Sir,
NSE - moving towards moral bankruptcy
This letter is from an Indian investor. With the dominant share of my investments routed through the National Stock Exchange, I am a stakeholder too.
The advent of the NSE changed the playing field for the retail investors like us. NSE gave transparency, reduced transaction costs, sped up settlements and almost did away with the fear of payment defaults. The system which the NSE put in place raised the benchmarks on how stock exchange mechanisms ought to work. The almost obsessive zeal with which the system was run has become the hallmark of the NSE.
Therein lies the problem with the NSE. It is all about how the trading platform is run and how the systems are managed. In this obsessive zeal, the NSE has created lacunae within, which call for urgent introspection and remedies. The CEO has a fiduciary responsibility to address these issues. I raise a few:
- The NIFTY index includes a holding company (Reliance Industries Ltd) and a subsidiary company (Reliance Petroleum) in which it has controlling interest. What is the logic behind this duplicative representation? The same question holds for Reliance Infra and Reliance Power too.
- When an analyst computes index PEs, the earnings of the companies which constitute the index are material to the Index EPS. Why include Reliance Power and Reliance Petroleum in the NIFTY long before they started commercial production? What is the rationale behind giving a company index representation when it has no earnings history?
- A company's price discovery starts when it makes an IPO. The price discovery process would be effective only after a reasonable period of time. Why then a company like DLF was included within months of listing? DLF's dominant revenues were from interse transactions with its own subsidiary or related parties. What was the assessment of corporate governance done by the NSE before it brought DLF into its index? How bringing DLF into the NIFTY with not even a few quarterly results to judge performance or corporate governance is justified? The serious litigation that DLF had with its minority shareholders just months before its IPO and the covertly-managed delisting process reflected abject lack of corporate governance in the company. DLF made out-of-court settlements with the litigant shareholders in a hurry to raise capital and relist. Were these factors duly considered before giving DLF an index presence?
- Reliance Power stock crashed within minutes on the listing day. Institutional shareholders dumped the stock on the listing day implying that they had been duped on valuation. Yet, NSE included it into the Nifty within months of listing! Implicitly, NSE made every NIFTY index fund buy the stock which the funds had chosen to dump months ago. Was it not interfering with the price discovery and forcing investors to buy an out-of-favour stock by giving it index representation?
- NSE included several scrips in the F&O segment like Educomp Systems, Lanco infra, HDIL, Sobha Developers, AIA Engg and Rajesh Exports, to name a few. These scrips were thinly traded even in the cash segment before they were brought into the F&O. The valuations went up several 'fold after they came into F&O. What is NSE's method of evaluation of a company before including it in F&O? Is there a transparent mechanism and a designated committee to decide which company is introduced into the F&O?
I feel the futures segment was used to rig the stock prices in several mid-cap companies in 2007-08. Is the mere inclusion of a company in the F& O a reason for its valuation to rise several 'fold?
- I raise the issue of circuit filters being used as a price manipulation tool. If the circuit filter is 5 per cent, the NSE believes that the price volatility is restricted by that measure. But, the actual outcome is that operators find it quite easy to rig a stock by 5 per cent every day. Take it up by 5 per cent for several days and then dump it when the gullible traders expect it to rise one more day. The stock freeze which NSE uses to prevent price volatility actually serves as the operator's most effective exit tool. Why have any circuit filters at all? Can't price discovery be left to market forces with regulatory action restricted to tracking broker actions?
I can assure you that there are many more questions. What investors expect from the country's premier stock exchange is not merely a world class trading system. We are looking for a management which understands its fiduciary responsibility and works to manage its indices and its F&O in a manner which is representative of the Indian economy as a whole. Otherwise the NSE would end up working against the interests of the larger investing community.
Shyam Sekhar, Investment Thinker,Chennai.
Sir,
I would like to take this opportunity to rebut one point you raised at our 5 November event, namely your assertion that the United States is facing an agricultural trade deficit.
I expressed my skepticism about that assertion during the meeting, but I wanted to keep the focus of the event on the election and what it meant, and not get bogged down in discussions of trade minutiae.
While the United States has managed a sizeable overall trade deficit for some time, I can assure you that agricultural trade is one area where the United States continues to enjoy a significant - and growing - trade surplus with the rest of the world. In fact, our surplus in agricultural trade tripled in fiscal year 2008 (ending on October 1) to USD 36.1 billion, according to official statistics from the US Department of Agriculture.
I do look forward to crossing paths with you again during my tenure in Chennai, and I wish you and your organization much success.
Andrew T Simkin, Consul General, USA
Please accept our thanks for correcting us in regard to US agricultural trade. We notice a huge jump in US agricultural trade surplus through fiscal 2008.
In looking at the US agricultural trade figures, we noticed the peak surplus of 26.9 mn tonnes was touched in 1996. But in the subsequent 10 years, we found a decline in the surpluses, touching a low of $ 3.9 bn in 2005 and improving to 5.6 bn in the next year. With the US functioning as the leading food bowl of the world for years, you will understand concern over this precipitous fall.
On the basis of the then projections we were led to infer a trade deficit. We notice this surplus tripling to $18 bn through 2007. I am also happy to see the figure further doubling to a record $ 36 bn in fiscal 2008. I record my compliments on this. Ed - IE
Dear Sir,
In your article Miracle at Baramati (IE November 2008 issue) - mentioning the client list of Schreiber Dynamix Diary.
There is an error it mentioned : "client list is who's who in the diary business of India and includes Amul." Amul is not our client, we both have a separate identity in the diary business.
S. Raghunathan Menon, Schereiber Dynamix Dairies Ltd, Baramati
It should read Mother Dairy instead of Amul. The error regretted
Ed - IE
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