Showing posts with label SEBI. Show all posts
Showing posts with label SEBI. Show all posts

Monday, 8 February 2021

Real Estate Investment Trusts (REITs) - My Tweets - vrk100 - 08Feb2021

Real Estate Investment Trusts (REITs) - My Tweets

 

 

(Update 27Sep2021 on REITs is available) 

 

 

India is no stranger to REITs or Real  Estate Investment Trusts. REITs first caught my attention back in June 2006 when I wrote an article on them. The article can be accessed at: REITs - What Are They?
 
Since then, many things have happened though belatedly. India's capital market regulator was slow to introduce them to financial markets. The lethargy can be gauged from the fact that India's first REIT went public only in March 2019, with Embassy Office Parks REIT coming out with an initial public offer (IPO). The REIT's units were listed on BSE (formerly Bombay Stock Exchange) and NSE (National Stock Exchange of India) on 1st of April 2019.

The second REIT in India is Mindspace Business Parks REIT, which was listed on 07Aug2020.

A third REIT will be listed this week. It is Brookfield India Real Estate Trust, whose IPO was closed on 05Feb2021.

The details, as of today, are:

 

As can be seen from the below chart, the interest in the two listed REITs is subdued now even though initially investor interest was high in them. Embassy REIT's issue price was Rs 300 and it closed on first day of its listing (01Apr2019) at Rs 315. On 05Mar2020, it touched all-time-high of Rs 480, but as of now it slipped to Rs 355.

And Mindspace REIT is now quoting at Rs 330, a gain of 20 per cent from its issue in August 2020.  

In comparison, the stock of DLF Ltd is now quoting at Rs 313 with a market cap of Rs 77,600 crore. 

You can read the story of REITs in India through the following tweets: 

1) As more players are likely to join the space, we may see more REITs in public markets going forward. For example, DLF Limited has expressed its interest in launching a REIT. My tweet dated 01Nov2020 (click on the tweet thread for more details):

2) My tweet dated 08Oct2019 commenting on the market fancy for Embassy Office Parks REIT as compared to DLF stock (click on the tweet thread for more details). In Oct2019, DLF's market capitalisation was Rs 35,600 crore and that of Embassy REIT was Rs 33,150 crore. As of now, DLF's market cap is Rs 77,600 crore, a gain of 118 per cent in the past 16 months. 

Whereas, Embassy REIT's market cap is now Rs 33,600 crore, a gain of just one per cent in the same period. It's obvious that the initial euphoria surrounding the REIT's IPO died down, which is natural. In the past 16 months, the pendulum has swung to the other side, with investors turning euphoric about real estate stocks, while showing little interest in the two listed REITs.

Actually, there is a flaw in comparing unit prices of REITs with share prices of real estate companies. Most of the income of REITs comes from dividends paid by the underlying SPVs.

These SPVs receive cash flows mainly through rental income from income-generating properties, either residential or commercial. As per SEBI mandate, REITs have to pay out at least 90 per cent of their net distributable cash flows to unitholders on a half-yearly basis.

Whereas, distributions to shareholders from listed companies comprise of dividends and share buybacks.  And companies are not mandated to compulsorily pay dividends or undertake share buybacks; unlike REITs which have to distribute 90 per cent of their cash flows. 

  

3) My tweet dated 01Nov2020 about Embassy REIT joining S&P Global Property Index (click on the tweet thread for more details):

 

 

4) My tweet dated 19May2019 with details of Embassy REIT's offer document: 

 

5) DLF expressed its intention to float a REIT back in November 2014. Even after six years, the REIT has still been in the pipeline. It is hoped that its REIT may see the light of the day in 2021. My tweet dated 15Nov2014 about DLF's intention:

 

 6) My tweet dated 16Aug2014 about REITs' potential if implemented and regulated properly: 

 

 7) My tweet dated 13Aug2014 about hurdles to REITs:

 

  8) My tweet dated 10Aug2014 about SEBI approving REIT norms:

 

9) My tweet dated 11Jul2014 about tax clarity: 

 

10) My tweet dated 11Jul2014 about diversification benefits of REITs: 

 

 For more on REITs and my tweets, you can check this: weblink

 

- - - 


Disclosure:  I've vested interested in Indian stocks. It's safe to assume I've interest in the stocks discussed, if any.

