index. 2004 vs. 2003 While China continued to be the dominant force even in 2004, driving metal prices through the roof, there were significant apprehensions during the first half of 2004 with respect to the Chinese economy slowing down. It must be noted that Chinese authorities have adopted concerted efforts to reign in their galloping economy so as to prevent a hard landing in the event of a slowdown. However, their efforts have not yielded much result as yet, which has led to the extension of the steel cycle and further strengthening the aluminum cycle. Steel - The prolonged steel cycle, contrary to our expectations, continued to immensely benefit steel sector companies in terms of
STOCK MARKET TRENDS IN INDIA
110
higher realizations - average steel prices surged approximately 30% YoY. Continued high levels of capacity utilization on the back of strong domestic and international (led by China) demand helped steel companies register strong bottom-line growth during the year. Apart from the financial performance, the sector continued to hog the limelight all through 2004. The primary reason for the steel sector to hit the headlines time and again in 2004 revolved around rising steel prices. While steel manufacturers cited helplessness in the face of surging raw material prices like that of coke, iron ore and melting scrap, which forced them to pass on the same to consumers, there was significant opposition by steel user industries including auto and construction citing significant pressure on their margins. Further, with India passing through an inflationary phase (more than 8% in August 2004), the sector came under government scrutiny time and again, with a view to control the spiraling steel prices. This included measures like suspending the DEPB scheme so as to discourage exports to increase domestic availability, forcing players to withhold price hikes (during election months) and announcing custom duty cuts on various forms of iron and steel products to repel steel companies’ intentions of hiking prices. Steel: The out performers
Company BSE-SENSEX SESA GOA JINDAL STEEL
Price on Dec 26, Price on Dec 27, % 2003 (Rs) 5,699 592 & 550 2004 (Rs) 6,513 1,006 887 change 14.3% 69.8% 61.4%
STOCK MARKET TRENDS IN INDIA POWER ESSAR STEEL ISPAT INDUSTRIES TISCO SAIL 26 16 283 52 39 21 374 61 327
111
49.4% 33.8% 32.3% 17.2% 15.1%
JINDAL IRON & STEEL 284 Expectation in 2005
We continue to maintain our positive stance towards the aluminum sector for 2005. This is on the back of a global economic recovery and strong domestic economic growth. The aluminum sector will benefit from impressive growth in transport and construction sectors. The global recovery in aluminum demand, led by major economies like the US, Europe and China, is intact. Aluminum prices therefore, are unlikely to weaken much in the medium-term. Further, the added advantage for Hindalco would be the improvement in performance of its copper business in wake of higher TC/RC margins. As far as the steel sector is concerned, we must admit that the steel cycle has extended beyond our expectation as China continues to register strong growth rates despite efforts by its authorities to cool down the economy. However, we continue to remain apprehensive on the steel sector for the medium-term owing to various reasons. We believe that the steel cycle has peaked and the various domestic and global capacity expansion plans that are taking shape would put pressure on steel prices. Indian steel majors have already announced aggressive capacity expansion plans in India. This means that any shortfall in the demand/imports from China will lead to overcapacity in the domestic market. It must be noted that in the first 10 months of 2004, Chinese steel imports have fallen by 18%. At the current juncture, the risk-reward ratio in the sector is against the investor.
STOCK MARKET TRENDS IN INDIA SAIL Performance summary
112
Public sector steel behemoth, SAIL, announced its 3QFY05 results today, which were largely in line with our expectations. The company’s bottomline has more than doubled on the back of strong topline growth. Riding high on strong realizations of the current prolonged strength in the steel cycle, SAIL’s operating margins have continued to leapfrog. (Rs m) Net Sales Expenditure Operating (EBDITA) EBITDA margin (%) Other income Interest Depreciation Profit before tax Tax Profit after Tax/(Loss) Net profit margin (%) No. of Shares (m) Diluted earnings 21.1% 40.0% 212 2,109 2,885 7,666 286 7,380 642 1,756 2,868 203.2 % -16.8% 7,141 -0.6% % 11,964 4078.8 466 % 15,142 105.2 % 12.5% 19.5% 4,130 per 7.1 4,130 14.7 9.8% 4,130 4.8 21.0% 4,130 13.4 16,001 3334.4 % 14,978 41,390 176.3% 8,479 4,476 8,431 -37.3% -0.6% 3QFY0 3QFY0 Chang 9mFY 9mFY Chang 4 5 e 04 7 46,458 46,603 0.3% Profit 12,448 31,088 149.7 % 20.0% 34.6% 530 2,056 288.1% 3 05 1 0 e 58,906 77,691 31.9% 152,53 197,44 29.4% 122,00 129,20 5.9% 30,534 68,241 123.5%
27,106 253.6
15,444 57,391 271.6%
STOCK MARKET TRENDS IN INDIA share* Price to earnings ratio (x) (* annualized) 4.0 4.4
113
Company profile Steel Authority of India Ltd. (SAIL), the domestic public sector steel behemoth, is India’s largest steel producer and is the world’s 15th largest. The company commands almost 1/3rd of the domestic market share with its 13 MTPA capacity. It operates 4 integrated steel plants and 2 specialty steel plants. After bleeding at the net profit level during the period FY99 to FY03 owing to an unfavorable steel cycle, the company turned around in FY04 and has continued its commendable performance into 9mFY05. Further, going forward, the company has embarked on a massive expansion plan (split into two phases), which will take its steel production capacity to 20 MTPA by FY12. Reasons for good performance in 3QFY05 Not just strong realizations: While strong realizations continue to be the sole driver for the company’s topline growth (up 32% YoY), its efforts to improve the product mix have also started to yield results. It must be noted that average steel prices in the domestic markets during the quarter were higher by 34% compared to the corresponding quarter last year. Further, higher contribution from better margin product sales i.e. value-added products, such as heavy structural, rails, plates, wheels & axles and bars & rounds have also seemingly aided the topline growth. While the company does not provide volume sales numbers, during the quarter its saleable steel production registered a rise of 5% over the corresponding period last year.
STOCK MARKET TRENDS IN INDIA
114
Improving efficiencies aid profitability: SAIL’s operating margins have nearly doubled in the last one-year from 21% in 3QFY04 to the current 40% (3QFY05). While strong steel prices deserve a significant credit for this as steel companies enjoy a high operating leverage, the company’s efforts at improving its operating efficiencies have also aided this margin improvement. As per the company, there was consistent improvement in production through energy efficient continuous casting route, increase in share of value added products, improvement in techno-economic factors like reduction in coke consumption rate, all of which have collectively contributed to the overall profitability. Bottom-line doubles: Post the 150% YoY rise in operating profits, an over 200% rise in other income and a 17% fall in interest costs (on the back of continuous debt reduction and debt replacement exercise); the profits registered a 253% rise at the PBT level. However, the bottom-line growth was curtailed to 105% (though still splendid) owing to a massive rise in tax provisioning. However, in what could be termed as a major landmark in the overall turnaround process of SAIL, the board for the first time since 1997-98 has announced an interim dividend of 15% on paid-up.
STOCK MARKET TRENDS IN INDIA
115
SAIL
Live BSE Quotes Price (Rs) 65.85 % Change 2.09 Open (Rs) 66.00 Volume 5,441,256 Mar 11, 2005 ( Cl o s e ) High (Rs) Low 66.40 (Rs) 64.65 Value (Rs) 52356,860,704 Week H/L 67.65 / 20.00 Mar 11, 2005 ( Cl o s e )
Live NSE Quotes
Software Introduction Between the two under-performers of the calendar year 2003 in relation to the benchmark index i.e. the Sensex, the software sector was a surprising one besides FMCG. Forward to the calendar year 2004, the
STOCK MARKET TRENDS IN INDIA
116
CNX IT index has outperformed the Nifty Fifty. We take a closer look at the events that shaped up for the software sector in calendar year that passed by, including the reasons for the out performance, and what lies ahead?
2004 vs. 2003 The year 2004 marked the continuity in prospects for the Indian software sector with billing rates stabilizing (at least for Tier-1 companies) and volume expanding at ‘faster than earlier’ pace. However, the year also led the management of Indian software companies chew on risks on the outsourcing front in wake of the US presidential elections held in November. While the return of Mr. Bush Junior brought some respite for these companies as the year drew to a close, it was not before a lot of apprehensions were raised whether the backlash would affect Indian software companies. These apprehensions were, however, laid to rest by managements of most of leading software players as they reported their first quarter results for the fiscal 2004-05. While we did not deny that the backlash against outsourcing had seeds of much larger resistance throughout the globe, we believed that, in the long-term, economic senses would prevail as global corporations, in their aim of becoming globally more competitive, would outsource their non-core operations to low-cost
STOCK MARKET TRENDS IN INDIA
117
countries that provide high-quality services (India, for example). This belief was vindicated as most of the leading players from the Indian software sector came out with improved forecasts for the future. The rest is, as they say, history! 2004 also saw the listing of TCS, Asia’s largest software services exporter onto the Indian bourses. The issue received a wide response and the stock was listed at the upper end of the issue price. Another event to have marked 2004 was the crossing of US$ 1 bn revenue mark by two Indian tech majors – Infosys and Wipro. While size of these three Indian software players are still miniscule as compared to global technology majors, the crossover of the US$ 1 bn revenue mark definitely marks their emergence into the global technology domain where balance sheet size plays a vital role in garnering large-scale contracts and growing businesses rapidly. Out performer: Infosys A look at the tables of key gainers below indicates that this year has belonged to the leading players in the industry, be it from the end-toend segment (Infosys and Wipro) or from the focused and niche categories (Hexaware and Kale Consultants). Gains, specifically, in stocks of large players like Infosys and Wipro were due to belief that these would be the biggest beneficiaries of the increased outsourcing momentum. These players are consistently building up their employee bases, investing consistently in building up infrastructure (development centres, marketing and distribution network), and this is all in the anticipation that they would get enough work to justify their investments. However, we believe that if that fails to fructify, or that if these companies fail to garner adequate business in line with their expectations, times might come out to be tough.
STOCK MARKET TRENDS IN INDIA Software: Key gainers in 2004
118
26-Dec- 27-Dec- % 03 INFOSYS HEXAWARE TECH WIPRO KALE CONSULTANTS RAMCO SYSTEMS The laggard: SSI 366 462 26.3% 1,348 407 571 59 04 2,055 598 753 75 Change 52.5% 47.0% 31.9% 27.1%
Companies that have had a poor track record and that were named in the stock markets scam of 2000, lost out considerably in 2004. This is a good sign considering the historical performance when such stocks rallied along with the better players from the sector. As a matter of fact, the major loser in the calendar year 2003 was Silverline (down 71%) followed by Pentasoft (down 60%). Software: Key losers in 2004
26-Dec- 27-Dec- % 03 SSI LTD PENTASOFT TECH VISUALSOFT NIIT 258 266 128 9 178 -50.4% -48.3% -33.2% DSQ SOFTWARE 17 192 8 04 44 3 Change -77.1% -61.2%
STOCK MARKET TRENDS IN INDIA
119
Expectation in 2005 While software has been considered a relatively insulated sector from geo-political ‘upheavals’ in the domestic and global arena, the degree of insulation varies across companies. We believe that continuing from what has been witnessed off late in 2004, demand for technology solution from global clients is likely to be concentrated among a few players. These could be any of those who operate across the value chain or who are focused on specific domain(s). This is because the demand for technology is likely to be more guided by the ‘Return on Investment’ factor, i.e., how much of cost saving or return on investment can be obtained by clients from their IT spending. Moreover, taking cue from the changes that increasing global competition is bringing, many Indian software companies are moving from competing just on the cost front to improving their domain competencies (like establishing greater presence in high-technology telecom and financial services verticals) to compete with global majors in their territories. Some, like Infosys and Wipro, have succeeded to an extent in this endeavors. However, for other Indian companies to make a mark on the global scale, it would require a Herculean effort. They cannot rely on the cost arbitrage advantage for long. And if they do so, investors, better keep a watch. Overall, while 2005 might bring in greater challenges for Indian software companies, these challenges are not likely to be adrift of the consequent opportunities.
STOCK MARKET TRENDS IN INDIA
120
MASTEK
Live BSE Quotes Price (Rs) 381.70 % Change -1.22 Open (Rs) 387.80 Volume 82,252 Mar 11, 2005 ( Cl o s e ) High (Rs) Low 394.70 (Rs) 380.00 Value (Rs) 5231,762,100 Week H/L 408.40 / 189.00 Mar 11, 2005 ( Cl o s e ) High (Rs) Low 394.00 (Rs) 381.00 Value (Rs) 52152,130,000 Week H/L 407.25 / 190.00
Live NSE Quotes Price (Rs) 382.05 % Change -1.04 Open (Rs) 389.90 Volume 393,498
Valuation EPS (Rs)* 25.65
P/E Ratio (x) 14.88
Market Cap (Rs m) 5,298.00
P/BV (x) 4.13
STOCK MARKET TRENDS IN INDIA Pharma Introduction
121
The year 2004 was another ‘special’ year for the stock market participants, as the markets see-sawed towards their all time high levels. While almost all the sectors participated in the bull-run, Pharma stocks were among the leaders, again outperforming the broader indices after the strong performance in 2003. Against 14% gains for the Sensex, the Pharma index gained 20% during the year.
2004 vs. 2003 The year started well for the industry with robust growth witnessed during the first quarter. A major growth driver for the industry once again was new products introduction as companies tried their hands out on various kinds of products in order to capture largest market share before the new patent regime comes into picture. The growth in the domestic market was sluggish while revenues from international markets grew at a rapid pace for Indian companies. According to the statistics of Ministry of Chemicals and Fertilizers, export revenues from the pharmaceutical sector are likely to grow at a
STOCK MARKET TRENDS IN INDIA
122
CAGR of 30% over the next three years (including FY05). The year saw smaller companies like Matrix labs and Divi’s Labs made their way further into exports markets. Sector out performer: Aventis MNC pharma companies were the biggest gainers during 2004 with Aventis emerging the leader. There were two reasons for this outperformance by Aventis. While the performance of the company was very good on profitability front, the markets have also taken a re-look at the valuations. Somewhat similar was the case with other major MNC pharma companies like Glaxo and Novartis. While Novartis saw a rise in its stock price after the announcement by the company that it will try to reach out into a larger part of India. The company has plans to introduce new drugs once the product patent comes into force. 26-Dec- 27-Dec- % 03 Aventis Nicholas Piramal Novartis Abbott Wockhardt 432 495 259 682 736 356 58.1% 48.7% 37.6% 682 166 04 1,370 292 Change 100.9% 76.4%
Apart from the MNC pharma companies, Nicholas Piramal was amongst the major gainers in the sector. Two important events that marked the year for Nicholas Piramal were the contract manufacturing business picking pace, as well the investment in R&D. The company started a new R&D center with a capital expenditure of about Rs 1 bn making it one of the biggest R&D center in private sector. On the contract manufacturing side, the company was able to enter into three
STOCK MARKET TRENDS IN INDIA
123
agreements for custom manufacturing of different products. The total size of the three deals is about US$ 50 m which is equal to about 20% of the company’s current revenue. The Laggard: Dr Reddy’s 26-Dec- 27-Dec- % 03 Dr Reddy's Biocon Cipla Pfizer Glaxo 484 257 557 595 497 1,241 308 698 776 2.6% 13.0% 19.5% 25.3% 30.4% Ranbaxy 1,099 1,423 04 855 Change -39.9%
Despite the strong performance of the overall market, including stocks from the pharma sector, leading Indian player, Dr. Reddy’s witnessed a decline in 2004. The year started on a bad note for the company as a US federal court reversed the lower court decision by its verdict saying that the company’s generic version ‘Amolodipine Maleate’ will infringe upon the patent of Pfizer’s ‘Norvasc’. To add on to this, in the first quarter of 2004, the company also reported operating losses. The dismal performance continued for the rest of the year. Higher sales and distribution and R&D expanses led to the declining margins for the company. In another important event from the sector, India’s largest biotech company, Biocon, came up with its initial public offering. The biggest event of the year, however, which was keenly awaited both by the industry as well as the markets, was the introduction of the new patent regime. Although, a change in government earlier in the year meant
STOCK MARKET TRENDS IN INDIA
124
that the new government was not ready with a fresh bill, and hence the recently issued ordinance in order to comply to the WTO regulations. The ordinance on patent third amendment act meant that India would transform into the era where the intellectual property rights will be respected and will have a legal framework for enforcement. Expectation in 2005 The year 2004 was an eventful year with new companies entering into the bandwagon for pharma exports. However, 2005 is likely to be ‘the’ year of execution for most of the companies. As far as the domestic markets are concerned, the patent ordinance will definitely instill confidence among players in the industry. However, we may not see a sudden jump in revenues and profits of MNC companies as they may approach new product launches with caution. On the exports front, the US government has intensified its efforts towards usage of generics drugs. Drugs worth US$ 35 billion are going off patent in the next three years and Indian companies are likely to be the biggest beneficiaries of the same. While Indian companies like Ranbaxy, Sun Pharma, Lupin Labs and Dr. Reddy’s are likely to get the benefits directly they might feel competitive pressures as MNC players are sourcing their drugs from India thus reducing the costs. 2005 is, thus, likely to witness greater global acceptance of India as a pharmaceutical power to reckon with!
Wockhardt Performance
STOCK MARKET TRENDS IN INDIA
125
Domestic pharma company, Wockhardt, recently declared its December quarter as well as full year numbers. In 4QCY04, the company's consolidated revenues clocked a buoyant 21% growth led by strong performance in Europe and rest of the world. Its bottomline growth was equally buoyant at 26% YoY. The company ended the full year with over 31% revenue and nearly 50% bottomline growth. (Rs m) Net sales Expenditure Operating profit (EBDITA) Operating (%) Other income Interest Depreciation Profit before tax 65 (27) 83 605 152 (119) 99 913 (113) 168 632 % 4 (17) 368 19.3% 267 7 Extraordinary expenditure Tax Profit after tax/(loss) Net profit margin (%) No. of shares (m) Diluted earnings per share 102 503 (113) 371 117.0 % 25.6% 1,42 2,135 49.7% 6 17.7% 18.4% 72.6 109.0 15.1 17.2 % % 72.6 109.0 13.1 19.6 64.7% 171 profit 4QCY0 4QCY0 Chan CY0 CY04 Chang 3 2,838 2,242 596 4 3,438 2,697 741 ge 3 0 6 24.3% 1,79 2,812 56.7% 4 margin 21.0% 21.6% 19.0 22.7 % 133.8 74 % 158 113.5 % 37.8% 9 e 21.1% 9,42 12,38 31.5% 20.3% 7,62 9,577 25.6%
50.9% 1,59 2,619 64.0%
STOCK MARKET TRENDS IN INDIA (Rs)* P/E ratio (x) (* annualized) 19.2
126
Company Profile Wockhardt is one of the leading domestic pharma companies with strong presence in the lifestyle segment and growing focus on biotechnology. The company, a few years back, was focused on the domestic market, but intense price competition and price regulations resulted in the company gradually shifting its focus to exports. Consequently, Wockhardt acquired two UK-based companies Wallis Laboratories and CP Pharma. The company now derives 60% of its revenues from non-India regions. The company has proven its R&D capabilities insulin). Performance in CY04: Europe potion: Though European growth has slowed down post the acquisition spurt, the region still clocked a healthy 29% revenue growth. Just to put things in perspective, the revenues from European business in June quarter last year were Rs 333 m, while the revenues in September quarter 2003 significantly increased to over Rs 1 bn, led by the acquisition of CP Pharma. For the full year, the region grew by a significant 77% YoY and now forms 42% of Wockhardt’s revenues. In May 2004, Wockhardt acquired ‘esparma GmbH’ to give its German plans a fillip. Incidentally, Germany is the largest branded generics market in Europe. by indigenously developing and launching Biovac-B (hepatitis - B) vaccine, Wepox (Erythropotein) and Wosulin (human
STOCK MARKET TRENDS IN INDIA
127
US – The emerging driver: Going forward, the company's growth is likely to gain momentum in the US, where it launched 3 new products under the Wockhardt banner during third quarter of 2004. While the US market grew by a staid 3% in September quarter, in December quarter it displayed signs of picking up pace with nearly 10% revenue growth. US accounted for 8.3% of consolidated CY04 revenues. The region’s share in the pie is likely to go up over the next couple of years. Home score: The sales in the domestic market were up 10% during the quarter and over 13% in CY04. The field force re-structuring in the domestic market, as well as buoyancy in the lifestyle segment (biotechnology, Nephrology, Diabetology) has helped company beat the industry growth rate. The 30 power brands of the company, which constitute 80% of the domestic revenue, grew by 15% in CY04. Also, the revenues from its biotech portfolio grew by 81% YoY during CY04. Wepox (Erythropoeitin) is growing at 47% plus and Wosulin, which has completed one year of its launch, increased its market share to about 6%-7% in domestic insulin market. Geographical Mix…
(Rs m) India Europe US Rest World
4QCY0 4QCY0 Chan CY0 CY04 Chang 3 1,057 1,219 304 of 259 4 1,164 1,574 334 365 ge 3 2 29.1% 2,93 5,206 77.2% 8 9.9% 1,07 1,033 -4.1% 7 40.9% 1,06 1,233 15.9% 4 e 10.1% 4,34 4,916 13.2%
STOCK MARKET TRENDS IN INDIA Total 2,839 3,437 21.1 % 9,42 12,3 31.5% 1 88
128
Margin story: The operating profit grew faster than the revenues. The basic reason for this is the increased contribution from the European markets, where margins are higher, as also the benefits of restructuring. Increased contribution from the high margin formulations business has also expanded operating margins. However, this margin profile is likely to be affected once competition picks up in the European markets. Also, company's recent entry into the US market on its own will affect the margins, as the cost of establishing sales and marketing network will take its toll, at least in the near term. Business Mix… (Rs m) Formulatio ns Bulk Drug Total 2,439 400 2,956 482 4QCY0 4QCY0 Chan CY0 CY04 Chang 3 4 ge 3 7,77 10,61 21.2% 8 1,64 20.5% 3 21.1 2,839 3,438 % 1 1,772 7.9% 88 31.5% 9,42 12,3 6 36.5% e
Tax provision and extraordinary expenses: Net profit grew by 26% in the quarter and by 50% in CY04. The company has recently issued FCCB's (Foreign currency convertible bonds) worth US$ 110 m. The interest charges are likely to increase owing to increased borrowings for funding acquisitions. Moreover, as the company’s contribution from the European operations pick up, the tax outgo could increase, as effective taxes are higher in those countries. The extraordinary expense of Rs
STOCK MARKET TRENDS IN INDIA
129
113 m in 4QCY04 as well as CY04 pertains to restructuring expenses in UK, as well as cost of setting up the US office.