Disclaimer: The analysis and opinion provided here are only for information purposes and should not be construed as investment advice. Investors should consult their own financial advisers before making any investments. The author is a CFA Charterholder with a vested interest in financial markets. He blogs at:

https://ramakrishnavadlamudi.blogspot.com/

https://www.scribd.com/vrk100

Twitter @vrk100    
Posted by at No comments:
Labels: , , , , , , , , , ,

Sunday, 20 September 2020

SEBI's New Regulation on Multi-cap Funds and Market Behaviour-VRK100-11Sep2020

SEBI's New Regulation on Multi-cap Funds and Market Behaviour-VRK100-11Sep2020

 

 

India's capital markets regulator SEBI on 11 September 2020 came out a new mutual fund regulation saying that it is mandatory for multi-cap funds (a category of equity funds under SEBI's categorization and classification of mutual funds introduced in October 2017) to invest 25% each of their assets in large-, mid-, and small-cap stocks. The following is my immediate response to this maverick regulation by SEBI.

 

While I do believe that SEBI should not constrain a fund manager's ability to move among various stocks and distort the markets by resorting to back-seat driving, I would like to point to the dramatic statements being made in the media.

 

There seems to be a notion that thousands and thousands of crores will move from large-cap stocks to mid- and small-cap stocks in the light of the changed SEBI regulations.

 

I do think this is a bit naïve. One must also consider the second- and third-order effects.

 

As per SEBI's rules on categorization, there are 10 types of equity mutual funds. Let us assume that the new rules will lead to a lot of churn as funds start selling large caps and move to small and mid-caps. This will affect all the other nine categories.

 

Why? Because small caps become mid caps, mid caps become large-caps, and large caps shrink into mid caps. At least in theory. As one category of equity mutual funds sees selling, another would witness buying. Due to this, overall selling and buying may be muted.

 

Moreover, the new categorization rules will come into effect only in February 2021.

 

The transition should be much smoother than is anticipated.

 

As per George Soros' reflexivity theory, "markets can influence the events that they anticipate." If sufficient market participants expect the Rs 40,000 crore bonanza, then money may move to small- and mid-cap stocks as is being theorised now. I do believe the chances are remote.

 

Let me explain with some examples.

 

HDFC Small Cap has 70% of its assets invested in small caps. Assume small-cap prices shoot up as is being speculated. The allocation of small caps in this fund may reach 75%. Due to liquidity concerns, the fund manager will bring down the small-cap stake.

 

ABSL Frontline Equity has 85% of its portfolio in large caps. Due to the anticipated shift from large cap stocks to lower market caps, the large-cap allocation may shrink to 75%. At which time, the fund manager may be forced to increase the stake in large caps to 80%.

 

My point is that the situation will be in constant flux, affecting all sorts of equity funds – large cap, mid cap, small cap, balanced, hybrid, thematic and sectoral.

 

Now let us further assume that more than Rs 40,000-crore or Rs 50,000 crore mutual fund assets would move from large caps in the next two months. This would put pressure on large-cap stocks leading to drop in the Sensex and Nifty. This drop may further lead to selling which could precipitate more selling. This feedback loop will lead to erosion of mid- and small-cap stock prices.

 

- - -

 

Reference: For SEBI's circular new regulation on multi-cap funds: Tweet dated 11Sep2020

 

The above views expressed by me on my Twitter handle @vrk100 are carried by Morningstar India: weblink on 12Sep2020 

 

Shout-out: I express my sincere gratitude to Ms Larissa Fernand (Twitter handle @larissafernand), Editor of Morningstar India, for help publishing my views on their website. 

 

My Tweet thread dated 11 September 2020 >

 

 ----------------

Multi-cap funds: Additional comments I made on Twitter, during my interaction with others, between 11Sep2020 and 15Sep2020 (these additional comments were added in this blog post on 11Oct2020):





 

1) Tweet thread dated 14Sep2020:

 

The world is divided between diversification and concentration. What is suitable for one may not be suitable for others. Prudent management of funds means regulator will have some investment restrictions--but they should not burden a manager's flexibility.

 

SEBI's original circular and the clarificatory one show that SEBI is clueless about market dynamics.

 

2) Tweet thread dated 14Sep2020:

 

Constant tinkering with fund %ages will inject uncertainty into the minds of investors--not many are sophisticated enough to follow the norms. Any regulation needs to be nuanced, not blunt like this 25%.

 

Agree there are different viewpoints and I respect those views. But the regulator should climb down its high stupid ground. It's high time SEBI reduced the percentages for mid- and small-cap stocks to like 12% or 10% in line with their weight in NSE 500 or BSE 500 index.

 

Unlisted firms are avoiding listing due to SEBI over regulation, burden of excessive enforcement, higher listing costs, and skewed policies. In India, investing opportunities are more in unlisted space vs listed universe.

 

It's a well-known fact that due to onerous capital controls and capricious and oppressive taxation; a large part of Nifty and Rupee trading ( in NDF market) has shifted outside India. Over-enthusiastic and wild regulation by regulators & gov't is killing Indian businesses.

 

The kind of back-seat driving by SEBI in fund management is so burdensome and oppressive that smart money managers may consider shifting their base to say, Singapore, London or Frankfurt.

 

 

3) Tweet thread dated 14Sep2020:

 

I'm sure all mutual fund managers are seething with anger against SEBI's action that severely constricts fund management and jeopardises investor interest. But so far, no money manager has called SEBI's bluff openly. What are they afraid of? Hypocrisy?

 

How could SEBI force an FM to buy a certain %age of stocks when the stock universe is small? Is SEBI so vapid that it's unaware of liquidity risk in mid-& small-cap stocks? Indian markets lack depth, due to a variety of reasons, like, high compliance costs & regulatory overreach.

 

4) Tweet dated 14Sep2020:

 

I don't know whether all the 700+ stocks in BSE SmallCap index will rise or fall in the next few weeks reacting to regulatory action. But I'm sure select neglected stocks, with low/manageable debt, high profitability, sustainable businesses and strong balance sheets will do well.

 

5) More tweets in the second week of Sep2020 on this hot issue of new SEBI regulation on multi-cap funds:

 

The scenario presented by you (small caps will rally after SEBI new regulation) is quite possible. But the probability of this scenario is low in my opinion given the precarious nature of the economy. This madcap circular may be used by market players for satisfying their trading / selling instinct.

 

If market sell-off occurs, it may be an opportunity for people who are on the sidelines with pots of money.

 

Long-term investors, in my opinion, should not bother about this SEBI circular on multi-cap funds. There is always a possibility that market will use this as an excuse and resort to selling which is going to hurt mid- and small-cap stocks more than the large-caps.

 

Exactly! HNIs with good knowledge of international markets will tend to move away from Indian stocks due to this capricious market regulators. It's not worth their time to remain invested in Indian stocks.

 

Several fund houses are already into all types of EMF categories. Only a few AMCs may be able to move from multi-cap to other equity categories, provided the regulator permits the switch.

 

This is a good point! But some AMCs are fully into all types of EMF categories. Only a few may be having this option of switching, rules permitting. Another option would to merge multi-cap funds into other types of funds with high large-cap exposure.

 

If only people (including me) had spent more time on improving their skills rather than wasting time on this madcap SEBI circular, productivity levels of India would surpass those in advanced economies. And PM Modi's dream of USD 500-trillion-economy can be achieved by 2023.

 

Snake oil peddlers have already started selling their "wares" to the greedy. (SEBI madcap circular).

 

Different scenarios are possible. My simple point is we should not base our investment strategy depending on the mood swings of the regulator. Long-term investors should pick stocks based on the fundamentals.

 

Another possibility is: AMCs may persuade SEBI to change the tenor of this circular or dump it altogether. Another option would be to change the large, small & mid cap definition. I mean they may say top 150 are large caps (now top 100) and top 151-350 (now 101-250) are mid-caps.

 

SEBI rules permitting, merger and / or re-classification of equity MF schemes will lead to changes in ranking of individual MF plans in different EMF categories.

 

Indian financial regulators, be it SEBI or RBI, etc., confuse regulation with action. SEBI failed miserably to check MF mis-selling, debt funds misusing their mandate, promoters' greed and fraud, and several others. To offset their incompetence, they come up with mindless norms.