The company has achieved robust growth on the back of its inorganic strategy over the past few quarters. Apart from this, changing geographical mix and streamlining of operations has helped Wockhardt to maintain healthy margins over the last few quarters. Expectations At Rs 376, the stock is trading at 19 times CY04 earnings. Wockhardt, despite its past strong presence in the domestic market, has failed to capitalize on the same over the years. But with its recent focus on the international markets and some prudent acquisitions in Europe, growth prospects look promising. The company has achieved significant topline and bottomline growth in CY04, basically on the back of inorganic growth and restructuring moves. Further benefits of the restructuring are likely to filter in during 2005. The business strategy looks viable. We will update our report on the company soon.
STOCK MARKET TRENDS IN INDIA
130
WOCKHARDT
Live BSE Quotes Price (Rs) 373.85 % Change 0.38
(WOCK)
Mar 11, 2005 ( Cl o s e ) High (Rs) Low 380.00 (Rs) 371.05 Value 52(Rs) Week 8,609,900 H/L 391.50 / 236.25 Mar 11, 2005 ( Cl o s e ) High (Rs) Low 384.00 (Rs) 373.00 Value (Rs) 5223,429,300 Week H/L 405.90 / 224.65
Open (Rs) 377.70 Volume 22,803
Live NSE Quotes Price (Rs) 375.30 % Change 0.29 Open (Rs) 377.05 Volume 61,904
STOCK MARKET TRENDS IN INDIA
Valuation EPS (Rs)* 19.10
131
P/E Ratio (x) 19.57
Market Cap (Rs m) 40,674.88
P/BV (x) 8.59
ACC
A.C.C.
Price (Rs) 366.45 % Change -0.72
(ACC)
Mar 11, 2005 ( Cl o s e ) High (Rs) Low 372.30 (Rs) 365.60 Value (Rs) 5280,899,104 Week H/L 385.00 / 218.00 Mar 11, 2005 ( Cl o s e ) High (Rs) Low 372.40 (Rs) 365.60 Value (Rs) 52194,642,304 Week H/L 386.85 / 220.90
Live BSE Quotes Open (Rs) 370.00 Volume 219,280
Live NSE Quotes Price (Rs) 366.55 % Change -0.76 Open (Rs) 369.50 Volume 527,809
STOCK MARKET TRENDS IN INDIA
132
Market Cap (Rs m) 65,316.05 *Trailing 12 months earnings | BSE Sensex | S&P CNX Nifty
Valuation EPS (Rs)* 17.80
P/E Ratio (x) 20.59
P/BV (x) 4.95
Excerpts from the interview with Fortis Securities The two stocks that performed really well in the bourses during the year 2004 were the stocks of SAIL & Task pharma. The banking stock SBI and the pharma stock Ranbaxy were the moderate performers in the same year. The worst performing stock was that of the BPL because of the ongoing feud in the family. After the budget announcement by the finance minister the Sensex fell drastically because of the sheer panic due to the constant policy differences between the ruling government and the left parties (introduction of the STT was also responsible of the downward trend of the index). However it has bounced back and has hit a record high of 6680 in the beginning of the year 2005. . SAIL will continue to perform well in the year 2005 due to the rising domestic as well as foreign demand for steel. Ranbaxy too has a positive year ahead with India moving into the product patent regime. The stock price will depend on the company’s ability to come out with newer drugs since they have invested heavily in the R & D.Task pharma continues to perform well in the year 2005. The future of the BPL stock is unpredictable unless the ongoing family feud is resolved. Bharti Televentures is another company whose stock has really performed well in the year 2004.This is mainly because of their increasing revenues from their landline connections, broadband facilities and their licenses to offer cellular services in the newer circles such as J
STOCK MARKET TRENDS IN INDIA
133
& K. Moreover they also have the first mover advantage in the telecom sector. The outsourcing of their complete network management to IBM and their focus on customer service has definitely contributed to the upward movement of the stock. General questions 1. The Sensex dropped drastically post budget 2004 mainly because of the sheer panic reaction. There were some differences between the ruling government and the left parties over some policy issues and the introduction of the STT was in some way responsible for the downfall of the Sensex. The investors were unclear about the STT and it was their panic move that resulted in Sensex dropping sharply. 2. The coming budget is definitely a good one for the stock market. The investors were unmoved by the hike in the STT in the recent budget. They all took a broader view of the budget which is generally perceived to be a positive one for the market and industry. Riding high on the back of the positive measures the Sensex witnessed a smart rally and closed strong at 6714 up 144 points. 3. The imposition of VAT will not cause much change in the Sensex. However the VAT will take sometime to be implemented and it may not be implemented according to the deadline given by the government. 4. The hike in the STT is a good move by the finance minister and it will not create any problems from the investor community. STT may continue to be hiked on a year on year basis. The FIIs are planning to invest heavily in India in the near future. Lots of money is waiting outside India in the hands of the FIIs to be
STOCK MARKET TRENDS IN INDIA
134
invested in the Indian market. The investment that these FIIs make in India is very miniscule compared to the total size of their holding. Energy sector
1. The ongoing family feud had a very little impact on the performance of the stock mainly because Reliance is such a large holding and a highly trusted and stable brand in the eyes of the investors. 2. There is no likelihood that the splitting (if it happens) of the company will affect its stock performance in a major way. 3. The approval of the Iran gas pipeline is a major boost for the company. But unless the project is executed nothing can be predicted about its impact on the company’s stok. Oil sector as a whole was a laggard one in the year 2004.The share price of oil companies HPCL & BPCL were badly affected owing to the divestment of these two PSUs. The share prices of these two companies are slowly bouncing back this year. Cement sector
2. The top performer in the cement sector in the year 2004 was the Grasim cements. IT sector
The US presidential elections were a major concern for this sector because of the outsourcing issue involved. All the fears were laid to rest with Mr. Bush becoming the American president (Mr.Kerry was antioutsourcing). There was not much variations in the stock prices of the IT giants. Outsourcing is the way to the future and all the big companies are doing it in large scale to reduce costs.
STOCK MARKET TRENDS IN INDIA
135
1. With the IT giants like Infosys and Wipro joining the billion dollar club, the small companies are really facing a uncertain future. The smaller companies like Polaris, NIIT etc are losing their clients to their bigger competitors. The clients are turning to the bigger IT companies because of their larger size and their capability to offer everything under one roof. Barring a few companies like Mphasis BFL most of the small companies are facing difficult challenges to survive which is adversely affecting their stock prices in a big way.
Pharma sector 1. With India moving into the product patent regime the pharma sector is bound to have a bright future. Indian pharma giants like Ranbaxy, Cipla have an established presence in the North American and European markets and have a very bright year ahead. Also these companies have invested heavily in their R & D facilities which will definitely give them a good ROI in the near future. The capability of these pharma majors to come up with new drugs will be the major factor in their stock performance. Overall the pharma sector has a very bright future ahead. 2. Exports are bound to rise in the near future though not as much as 30% but considerably little less. However in the long run the Indian Pharma sector will definitely boom and has a very positive 2005 ahead. 3. The entry of small companies will not affect the larger ones in a big way because in the Pharma sector there is space for everyone.
STOCK MARKET TRENDS IN INDIA
136
The big giants can always fall back on their superior R & D facilities to come out with newer drugs compared to the smaller companies. Technical analysis is the prediction of future performance of a stock based on the historic data available using different techniques. It is a complex task of analyzing statistical data and graphs to predict the future outlook of a company’s stock. Different ratios are involved to analyze the stock of a company (EPS, Debt-Equity etc.) and prepare a financial report of the company that can be very helpful for the investors.
END OF CHAPTER VI
doc_139033569.doc
a project on share market
STOCK MARKET TRENDS IN INDIA CHAPTER I – SECURITIES MARKET IN INDIA ? AN OUTLINE A. INTRODUCTION
1
A
fter the securities are issued in the primary market, they are traded in the secondary market by the investors. The stock exchanges along with a host of other intermediaries provide the
necessary platform for trading in secondary market and also for clearing and settlement. The securities are traded, cleared and settled within the regulatory framework prescribed by the Exchanges and the SEBI. Till recently, it was mandatory for the companies to list their securities on the regional stock exchange nearest to their registered office, in order to provide an opportunity to investors to invest/trade in the securities of local companies. However, following the withdrawal of this restriction, the companies have an option to choose from any one of the existing stock exchanges in India to list their securities. Due to the earlier regulation requiring companies to get listed first at the regional stock exchange, there are in all 23 exchanges operating today in the country. With the increased application of information technology, the trading platforms of all the stock exchanges are accessible from anywhere in the country through their trading terminals. However, the trading platform of NSE is also accessible through internet and mobile devices. In a geographically widespread country like India, this has significantly expanded the reach of the exchanges to the homes of ordinary investors and assuaged the aspirations of people to have exchanges in their vicinity. As a result of the reforms/initiatives taken by the Government and the Regulators, the market microstructure has been refined and
STOCK MARKET TRENDS IN INDIA
2
modernized. The investment choices for the investors have also broadened. The securities market moved from T+3 settlement periods to T+2 rolling settlement with effect from April 1, 2003. Further, straight through processing has been made mandatory for all institutional trades executed on the stock exchange. Real time gross settlement has also been introduced by RBI to settle inter-bank transactions online at real time mode. These developments in the securities market provide the necessary impetus for growth and development, and thereby strengthen the emerging market economy in India. B. PRODUCTS AND PARTICIPANTS
M
obilization of savings from surplus savers to deficit savers is most efficiently carried out by the securities market through a range of complex products called “securities”. The definition
of securities as per the SCRA, 1956 includes shares, bonds, scrips, stocks or other marketable securities of like nature in or of any incorporate company or body corporate, government securities, derivatives of securities, units of collective investment scheme, interest and rights in securities, security receipt or any other instruments so declared by the central government. The securities market has essentially three categories of participants, viz., the issuer of securities, investors in securities and the intermediaries. The issuers are the borrowers or deficit savers, who issue securities to raise funds. The investors, who are surplus savers, deploy their savings by subscribing to these securities. The intermediaries are the agents who match the needs of users and suppliers of funds for a commission. These intermediaries pack and unpack securities to help both the issuers and investors to achieve their respective goals. There are a large variety and number of intermediaries providing various services in the Indian securities market (Table 1-1). This process of mobilization of resources
STOCK MARKET TRENDS IN INDIA
3
is carried out under the supervision and overview of the regulators. The regulators develop fair market practices and regulate the conduct of issuers of securities and the intermediaries. They are also in charge of protecting the interests of the investors. The regulator ensures a high service standard from the intermediaries and supply of quality securities and non-manipulated demand for them in the market.
C. MARKET SEGMENTS
T
he securities market has two interdependent segments: the primary and the secondary market. The primary market is the channel for creation of new securities. These securities are
issued by public limited companies or by government agencies. In the primary market the resources are mobilized either through the public
STOCK MARKET TRENDS IN INDIA
4
issue or through private placement route. It is a public issue if anybody and everybody can subscribe for it, whereas if the issue is made available to a selected group of persons it is termed as private placement. There are two major types of issuers of securities, the corporate entities who issue mainly debt and equity instruments and the government (central as well as state) who issue debt securities. These new securities issued in the primary market are traded in the secondary market. The secondary market enables participants who hold securities to adjust their holdings in response to changes in their assessment of risks and returns. The secondary market operates through two mediums, namely, the over-the-counter (OTC) market and the exchange-traded market. OTC markets are informal markets where trades are negotiated. Most of the trades in the government securities are in the OTC market. All the spot trades where securities are traded for immediate delivery and payment take place in the OTC market. The other option is to trade using the infrastructure provided by the stock exchanges. There are 23 exchanges in India and all of them follow a systematic settlement period. All the trades taking place over a trading cycle (day=T) are settled together after a certain time (T+2 day). The trades executed on the National Stock Exchange (NSE) are cleared and settled by a clearing corporation. The clearing corporation acts as a counterparty and guarantees settlement. Nearly 100% of the trades in capital market segment are settled through demat delivery. NSE also provides a formal trading platform for trading of a wide range of debt securities, including government securities. A variant of the secondary market is the forward market, where securities are traded for future delivery and payment. A variant of the forward market is Futures and Options market. Presently only two exchanges viz., NSE and Stock Exchange, Mumbai (BSE) provides trading in the derivatives of securities.
STOCK MARKET TRENDS IN INDIA
5
D. SECONDARY MARKET
C
orporate Securities - There are 23 exchanges in the country, which offer screen based trading system. The trading system is connected using the VSAT technology from over 357 cities.
There were 9,368 trading members registered with SEBI as at end March 2004 (Table 1-10). The market capitalization has grown over the period indicating more companies using the trading platform of the stock exchange. The all India market capitalization is estimated at Rs. 13,187,953 million at the end of March 2004. The market capitalization ratio defined as the value of listed stocks divided by GDP is used as a measure of stock market size. It is of economic significance since market is positively correlated with the ability to mobilize capital and diversify risk. It increased sharply to 52.3% in 2003-04 against 28.5% in the previous year. The trading volumes on exchanges have been witnessing phenomenal growth over the past decade. The trading volume, which peaked at Rs. 28,809,900 million in 2000-01, fell substantially to Rs. 9,689,093 million in 2002-03. However, the year 2003-04 saw a turnaround in the total trading volumes on the exchanges. It registered a volume of Rs. 16,204,977 million. The turnover ratio, which reflects the volume of trading in relation to the size of the market, has been increasing by leaps and bounds after the advent of screen based trading system by the NSE. The turnover ratio for the year 2003-04 accounted at 122.9%. The relative importance of various stock exchanges in the market has undergone dramatic change during this decade. The increase in turnover took place mostly at the big exchanges. The NSE yet again registered as the
STOCK MARKET TRENDS IN INDIA
6
market leader with more 85% of total turnover (volumes on all segments) in 2003-04. Top 5 stock exchanges accounted for 99.88% of turnover, while the rest 18 exchange for less than 0.12% during 2003-04 (Table 1-11). About ten exchanges reported nil trading volume during the year.
The movement of the S&P CNX Nifty, the most widely used indicator of the market, is presented in Chart 1-1. The index movement has been responding to changes in the government’s economic policies, the increase in FIIs inflows, etc. However, the year 2003-04 witnessed a favorable movement in the Nifty, wherein it registered its all time high in January 2004 of 2014.65. The point-to-point return of Nifty was 80.14% for 2003-04.
STOCK MARKET TRENDS IN INDIA
7
G
overnment Securities - The trading in government securities exceeded the combined trading in equity segments of all the exchanges in the country during 2003-04. The aggregate
trading in central and state government dated securities, including treasury bills, increased by manifold over a period of time. During 200304 it reached a level of Rs. 26,792,090 million. The share of WDM segment of NSE in total turnover for government securities decreased marginally from 52% in 2002-03 to 47.6% in 2003-04. However, the share of WDM segment of NSE in the total of Non-repo government securities increased marginally from 74.01% in 2002-03 to 74.89% in 2003-04 (Table 1-10).
END OF CHAPTER I
STOCK MARKET TRENDS IN INDIA
8
CHAPTER II - REGULATORY FRAMEWORK The four main legislations governing the securities market are (a) The SEBI Act, 1992 (b) The Companies Act, 1956 (c) The Securities Contracts (Regulation) Act, 1956, and (d) The Depositories Act, 1996 A brief about these legislations are as given below:
S
EBI Act, 1992: The SEBI Act, 1992 was enacted to empower SEBI with statutory powers for (a) protecting the interests of investors in securities, (b) promoting the development of the
securities market, and (c) regulating the securities market. Its regulatory jurisdiction extends over corporates in the issuing capital and all intermediaries and persons associated with securities market. It can conduct enquiries, audits and inspection of all concerned participants and adjudicate offences under this Act. It has powers to register and regulate all the market intermediaries. Further it can also penalize them in case of violations of the provisions of the Act, Rules and Regulations made there under. SEBI has full autonomy and authority to regulate and develop an orderly securities market.
STOCK MARKET TRENDS IN INDIA
9
S
ecurities Contracts (Regulation) Act, 1956: It provides for direct and indirect control of virtually all aspects of the securities trading including the running of stock exchanges with
an aim to prevent undesirable transactions in securities. It gives the Central Government regulatory jurisdiction over (a) stock exchanges through a process of recognition and continued supervision, (b) contracts in securities, and (c) listing of securities on stock exchanges. As a condition of recognition, a stock exchange complies with the requirements prescribed by the Central Government. The stock exchanges frame their own listing regulations in consonance with the minimum listing criteria set out in the Rules.
D
public
epositories Act, 1996: The Depositories Act, 1996 provides for the establishment of depositories for securities to ensure transferability of securities with speed, accuracy and security. companies freely transferable subject to certain
For this, these provisions have been made: (a) making securities of limited exceptions; (b) dematerializing the securities in the depository mode; and (c) providing for maintenance of ownership records in a book entry form. In order to streamline the settlement process, the Act envisages transfer of ownership of securities electronically by book entry without moving the securities from persons to persons. The Act has made the securities of all public limited companies freely transferable, restricting the company’s right to use discretion in effecting the transfer of securities, and the transfer deed and other procedural requirements under the Companies Act have been dispensed with.
C
ompanies Act, 1956: It deals with issue, allotment and transfer of securities and various aspects relating to company management. It provides for standards of disclosure in the
public issues, particularly in the fields of company management and
STOCK MARKET TRENDS IN INDIA
10
projects, information about other listed companies under the same management, and management perception of risk factors. It also regulates underwriting, the use of premium and discounts on issues, rights and bonus issues, payment of interest and dividends, supply of annual report and other information. A. RULES, REGULATIONS & REGULATORS
T
he Government has framed rules under the SCRA, the SEBI Act and the Depositories Act. The SEBI has framed regulations under these acts for registration and regulation of the market
intermediaries and for prevention of unfair trade practices. Under these Acts, the Government and the SEBI issue notifications, guidelines and circulars, which the market participants comply with. The SROs like the stock exchanges have also laid down their rules and regulations. The regulator has to ensure that the market participants behave in a desired manner so that securities market continue to be a major source of finance for corporate and government while protecting the interest of investors. The responsibility for regulating the securities market is shared jointly by Department of Economic Affairs (DEA), Department of Company Affairs (DCA), Reserve Bank of India (RBI) and SEBI. The activities of all these agencies are coordinated by a High Level Committee on Capital Markets. Most of the powers under the SCRA are exercisable by DEA while a few others by SEBI and some are concurrently by them. The regulation of the contracts for sale and purchase of securities, gold related securities, money market securities and securities derived from these securities and ready forward contracts in debt securities are exercised concurrently with the RBI. The SEBI Act and the Depositories Act are mostly administered by SEBI. While the rules under the securities laws are framed by government, regulations are framed by SEBI. The powers under the Companies Act relating to
STOCK MARKET TRENDS IN INDIA
11
issue and transfer of securities and non-payment of dividend are administered by SEBI in case of listed public companies and public companies proposing to get their securities listed. The SROs ensure compliance of market participants with their own rules as well as with the rules relevant for them under the securities laws.
END OF CHAPTER II
CHAPTER III - REFORMS IN INDIAN SECURITIES MARKETS
A. Policy Developments
O
ver the last decade the Government and the market regulators have taken several policy measures to improve the operations of the stock exchanges and market intermediaries. The
measures are aimed at improving the market infrastructure and upgradation of risk containment, so as to protect the interest of the investors. The policy developments during April 2003 and June 2004 pertaining to trading of securities are enumerated below: Initiatives from Government I. Union Budget The Union Budget for 2004-05 proposed the following measures that have a bearing on the functioning of the secondary market: 1. An alternate trading platform for Small and Medium Enterprises (SME) have been proposed to be set up. This will help these enterprises in raising equity and debt from the Capital Market. 2. The procedure for registration and operation of FIIs is to be made simpler and quicker.