 

Fund managers need full control over plan assets. SEBI's rules on categorization and reclassification are useless. They norms don't benefit investors at all.

 

Sir, as you know, there are several moving parts. AMCs rejigging their portfolios, traders and investors churning their portfolios, and SEBI coming up some more new norms. Long-term investors should not worry too much (about this regulation).

 

As you know, nothing works in isolation in markets. All kinds of scenarios are possible. But we need to think in terms of probability (odds) of these possibilities. I don't know how the market reacts, hence I should follow a strategy that is suitable for me.

 

Hefty money managers say they will 'wait and watch.'. It's quite possible they would do the opposite. Markets are cold-blooded. They don't give two hoots to platitudes. Going by the commentary, it seems a big jolt is coming in the next 3 to 4 days. But, this optimism needs to be tempered with SEBI future action--I suspect that SEBI should definitely bring down this 25% madcap limits to say 12% or 8%. Otherwise, active fund mgmt is pointless.

 

In any other country, the incompetent heads would have been 'sacrificed.'

 

This two-day storm-in-a-tea-cup cost us Rs 50,000 crore national income. Total waste of time!

  

- - -

Disclosure:  I've vested interested in Indian stocks. It's safe to assume I've interest in the stocks discussed, if any.


Disclaimer: The analysis and opinion provided here are only for information purposes and should not be construed as investment advice. Investors should consult their own financial advisers before making any investments. The author is a CFA Charterholder with a vested interest in financial markets. He blogs at:

http://ramakrishnavadlamudi.blogspot.com

http://scribd.com/vrk100

 

Twitter @vrk100

 


 

 

Posted by at No comments:
Labels: , , , , , , , , , , , , ,

Friday, 18 October 2013

Relaunch of Interest Rate Futures?-VRK100-18Oct2013




Interest rate futures (IRF) may be relaunched for the third time in India, according to media reports widely circulated today—quoting sources in the Reserve Bank of India, India’s central bank.

Exchange traded interest rate futures (ETIRF) were earlier launched by National Stock Exchange (NSE), country’s premier stock exchange, once in 2003 and again in 2009. If this financial derivative product is launched again, this will be third time that the product will be making a re-entry in the Indian market.

On 31 August 2009, NSE relaunched ETIRF based on 10-year Government of India (GOI) security having a notional coupon of 7 percent, with physical settlement. And on 4 July 2011, NSE launched another IRF based on 91-day Treasury Bill, with cash settlement. Initially, these two products experienced some trades from market players. Later, market interest in these products died down. According to NSE’s IRF Tracker, trades are nil in them now.

Liquidity was confined to only a few government bonds. Traders were not interested in holding such illiquid bonds, which adversely affected trading interest in this ETIRF product.

The failure of this product could be attributed to a few things. The ownership of government securities in India is highly skewed towards banks and insurance companies, which keep these assets for long term and their risk appetite for trading is very low. So only a few players are in this market.

Another distorting factor is that banks need not value government securities as per the market value at day’s end (mark-to-market or MTM) since bulk of their investments are allowed to be kept in held-to-maturity (HTM) category. More than 90 percent of such securities are held in this HTM category, which prompts banks not to trade them and thereby avoid any interest rate risk.

Moreover, RBI is the Government’s money manager, undertaking issue of government securities, treasury bills and cash management bills. As a regulator and as a government’s fund manager, RBI exercises enormous control over banks in India—relating to reserve requirements and tweaking rules. As a Government's money manager and enforcer of reserve requirements for banks, it can be said that RBI has a conflict of interest. (However, a few studies dispute this conflict of interest argument).

If this interest rate futures product is to made successful in the Indian market, both RBI and SEBI (Securities and Exchange Board of India, capital market regulator) will have to make it more attractive by allowing flexibility for exchanges to design the product and features, allow cash settlement as against physical settlement, and permit contracts in various maturities.

Time will tell whether the new RBI governor, Raghuram G Rajan, will make this product click and tick. 
(Please see below to know about basics of interest rate futures, their features and contract specifications).



------------------------------------------------------------------------------------



For the benefit of readers, I reproduce my earlier article dated 28 August 2009 when NSE relauched interest rate futures.