STOCK MARKET TRENDS IN INDIA
12
3. The investment ceiling for FIIs in debt funds have been raised to US$ 1.75 billion from US$ 1 billion. 4. Long-term capital gains tax on securities transaction has been abolished. The short term capital gains tax has been proposed to be at a flat rate of 10 percent. 5. Turnover taxes have also been imposed on delivery-based transaction at the rate of 0.15% and for non-delivery transactions at the rate of 0.015% for equities and 0.01% on trades on the derivatives segment. II. Pension System/Interim Pension Fund Regulator The Government has approved the basic features of the new pension system. A pension fund regulatory and development authority (PFRDA) in the interim is to be set up with the purpose to regulate and develop the pension market. In this system, there would be three different choices for investments e.g. Option A, B and C. The option A would imply predominant investments in fixed income instruments with some investments in equity. Option B with greater investments in equity and Option C would carry equal investment in fixed income and equity. The pension fund managers would be free to make investments in international markets subject to regulatory restrictions. III. Amendment to Securities Contracts (Regulation) Act, 1957 As per the recommendations of a Committee constituted by the SEBI under the chairmanship of Shri K. R. Ramamoorthy, the Securities Contracts (Regulation) Rules, 1957 have been amended. They are called the Securities Contracts (Regulation) Amendment Rules, 2003. It states that a member is permitted to conduct business in commodity derivatives only by setting up a separate company. It is required that the company should comply with the regulatory requirements in terms of net worth, capital adequacy, margins and exposure norms as maybe specified by the Forward Market Commission.
STOCK MARKET TRENDS IN INDIA
13
IV. Revised ECB Guidelines The Government notified the liberal External Commercial Borrowing (ECB) policy on January 19, 2004. Listed below are the new policies: (i) Removal of end-use restrictions: ECBs are allowed for corporate investments in industrial sector especially infrastructure sector for acquisition of shares under the Governments disinvestment programme of PSU shares up to US$ 500 million having minimum average maturity of 5 years under the automatic route. The usual restriction on ECB for investment in capital market or in the real estate is to continue. (ii) Eligibility: All corporates, except banks, NBFCs and FIs are eligible to borrow through the ECB route. However, those banks and FIs, who have participated in the Textile or Steel sector restructuring package of the Government/RBI, are permitted, but only to the extent of their investment in the package. (iii) Interest Rate Spreads: All ECBs are subject to the following revised maximum spreads, over six month LIBOR or the applicable benchmark(s), as the case may be (a) Average maturity of 3-5 years -200 basis points and (b) More than 5 years of average maturity - 350 basis points. (iv) Guarantee: Banks, FIs, NBFCs are not permitted to provide guarantee/letter of comfort. (v) Procedure: All ECBs satisfying the above criteria will be under the auto route up to US$ 20 million for ECBs between 3-5 years of average maturity and up to US$ 500 million for ECBs having average maturity of more than 5 years. All cases, which fall outside the purview of the autoroute in the new liberalized ECB policy, should be subject to the approval by the Empowered Committee of the RBI. On similar lines, guidelines for Foreign Currency Convertible Bonds (FCCBs) have been liberalized.
STOCK MARKET TRENDS IN INDIA
14
V. Companies (Issue of Indian Depository Rules) 2004 Ministry of Finance (MoF) has notified the Companies (Issue of Indian Depository Rules), 2004, applicable to those companies incorporated outside India desiring to raise resources through Indian securities markets. The issuer company can issue Indian Depository Receipts (IDRs) only against its underlying equity shares. The rules require that the issuer company’s pre-issue paid up capital and average turnover should be US$ 100 millions and US$ 500 millions, respectively. The company should also be making profits for at least 5 years preceding the issue and must have declared dividend of at least 10% during the period and has a pre-issue debt equity ratio of 2:1. The issuer company has to obtain prior permission from the SEBI and the necessary approvals/exemptions from the country of its incorporation (where required) for making the issue. Following the approval, issuer should appoint a number of intermediaries such as overseas custodian bank, domestic depository, and a merchant banker. The issuer company should also take in-principle listing approval from one or more stock exchanges having nation wide trading terminals in India. The IDRs should be denominated in Indian Rupees and not exceed 15% of the total paid-up capital and free reserves of the company. Redemptions are to be subject to FEMA and other laws and cannot be made within one year of their issue. In case of redemption, the underlying equity shares may be released to the IDR holder or may be sold directly by him. Initiatives from SEBI I. SEBI (Listing Authority) Regulations, 2003 To bring about uniformity in scrutinizing listing applications across the stock exchanges and to strengthen the listing agreement, SEBI has established the Central Listing Authority (CLA) under the SEBI (Central
STOCK MARKET TRENDS IN INDIA
15
Listing Authority) Regulations, 2003. The important features of these regulations are as follows: (i) The Central Listing Authority (CLA) is to be constituted by SEBI and should consist of a President and a maximum of ten other members, of which at least four members should be representatives of the stock exchanges. The SEBI Board shall appoint the President and the members from amongst persons having integrity and outstanding ability from judiciary, lawyers, academicians, financial experts etc. (ii) The authority should discharge the following functions viz., processing the application made for listing by any body corporate, MF or CIS, issuing the letter of recommendations, reviewing listing norms and any other functions as may be specified by the Board from time to time. (iii) Prior to applying for listing to any stock exchange, a body corporate, MF or CIS should obtain a letter of recommendations to list from the CLA. (iv)Any exchange should not consider any listing application, unless it is accompanied by a letter of recommendation issued by the CLA. (v) In case, the CLA refuses to issue letter of recommendation in accordance with the procedure laid down in the Regulations, the aggrieved party may approach SEBI within 10 days of receipt of the refusal. If the SEBI is not satisfied with the reason, SEBI may direct the CLA to issue a letter of recommendation within 15 days of receipt of such representation. (vi) If the exchange refuses listing to the body corporate, MF or CIS, it may appeal to the Securities Appellate Tribunal (SAT) as provided in the Securities Contracts (Regulation) Act, 1956. (vii) The CLA should also constitute a ‘Fund’ to be called the Central Listing Authority Fund, which should be constituted basically from the processing fees charged and received by the Authority. II. Amendments to Listing Agreement
STOCK MARKET TRENDS IN INDIA
16
SEBI advised the Stock Exchanges to initiate action against the listed companies, who have not complied with the various requirements of the listing agreements. It has been clarified that Section 23(2) of the SC(R)A, 1956 prescribes punishment for violation and non compliance of the provisions of listing agreement. Further, in order to ensure that listed companies do not in anyway violate or override or circumscribe the provisions of securities laws or the stock exchange requirements, SEBI amended the clause 24 of the listing agreement. The amended clauses are as given below: (a) The company should file with the stock exchange for approval any scheme/petition proposed to be filed before any court or tribunal at least a month before it is presented to the Court/tribunal. (b) The company should ensure that any scheme of arrangement/amalgamation/merger/reconstruction/reduction of capital, etc., to be presented to any Court or Tribunal does not in any way violate, override or circumscribe the provisions of securities laws or the stock exchange requirements. Securities law here means the SCRA 1956, the SEBI Act, 1992, the Depositories Act 1996 and the provisions of Companies Act 1956 and the other rules, regulations, guidelines etc. made under these Acts, and the Listing Agreement. III. Margin Trading With a view to improve liquidity in the equity market, SEBI initiated steps to introduce margin trading w.e.f. April 1, 2004. The securities, eligible for margin trading, should have an average impact cost of less than or equal to 1 and should be traded on at least 80% (+/-5%) of the days for the previous eighteen months. Only corporate brokers with net worth of at least Rs. 3 crore are eligible to offer this facility. They may use their own or borrowed funds, however, their total indebtedness should not exceed 5 times their net worth. The initial and maintenance margin is to be paid in cash and have to be a minimum of 50% and 40%,
STOCK MARKET TRENDS IN INDIA
17
respectively. While providing the margin trading facility, the broker should be prudent and ensure that there is no concentration on any single client. The arbitration mechanism of the exchange is not available for grievances arising out of this facility. IV. Eligibility of a Sub-broker to Trade through the Subsidiary Company The Stock Exchanges had been allowed to set up subsidiary company to acquire membership rights of other stock exchanges subject to certain conditions prescribed by SEBI. As per the conditions stated in the SEBI directive, the subsidiary company could register only the members of the parent stock exchange as sub-brokers of the subsidiary company. However, it was noticed that the necessary changes have not been made in the rules, bye-laws and the regulations of all the stock exchanges which have set up subsidiaries and Memorandum/Articles of Association of the subsidiary company. Therefore, all the stock exchanges, which have set up subsidiaries were directed to make the necessary provisions in their rules, regulations and the bye-laws as well as in the Memoranda/Articles of Associations to this effect. V. Listing Fees It has been decided by SEBI, that the stock exchanges should have the freedom to charge listing fees without seeking prior approval from the SEBI. Accordingly, the exchanges have been directed to make necessary amendments to the bye-laws, rules and regulations/listing agreement. VI. Mark-up in respect of debentures and bonds traded on the Stock Exchange Through a circular issued by SEBI on December 09, 1996, it has been stipulated that the mark-up for the close out should be 20% above the
STOCK MARKET TRENDS IN INDIA
18
official closing price for equities as well as debentures and bonds. However, based on the recommendations of the Advisory Committee on Derivatives and Market Risk Management it has now been decided that in case of debentures and bonds with a credit rating AAA and above, close out mark-up of 5% should be applied. In cases where the credit rating is below AAA, then the existing close out mark-up of 20% should be applicable. VII. Fair Practices and Code of Conduct A code of conduct for public representatives/SEBI nominee directors has been notified to ensure that the affairs of the stock exchanges are conducted on the healthy lines with the highest standards of professional conduct, business ethics and morality. Also the guidelines enumerating • fair practices have been notified. The public representatives/SEBI nominee directors should: endeavor to attend all the board meetings. They should be liable to vacate their office if they remain absent for three consecutive meetings of the Board of Directors or do not attend 75% of the total meetings of the Board in a calendar year. • not participate in the discussion on subjects, which may involve any conflict of interest or give rise to. If in case it happens then the same should be disclosed and recorded in the minutes of the meeting; however, during the meeting the agenda papers should not be circulated, unless circumstances requires. • • meet at least once in 6 months separately, if necessary, to exchange views on critical issues. offer their comments on the draft minutes and ensure that the same are incorporated in the final minutes. It should be ensured that the minutes of the previous meeting are placed for approval in the subsequent meeting.
STOCK MARKET TRENDS IN INDIA •
19
endeavor to have the date of next meeting fixed at each Board Meeting itself in consultation with other members of the Governing Board. In case, all the items of the agenda of a meeting are not covered, then next meeting is to be held within 15 days.
•
participate in the formulation and execution of various strategies by being pro-active in decision making in the Board meetings, so that the exchanges benefits from their experience and expertise.
•
endeavor to ensure that the Exchange abides by all the provisions of the SEBI Act, Securities Contracts (Regulation) Act, Rules, Regulations framed there under and the circulars, directions issued by the Government/SEBI.
•
endeavour to make the regulatory system foolproof by ensuring compliance at all levels of hierarchy in the Exchange. They should also ensure that the Exchange honors the time limit prescribed by SEBI for corrective actions.
•
not support any decision of the Board, which may adversely affect the interest of investors. They should report forthwith any such decision to SEBI.
•
make sure that the arbitral award is given within the period stipulated in the Bye-Laws, Rules or Regulations of the Exchange and in any case, the award is to be delivered within 15 days after the final meeting.
•
priorities redressing of investor grievances by encouraging fair trade practice. They should also make use of every opportunity to enhance and improve their level of knowledge, so that they are able to resolve various issues arising in the operations of the exchange with professional competence, fairness, impartiality, efficiency and effectiveness.
STOCK MARKET TRENDS IN INDIA •
20
submit the necessary disclosures/statement of holdings/dealings in securities as required by the Exchange as per their Rules or Articles of Association.
•
maintain confidentiality about any information obtained in the discharge of their duty unless otherwise required by law. Further, they should not use the confidential information for their personal gains.
• •
avoid any interest or activity which is in conflict with the conduct of their official duties. not engage in any act involving moral turpitude, dishonesty, fraud, deceit, or misrepresentation or any other act prejudicial to the administration of the exchange.
VIII. Corporate Governance in Listed Companies Clause 49 of the listing agreement has been amended to include the recommendations as prescribed by the committee on corporate governance set up under the chairmanship of Shri N. R. Narayana Murthy: Composition of Board: The board of directors of a company should have an optimum combination of executive and non-executive directors. However, the non-executive directors should not be less than 50% of the directors. The number of independent directors should be determined on the basis of the post held by the Chairman; in case of a non-executive chairman, at least 1/3rd of board should comprise of independent directors and if he is an executive chairman, then at least half of Board should comprise of independent directors. Non-Executive Directors’ Compensation and Disclosures: All the compensation paid to non-executive directors should be fixed by the
STOCK MARKET TRENDS IN INDIA
21
Board and should be approved by shareholders in general meeting. A limit should be placed for the maximum number of stock options that can be granted to them in any financial year and in aggregate. In its annual report, the company should publish its compensation philosophy, statement of entitled compensation in respect of non-executive directors and the details of shares held by non-executive directors. Independent Director: Independent Director should periodically review the company’s legal compliance reports as well as the steps taken by the company. In the event of any legal proceedings against an independent director in connection with the affairs of the company, the defence would not be permitted on the ground that he was unaware of his responsibility. Board Procedure: The Board should meet at least four times a year, with a maximum time gap of four months between any two meetings. A director should not be a member in more than 10 committees or act as Chairman of more than five committees across all companies in which he is a director. Furthermore, it should be mandatory for all the directors to inform the company about the positions they occupy in other companies every year and also notify changes as and when they take place. Code of Conduct: It is obligatory for the Board to lay down the code of conduct for all its members and the senior management of the company, which should be posted on the company’s website. On an annual basis, all the members of the Board and senior management personnel should affirm compliance with the code. In addition, the annual report should contain a declaration to this effect signed by the CEO and COO. Term of Office of Non-executive directors: A person would be eligible for the office of non-executive director so long as his term in the office has not exceeded nine years in three terms of three years each, running continuously.
STOCK MARKET TRENDS IN INDIA
22
Qualified and Independent Audit Committee: A qualified and independent audit committee with a minimum of three members comprising of a chairman and members shall be set up. Wherein the chairman should be an independent director and majority of members should be independent directors. It is required that all the members of audit committee should be financially literate and at least one of them should have accounting or related financial management expertise. The Chairman should be present at Annual General Meeting to answer the queries of the shareholders. The audit committee should invite executives, as it considers appropriate (and particularly the head of the finance function) to be present at the meetings, but on occasions it may also meet without the presence of any executives. Audit Committee: The audit committee should meet at least thrice a year, but once every six months; at least one meeting should be held before finalization of annual accounts. The quorum for the meeting should be either two members or one third of the total members; whichever is higher and minimum of two independent directors. The committee is empowered to (i) investigate any activity within its terms of reference (ii) seek information from any employee (iii) obtain outside legal or other professional advice (iv) secure attendance of outsiders with relevant expertise, if it considers necessary. Role of Audit Committee: The role of the audit committee should be to (a) oversees the company’s financial reporting process and the disclosure made in the financial statement and ascertains its accuracy, sufficiency and credibility (b) recommend the appointment and removal of external auditor, fixation of audit fee and also approve payment for any other services (c) review the adequacy of internal audit function, including the structure of the internal audit department, its staff, officials heading the department, reporting structure coverage and frequency of internal audit. Further, the committee should discuss with internal auditors any significant
STOCK MARKET TRENDS IN INDIA
23
findings and follow them up (d) review the findings of any internal investigations into matters of a suspected fraud or irregularity or a failure of internal control systems of a material nature and reporting the matter to the board. Also, the committee should discuss with external auditors before the audit commences about nature and scope of audit. Post-audit the committee should ascertain any area of concern regarding company’s financial and risk management policies. The Audit Committee should also compulsorily review information related to (i) financial statements and draft audit report, including quarterly/halfyearly financial information; (ii) management discussion and analysis of financial condition and results of operations; (iii) reports relating to compliance with laws and to risk management; and (iv) management letters/letters of internal control weaknesses issued by statutory/internal auditors.
IX. Listing of Further Issue of Capital Following the withdrawal of compulsory listing of companies on regional stock exchange, it has been decided by the SEBI that a company should be listed on any of the stock exchanges, which have a nationwide trading terminals. If the company is not listed on any stock exchange having nationwide trading terminals, then it should continue to obtain ‘in-principle’ approval from all the exchanges where it is listed. The listing agreement states: “The Company agrees to obtain ‘in-principle’ approval for listing from the exchanges having nationwide trading terminals where it is listed, before issuing further shares or securities. Where the company is not listed on any exchange having nationwide trading terminals, it agrees to obtain such ‘in-principle’ approval from all the exchanges in which it is listed before issuing further shares or securities.”
STOCK MARKET TRENDS IN INDIA
24
X. Amendment to SEBI (Depositories and Participants) (Second Amendment) Regulations 2003 SEBI amended the SEBI (Depositories and Participants) Regulations 1996 to include the clauses regarding the manner of handling the share registry work, redressal of investor grievances and maintenance of audit reports. All matters relating to transfer of securities, maintenance of records of holders of securities, handling of physical securities should be handled and maintained at a single point by establishing connectivity with the depositories i.e. either in-house by the issuer or by a Share Transfer Agent (STA) registered with the SEBI. Every issuer or its agent or any person who is registered as an intermediary under this act, should redress the grievances of beneficial owners within thirty days of the receipt of the complaint. Simultaneously, the depository should also be informed about the number and nature of grievances redressed by it and number of grievances pending before it. The issuers should submit the audit report on a quarterly basis, starting from September 30, 2003 to the concerned stock exchanges audited by a qualified Chartered Accountant or a practicing Company Secretary. XI. Amendment to SEBI (FII) (Second Amendment) Regulations 2003 The SEBI (Foreign Institutional Investors) Regulations has been amended by the SEBI to include the new clauses as stated herewith. The FIIs should fully disclose information concerning the terms of and parties to off-shore derivative instruments such as Participatory Notes (P-Notes), Equity Linked Notes (ELN) or any other such instruments listed or proposed to be listed. The code of conduct has also been specified which states that (a) a FII and its key personnel should observe high standards of integrity, fairness and professionalism in all their
STOCK MARKET TRENDS IN INDIA dealings render with high intermediaries, standards of regulatory and other due
25 government and
authorities in the Indian securities market. They should, at all times, service; exercise diligence independent professional judgment (b) a FII should ensure and maintain confidentiality in respect of trades done on its own behalf and/or on behalf of its sub-accounts/clients. There should be clear segregation of its own money/securities and sub-accounts’ money/securities; arms length relationship should be maintained between its business of fund management/investment and its other business (c) a FII should maintain an appropriate level of knowledge and competency and abide by the provisions of the Act, regulations made there under and the circulars and guidelines applicable and relevant to them. Every FII should also comply with award of the Ombudsman and decision of the Board under SEBI (Ombudsman) Regulations, 2003 (d) a FII should not make any untrue statement or suppress any material fact in any documents, reports or information furnished to the Board (e) they should ensure that good corporate policies and corporate governance are observed and do not engage in fraudulent and manipulative transactions in the securities listed in any stock exchange in India (f) a FII and/or any of its affiliates should not indulge in any insider trading, should not be a party to or instrumental for creation of false market in securities listed or proposed to be listed in any stock exchange in India. They should not be involved in price rigging or manipulation of prices of securities listed or proposed to be listed in any stock exchange in India. XII. SEBI (Central Database of Market Participants) Regulations 2003 The SEBI (Central Database of Market Participants) Regulations, 2003 intends to develop an inventory of Market Participants and Investors and also set up standards for client code. It places a mandatory obligation on all entities under the jurisdiction of SEBI and specified investors to
STOCK MARKET TRENDS IN INDIA
26
obtain unique identification number under MAPI database. The main features of this regulation are as cited: (a) every investor, listed company, company intending to get its securities listed, intermediary and other entities should make applications for allotment of unique identification numbers (UINs) for itself and for its related persons (b) the application made by a specified intermediary or any other entity should be in a specified form. On receipt of an application, the designated service provider should allot to the applicant a UIN. In case of any defect, the designated service provider should give the applicant an opportunity to rectify it within a period of 15 days from the date of the intimation or within the period approved by the Board. If the defect is not rectified within the allotted time period, then the designated service provider should refer the application to the SEBI board (c) if unique identification number was obtained through fraud or misrepresentation or was allotted to a person by mistake, the Board may, after giving him an opportunity of making representations, revoke the UIN allotted to him or to the related persons. Once the UIN is revoked, the person will be treated as if no UIN was allotted to him. In case a person issues any security or buys, sells or deals in any securities in contravention of these regulations, they would be liable for suspension from trading or may be debarred from dealing in the securities market, or any other action as may be deemed appropriate by the Board. XIII. Disclosure of Proprietary Trading by Brokers to Client To increase the transparency in the dealings between the broker and the client, it has been decided that every broker should disclose to his client whether he does client based business or proprietary trading as well. This should be disclosed to all his existing clients and also to his new clients at the time of entering into the ‘Know Your Client’ agreement. In case of a broker who at present does not trade on
STOCK MARKET TRENDS IN INDIA
27
proprietary account, chooses to do so at a later date, he is required to disclose this to his clients before carrying out any proprietary trading. XIV. Trading by Members/Sub-brokers Since certain members/sub-brokers deal through a large number of other stock brokers/sub-brokers on the same exchange/other exchanges for their proprietary trades as well as trades on behalf of their clients, SEBI has prohibited these transactions, except with the prior permission of the exchange. After the stock exchange considers the reason stated by the broker-sub-broker for such transactions and carry out due diligence, it should permit such deals with only one broker/sub-broker registered with it. The stock broker/sub-broker of an exchange can deal with only one broker/sub-broker of another exchange for proprietary trading after intimating the names of such stock broker/sub-broker to his parent stock exchange XV. Disclosure of Trade Details of Bulk Deals SEBI has decided to bring about greater disclosure in the nature of the bulk deals. All transactions in scrip where total quantity of shares bought/sold is more than 0.5% of the outstanding equity shares of that company are considered to be bulk deals. The brokers should disclose to the stock exchange the name of the scrip, name of the client, quantity of shares bought/sold and the traded price. Immediately after executing the trade, the brokers should intimate the exchange and the stock exchange, in turn, should disseminate the aforesaid information on the same day after the market hours to the general public. XVI. Changes in the Name of the Listed Companies All listed companies, which decide to change their names, are required to comply with certain provisions: (i) They have to maintain a time
STOCK MARKET TRENDS IN INDIA
28
period of at least one year before the last name change (ii) At least 50% of its total revenue in the preceding one year period should have been accounted for by the new activity suggested by the new name (iii) The new name along with the old name should be disclosed through web sites of the respective stock exchange/s where the company is listed and also through EDIFAR web site for a continuous period of one year from the date of last name change. XVII. Reduction in Notice Period for Fixing the Book
Closure/Record Date On receiving representations from various quarters and in view of the major structural changes/developments in the secondary markets, SEBI decided to reduce the notice period which the listed companies have to give to the stock exchanges before their book-closure/record date. In the first phase, the said notice period has been reduced to 15 calendar days from 30 days in case of dematerialized scrips and from 42 days to 21 calendar days in case of physical scrips.
Initiatives from RBI I. FIs Trading in GOI Securities With a view to facilitate participation of the financial institutions (FIs) for trading in government securities on the stock exchanges, the FIs have to follow the procedure mentioned below: 1. FIs should open demat accounts with the Depository Participant (DP) of either NSDL/CDSL, in addition to their SGL Accounts with RBI.
STOCK MARKET TRENDS IN INDIA
29
2. Value free transfer, (i.e. transfer of the GOI securities from the SGL/CSGL account to the demat account of the same party) of securities between SGL/CSGL and demat accounts should be enabled subject to operational guidelines. 3. FIs should also ensure: (a) to obtain specific approval from their Board of Directors to enable them to trade in Government securities on the stock exchanges, (b) they should put in place necessary infrastructure, risk management systems and appropriate internal control systems for trading/settlement of Government securities on stock exchanges (c) their transactions through any single broker should be subjected to the extant guidelines on dealings through brokers (d) all their trades should be settled either directly with clearing corporation/clearing house or else through clearing member custodians (e) at the time of trade, securities should be available with the FIs either in their SGL account with RBI or in demat account with depositories (f) the purchase transactions by the FIs should be subject to availability of clear funds in their settlement accounts at the time of pay-in, (g) all pay-out of funds should invariably be out of clear funds, i.e. the pay out must not be contingent upon the outcome of any clearing to be conducted on that day. 4. Any settlement failure on account of non-delivery of securities/nonavailability of clear funds should be treated as SGL bouncing and the penalties in respect of SGL bouncing should be applicable. 5. All the details of transaction in Government securities, on aggregate basis, undertaken on the stock exchanges and particulars of any “closed out” should be reported to the audit committee of the Board. In the mid-term review of the monetary and credit policy, RBI has permitted sale of Government security already contracted for purchase subject to two conditions: (a) the purchase contract is confined prior to the sale, is guaranteed by CCIL or the security is contracted for purchase from the RBI; (b) the sale transaction settles either in the same settlement cycle as the preceding purchase contract so that the
STOCK MARKET TRENDS IN INDIA
30
delivery obligation under the sale contract is met by the securities acquired under the purchase contract. II. De-recognition of Overseas Corporate Bodies as an Investor Class RBI in consultation with the Government have de-recognized Overseas Corporate Bodies (OCBs) in India as an eligible ‘class of investor’ under various routes/schemes available under extant Foreign Exchange Management Regulations. In addition, following measures have also been initiated (i) an unincorporated entity also should not be allowed to make fresh investments under the Foreign Direct Investment scheme including the automatic route. However, the unincorporated entities and OCBs may continue to hold shares and convertible debentures till they are sold/redeemed (ii) they should also not undertake purchase of Government dated securities or treasury bills or units of domestic MFs or units of Money Market Mutual Funds (MMMFs) in India or National Plan/Savings Certificates both on repatriation and no repatriation basis. However, they may continue to hold these securities till they are sold/matured (iii) a person resident outside India including OCBs should not transfer by way of sale or gift, the shares or convertible debentures held by them to another OCB (iv) OCBs should not purchase equity or preference shares or convertible debentures offered on right basis by an Indian company. A person resident in India should also not borrow in foreign currency from OCBs (v) an Indian company should not borrow in rupees on repatriation and non-repatriation basis from OCBs by way of investment in Non-Convertible Debentures(NCDs) (vi) an Indian company, a proprietorship concern or a firm in India should not accept deposits from OCBs on non-repatriation basis (vii) OCBs should not open and maintain Non-Resident (External) Rupee Account (NRE), Foreign Currency (Non-Resident) Account (Banks)[FCNR(B)] Accounts and NonResident Ordinary Rupee (NRO) Deposit Account with Authorized
STOCK MARKET TRENDS IN INDIA
31
Dealers in India. (viii) no new NRE/FCNR/NRO Accounts in the name of OCBs should be opened and no renewal of deposits should be made. As regards with investment on repatriation basis, authorized dealers (ADs) may allow repatriation as authorized. For investment on non-repatriation basis, ADs should arrange to obtain requests for disposal of funds from their OCB clients and seek the specific approval for each case from the RBI. The ban imposed on OCBs under PIS vide a circular issued earlier shall continue. However, they are allowed to hold the shares and convertible debentures purchased under PIS till such time these are sold on Stock Exchange in India. It has also been clarified that the derecognition of OCBs as a separate category of investor meant withdrawal of special facilities made available to them. However, the overseas entities owned by NRIs remain unaffected of the same. III. Bank Financing of Equities and Investments in Shares As per the RBI directive, banks were required to apply a uniform margin of 40% on all advances against shares/financing of IPO’s/issue of guarantees. A minimum cash margin of 20 per cent (within the margin of 40%) is also to be applied in respect of guarantees issued by the banks. This has been reviewed and it has been raised to a uniform margin of 50% to all fresh advances/guarantees issued. A minimum cash margin of 25% (within the margin of 50%) should be maintained in respect of guarantees issued by banks for capital market operations. The existing advances/guarantees issued may continue at the earlier margins until they come up for renewal.
END OF CHAPTER III
STOCK MARKET TRENDS IN INDIA
32
CHAPTER IV - STOCK MARKET DESIGN – FACTS AND FIGURES
A
t the end of March 2004, there were 23 operative stock exchanges with 9,368 registered brokers and 12,815 registered sub-broker trading on them (Annexure 4-1). The stock
exchanges need to be recognized under the Securities Contracts (Regulation) Act, 1956. Of the 23 recognized stock exchanges, only 3 exchanges (Mumbai, Ahmedabad, and Madhya Pradesh) are organized in the form of “Association of Persons”, while the rest are organized as limited companies. Except NSE, all exchanges are not-for-profit making organizations. Realizing the problems of a non-demutualised set up, a committee under the chairmanship of Chief Justice M. H. Kania was set
STOCK MARKET TRENDS IN INDIA
33
up (i) to review the present structures of stock exchanges (ii) to examine the legal, financial and fiscal issues involved to corporatise and demutualise the stock exchanges, and recommend the specific steps that need for demutualisation, and (iii) to advise on the consolidation and merger of the stock exchanges. The committee recommended a uniform model of demutualisation and corporatisation and advised the stock exchanges to initiate the process of getting demutualised. As on date only two exchanges viz., NSE and OTCEI are demutualised and others are in the process of getting demutualised. A. Functions of stock exchanges
S
tock exchanges provide liquidity to the listed companies. By giving quotations to the listed companies, they help trading and raising funds from the market. Savings of investors flow into
public loans and to joint-stock enterprises because of this ready marketability and unequalled facility for transfer of ownership of stocks, shares and securities provided by the recognized stock exchanges. As a result, over the hundred and twenty years during which the stock exchanges have existed in this country and through their medium, the Central and State governments have raised crores of rupees by floating public loans ; Municipal corporations, Improvement trusts Local Bodies and State Finance Corporations have obtained from the public their financial requirements, and industry , trade and commerce-the backbone of country’s economy –have secured capital of crores of rupees through issue of stocks, shares and debentures for financing their day to day requirements, organizing new ventures and completing projects of expansion , diversification and modernization. By obtaining the listing and trading facilities, public investment is increased and companies were able to raise more funds. The quoted companies with
STOCK MARKET TRENDS IN INDIA
34
wide public interest have enjoyed some benefits and asset valuation has become easier for tax and other purposes. In line with the growth in the new issues market during the eighties, the secondary market also expanded fast during this period. The number of stock exchanges has increased from 8 in 1980 to a total 24 in 1996. The membership of the stock exchanges has also increased substantially over the years. The number of listed companies has also increased and the market capitalization has also shown a substantial increase. The volume of daily turnover of trade and the number of dealings per day have gone up sharply. B. Membership
T
he trading platform of a stock exchange is accessible only to brokers. They play a significant role in the secondary market by bringing together the buyers and sellers. The brokers input
buy/sell orders either on his own account or on behalf of clients. The clients may place their orders either with them directly or through a sub-broker indirectly. Thus, as these buy and sell order matches, the trades are executed. The exchange can admit a broker as its member only on the basis of the terms specified in the Securities Contracts (Regulation) Act, 1956, the SEBI Act 1992, the rules, circulars, notifications, guidelines, and the byelaws, rules and regulations of the concerned exchange. No stock broker or sub-broker is allowed to buy, sell or deal in securities, unless he or she holds a certificate of registration from the SEBI. The stock exchanges, however, are free to stipulate stricter requirements than those stipulated by the SEBI. The minimum standards stipulated by NSE are in excess of those laid down by the SEBI. The NSE admits members based on factors, such as, corporate structure, capital adequacy, track record, education, and
STOCK MARKET TRENDS IN INDIA
35
experience (Table 4-2). This reflects a conscious decision of NSE to ensure quality broking services. The authorities have been encouraging corporatisation of the broking industry. As a result, a number of brokersproprietor firms and partnership firms have converted themselves into corporates. As at end-March 2004, there were brokers 9,368 (including multiple registrations) registered with SEBI as compared to 9,519 brokers as at end-March 2003. As of end-March 2004, 3,787 brokers, accounting for nearly 40% of total have become corporate entities. Amongst those registered with NSE around 88.97% of them were corporatised, followed by OTCEI with 77.85% corporate brokers. As at end-March 2004, there were 12,815 sub-brokers registered with SEBI, as compared with 13,291 sub-brokers as at end of previous year. There were a total of 141 additions of members during the year 2003-04, whereas 292 were membership cases of reconciliation/ cancellation/surrender. NSE and BSE together constituted 88.29% of the total sub-brokers.
STOCK MARKET TRENDS IN INDIA C. Listing of Securities
36
L
isting means formal admission of a security to the trading platform of a stock exchange. Listing of securities on the domestic stock exchanges is governed by the provisions in the
Companies Act, 1956, the Securities Contracts (Regulation) Act, 1956 (SC(R)A), the Securities Contracts (Regulation) Rules (SC(R)R), 1957, the circulars/guidelines issued by Central Government and SEBI. In addition, they are also governed by the rules, bye-laws and regulations of the concerned stock exchange and by the listing agreement entered into by the issuer and the stock exchange. Some of the key provisions are enumerated below: 1. The Companies Act, 1956 requires a company intending to issue securities to the public should seek a permission from one or more recognized stock exchanges for its listing. If the permission is not granted by all the stock exchanges before the expiry of 10 weeks from the closure of the issue, then the allotment of securities would be void. Also, a company may prefer to appeal against refusal of a stock exchange to list its securities to the Securities Appellate Tribunal (SAT). The prospectus should state the names of the stock exchanges, where the securities are proposed to be listed. 2. The bye-laws of the exchanges stipulate norms for the listing of securities. All listed companies are under obligation to comply with the conditions of listing agreement with the stock exchange where their securities are listed. If they fail to comply with them, then they are punishable with a fine up to Rs. 1,000. 3. The SC(R)R prescribe requirements with respect to the listing of securities on a recognized stock exchange and empowers SEBI to waive or relax the strict enforcement of any or all of them. 4. The listing agreement states that the issuer should agree to adhere to the agreement of listing, except for a written permission from the SEBI.
STOCK MARKET TRENDS IN INDIA
37
As a precondition for the security to remain listed, an issuer should comply with the conditions as may be prescribed by the Exchange. Further, the securities are listed on the Exchange at its discretion, as the Exchange has the right to suspend or remove from the list the said securities at any time and for any reason, which it considers appropriate. 5. A SEBI circular asserts that the basic norms of listing on the stock exchanges should be uniform across the exchanges. However, the stock exchanges can prescribe additional norms over and above the minimum, which should be part of their bye-laws. SEBI has been issuing guidelines/circulars prescribing certain norms to be included in the listing agreement and to be complied by the companies. 6. The stock exchanges levy listing fees on the companies, whose securities are listed with them. The listing fee has two componentsinitial fee and annual fee. While, initial fee is a fixed amount, the annual fee varies depending upon the size of the company. NSE charges Rs. 7,500 as initial fees. For companies with a paid-up share and/or debenture capital of less than or equal to Rs. 1 crore annual listing fees is Rs. 4,200. For companies with a paid-up share and/or debenture capital of more than Rs. 50 crore, the annual listing fees is Rs. 70,000 plus Rs. 1,400 for every additional Rs. 5 crore or part thereof. A number of requirements, under the SC(R)R, the bye-laws, the listing agreement have to be continuously complied with by the issuers to ensure continuous listing of its securities. The listing agreement also stipulates the disclosures that have to be made by the companies. In addition, the corporate governance practices enumerated in the agreement have to be followed. The Exchange is required to monitor the compliance with requirements. In case a company fails to comply with the requirements, then trading of its security would be suspended for a specified period, or withdrawal/delisting, in addition to penalty as prescribed in the SC(R)A.
STOCK MARKET TRENDS IN INDIA D. Trading Mechanism
38
N
SE was the first stock exchange in the country to provide nation-wide, anonymous, order driven, screen-based trading system, known as the National Exchange for Automated
Trading (NEAT) system. The member inputs, in the NEAT system, the details of his order such as the quantities and prices of securities at which he desires to transact. The transaction is executed as soon as it finds a matching sale or buys order from a counter party. All the orders are electronically matched on a price/time priority basis. This has resulted in a considerable reduction in time spent, cost and risk of error, as well as frauds, resulting in improved operational efficiency. It allows for faster incorporation of price sensitive information into prevailing prices, as the market participants can see the full market on real time basis. This increases informational efficiency and makes the market more transparent. Further, the system allows a large number of participants, irrespective of their geographical locations, to trade with one another simultaneously, improving the depth and liquidity of the market. A single consolidated order book for each stock displays, on a real time basis, buy and sell orders originating from all over the country. The book stores only limit orders, which are orders to buy or sell shares at a stated quantity and stated price, are executed only if the price quantity conditions match. Thus, the NEAT system provides an Open Electronic Consolidated Limit Order Book (OECLOB), which ensures full anonymity by accepting orders, big or small, from members without revealing their identity. Thus, provides equal access to all the investors. A perfect audit trail, which helps to resolve disputes by logging in the trade execution process in entirety, is also provided. The trading platform of the CM segment of NSE is accessed not only from the computer terminals, but also from the personal computers of the investors through the Internet and from the hand-held devices through
STOCK MARKET TRENDS IN INDIA
39
WAP. SEBI has allowed the use of internet as an order routing system for communicating investors’ orders to the exchanges through the registered brokers. These brokers should obtain the permission from their respective stock exchanges. In February 2000, NSE became the first exchange in the country to provide web-based access to investors to trade directly on the Exchange followed by BSE in March 2001. The orders originating from the PCs of investors are routed through the internet to the trading terminals of the designated brokers with whom they have relations and further to the exchange. After these orders are matched, the transaction is executed and the investors get the confirmation directly on their PCs. SEBI has also allowed trading through wireless medium or Wireless Application Protocol (WAP) platform. NSE is the only exchange to provide access to its order book through the hand held devices, which use WAP technology. This particularly helps those retail investors, who are mobile and want to trade from any place. E. Technology
W
technology
ith the developments in communication and network technologies, there has been a paradigm shifts in the operations of the securities market across the globe.
Technology has enabled organizations to build new sources of competitive advantage, bring about innovations in products and services, and provide new business opportunities. Stock exchanges all over the world have realized the potential of IT and have moved over to electronic trading systems, which have wider reach and provide a better mechanism for trade and post trade execution. Given the importance of in shaping the securities industry, NSE has been emphasizing on innovations and sustained investments in technology. NSE is the first exchange in the world to use satellite communication technology for trading and also has the largest VSAT-based trading
STOCK MARKET TRENDS IN INDIA
40
network in the world and largest VSAT network for any purpose in the Asia Pacific region. It uses satellite communication technology to energize participation from more than 2,800 VSATs from approximately 365 cities spread all over the country. It has been continuously undertaking capacity enhancement measures so as to effectively meet the requirements of increased users and associated trading loads. NSE’s trading system called the National Exchange for Automated Trading (NEAT), is a state of-the-art client server based application. At the server’s end all the trading information is stored in an in-memory database to achieve a minimum response time and maximum systems availability for users. It has uptime records of 99.7%. The system also ensures data integrity with past record of single error in 10 million bits. For all trades entered into the NEAT system, there is uniform response time of less than 1.5 seconds. NSE has also put in place NIBIS (NSE’s internet Based Information System) for on-line real-time dissemination of trading information through its website. As part of its business continuity plan, NSE has established a disaster back-up site at Chennai along with its entire infrastructure, including the satellite earth station. This site at Chennai is a mirror replica of the complete production environment at Mumbai. The link between the two is through a highspeed optical fiber and the transaction data is backed up on near real time basis from the main site to the disaster back-up site to keep both the sites synchronized with each other all the time. F. Trading Rules
I
nsider Trading: Insider trading is considered an offence and is hence prohibited. The SEBI (Prohibition of Insider Trading) Regulations, 1992 prohibits an insider from dealing (on his own price sensitive information’. It also prohibits
behalf or on behalf of others) in listed securities on the basis of ‘unpublished
STOCK MARKET TRENDS IN INDIA
41
communicating, counseling or procuring such information from any other person to deal in securities of any company on the basis of such information. Price sensitive information for a security is any information, which if published, is likely to affect its price. It includes information regarding the financial results of the company, intended declaration of dividends, issue of securities or buy back of securities, amalgamation, mergers, takeovers, and any major policy changes. SEBI, on the basis of any complaint or otherwise, is empowered to investigate/inspect these allegation of insider trading. If a person is found prima facie guilty of insider trading, then SEBI may prosecute persons in an appropriate court or pass such orders as it may deem fit. In order to strengthen insider trading regulations, SEBI has mandated a code of conduct for listed companies, its employees, analysts, market intermediaries and professional firms. The insider trading regulations require initial and continuous disclosure of shareholding by directors, officers and major shareholders to price (holding more than 5% shares/voting rumors, rights). reporting The of companies are also mandated to adopt a code of disclosure with regards sensitive information, market shareholding/ownership, etc.
U
nfair Trade Practices: The SEBI (Prohibition of Fraudulent and Unfair Trade Practices in relation to the Securities Market) Regulations, 1995 empowers SEBI to investigate into cases of
market manipulation, fraudulent and unfair trade practices. The regulations define frauds as acts committed by a party of the contract or by his agent, with intent to deceive another party or his agent or to induce him to enter into the contract. The regulations specifically prohibit market manipulation, misleading statements to induce sale or purchase of securities, and unfair trade practices relating to securities. Under these regulations, SEBI can investigate into violations committed by any person, including an investor, issuer or an intermediary, suo
STOCK MARKET TRENDS IN INDIA
42
moto or upon information received by it. Based on the report of the investigating officer, SEBI can initiate action for suspension or cancellation of registration of an intermediary.
T
• • •
akeovers: The restructuring of companies through takeover is governed by the SEBI (Substantial Acquisition of Shares and Takeovers) Regulations, 1997. The Regulations were formulated
so that the process of acquisitions and takeovers is carried out in a welldefined and orderly manner following the principles of fairness and transparency. As per the regulations, the mandatory public offer is triggered on: crossing the threshold limit of 15%, crossing the creeping acquisition limit of 15% or more but less than 75% of shares or voting rights of a target company, Attempts by persons having 75% or more to acquire more shares. The regulations give enough scope for existing shareholders to consolidate and also cover the scenario of indirect acquisition of control. The applications for takeovers are scrutinized by the Takeover Panel constituted by the SEBI.
B
and
uy Back: Buy back is done by the company with the purpose to improve liquidity in its shares and enhance the shareholders’ wealth. Under the SEBI (Buy Back of Securities)
Regulations, 1998, a company is permitted to buy back its shares from: (a) existing shareholders on a proportionate basis through the offer document; (b) open market through stock exchanges using book building process; (c) shareholders holding odd lot shares.
STOCK MARKET TRENDS IN INDIA
43
The company has to disclose the pre and post-buy back holdings of the promoters. To ensure completion of the buy back process speedily, the regulations have stipulated time limit for each step. For example, in the cases of purchases through stock exchanges, an offer for buy back should not remain open for more than 30 days. The verification of shares received in buy back has to be completed within 15 days of the closure of the offer. The payments for accepted securities has to be made within 7 days of the completion of verification and bought back shares have to be extinguished and physically destroyed within 7 days of the date of the payment. Further, the company making an offer for buy back will have to open an escrow account on the same lines as provided in takeover regulations.
C
ircuit Breakers: Volatility in stock prices is a cause of concern for both the policy makers and the investors. To curb excessive volatility, SEBI has prescribed a system of circuit breakers. The
circuit breakers bring about a nation-wide coordinated halt in trading on all the equity and equity derivatives markets. An index based marketwide circuit breaker system applies at three stages of the index movement either way at 10%, 15% and 20%. The breakers are triggered by movement of either S&P CNX Nifty or Sensex, whichever is breached earlier. Further, the NSE views entries of non-genuine orders with utmost seriousness as this has market-wide repercussion. It may suomoto cancel the orders in the absence of any immediate confirmation from the members that these orders are genuine or for any other reason as it may deem fit. As an additional measure of safety, individual scripwise price bands have been fixed as below: • • Daily price bands of 2% (either way) on a set of specified securities, Daily price bands of 5% (either way) on a set of specified securities,
STOCK MARKET TRENDS IN INDIA • •
44
Daily price bands of 10% (either way) on another set of specified securities, Price bands of 20% (either way) on all remaining securities (including debentures, warrants, preference shares etc. which are traded on CM segment of NSE),
•
No price bands are applicable on scrips on which derivative products are available or on scrips included in indices on which derivatives products are available.
For auction market the price bands of 20% are applicable. In order to prevent members from entering orders at non-genuine prices in these securities, the Exchange has fixed operating range of 20% for such securities.
D
emat
Trading:
A
depository
holds
securities
in
dematerialised form. It maintains ownership records of securities in a book entry form, and also effects transfer of
ownership through book entry. Though, the investors have a right to hold securities in either physical or demat form, SEBI has made it compulsory that trading in securities should be only in dematerialised form. This was initially introduced for institutional investors and was later extended to all investors. The companies, which fail to establish connectivity with both the depositories on the scheduled date as announced by SEBI, their securities are traded on the ‘trade for trade’ settlement window of the exchanges. At the end of March 2004, the number of companies connected to NSDL and CDSL were 5,212 and 4,720, respectively. The number of dematerialised securities have increased from 76.9 billion at the end of March 2003 to 97.7 billion at the end of March 2004. During the same period the value of dematerialised securities has increased from Rs. 5,875 billion to Rs. 10,701 billion. Since the introduction of the depository system,
STOCK MARKET TRENDS IN INDIA
45
dematerialization has progressed at a fast pace and has gained acceptance amongst the market participants. All actively traded scrips are held, traded and settled in demat form. G. Charges for Services
A
s per SEBI Regulations, every stockbroker, on the basis of his total turnover, is required to pay annual turnover charges, which are to be collected by the stock exchanges. In order to
share the benefits of efficiency, NSE has been reducing the transaction charges over a period of time. At present a trading member is required to pay the exchange transaction charges @0.004% (Rs. 4 per Rs.1 lakh) of the turnover. The maximum brokerage chargeable by a broker is fixed at 2.5% of the contract price, exclusive of statutory levies like, SEBI turnover fee, service tax, and stamp duty. This is inclusive of the brokerage charged by the sub-broker, which should not exceed 1.5% of contract price. However, the brokerage charged varies from clients to clients. There are instances wherein brokerage as low as 0.15% has been charged. Stamp duties are payable as per the rates prescribed by the relevant states. In Maharashtra, it is charged @ Re. 1 for every Rs. 10,000 or part thereof (i.e. 0.01%) of the value of security at the time of its purchase/sale as the case may be. However, if the securities are not delivered, it is levied @ 20 paise for every Rs. 10,000 or part there of (0.002%). The depositories provide depository services to investors through depository participants (DPs). They do not charge the investors directly, but charge their DPs who are free to have their own free structure for their clients. The depositories, however, have been reducing their charges from DPs over a period of time. The charges levied on DPs by NSDL and CDSL are presented in Table 4-4b.
STOCK MARKET TRENDS IN INDIA
46
H. Institutional Trades
T
rades by Mutual Funds and Foreign Institutional Investors are termed as Institutional trades, Transactions by MFs in the secondary market are governed by SEBI (Mutual Funds)
Regulations, 1996. A MF under all its schemes is not allowed to own more than 10% of any company’s paid-up capital. They are allowed to do only ‘delivery-based’ transactions. A MF cannot invest more than 10% of the NAV of a particular scheme in the equity shares or equity related instruments of a single company. The investments by FIIs are governed by the rules and regulations of the RBI and the SEBI. As per the RBI guidelines, each FII can invest up to 10% of the paid-up capital of a company; however, the total FII investment should not exceed 24%. This can, however, be increased up to the sectoral cap/statutory ceiling, as applicable, provided the Indian company’s board of directors and also its general body approve it. As per the SEBI guidelines, all FII transactions are to be routed through a registered member of a recognized stock exchange in India. FIIs have to necessarily give and take delivery of securities sold and bought.
STOCK MARKET TRENDS IN INDIA
47
I. Index Services
A
stock index consists of a set of stocks that are representative of
either the whole market, or a specified sector. It helps to measure the change in overall behaviour of the markets or
sector over a period of time. NSE and CRISIL, in technical partnership with Standard & Poor’s, have jointly promoted the India Index Services & Products Limited (IISL). The IISL provides stock index services by developing and maintaining an array of indices for stock prices. IISL is the only specialized organization of this type in the country. IISL maintains a number of equity indices comprising broad-based benchmark indices, sectoral indices and customized indices. The most popular index is the S&P CNX Nifty, followed by the CNX Nifty Junior, S&P CNX Defty, S&P CNX 500, CNX Midcap 200, S&P CNX Industry indices (for 73 industries) and CNX IT Index. These indices are monitored and updated dynamically and are reviewed regularly. These are maintained professionally to ensure that it continues to be a consistent benchmark of the equity markets, which involves inclusion and exclusion of stocks in the index, day-to-day tracking and giving effect to corporate actions on individual stocks. S&P CNX Nifty is a well diversified 50 stock index accounting for 24 sectors of the economy. It accounted for 56.97% of total market capitalization of CM segment of NSE as at end-March 2004. The total traded value of all Nifty stocks is approximately 77% of the traded value of all the stocks on the NSE. CNX Nifty Junior accounts for 11.6% of the market capitalization in NSE. After carrying out a number of iterations, it was felt that Indian stock market had comfortable liquidity at around 50 stocks. Beyond 50, the liquidity levels became increasingly lower. Hence the index set size of 50 stocks was chosen. The stocks included in the Nifty index are selected on the basis of their impact cost, liquidity and market capitalization. The
STOCK MARKET TRENDS IN INDIA
48
composition of Nifty is reviewed at every quarter. The index is calculated afresh every time a trade takes place in any of the index stock. It is calculated on-line and disseminated over trading terminals across the country. Annexure 4-2 to 4-5 present the market capitalization, weightage, beta and monthly returns of the S&P CNX Nifty stocks for the period April 2003-March 2004. S&P CNX Nifty was introduced considering the fact that it would not only be used for reflecting the stock market behavior accurately, but also for modern applications such as index funds and index derivatives. It has become the most popular and widely used stock market indicator in the country. Index futures and options have been launched based on S&P CNX Nifty index and on CNX IT Index. Futures contracts based on S&P CNX Nifty have also been launched at the derivative exchange at Singapore. It is the only Indian index-based derivative product traded on a foreign exchange. J. Market Outcome
T
urnover – Growth and Distribution: Trading volumes in the equity segments of the stock exchanges have witnessed phenomenal growth over the last few years. While it has
increased from Rs. 10,233,820 million in 1998-99 to Rs. 28,809,900 million in 2000-01, it witnessed a slump during 2001-02 registering volumes of only Rs. 8,958,180 million. The traits of recovery in the market are visibly seen for the last two years. The volumes have risen to Rs. 9,689,093 million in 2002-03 and further to Rs. 16,204,977 million in 2003-04. In percentage terms there has been a growth of 67.29% in 2003-04 over the previous year’s volume (Table 4-5). The monthly trading value of the CM segment on NSE increased from Rs. 489,713 million in April 2003 to Rs. 1,048,765 million in March 2004 (Table 4-6). The daily turnover on NSE
STOCK MARKET TRENDS IN INDIA
49
averaged around Rs. 43,289 million in this year. Most of the exchanges saw large scale declines in their trading volumes in the year 2003-04 with nine exchanges viz., Calcutta, Uttar Pradesh, Ahmedabad, Delhi, Pune, ICSE, Hyderabad, Vadodara and Magadh observing the highest decline. Five exchanges viz., NSE, BSE, Bangalore, Madras and OTCEI were the only ones showing growth trends in this period. NSE consolidated its position further as the market leader by contributing about 67.8% of the total turnover. Since its inception in 1994, NSE has emerged as the favored exchange among trading members. The consistent increase in popularity of NSE is clearly evident from Annexure 4-6, which presents business growth of CM segment of NSE. NSE now reports higher turnover from its trading terminals in most of the cities than their corresponding regional exchanges. The comparative picture of turnover of regional stock exchanges and turnover of NSE terminals at different cities is presented in Table 4-7. Not only in the national arena, but also in the international markets, NSE has been successful in creating a niche for itself. According to reports of FIBV, in the calendar year 2003, in terms of trading intensity NSE ranked 3rd next only to NASDAQ and NYSE.
ATTN: TABLE ON NEXT PAGE
STOCK MARKET TRENDS IN INDIA
50
STOCK MARKET TRENDS IN INDIA
51
The sectoral distribution of turnover has undergone significant change over last few years. Table 4-8 presents the share of top ‘50’ companies at NSE, classified according to different sectors, in turnover and market capitalization. The share of manufacturing companies in trading volume of top ‘50’ companies, which was nearly more than 23% in 1998-99, witnessed a sharp decline to 2.03% 2002 -03. Further, in 2003 -04, their share has risen sharply to 37.66%. The share of information technology (IT) companies in trading volume has fallen from 74.71% in 2002 - 03 to only 31.04% in 2003 - 04.
ATTN: TABLE ON NEXT PAGE
STOCK MARKET TRENDS IN INDIA
52
The share of top ‘5’ securities in turnover has been on a declining trend since the past few years from 52.2% in 2000-01 to 31.04% in 2003-04 (Table 4-9). Trading in top ‘100’ securities also has witnessed a decline from 97.5% to 91.03% over the same period. Member-wise distribution of turnover indicates increasing diffusion of trades among a larger number of trading members over the years. During 2003-04, top ‘5’ members accounted for only 11.6% of turnover, while top ‘100’ members accounted for 61.4% of total turnover. Turnover in India seems to be more concentrated in comparison to that in other comparable markets (international) as may be seen from Table 4 -10. Ten most active index securities accounted for 44.2% of turnover in India and top ten index securities in terms of equity base accounted for 36.5% of market capitalization at the end of December 2003.
STOCK MARKET TRENDS IN INDIA
53
At the end of March 2004, NSE has permitted 70 members on its CM segment the web based access to its trading system. These members in turn have registered 413,454 clients for web based access. About 235 lakh
STOCK MARKET TRENDS IN INDIA
54
trades for Rs. 379,451 million constituting 3.45% of the total trading volume were routed and executed through the internet. NEATiXS a product of the NSE.IT helps brokerage firms to conduct internet trading, which can be accessed easily using standard browsers. It provides real time on-line market information including stock quotes and order screens, allowing investors to place orders from their personal computers. The success of internet trading in India, however, will depend on expansion of internet bandwidth, which is necessary for faster execution of trades. K. Market Capitalization
T
he market capitalization for securities available for trading on the equity segment of NSE and BSE witnessed enormous growth over the previous years (Table 4-6). The market capitalization of
NSE and BSE as at end March 2004 amounted to Rs. 11,209,760 million and Rs. 12,012,068 million respectively. A sharp change in the shares of different sectors in market capitalization is observed over the years (Table 4-8). Sectors like manufacturing, which used to dominate in terms of market capitalization with more than 35% in the year 1998-99, have shown declines in 2001-02 and 2002-03. However, they witnessed a turnaround in 2003-04 having registered 31.13% share in market capitalization of the top 50 companies. L. Prices
T
he year 2003-04 proved to be good for all the major indices in the world. The S&P CNX Nifty index, which remained subdued for the early part of 2003, rose sharply from August 2003 onwards
to reach a peak of 2014.65 in January 2004. The index rose by 81.14%
STOCK MARKET TRENDS IN INDIA
55
in 2003-04 as compared to its previous years close (Table 4-11). Similarly BSE also gave returns to the tune of 83.38% in the said period.
Of late, the market participants, analysts and investors have related the developments in domestic equity markets with the NASDAQ. NASDAQ index has come to symbolize the new economy or technology stocks. Chart 4-1 plots the daily movement in S&P CNX Nifty, Sensex and NASDAQ index. During most part of the year, the stock prices in India are synchronized with that in NASDAQ.
STOCK MARKET TRENDS IN INDIA
56
J. Volatility
T
he stock markets witnessed maximum volatility in January 2004 due to the fear of possible ban on the use of Participatory Notes (P-Notes), wherein it was 2.18% and 2.05% on Nifty and Sensex,
respectively (Table 4-12). However, in May 2003 lowest volatility was witnessed at 0.74% and 0.72% for S&P CNX Nifty and Sensex respectively. Chart 4-2 presents the volatility of S&P CNX Nifty, Sensex and NASDAQ. The volatility across different sectoral indices varied widely (Table 4 -13). For the month of April 2003, while the Nifty volatility was 1.38%, the volatility of CNX IT Index was 5.20%.
STOCK MARKET TRENDS IN INDIA
57
K. Returns in Indian Market
T
he performance of S&P CNX Nifty and various other indices over different periods of last one month to 12 months is presented in Table 4-14. It reveals that the indices have performed with
varying degrees over varying periods. A common phenomenon observed was that some of the indices provided substantial gains in the longer period of 6 months and one year, but did not give encouraging returns for the shorter periods of 1 month, 3 months. The investments made in
STOCK MARKET TRENDS IN INDIA
58
S&P CNX Nifty securities in February 2004 did not yield having positive returns, however the investments in the same a year back (March 2003) gave out positive returns of 81.14%. CNX Midcap 200 and CNX IT index proved to follow the same trend as of Nifty. The comparative performance of five major sectoral indices, viz. S&P CNX Petrochemicals Index, S&P CNX Finance Index, CNX FMCG Index, S&P CNX Pharma Index, and CNX IT Index, with that of S&P CNX Nifty Index for the year 2003-04 is presented in Chart 4-3. It is observed that during the entire period, CNX Finance Index, S&P CNX Petrochemicals Index and the S&P CNX Pharma Index out-performed the Nifty. The CNX IT Index, was the worst performer during the whole year. CNX FMCG Index though mirrored the movement of Nifty during the first half of the year. However, it under performed the benchmark index ‘Nifty’ during the later half. The monthly closing prices of these sectoral indices are presented in Table 4 -13.
STOCK MARKET TRENDS IN INDIA
59
L. Exchange Traded Funds
T
million.
he first ETF in India, the “Nifty BeES (Nifty Benchmark Exchange Traded Scheme) is based on S&P CNX Nifty. It was launched in December 2001 by Benchmark Mutual Fund. It is bought and
sold like any other stock on NSE and has all characteristics of an index fund. As on March end 2003, there were five ETFs launched on Nifty, Junior Nifty, CNX Bank Index namely, the Nifty BeES, Junior Nifty BeES, Bank BeES, Liquid BeES and SUNDER (S&P CNX Nifty UTI Notional Depository Receipts Scheme). Prudential ICICI launched an ETF based on BSE Sensex, namely SPICE (Sensex Prudential ICICI Exchange Traded Fund). During the month of March 2004, 637 trades involving 0.13 million Nifty BeES were transacted. The trading value was Rs. 22.42
M. Liquidity
M
any listed securities on stock exchanges are not traded actively. The percentage of companies traded on BSE was quite low at 35.93% as compared with 97.71% on NSE in
March 2004 (Table 4-15). Only 75.10% of companies traded on BSE
STOCK MARKET TRENDS IN INDIA
60
were traded for more than 100 days during 2003-04, while that on NSE, it has been 92.16% (Table 4-16). Trading took place for less than 100 days in case of 24.9% of companies traded at BSE during the year, and for less than 10 days in case of 5.6% of companies traded.
N. Institutional Transactions
STOCK MARKET TRENDS IN INDIA
61
T
hough the volume of trades done by FIIs is not very high as compared to other market participants, they are the driving force in determination of market sentiments and price trends.
This is so because, they do only delivery-based trades and they are perceived to be infallible in their assessment of the market. During 2003-04, the investments made by FIIs were a total turnaround compared to its performances in the earlier years. The strong risk adjusted returns of the Indian market have led FIIs to make more allocations to India. The FIIs registered a net investment of Rs. 457,645 million. The FIIs net investment was highest during the month of October 2003, when they made net purchases for a peak of Rs. 67,228 million (Table 4-17). The cumulative net FIIs investment touched US$ 25.75 billion by end- March 2004. As on end March 2004, the total number of FIIs registered with SEBI amounted to 540 against 502 in March 2003. During 2003-04, the MFs have invested more funds in the debt instruments than equity instruments (Table 4-18). In the equity market, MFs were net buyers to the tune of Rs. 13,157 million during 2003-04. The months of April 2003, June 2003, September 2003, October 2003 and February 2004 witnessed the MFs in a selling spree in the equity, whereas in the debt instruments only February 2004 witnessed the MFs in selling mode.
ATTN: TABLE ON NEXT PAGE
STOCK MARKET TRENDS IN INDIA
62
STOCK MARKET TRENDS IN INDIA O. ADR/GDR Prices
63
A
comparison of the price of ADR/GDR of a company with the
domestic price of its share gives an idea about the extent to which domestic price of the security is at premium/discount to
the international price. The extent of divergence between the prices of ADRs/GDRs and the domestic prices of the companies constituting the Instanex Skindia index is presented in Table 4-19. RBI permitted twoway fungibility for ADRs/GDRs, which meant that the investors (foreign institutional or domestic) in any company that has issued ADRs/GDRs could freely convert the ADRs/GDRs into underlying domestic shares. They could also reconvert the domestic shares into ADRs/GDRs, depending on the direction of price change in the stock
P. Takeovers
STOCK MARKET TRENDS IN INDIA
64
I
n 2003-04, there were 65 takeovers under open category involving Rs. 15,948 million as against Rs. 63,891 million during the preceding year (Table 4-20). However, there were 171 takeovers under
exempted category involving Rs. 14,357 million as against Rs. 24,284 million in the previous year.
Q. Performance of Brokers
A
s mentioned earlier, there were 9,368 trading members at the end of March 2004, however, the details of their performance are not readily available. A brief detail with respect to 799
members of NSE is presented in Table 4-21. It is observed that about 57% of the members had deployed a capital of less than Rs. 20 million at the end of March 2003, while 5% have deployed more than Rs. 100 million. Similarly about 52% of members had a turnover of less than Rs. 10,000 million during 2003-04, while about 6% had turnover of more than Rs. 10,000 crore.
STOCK MARKET TRENDS IN INDIA
65
END OF CHAPTER IV
CHAPTER V – TECHNICAL ANAYSIS IN THE STOCK MARKET
STOCK MARKET TRENDS IN INDIA
66
T
echnical analysis is simply the study of prices as reflected on price charts. Technical analysis assumes that current prices should represent all known information about the markets.
Prices not only reflect intrinsic facts, they also represent human emotion and the pervasive mass psychology and mood of the moment. Prices are, in the end, a function of supply and demand. However, on a moment to moment basis, human emotions…fear, greed, panic, hysteria, elation, etc. also dramatically effect prices. Markets may move based upon people’s expectations, not necessarily facts. A market "technician" attempts to disregard the emotional component of trading by making his decisions based upon chart formations, assuming that prices reflect both facts and emotion. A. STOCK CHARTS Stock charts gained popularity in the late 19th Century from the writings of Charles H. Dow in the Wall Street Journal. His comments, later known as "Dow Theory", alleged that markets move in all kinds of measurable trends and that these trends could be deciphered and predicted in the price movement seen on all charts. FUNDAMENTAL ANALYSIS seeks to determine future stock price by understanding and measuring the objective "value" of an equity. The study of stock charts, known as TECHNICAL ANALYSIS, believes that the past action of the market itself will determine the future course of prices. A stock chart is a simple two-axis (x-y) plotted graph of price and time. Each individual equity, market and index listed on a public exchange has a chart that illustrates this movement of price over time. Individual
STOCK MARKET TRENDS IN INDIA
67
data plots for charts can be made using the CLOSING price for each day. The plots are connected together in a single line, creating the graph. Also, a combination of the OPENING, CLOSING, HIGH and/or LOW prices for that market session can be used for the data plots. This second type of data is called a PRICE BAR. Individual price bars are then overlaid onto the graph, creating a dense visual display of stock movement. Stock charts can be created in many different time frames. Mutual fund holders use monthly charts in which each individual data plot consists of a single month of activity. Day traders use 1 minute and 5 minute stock charts to make quick buy and sell decisions. The most common type of stock chart is the daily plot, showing a single complete market session for each unit. Stock charts can be drawn in two different ways. An ARITHMETIC chart has equal vertical distances between each unit of price. A LOGARITHMIC chart is a percentage growth chart. It has equal vertical distances between the same percentages of price growth. For example, a price movement from 10 to 20 is a 100% move. A move from 20 to 40 is also a 100% move. For this reason, the vertical distance from 10 to 20 and the vertical distance from 20 to 40 will be identical on a logarithmic chart. Stock chart analysis can be applied equally to individual stocks and major indices. Analysts use their technical research on index charts to decide whether the current market is a BULL MARKET or a BEAR MARKET. On individual charts, investors and traders can learn the same thing about their favorite companies.
STOCK MARKET TRENDS IN INDIA B. TRENDS
68
Use the stock chart to identify the current trend. A trend reflects the average rate of change in a stock's price over time. Trends exist in all time frames and all markets. Day traders can establish the trend of their stocks to within minutes. Long term investors watch trends that persist for many years. Trends can be classified in three ways: UP, DOWN or RANGEBOUND. In an uptrend, a stock rallies often with intermediate periods of consolidation or movement against the trend. In doing so, it draws a series of higher highs and higher lows on the stock chart. In an uptrend, there will be a POSITIVE rate of price change over time. In a downtrend, a stock declines often with intermediate periods of consolidation or movement against the trend. In doing so, it draws a series of lower highs and lower lows on the stock chart. In a downtrend, there will be a NEGATIVE rate of price change over time.
STOCK MARKET TRENDS IN INDIA
69
Range bound price swings back and forth for long periods between easily seen upper and lower limits. There is no apparent direction to the price movement on the stock chart and there will be LITTLE or NO rate of price change. Trends tend to persist over time. A stock in an uptrend will continue to rise until some change in value or conditions occurs. Declining stocks will continue to fall until some change in value or conditions occurs. Chart readers try to locate TOPS and BOTTOMS, which are those points where a rally or a decline ends. Taking a position near a top or a bottom can be very profitable. Trends can be measured using TRENDLINES. Very often a straight line can be drawn UNDER three or more pullbacks from rallies or OVER pullbacks from declines. When price bars then return to that trend line, they tend to find SUPPORT or RESISTANCE and bounce off the line in the opposite direction. A famous quote about trends advises that "The trend is your friend". For traders and investors, this wisdom teaches that you will have more success taking stock positions in the direction of the prevailing trend than against it. C. Volume
STOCK MARKET TRENDS IN INDIA
70
Volume measures the participation of the crowd. Stock charts display volume through individual HISTOGRAMS below the price pane. Often these will show green bars for up days and red bars for down days. Investors and traders can measure buying and selling interest by watching how many up or down days in a row occur and how their volume compares with days in which price moves in the opposite direction. Stocks that are bought with greater interest than sold are said to be under ACCUMULATION. Stocks that are sold with great interest than bought are said to be under DISTRIBUTION. Accumulation and distribution often LEAD price movement. In other words, stocks under accumulation often will rise some time after the buying begins. Alternatively, stocks under distribution will often fall some time after selling begins. It takes volume for a stock to rise but it can fall of its own weight. Rallies require the enthusiastic participation of the crowd. When a rally runs out of new participants, a stock can easily fall. Investors and traders use indicators such as ON BALANCE VOLUME to see whether participation is lagging (behind) or leading (ahead) the price action. Stocks trade daily with an average volume that determines their LIQUIDITY. Liquid stocks are very easy for traders to buy and sell. Illiquid stocks require very high SPREADS (transaction costs) to buy or sell and often cannot be eliminated quickly from a portfolio. Stock chart analysis does not work well on illiquid stocks.
STOCK MARKET TRENDS IN INDIA
71
Breakouts accompanied by volume much higher than the average for that stock are healthy for the continuation of the price movement in that direction. But after long rallies or declines, stocks often have a day of very high volume known as a CLIMAX. During these days, the last of the buyers or sellers take positions. The stock then reverses as there are no longer enough participants to cause price to move in that direction. D. Patterns and Indicators
How can you organize the endless stream of stock chart data into a logical format that doesn't require rocket science to interpret? Charts allow investors and traders to look at past and present price action in order to make reasonable predictions and wise choices. It is a highly visual medium. This one fact separates it from the colder world of valuebased analysis. The stock chart activates both left-brain and right-brain functions of logic and creativity. So it's no surprise that over the last century two forms of analysis have developed that focus along these lines of critical examination.
STOCK MARKET TRENDS IN INDIA
72
The oldest form of interpreting charts is PATTERN ANALYSIS. This method gained popularity through both the writings of Charles Dow and Technical Analysis of Stock Trends, a classic book written on the subject just after World War II. The newer form of interpretation is INDICATOR ANALYSIS, a math-oriented examination in which the basic elements of price and volume are run through a series of calculations in order to predict where price will go next. Pattern analysis gains its power from the tendency of charts to repeat the same bar formations over and over again. These patterns have been categorized over the years as having a bullish or bearish bias. Some well-known ones include HEAD and SHOULDERS, TRIANGLES, RECTANGLES, DOUBLE TOPS, DOUBLE BOTTOMS and FLAGS. Also, chart landscape features such as GAPS and TRENDLINES are said to have great significance on the future course of price action. Indicator analysis uses math calculations to measure the relationship of current price to past price action. Almost all indicators can be categorized as TREND-FOLLOWING or OSCILLATORS. Popular trendfollowing indicators include MOVING AVERAGES, ON BALANCE VOLUME and MACD. Common oscillators include STOCHASTICS, RSI and RATE OF CHANGE. Trend-following indicators react much more slowly than oscillators. They look deeply into the rear view mirror to locate the future. Oscillators react very quickly to short-term changes in price, flipping back and forth between OVERBOUGHT and OVERSOLD levels. Both patterns and indicators measure market psychology. The core of investors and traders that make up the market each day tend to act with a herd mentality as price rises and falls. This "crowd" tends to develop known characteristics that repeat themselves over and over
STOCK MARKET TRENDS IN INDIA
73
again. Chart interpretation using these two important analysis tools uncovers growing stress within the crowd that should eventually translate into price change. E. Moving Averages
The most popular technical indicator for studying stock charts is the MOVING AVERAGE. This versatile tool has many important uses for investors and traders. Take the sum of any number of previous CLOSE prices and then divide it by that same number. This creates an average price for that stock in that period of time. A moving average can be
STOCK MARKET TRENDS IN INDIA
74
displayed by re-computing this result daily and plotting it in the same graphic pane as the price bars. Moving averages LAG price. In other words, if price starts to move sharply upward or downward, it will take some time for the moving average to "catch up". Plotting moving averages in stock charts reveals how well current price is behaving as compared to the past. The power of the moving average line comes from its direct interaction with the price bars. Current price will always be above or below any moving average computation. When it is above, conditions are "bullish". When below, conditions are "bearish". Additionally, moving averages will slope upward or downward over time. This adds another visual dimension to a stock analysis. Moving averages define STOCK TRENDS. They can be computed for any period of time. Investors and traders find them most helpful when they provide input about the SHORT-TERM, INTERMEDIATE and LONG-TERM trends. For this reason, using multiple moving averages that reflect these characteristics assist important decision making. Common moving average settings for daily stock charts are: 20 days for short-term, 50 days for intermediate and 200 days for long-term. One of the most common buy or sell signals in all chart analysis is the MOVING AVERAGE CROSSOVER. These occur when two moving averages representing different trends criss-cross. For example, when a short-term average crosses BELOW a long-term one, a SELL signal is generated. Conversely, when a short-term crosses ABOVE the long-term, a BUY signal is generated. Moving averages can be "speeded up" through the application of further math calculations. Common averages are known as SIMPLE or SMA. These tend to be very slow. By giving more weight to the current
STOCK MARKET TRENDS IN INDIA
75
changes in price rather than those many bars ago, a faster EXPONENTIAL or EMA moving average can be created. Many technicians favor the EMA over the SMA. Fortunately all common stock chart programs, online and offline do the difficult moving average calculations for you and plot price perfectly. F. Support and Resistance
The concept of SUPPORT AND RESISTANCE is essential to understanding and interpreting stock charts. Just as a ball bounces when it hits the floor or drops after being thrown to the ceiling, support and resistance define natural boundaries for rising and falling prices. Buyers and sellers are constantly in battle mode. Support defines that level where buyers are strong enough to keep price from falling further. Resistance defines that level where sellers are too strong to allow price to rise further. Support and resistance play different roles in uptrends and downtrends. In an uptrend, support is where a pullback from a rally should end. In a downtrend, resistance is where a pullback from a decline should end.
STOCK MARKET TRENDS IN INDIA
76
Support and resistance are created because price has memory. Those prices where significant buyers or sellers entered the market in the past will tend to generate a similar mix of participants when price again returns to that level. When price pushes above resistance, it becomes a new support level. When price falls below support, that level becomes resistance. When a level of support or resistance is penetrated, price tends to thrust forward sharply as the crowd notices the BREAKOUT and jumps in to buy or sell. When a level is penetrated but does not attract a crowd of buyers or sellers, it often falls back below the old support or resistance. This failure is known as a FALSE BREAKOUT. Support and resistance come in all varieties and strengths. They most often manifest as horizontal price levels. But trend lines at various angles represent support and resistance as well. The length of time that a support or resistance level exists determines the strength or weakness of that level. The strength or weakness determines how much buying or selling interest will be required to break the level. Also, the greater volume traded at any level, the stronger that level will be. Support and resistance exist in all time frames and all markets. Levels in longer time frames are stronger than those in shorter time frames. The ideas of Charles Dow, the first editor of the Wall Street Journal, form the basis of technical analysis today. Dow created the Industrial Average, of top blue chip stocks, and a second average of top railroad stocks (now the Transport Average). He believed that the behavior of the averages reflected the hopes and fears of the entire market. The behavior patterns that he observed apply to markets throughout the world.
STOCK MARKET TRENDS IN INDIA G. Dow Theory I. Three Movements Markets fluctuate in more than one time frame at the same time:
77
Nothing is more certain than that the market has three well defined movements which fit into each other.
•
The first is the daily variation due to local causes and the balance of buying and selling at that particular time (Ripple). The secondary movement covers a period ranging from days to weeks, averaging probably between six to eight weeks (Wave). The third move is the great swing covering anything from months to years, averaging between 6 to 48 months. (Tide).
•
•
•
Bull markets are broad upward movements of the market that may last several years, interrupted by secondary reactions. Bear markets are long declines interrupted by secondary rallies. These movements are referred to as the primary trend.
•
Secondary movements normally retrace from one third to two thirds of the primary trend since the previous secondary movement.
•
Daily fluctuations are important for short-term trading, but are unimportant in analysis of broad market movements.
STOCK MARKET TRENDS IN INDIA H. Dow Theory I. Primary Movements have Three Phases Look out for these general conditions in the market. Bull markets
•
78
Bull markets commence with reviving confidence as business conditions improve. Prices rise as the market responds to improved earnings Rampant speculation dominates the market and price advances are based on hopes and expectations rather than actual results.
• •
Bear markets
•
Bear markets
start with abandonment of
the hopes
and
expectations that sustained inflated prices.
• •
Prices decline in response to disappointing earnings. Distress selling follows as speculators attempt to close out their positions and securities are sold without regard to their true value.
Ranging Markets
•
A secondary reaction may take the form of a ‘line’ which may endure for several weeks. Price fluctuates within a narrow range of about five per cent.
•
STOCK MARKET TRENDS IN INDIA
79
Breakouts from a range can occur in either direction.
•
Advances above the upper limit of the line signal accumulation and higher prices; Declines below the lower limit indicate distribution and lower prices; Volume is used to confirm price breakouts.
•
•
I. Dow Theory I. Trends Bull Trend - A bull trend is identified by a series of rallies where each rally exceeds the highest point of the previous rally. The decline, between rallies, ends above the lowest point of the previous decline
STOCK MARKET TRENDS IN INDIA Successive higher highs and higher lows.
80
The start of an up trend is signaled when price makes a higher low (trough), followed by a rally above the previous high (peak): Start = higher Low + break above previous High. The end is signaled by a lower high (peak), followed by a decline below the previous low (trough): End = lower High + break below previous Low.
STOCK MARKET TRENDS IN INDIA
81
What if the series of higher Highs and higher Lows is first broken by a lower Low? There are two possible interpretations - see Large Corrections. Bear Trends - Each successive rally fails to penetrate the high point of the previous rally. Each decline terminates at a lower point than the preceding decline. Successive lower highs and lower lows.
STOCK MARKET TRENDS IN INDIA
82
A bear trend starts at the end of a bull trend: when a rally ends with a lower peak and then retreats below the previous low. The end of a bear trend is identical to the start of a bull trend. What if the series of lower Highs and lower Lows is first broken by a higher High? This is a gray area - see Large Corrections.
J. Dow Theory I. Large Corrections A large correction occurs when price falls below the previous low (during a bull trend where price rises above the previous high (in a bear trend).
STOCK MARKET TRENDS IN INDIA
83
Some purists argue that a trend ends if the sequence of higher highs and higher lows is broken. Others argue that a bear trend has not started until there is a lower High and Low nor has a bull trend started until there is a higher Low and High. For practical purposes: Only accept large corrections as trend changes in the primary trend:
• • •
A bull trend starts when price rallies above the previous high A bull trend ends when price declines below the previous low, A bear trend starts at the end of a bull trend (and vice versa).
K. An Introduction to Japanese Candlestick Charting
STOCK MARKET TRENDS IN INDIA
84
Standard bar charts are commonly used to convey price activity into an easily readable chart. Usually four elements make up a bar chart, the Open, High, Low, and Close for the trading session/time period. A price bar can represent any time frame the user wishes, from 1 minute to 1 month. The total vertical length/height of the bar represents the entire trading range for the period. The top of the bar represents the highest price of the period, and the bottom of the bar represents the lowest price of the period. The Open is represented by a small dash to the left of the bar, and the Close for the session is a small dash to the right of the bar. Below is a standard bar chart example.
Candlestick Charts Explained You may be asking yourself, "If I can already use bar charts to view prices, then why do I need another type of chart?" The answer to this question may not seem obvious, but after going through the following candlestick chart explanations and examples, you will surely see value in the different perspective candlesticks bring to the table. In my opinion, they are much more visually appealing, and convey the price information in a quicker, easier manner.
STOCK MARKET TRENDS IN INDIA History of Candlestick Charts
85
Candlestick charts are on record as being the oldest type of charts used for price prediction. They date back to the 1700's, when they were used for predicting rice prices. In fact, during this era in Japan, Munehisa Homma become a legendary rice trader and gained a huge fortune using candlestick analysis. He is said to have executed over 100 consecutive winning trades! The candlesticks themselves and the formations they shape were give colorful names by the Japanese traders. Due in part to the military environment of the Japanese feudal system during this era, candlestick formations developed names such as "counter attack lines" and the "advancing three soldiers". Just as skill, strategy, and psychology are important in battle, so too are they important elements when in the midst of trading battle. Candlestick charts are much more visually appealing than a standard two-dimensional bar chart. As in a standard bar chart, there are four elements necessary to construct a candlestick chart, the OPEN, HIGH, LOW and CLOSING price for a given time period. Below are examples of candlesticks and a definition for each candlestick component:
STOCK MARKET TRENDS IN INDIA
86
•
The body of the candlestick is called the real body,
and represents the range between the open and closing prices.
•
A black or filled-in body represents that the close
during that time period was lower than the open, (normally considered bearish) and when the body is open or white, that means the close was higher than the open (normally bullish).
STOCK MARKET TRENDS IN INDIA
•
87
The thin vertical line above and/or below the real
body is called the upper/lower shadow, representing the high/low price extremes for the period.
Bar Compared to Candlestick Charts Below is an example of the same price data conveyed in a standard bar chart and a candlestick chart? Notice how the candlestick chart appears 3-dimensional, as price data almost jumps out at you.
( 3a )
(3b) The long, dark, filled-in real bodies represent a weak (bearish) close ( 3a ), while a long open, light-colored real body represents a strong (bullish) close ( 3b ). It is important to note that Japanese candlestick analysts
STOCK MARKET TRENDS IN INDIA
88
traditionally view the open and closing prices as the most critical of the day. At a glance, notice how much easier it is with candlesticks to determine if the closing price was higher or lower than the opening price. Common Candlestick Terminology The following is a list of some individual candlestick terms. It is important to realize that many formations occur within the context of prior candlesticks. What follows is merely a definition of terms, not formations.
•
The Black Candlestick -- when the close is lower than
the open.
•
The White Candlestick -- when the close is higher
than the open.
STOCK MARKET TRENDS IN INDIA
89
•
The Shaven Head -- a candlestick with no upper
shadow.
•
The Shaven Bottom -- a candlestick with no lower
shadow.
STOCK MARKET TRENDS IN INDIA
•
90
Spinning Tops -- candlesticks with small real bodies,
and when appearing within a sideways choppy market, they represent equilibrium between the bulls and the bears. They can be either white or black.
•
Doji Lines -- have no real body, but instead have a
horizontal line. This represents when the Open and Close are the same or very close. The length of the shadow can vary.
Candlestick Reversal Patterns Just as many traders look to bar charts for double tops and bottoms, head-and-shoulders, and technical indicators for reversal signals, so too can candlestick formations be looked upon for the same purpose. A reversal does not always mean that the current uptrend/downtrend will
STOCK MARKET TRENDS IN INDIA
91
reverse direction, but merely that the current direction may end. The market may then decide to drift sideways. Candlestick reversal patterns must be viewed within the context of prior activity to be effective. In fact, identical candlesticks may have different meanings depending on where they occur within the context of prior trends and formations.
•
Hammer -- a candlestick with a long lower shadow
and small real body. The shadow should be at least twice the length of the real body, and there should be no or very little upper shadow. The body may be either black or white, but the key is that this candlestick must occur within the context of a downtrend to be considered a hammer. The market may be "hammering" out a bottom.
•
Hanging Man -- identical in appearance to the
hammer, but appears within the context of an uptrend.
STOCK MARKET TRENDS IN INDIA
92
•
Engulfing Patterns -- Bullish -- when a white, real
body totally covers, "engulfs" the prior day's real body. The market should be in a definable trend, not chopping around sideways. The shadows of the prior candlestick do not need to be engulfed.
•
Bearish -- when a black, real body totally covers,
"engulfs" the prior day's real body. The market should be in a definable trend, not chopping around sideways. The shadows of the prior candlestick do not need to be engulfed.
STOCK MARKET TRENDS IN INDIA
93
•
Dark-Cloud Cover (bearish) -- a top reversal
formation where the first day of the pattern consists of a strong white, real body. The second day's price opens above the top of the upper shadow of the prior candlestick, but the close is at or near the low of the day, and well into the prior white, real body.
•
Piercing Pattern (bullish) -- opposite of the darkcover. Occurs within a downtrend. The first
cloud
candlestick having a black, real body, and the second has a long, white, real body. The white day opens sharply lower,
STOCK MARKET TRENDS IN INDIA
94
under the low of the prior black day. Then, prices close above the 50% point of the prior day's black real body.
Stars These candlestick formations consist of a small real body that gaps away from the real body preceding it. The real body of the star should not overlap the prior real body. The color of the star is not too important, and they can occur at either tops or bottoms. Stars are the equivalent of gaps on standard bar charts.
STOCK MARKET TRENDS IN INDIA
95
Stars make up part of four separate reversal patterns: • • • • Morning Star Evening Star Doji Star Shooting Star (Inverted Hammer)
•
Morning Star -- this is a bullish bottom reversal pattern. The formation is comprised of 3 candlesticks. The first candlestick is a tall black real body followed by the second, a small real body, which gaps (opens), lower (a star pattern). The third candlestick is
STOCK MARKET TRENDS IN INDIA
96
a white real body that moves well into the first period's black real body. This is similar to an island pattern on standard bar charts.
•
E v e
ning Star -- a bearish top reversal pattern and counterpart to the Morning Star. Three candlesticks compose the evening star, the first being long and white. The second forms a star, followed by the third, which has a black real body that moves sharply into the first white candlestick.
•
Doji Stars -- When a Doji gaps above a real body in an uptrend, or gaps under a real body in a falling market, that particular Doji is called a Doji star. Two popular Doji stars are the evening star and the morning star.
STOCK MARKET TRENDS IN INDIA
97
•
Evening Doji Star -- a Doji star in an uptrend followed by a long, black real body that closed well into the prior white real body. If the candlestick after the Doji star is white and gapped higher, the bearishness of the Doji is invalidated.
•
Morning Doji Star -- a Doji star in a downtrend followed by a long, white real body that closes well into the prior black real
STOCK MARKET TRENDS IN INDIA
98
body. If the candlestick after the Doji star is black and gapped lower, the bullishness of the Doji is invalidated.
•
Shooting Star -- a small real body near the lower end of the trading range, with a long upper shadow. The color of the body is not critical. Not usually considered a major reversal sign, only a warning.
•
Inverted Hammer-- not really a star, but does look like a shooting star. When occurring within a downtrend, may be a turning signal. Body color is not critical.
STOCK MARKET TRENDS IN INDIA
99
END OF CHAPTER V
CHAPTER VI – SECTOR – WISE ANALYSIS
STOCK MARKET TRENDS IN INDIA A. Sectors and stocks used for the study
100
The following five sectors were considered for the purpose of study during the course of our project. • • • • • Telecom Steel Cement Pharma Software
The following stocks and their trends in the last one year (2004) were studied in the course of the project. • • • • • Bharti Televentures SAIL ACC Wockhardt Reliance
B. Analysis of the sector and the respective stocks in the year 2004 Telecom sector Introduction 2004 has been a momentous year for the Indian telecom sector. Explosive growth rate in the mobile telephony segment was almost counterbalanced by rapidly falling profitability due to regulatory pressures and pressure on tariffs. Increasing consolidation activity was also prominent throughout the year. The growth in the industry was
STOCK MARKET TRENDS IN INDIA
101
clearly reflected in the way major telecom players performed on the stock markets. Against the Sensex gains of 14%, the telecom index grew by an almost double 27% during 2004. Comparison between 2003 & 2004 The most important event of the year for the domestic telecom industry was the introduction of unified licensing regime (ULR). The main aim of this regime was to simply the licensing procedure and granting a unified license that enables services providers to provide all kinds of telecom services covering various geographical areas using any technology. Another big event in relation to the sector was the raising of FDI limits from 49% to 74%.
The strong growth witnessed in the cellular industry in 2004 was a result of combination of the following key factors – 1. Declining tariffs due to intensifying competition amongst existing players, 2. Aggressive pricing strategy adopted by service providers, and 3. Lowering of duties on handsets and equipments. Sector out performer: Bharti Tele
STOCK MARKET TRENDS IN INDIA
102
The growth in the industry was clearly reflected in the way major telecom players performed on the stock markets. Against the Sensex gains of 14%, the telecom index grew by an almost double 27% during 2004. The table below shows that Bharti Tele led the pack with a YoY gain of 99%. Strong performance of the stock, especially during the second-half of the year, mirrored the robust financial performance of the company. This growth was aided by a continued strong addition to the subscriber base. At the end of September 2004, Bharti had a base of 8.7m mobile subscribers, which was 20% of the Indian cellular (GSM+CDMA) market. This rapid addition to the base more than compensated for the pressure on ARPUs (average revenue per user) as the company improved upon its operating margins and profitability. Telecom: Key gainers in 2004
26-Dec- 27-Dec- % 03 BHARTI TELE VSNL TATA (MAH) MTNL ITI LTD 135 25 157 28 16.8% 13.1% 106 155 TESERV 23 04 212 234 34 Change 99.0% 50.4% 47.2%
The laggard: HFCL Apart from the gainers as mentioned above, there were just a couple of losers from the telecom sector in 2004 – HFCL (17%) and Krone Communications (21%). Expectation in 2005
STOCK MARKET TRENDS IN INDIA
103
In 2005, leading players are expected to make large-scale investments in technology and infrastructure (network expansion). This would be in line with their initiatives of tapping a wider customer base. A hike in the FDI limit has also increased the attractiveness of the sector for foreign telecom majors and consequently, there could be a large flow of capital into the sector. This will go a long way in improving the growth prospects of this sector. However, while the overall sector may paint a rosy picture, the story may be drastically different for individual players as they continue to grapple with falling ARPUs, regulatory pressures and defaulting customers. The ride for the telecom players may continue to be topsy-turvy in 2005. Also, since valuations of leading players seem stretched from the medium term perspective, stock prices might witness some volatility. Bharti Televentures Performance Summary India’s leading cellular services provider, Bharti Tele, has announced strong results for the quarter and nine-month period ending December 2004, reporting almost doubling of net profits on a YoY basis. Operating margins have also improved for both the periods. Bharti has crossed the 10 m customer mark in this quarter, cornering a share of over 26% of all-India GSM mobile subscriber base.
Consolidated snapshot…
financial
performance
(IFR
Standards):
A
STOCK MARKET TRENDS IN INDIA
104
Rs m Sales Expenditure Operating profit (EBDIT) Operating (%) Other income Interest Depreciation Profit before tax Miscellaneous (expenditure) Minority interest Tax Profit after tax/(loss) Net profit margin (%) No. of shares Diluted Earnings profit
3QFY0 3QFY0 Chang 9mFY 9mFY Chang 4 7,959 4,728 5 e 04 05 e 12,687 21,530 69.7% 34,492 57,174 65.8% 13,886 74.5% 23,110 36,540 58.1% 7,644 61.7% 11,382 20,633 81.3% 33.0% 36.1% 68.8% 105 -73.8% 2,067 35.3% 6,332 147.9 3,087 % income/ 300 (10) 103.4 % 6 219 1,913 51 768 3,726 801.8 10 % 250.3 220 % 94.8% 3,157 9.2% 0 2.3 10,025 217.5% 17.5% 0 7.2 29.1 15.1% 17.3% 1,853. 1,853. 0 per 4.1 0 8.0 1,505 584.0% 52 403.8% 300 (46) 115.2% 204 1,389 7,821 93.4% -32.8% 23.5%
margin 37.3% 35.5% 79 729 2,240 1,838 134 191 3,031 4,555
11,627 276.6%
1,853. 1,853.
share* (Rs) P/E ratio (x) (* annualized)
Company’s Profile
STOCK MARKET TRENDS IN INDIA
105
Bharti Televentures is one of the largest telecom service providers in the country. It is the largest mobile service provider in the country with an over 26% market share (nearly 9.8 m customers) in the all-India GSM mobile subscriber base in the country. The company also provides fixed line and long distance telephony services to its customers. 3QFY05 saw the company cross the 10 m customer mark. Bharti also provides other allied telecom services like voice and data services and integrated services to corporates. It is one of the fastest growing companies in the Indian telecom sector. Performance in 3QFY05 Mobile services lead topline growth Bharti’s mobile services segment (62% of consolidated revenues) has led the growth in topline in this quarter with a YoY growth of 73%. This has mainly been a result of a strong 79% YoY growth in the subscriber base. Bharti’s all-India GSM subscriber base stands at 9.8 m at the end of December 2004, which is over 26% of the all-India base. What’s more, the company has cornered around 30% of the net additions to the GSM base in the country in 3QFY05. Combining the mobile base with the broadband and telephone base, Bharti has crossed the 10 m subscriber base, which seems to have benefited the company in form of utilizing its pan-India network and thus achieving economies of scale. Average revenue per user (ARPU) for the company’s mobile services has declined by 6% YoY. But this has been more than compensated by a 15% YoY growth in average minutes per user. Lower tariffs, attractive offers and a growing usage of mobile services have led to this growth in the same. On the broadband and telephone front, Bharti’s subscriber base has grown by 41% YoY. ARPU for this segment has declined by 2% YoY.
STOCK MARKET TRENDS IN INDIA Segment-wise performance…
106
3QFY0 % 4 Mobile Revenue PBIT PBIT margin 8,581 3,164 36.9% total
of 3QFY0 % 5 total
of Chang e 72.8% 52.8%
60.8% 66.7%
14,826 61.6% 4,836 32.6% 61.5%
Broadband & Telephone Revenue PBIT PBIT margin Long Distance Revenue PBIT PBIT margin Enterprise Revenue PBIT PBIT margin Total Revenue PBIT PBIT margin * Excluding inter-segment adjustments 14,103 4,746 33.7% 24,081 7,861 32.6% 70.8% 65.6% 731 300 41.0% 5.2% 6.3% 1,407 681 48.4% 5.8% 8.7% 92.5% 127.2 % 2,733 885 32.4% 19.4% 18.6% 4,907 1,497 30.5% 20.4% 19.0% 79.5% 69.3% 2,058 398 19.3% 14.6% 8.4% 2,942 846 28.8% 12.2% 10.8% 42.9% 112.9 %
STOCK MARKET TRENDS IN INDIA Higher interconnect charges dent margins
107
Despite the strong growth in the topline, Bharti has reported a 180 basis points narrowing of its operating margins for 3QFY05. This has been mainly a result of a 170 basis points increase in access and interconnection charges. On the contrary, expenses under other major heads like employee costs and license fee have declined in the quarter. With the revised ADC (access deficit charge) guidelines, which are expected to reduce burden on mobile services providers by reducing their payment to BSNL and MTNL, we expect the pressure on account of interconnect charges is likely to decline for Bharti going forward. Lower interest outgo aids net profits Despite a contraction in operating margins, a higher other income and lower interest charges have helped net profits growth outpace the growth in topline. Even a significant growth in tax outgo has failed to restrict the superior net profit growth. Expectation At the current price of Rs 210, the stock is trading at a price to earnings multiple of 29.1 times annualized 9mFY05 earnings. Bharti has continued its dominance on the Indian GSM mobile market as has been clearly stated above. With a presence across 21 of the 23 circles in the country, including the recent additions of J&K, West Bengal, Orrisa, Bihar and Jharkhand, Bharti is expected to reap scale advantages going forward. Growing competition on the tariff front has failed to cast pressure on the company’s performance as it has been able to reach out to a wide subscriber base through its mobile and other value add services.
BHARTI TELEVENTURES
STOCK MARKET TRENDS IN INDIA
Live BSE Quotes Price (Rs) 225.45 % Change 1.03 Open (Rs) 225.15 Volume 464,502 Mar 11, 2005 ( Cl o s e ) High (Rs) Low 229.90 (Rs) 221.00 Value (Rs) 52104,225,904 Week H/L 240.70 / 115.00 Mar 11, 2005 ( Cl o s e ) High (Rs) Low 230.00 (Rs) 221.00 Value (Rs) 52472,046,304 Week H/L 250.00 / 114.00
108
Live NSE Quotes Price (Rs) 223.75 % Change 0.13 Open (Rs) 230.00 Volume 2,105,958
Market Cap (Rs m) 417,842.27 *Trailing 12 months earnings | BSE Sensex | S&P
Valuation EPS (Rs)* 7.05
P/E Ratio (x) 31.99
P/BV (x) 9.87
Steel Introduction
STOCK MARKET TRENDS IN INDIA
109
It was yet another year of gains for investors in the stock markets with the benchmark index – Sensex – having notched gains of about 14% during 2004. Similar to last year, practically all the sectors (barring FMCG this time) ended the year with significant gains, as reflected by their respective indices. The metals index (steel & aluminum) has also ended the year in the positive by registering gains of about 27% (calculated on a simple average basis of the stocks in the tables below, as the BSE Metals index was launched only in 2HCY04). We take a look at what led the continued optimism amongst investors towards the sector after the spectacular performance in 2004 and what is in store for 2005. As mentioned above, the metals index has risen by about 27% during the year. However, if we consider the steel and aluminum sectors in isolation, the steel index has registered an impressive growth of about 40% while the aluminum sector has closed the year on a negative note with about 2% fall, consequently affecting the overall performance of the metals index. 2004 vs. 2003 While China continued to be the dominant force even in 2004, driving metal prices through the roof, there were significant apprehensions during the first half of 2004 with respect to the Chinese economy slowing down. It must be noted that Chinese authorities have adopted concerted efforts to reign in their galloping economy so as to prevent a hard landing in the event of a slowdown. However, their efforts have not yielded much result as yet, which has led to the extension of the steel cycle and further strengthening the aluminum cycle. Steel - The prolonged steel cycle, contrary to our expectations, continued to immensely benefit steel sector companies in terms of
STOCK MARKET TRENDS IN INDIA
110
higher realizations - average steel prices surged approximately 30% YoY. Continued high levels of capacity utilization on the back of strong domestic and international (led by China) demand helped steel companies register strong bottom-line growth during the year. Apart from the financial performance, the sector continued to hog the limelight all through 2004. The primary reason for the steel sector to hit the headlines time and again in 2004 revolved around rising steel prices. While steel manufacturers cited helplessness in the face of surging raw material prices like that of coke, iron ore and melting scrap, which forced them to pass on the same to consumers, there was significant opposition by steel user industries including auto and construction citing significant pressure on their margins. Further, with India passing through an inflationary phase (more than 8% in August 2004), the sector came under government scrutiny time and again, with a view to control the spiraling steel prices. This included measures like suspending the DEPB scheme so as to discourage exports to increase domestic availability, forcing players to withhold price hikes (during election months) and announcing custom duty cuts on various forms of iron and steel products to repel steel companies’ intentions of hiking prices. Steel: The out performers
Company BSE-SENSEX SESA GOA JINDAL STEEL
Price on Dec 26, Price on Dec 27, % 2003 (Rs) 5,699 592 & 550 2004 (Rs) 6,513 1,006 887 change 14.3% 69.8% 61.4%
STOCK MARKET TRENDS IN INDIA POWER ESSAR STEEL ISPAT INDUSTRIES TISCO SAIL 26 16 283 52 39 21 374 61 327
111
49.4% 33.8% 32.3% 17.2% 15.1%
JINDAL IRON & STEEL 284 Expectation in 2005
We continue to maintain our positive stance towards the aluminum sector for 2005. This is on the back of a global economic recovery and strong domestic economic growth. The aluminum sector will benefit from impressive growth in transport and construction sectors. The global recovery in aluminum demand, led by major economies like the US, Europe and China, is intact. Aluminum prices therefore, are unlikely to weaken much in the medium-term. Further, the added advantage for Hindalco would be the improvement in performance of its copper business in wake of higher TC/RC margins. As far as the steel sector is concerned, we must admit that the steel cycle has extended beyond our expectation as China continues to register strong growth rates despite efforts by its authorities to cool down the economy. However, we continue to remain apprehensive on the steel sector for the medium-term owing to various reasons. We believe that the steel cycle has peaked and the various domestic and global capacity expansion plans that are taking shape would put pressure on steel prices. Indian steel majors have already announced aggressive capacity expansion plans in India. This means that any shortfall in the demand/imports from China will lead to overcapacity in the domestic market. It must be noted that in the first 10 months of 2004, Chinese steel imports have fallen by 18%. At the current juncture, the risk-reward ratio in the sector is against the investor.
STOCK MARKET TRENDS IN INDIA SAIL Performance summary
112
Public sector steel behemoth, SAIL, announced its 3QFY05 results today, which were largely in line with our expectations. The company’s bottomline has more than doubled on the back of strong topline growth. Riding high on strong realizations of the current prolonged strength in the steel cycle, SAIL’s operating margins have continued to leapfrog. (Rs m) Net Sales Expenditure Operating (EBDITA) EBITDA margin (%) Other income Interest Depreciation Profit before tax Tax Profit after Tax/(Loss) Net profit margin (%) No. of Shares (m) Diluted earnings 21.1% 40.0% 212 2,109 2,885 7,666 286 7,380 642 1,756 2,868 203.2 % -16.8% 7,141 -0.6% % 11,964 4078.8 466 % 15,142 105.2 % 12.5% 19.5% 4,130 per 7.1 4,130 14.7 9.8% 4,130 4.8 21.0% 4,130 13.4 16,001 3334.4 % 14,978 41,390 176.3% 8,479 4,476 8,431 -37.3% -0.6% 3QFY0 3QFY0 Chang 9mFY 9mFY Chang 4 5 e 04 7 46,458 46,603 0.3% Profit 12,448 31,088 149.7 % 20.0% 34.6% 530 2,056 288.1% 3 05 1 0 e 58,906 77,691 31.9% 152,53 197,44 29.4% 122,00 129,20 5.9% 30,534 68,241 123.5%
27,106 253.6
15,444 57,391 271.6%
STOCK MARKET TRENDS IN INDIA share* Price to earnings ratio (x) (* annualized) 4.0 4.4
113
Company profile Steel Authority of India Ltd. (SAIL), the domestic public sector steel behemoth, is India’s largest steel producer and is the world’s 15th largest. The company commands almost 1/3rd of the domestic market share with its 13 MTPA capacity. It operates 4 integrated steel plants and 2 specialty steel plants. After bleeding at the net profit level during the period FY99 to FY03 owing to an unfavorable steel cycle, the company turned around in FY04 and has continued its commendable performance into 9mFY05. Further, going forward, the company has embarked on a massive expansion plan (split into two phases), which will take its steel production capacity to 20 MTPA by FY12. Reasons for good performance in 3QFY05 Not just strong realizations: While strong realizations continue to be the sole driver for the company’s topline growth (up 32% YoY), its efforts to improve the product mix have also started to yield results. It must be noted that average steel prices in the domestic markets during the quarter were higher by 34% compared to the corresponding quarter last year. Further, higher contribution from better margin product sales i.e. value-added products, such as heavy structural, rails, plates, wheels & axles and bars & rounds have also seemingly aided the topline growth. While the company does not provide volume sales numbers, during the quarter its saleable steel production registered a rise of 5% over the corresponding period last year.
STOCK MARKET TRENDS IN INDIA
114
Improving efficiencies aid profitability: SAIL’s operating margins have nearly doubled in the last one-year from 21% in 3QFY04 to the current 40% (3QFY05). While strong steel prices deserve a significant credit for this as steel companies enjoy a high operating leverage, the company’s efforts at improving its operating efficiencies have also aided this margin improvement. As per the company, there was consistent improvement in production through energy efficient continuous casting route, increase in share of value added products, improvement in techno-economic factors like reduction in coke consumption rate, all of which have collectively contributed to the overall profitability. Bottom-line doubles: Post the 150% YoY rise in operating profits, an over 200% rise in other income and a 17% fall in interest costs (on the back of continuous debt reduction and debt replacement exercise); the profits registered a 253% rise at the PBT level. However, the bottom-line growth was curtailed to 105% (though still splendid) owing to a massive rise in tax provisioning. However, in what could be termed as a major landmark in the overall turnaround process of SAIL, the board for the first time since 1997-98 has announced an interim dividend of 15% on paid-up.
STOCK MARKET TRENDS IN INDIA
115
SAIL
Live BSE Quotes Price (Rs) 65.85 % Change 2.09 Open (Rs) 66.00 Volume 5,441,256 Mar 11, 2005 ( Cl o s e ) High (Rs) Low 66.40 (Rs) 64.65 Value (Rs) 52356,860,704 Week H/L 67.65 / 20.00 Mar 11, 2005 ( Cl o s e )
Live NSE Quotes
Software Introduction Between the two under-performers of the calendar year 2003 in relation to the benchmark index i.e. the Sensex, the software sector was a surprising one besides FMCG. Forward to the calendar year 2004, the
STOCK MARKET TRENDS IN INDIA
116
CNX IT index has outperformed the Nifty Fifty. We take a closer look at the events that shaped up for the software sector in calendar year that passed by, including the reasons for the out performance, and what lies ahead?
2004 vs. 2003 The year 2004 marked the continuity in prospects for the Indian software sector with billing rates stabilizing (at least for Tier-1 companies) and volume expanding at ‘faster than earlier’ pace. However, the year also led the management of Indian software companies chew on risks on the outsourcing front in wake of the US presidential elections held in November. While the return of Mr. Bush Junior brought some respite for these companies as the year drew to a close, it was not before a lot of apprehensions were raised whether the backlash would affect Indian software companies. These apprehensions were, however, laid to rest by managements of most of leading software players as they reported their first quarter results for the fiscal 2004-05. While we did not deny that the backlash against outsourcing had seeds of much larger resistance throughout the globe, we believed that, in the long-term, economic senses would prevail as global corporations, in their aim of becoming globally more competitive, would outsource their non-core operations to low-cost
STOCK MARKET TRENDS IN INDIA
117
countries that provide high-quality services (India, for example). This belief was vindicated as most of the leading players from the Indian software sector came out with improved forecasts for the future. The rest is, as they say, history! 2004 also saw the listing of TCS, Asia’s largest software services exporter onto the Indian bourses. The issue received a wide response and the stock was listed at the upper end of the issue price. Another event to have marked 2004 was the crossing of US$ 1 bn revenue mark by two Indian tech majors – Infosys and Wipro. While size of these three Indian software players are still miniscule as compared to global technology majors, the crossover of the US$ 1 bn revenue mark definitely marks their emergence into the global technology domain where balance sheet size plays a vital role in garnering large-scale contracts and growing businesses rapidly. Out performer: Infosys A look at the tables of key gainers below indicates that this year has belonged to the leading players in the industry, be it from the end-toend segment (Infosys and Wipro) or from the focused and niche categories (Hexaware and Kale Consultants). Gains, specifically, in stocks of large players like Infosys and Wipro were due to belief that these would be the biggest beneficiaries of the increased outsourcing momentum. These players are consistently building up their employee bases, investing consistently in building up infrastructure (development centres, marketing and distribution network), and this is all in the anticipation that they would get enough work to justify their investments. However, we believe that if that fails to fructify, or that if these companies fail to garner adequate business in line with their expectations, times might come out to be tough.
STOCK MARKET TRENDS IN INDIA Software: Key gainers in 2004
118
26-Dec- 27-Dec- % 03 INFOSYS HEXAWARE TECH WIPRO KALE CONSULTANTS RAMCO SYSTEMS The laggard: SSI 366 462 26.3% 1,348 407 571 59 04 2,055 598 753 75 Change 52.5% 47.0% 31.9% 27.1%
Companies that have had a poor track record and that were named in the stock markets scam of 2000, lost out considerably in 2004. This is a good sign considering the historical performance when such stocks rallied along with the better players from the sector. As a matter of fact, the major loser in the calendar year 2003 was Silverline (down 71%) followed by Pentasoft (down 60%). Software: Key losers in 2004
26-Dec- 27-Dec- % 03 SSI LTD PENTASOFT TECH VISUALSOFT NIIT 258 266 128 9 178 -50.4% -48.3% -33.2% DSQ SOFTWARE 17 192 8 04 44 3 Change -77.1% -61.2%
STOCK MARKET TRENDS IN INDIA
119
Expectation in 2005 While software has been considered a relatively insulated sector from geo-political ‘upheavals’ in the domestic and global arena, the degree of insulation varies across companies. We believe that continuing from what has been witnessed off late in 2004, demand for technology solution from global clients is likely to be concentrated among a few players. These could be any of those who operate across the value chain or who are focused on specific domain(s). This is because the demand for technology is likely to be more guided by the ‘Return on Investment’ factor, i.e., how much of cost saving or return on investment can be obtained by clients from their IT spending. Moreover, taking cue from the changes that increasing global competition is bringing, many Indian software companies are moving from competing just on the cost front to improving their domain competencies (like establishing greater presence in high-technology telecom and financial services verticals) to compete with global majors in their territories. Some, like Infosys and Wipro, have succeeded to an extent in this endeavors. However, for other Indian companies to make a mark on the global scale, it would require a Herculean effort. They cannot rely on the cost arbitrage advantage for long. And if they do so, investors, better keep a watch. Overall, while 2005 might bring in greater challenges for Indian software companies, these challenges are not likely to be adrift of the consequent opportunities.
STOCK MARKET TRENDS IN INDIA
120
MASTEK
Live BSE Quotes Price (Rs) 381.70 % Change -1.22 Open (Rs) 387.80 Volume 82,252 Mar 11, 2005 ( Cl o s e ) High (Rs) Low 394.70 (Rs) 380.00 Value (Rs) 5231,762,100 Week H/L 408.40 / 189.00 Mar 11, 2005 ( Cl o s e ) High (Rs) Low 394.00 (Rs) 381.00 Value (Rs) 52152,130,000 Week H/L 407.25 / 190.00
Live NSE Quotes Price (Rs) 382.05 % Change -1.04 Open (Rs) 389.90 Volume 393,498
Valuation EPS (Rs)* 25.65
P/E Ratio (x) 14.88
Market Cap (Rs m) 5,298.00
P/BV (x) 4.13
STOCK MARKET TRENDS IN INDIA Pharma Introduction
121
The year 2004 was another ‘special’ year for the stock market participants, as the markets see-sawed towards their all time high levels. While almost all the sectors participated in the bull-run, Pharma stocks were among the leaders, again outperforming the broader indices after the strong performance in 2003. Against 14% gains for the Sensex, the Pharma index gained 20% during the year.
2004 vs. 2003 The year started well for the industry with robust growth witnessed during the first quarter. A major growth driver for the industry once again was new products introduction as companies tried their hands out on various kinds of products in order to capture largest market share before the new patent regime comes into picture. The growth in the domestic market was sluggish while revenues from international markets grew at a rapid pace for Indian companies. According to the statistics of Ministry of Chemicals and Fertilizers, export revenues from the pharmaceutical sector are likely to grow at a
STOCK MARKET TRENDS IN INDIA
122
CAGR of 30% over the next three years (including FY05). The year saw smaller companies like Matrix labs and Divi’s Labs made their way further into exports markets. Sector out performer: Aventis MNC pharma companies were the biggest gainers during 2004 with Aventis emerging the leader. There were two reasons for this outperformance by Aventis. While the performance of the company was very good on profitability front, the markets have also taken a re-look at the valuations. Somewhat similar was the case with other major MNC pharma companies like Glaxo and Novartis. While Novartis saw a rise in its stock price after the announcement by the company that it will try to reach out into a larger part of India. The company has plans to introduce new drugs once the product patent comes into force. 26-Dec- 27-Dec- % 03 Aventis Nicholas Piramal Novartis Abbott Wockhardt 432 495 259 682 736 356 58.1% 48.7% 37.6% 682 166 04 1,370 292 Change 100.9% 76.4%
Apart from the MNC pharma companies, Nicholas Piramal was amongst the major gainers in the sector. Two important events that marked the year for Nicholas Piramal were the contract manufacturing business picking pace, as well the investment in R&D. The company started a new R&D center with a capital expenditure of about Rs 1 bn making it one of the biggest R&D center in private sector. On the contract manufacturing side, the company was able to enter into three
STOCK MARKET TRENDS IN INDIA
123
agreements for custom manufacturing of different products. The total size of the three deals is about US$ 50 m which is equal to about 20% of the company’s current revenue. The Laggard: Dr Reddy’s 26-Dec- 27-Dec- % 03 Dr Reddy's Biocon Cipla Pfizer Glaxo 484 257 557 595 497 1,241 308 698 776 2.6% 13.0% 19.5% 25.3% 30.4% Ranbaxy 1,099 1,423 04 855 Change -39.9%
Despite the strong performance of the overall market, including stocks from the pharma sector, leading Indian player, Dr. Reddy’s witnessed a decline in 2004. The year started on a bad note for the company as a US federal court reversed the lower court decision by its verdict saying that the company’s generic version ‘Amolodipine Maleate’ will infringe upon the patent of Pfizer’s ‘Norvasc’. To add on to this, in the first quarter of 2004, the company also reported operating losses. The dismal performance continued for the rest of the year. Higher sales and distribution and R&D expanses led to the declining margins for the company. In another important event from the sector, India’s largest biotech company, Biocon, came up with its initial public offering. The biggest event of the year, however, which was keenly awaited both by the industry as well as the markets, was the introduction of the new patent regime. Although, a change in government earlier in the year meant
STOCK MARKET TRENDS IN INDIA
124
that the new government was not ready with a fresh bill, and hence the recently issued ordinance in order to comply to the WTO regulations. The ordinance on patent third amendment act meant that India would transform into the era where the intellectual property rights will be respected and will have a legal framework for enforcement. Expectation in 2005 The year 2004 was an eventful year with new companies entering into the bandwagon for pharma exports. However, 2005 is likely to be ‘the’ year of execution for most of the companies. As far as the domestic markets are concerned, the patent ordinance will definitely instill confidence among players in the industry. However, we may not see a sudden jump in revenues and profits of MNC companies as they may approach new product launches with caution. On the exports front, the US government has intensified its efforts towards usage of generics drugs. Drugs worth US$ 35 billion are going off patent in the next three years and Indian companies are likely to be the biggest beneficiaries of the same. While Indian companies like Ranbaxy, Sun Pharma, Lupin Labs and Dr. Reddy’s are likely to get the benefits directly they might feel competitive pressures as MNC players are sourcing their drugs from India thus reducing the costs. 2005 is, thus, likely to witness greater global acceptance of India as a pharmaceutical power to reckon with!
Wockhardt Performance
STOCK MARKET TRENDS IN INDIA
125
Domestic pharma company, Wockhardt, recently declared its December quarter as well as full year numbers. In 4QCY04, the company's consolidated revenues clocked a buoyant 21% growth led by strong performance in Europe and rest of the world. Its bottomline growth was equally buoyant at 26% YoY. The company ended the full year with over 31% revenue and nearly 50% bottomline growth. (Rs m) Net sales Expenditure Operating profit (EBDITA) Operating (%) Other income Interest Depreciation Profit before tax 65 (27) 83 605 152 (119) 99 913 (113) 168 632 % 4 (17) 368 19.3% 267 7 Extraordinary expenditure Tax Profit after tax/(loss) Net profit margin (%) No. of shares (m) Diluted earnings per share 102 503 (113) 371 117.0 % 25.6% 1,42 2,135 49.7% 6 17.7% 18.4% 72.6 109.0 15.1 17.2 % % 72.6 109.0 13.1 19.6 64.7% 171 profit 4QCY0 4QCY0 Chan CY0 CY04 Chang 3 2,838 2,242 596 4 3,438 2,697 741 ge 3 0 6 24.3% 1,79 2,812 56.7% 4 margin 21.0% 21.6% 19.0 22.7 % 133.8 74 % 158 113.5 % 37.8% 9 e 21.1% 9,42 12,38 31.5% 20.3% 7,62 9,577 25.6%
50.9% 1,59 2,619 64.0%
STOCK MARKET TRENDS IN INDIA (Rs)* P/E ratio (x) (* annualized) 19.2
126
Company Profile Wockhardt is one of the leading domestic pharma companies with strong presence in the lifestyle segment and growing focus on biotechnology. The company, a few years back, was focused on the domestic market, but intense price competition and price regulations resulted in the company gradually shifting its focus to exports. Consequently, Wockhardt acquired two UK-based companies Wallis Laboratories and CP Pharma. The company now derives 60% of its revenues from non-India regions. The company has proven its R&D capabilities insulin). Performance in CY04: Europe potion: Though European growth has slowed down post the acquisition spurt, the region still clocked a healthy 29% revenue growth. Just to put things in perspective, the revenues from European business in June quarter last year were Rs 333 m, while the revenues in September quarter 2003 significantly increased to over Rs 1 bn, led by the acquisition of CP Pharma. For the full year, the region grew by a significant 77% YoY and now forms 42% of Wockhardt’s revenues. In May 2004, Wockhardt acquired ‘esparma GmbH’ to give its German plans a fillip. Incidentally, Germany is the largest branded generics market in Europe. by indigenously developing and launching Biovac-B (hepatitis - B) vaccine, Wepox (Erythropotein) and Wosulin (human
STOCK MARKET TRENDS IN INDIA
127
US – The emerging driver: Going forward, the company's growth is likely to gain momentum in the US, where it launched 3 new products under the Wockhardt banner during third quarter of 2004. While the US market grew by a staid 3% in September quarter, in December quarter it displayed signs of picking up pace with nearly 10% revenue growth. US accounted for 8.3% of consolidated CY04 revenues. The region’s share in the pie is likely to go up over the next couple of years. Home score: The sales in the domestic market were up 10% during the quarter and over 13% in CY04. The field force re-structuring in the domestic market, as well as buoyancy in the lifestyle segment (biotechnology, Nephrology, Diabetology) has helped company beat the industry growth rate. The 30 power brands of the company, which constitute 80% of the domestic revenue, grew by 15% in CY04. Also, the revenues from its biotech portfolio grew by 81% YoY during CY04. Wepox (Erythropoeitin) is growing at 47% plus and Wosulin, which has completed one year of its launch, increased its market share to about 6%-7% in domestic insulin market. Geographical Mix…
(Rs m) India Europe US Rest World
4QCY0 4QCY0 Chan CY0 CY04 Chang 3 1,057 1,219 304 of 259 4 1,164 1,574 334 365 ge 3 2 29.1% 2,93 5,206 77.2% 8 9.9% 1,07 1,033 -4.1% 7 40.9% 1,06 1,233 15.9% 4 e 10.1% 4,34 4,916 13.2%
STOCK MARKET TRENDS IN INDIA Total 2,839 3,437 21.1 % 9,42 12,3 31.5% 1 88
128
Margin story: The operating profit grew faster than the revenues. The basic reason for this is the increased contribution from the European markets, where margins are higher, as also the benefits of restructuring. Increased contribution from the high margin formulations business has also expanded operating margins. However, this margin profile is likely to be affected once competition picks up in the European markets. Also, company's recent entry into the US market on its own will affect the margins, as the cost of establishing sales and marketing network will take its toll, at least in the near term. Business Mix… (Rs m) Formulatio ns Bulk Drug Total 2,439 400 2,956 482 4QCY0 4QCY0 Chan CY0 CY04 Chang 3 4 ge 3 7,77 10,61 21.2% 8 1,64 20.5% 3 21.1 2,839 3,438 % 1 1,772 7.9% 88 31.5% 9,42 12,3 6 36.5% e
Tax provision and extraordinary expenses: Net profit grew by 26% in the quarter and by 50% in CY04. The company has recently issued FCCB's (Foreign currency convertible bonds) worth US$ 110 m. The interest charges are likely to increase owing to increased borrowings for funding acquisitions. Moreover, as the company’s contribution from the European operations pick up, the tax outgo could increase, as effective taxes are higher in those countries. The extraordinary expense of Rs
STOCK MARKET TRENDS IN INDIA
129
113 m in 4QCY04 as well as CY04 pertains to restructuring expenses in UK, as well as cost of setting up the US office.
The company has achieved robust growth on the back of its inorganic strategy over the past few quarters. Apart from this, changing geographical mix and streamlining of operations has helped Wockhardt to maintain healthy margins over the last few quarters. Expectations At Rs 376, the stock is trading at 19 times CY04 earnings. Wockhardt, despite its past strong presence in the domestic market, has failed to capitalize on the same over the years. But with its recent focus on the international markets and some prudent acquisitions in Europe, growth prospects look promising. The company has achieved significant topline and bottomline growth in CY04, basically on the back of inorganic growth and restructuring moves. Further benefits of the restructuring are likely to filter in during 2005. The business strategy looks viable. We will update our report on the company soon.
STOCK MARKET TRENDS IN INDIA
130
WOCKHARDT
Live BSE Quotes Price (Rs) 373.85 % Change 0.38
(WOCK)
Mar 11, 2005 ( Cl o s e ) High (Rs) Low 380.00 (Rs) 371.05 Value 52(Rs) Week 8,609,900 H/L 391.50 / 236.25 Mar 11, 2005 ( Cl o s e ) High (Rs) Low 384.00 (Rs) 373.00 Value (Rs) 5223,429,300 Week H/L 405.90 / 224.65
Open (Rs) 377.70 Volume 22,803
Live NSE Quotes Price (Rs) 375.30 % Change 0.29 Open (Rs) 377.05 Volume 61,904
STOCK MARKET TRENDS IN INDIA
Valuation EPS (Rs)* 19.10
131
P/E Ratio (x) 19.57
Market Cap (Rs m) 40,674.88
P/BV (x) 8.59
ACC
A.C.C.
Price (Rs) 366.45 % Change -0.72
(ACC)
Mar 11, 2005 ( Cl o s e ) High (Rs) Low 372.30 (Rs) 365.60 Value (Rs) 5280,899,104 Week H/L 385.00 / 218.00 Mar 11, 2005 ( Cl o s e ) High (Rs) Low 372.40 (Rs) 365.60 Value (Rs) 52194,642,304 Week H/L 386.85 / 220.90
Live BSE Quotes Open (Rs) 370.00 Volume 219,280
Live NSE Quotes Price (Rs) 366.55 % Change -0.76 Open (Rs) 369.50 Volume 527,809
STOCK MARKET TRENDS IN INDIA
132
Market Cap (Rs m) 65,316.05 *Trailing 12 months earnings | BSE Sensex | S&P CNX Nifty
Valuation EPS (Rs)* 17.80
P/E Ratio (x) 20.59
P/BV (x) 4.95
Excerpts from the interview with Fortis Securities The two stocks that performed really well in the bourses during the year 2004 were the stocks of SAIL & Task pharma. The banking stock SBI and the pharma stock Ranbaxy were the moderate performers in the same year. The worst performing stock was that of the BPL because of the ongoing feud in the family. After the budget announcement by the finance minister the Sensex fell drastically because of the sheer panic due to the constant policy differences between the ruling government and the left parties (introduction of the STT was also responsible of the downward trend of the index). However it has bounced back and has hit a record high of 6680 in the beginning of the year 2005. . SAIL will continue to perform well in the year 2005 due to the rising domestic as well as foreign demand for steel. Ranbaxy too has a positive year ahead with India moving into the product patent regime. The stock price will depend on the company’s ability to come out with newer drugs since they have invested heavily in the R & D.Task pharma continues to perform well in the year 2005. The future of the BPL stock is unpredictable unless the ongoing family feud is resolved. Bharti Televentures is another company whose stock has really performed well in the year 2004.This is mainly because of their increasing revenues from their landline connections, broadband facilities and their licenses to offer cellular services in the newer circles such as J
STOCK MARKET TRENDS IN INDIA
133
& K. Moreover they also have the first mover advantage in the telecom sector. The outsourcing of their complete network management to IBM and their focus on customer service has definitely contributed to the upward movement of the stock. General questions 1. The Sensex dropped drastically post budget 2004 mainly because of the sheer panic reaction. There were some differences between the ruling government and the left parties over some policy issues and the introduction of the STT was in some way responsible for the downfall of the Sensex. The investors were unclear about the STT and it was their panic move that resulted in Sensex dropping sharply. 2. The coming budget is definitely a good one for the stock market. The investors were unmoved by the hike in the STT in the recent budget. They all took a broader view of the budget which is generally perceived to be a positive one for the market and industry. Riding high on the back of the positive measures the Sensex witnessed a smart rally and closed strong at 6714 up 144 points. 3. The imposition of VAT will not cause much change in the Sensex. However the VAT will take sometime to be implemented and it may not be implemented according to the deadline given by the government. 4. The hike in the STT is a good move by the finance minister and it will not create any problems from the investor community. STT may continue to be hiked on a year on year basis. The FIIs are planning to invest heavily in India in the near future. Lots of money is waiting outside India in the hands of the FIIs to be
STOCK MARKET TRENDS IN INDIA
134
invested in the Indian market. The investment that these FIIs make in India is very miniscule compared to the total size of their holding. Energy sector
1. The ongoing family feud had a very little impact on the performance of the stock mainly because Reliance is such a large holding and a highly trusted and stable brand in the eyes of the investors. 2. There is no likelihood that the splitting (if it happens) of the company will affect its stock performance in a major way. 3. The approval of the Iran gas pipeline is a major boost for the company. But unless the project is executed nothing can be predicted about its impact on the company’s stok. Oil sector as a whole was a laggard one in the year 2004.The share price of oil companies HPCL & BPCL were badly affected owing to the divestment of these two PSUs. The share prices of these two companies are slowly bouncing back this year. Cement sector
2. The top performer in the cement sector in the year 2004 was the Grasim cements. IT sector
The US presidential elections were a major concern for this sector because of the outsourcing issue involved. All the fears were laid to rest with Mr. Bush becoming the American president (Mr.Kerry was antioutsourcing). There was not much variations in the stock prices of the IT giants. Outsourcing is the way to the future and all the big companies are doing it in large scale to reduce costs.
STOCK MARKET TRENDS IN INDIA
135
1. With the IT giants like Infosys and Wipro joining the billion dollar club, the small companies are really facing a uncertain future. The smaller companies like Polaris, NIIT etc are losing their clients to their bigger competitors. The clients are turning to the bigger IT companies because of their larger size and their capability to offer everything under one roof. Barring a few companies like Mphasis BFL most of the small companies are facing difficult challenges to survive which is adversely affecting their stock prices in a big way.
Pharma sector 1. With India moving into the product patent regime the pharma sector is bound to have a bright future. Indian pharma giants like Ranbaxy, Cipla have an established presence in the North American and European markets and have a very bright year ahead. Also these companies have invested heavily in their R & D facilities which will definitely give them a good ROI in the near future. The capability of these pharma majors to come up with new drugs will be the major factor in their stock performance. Overall the pharma sector has a very bright future ahead. 2. Exports are bound to rise in the near future though not as much as 30% but considerably little less. However in the long run the Indian Pharma sector will definitely boom and has a very positive 2005 ahead. 3. The entry of small companies will not affect the larger ones in a big way because in the Pharma sector there is space for everyone.
STOCK MARKET TRENDS IN INDIA
136
The big giants can always fall back on their superior R & D facilities to come out with newer drugs compared to the smaller companies. Technical analysis is the prediction of future performance of a stock based on the historic data available using different techniques. It is a complex task of analyzing statistical data and graphs to predict the future outlook of a company’s stock. Different ratios are involved to analyze the stock of a company (EPS, Debt-Equity etc.) and prepare a financial report of the company that can be very helpful for the investors.
END OF CHAPTER VI
doc_139033569.doc