It is two months since the operational guidelines for ETIRF were issued by an RBI-SEBI Committee. Now, National Stock Exchange is re-launching trading in ‘Exchange-Traded Interest Rate Futures’ (ETIRF) from August 31, 2009.  The operational guidelines for the interest rate futures (IRFs) in India were issued on June 17, 2009, by a committee jointly set up by RBI and SEBI. Institutions like, banks, insurance companies, primary dealers, pension funds, mutual funds, financial institutions, companies and provident funds are exposed to interest rate risk on account of their huge exposure to government securities and other fixed income securities. To mitigate the interest rate risk, RBI along with SEBI, has introduced interest rate futures in India. This is a measure that helps in deepening the debt market in India. (IRFs were first launched in 2003 by National Stock Exchange, but did not find favour with market players).

Exchange-Traded Interest Rate Futures (ETIRF): 

 An IRF is a contract between two parties – a borrower and a lender – who agree to fix the rate at which they will borrow/lend on a future date. To put simply:

·        It is a hedging mechanism used by economic agents affected by interest rate movements
·        Alternatively put, it is a tool to manage interest rate risk
·        It is a derivative contract – providing standardization and transparency
·        It may be used by banks, insurers, primary dealers, provident funds, etc
·        Even FIIs and NRIs are allowed to take trading positions subject to norms
·        It will be traded on a stock exchange which bears the counterparty risk

Who are permitted:

·        Members registered by SEBI for trading in currency/equity derivatives are eligible to trade in IRF
·        Even individuals who have got interest rate exposures inherent in their fixed deposits, housing and car loans can hedge their positions with the help of an IRF
·        The minimum net worth of a trading member should be Rs one crore
·        The minimum net worth of a clearing member should be Rs 10 crore

The Exchange-Traded IRF product:

·        The IRF is based on yield-to-maturity curve
·        The notional coupon on the underlying 10-year Government Security would be seven per cent with semi-annual compounding
·        The size of the IRF contract would be Rs two lakh
·        Maximum maturity of the contract will be 12 months
·        The contract will be settled by the physical delivery of securities
·        The contract cycle will be at the end of March, June, September and December quarters

Gross Open Position:

·        The gross open position of a trading member across all contracts should not exceed 15 per cent of the total open interest or Rs 1,000 crore, whichever is higher
·        At the client level, the gross open position should not exceed six per cent of the total open interest or Rs 300 crore, whichever is higher
·        FIIs and NRIs, the gross long position in the debt market and the IRF contract should not exceed their maximum permissible debt market limit prescribed from time to time.

What is not permitted as of now:

·        IRF based on overnight rate (based on money market rates) is not permitted
·        IRF based on 91-day Treasury bill is not permitted now, but may be considered later

NSE’s ETIRF Product:



 The salient features of NSE’s new product are:

NSE Contract Specifications
Trading unit
One lot – equal to notional bonds of FV of Rs 2 lakhs
Underlying
10 Year Notional Coupon bearing Government of India (GOI) security (Notional Coupon 7% with semi annual compounding)
Tick size
Rs.0.0025 paise
Trading hours
Monday to Friday
9:00 a.m. to 5:00 p.m.
Contract trading cycle
Four fixed quarterly contracts for entire year ending March, June, September and December
Last trading day
Seventh business day preceding the last business day of the delivery month
Quantity Freeze
501 lots or greater
Settlement
Daily settlement  MTM:  T + 1 in cash
Delivery settlement :  In the delivery month i.e. the contract expiry month
Mode of settlement
Daily Settlement in Cash
Deliverable Grade Securities
GOI securities

  • NSE has waived transaction charges on IRF until December 31, 2009

Till now, the only interest rate derivative available for trading is Overnight Indexed Swap (OIS) which is a type of Interest Rate Swap (IRS). Interest rate swaps are agreements where one side pays the other a particular interest rate (fixed or floating) and the other side pays the other a different interest rate (fixed or floating). However, OIS is traded in the OTC market. The new IRF is the first interest rate derivative that is being traded on an Exchange.

IRF will be the first derivative product which will be settled by delivery whereas other exchange-traded derivatives (for example, stock futures, index futures, index options, etc) are settled by cash. Physical delivery will be in the demat form through the depositories NSDL, CDSL and Public Debt Office (PDO) of the Reserve Bank of India. 

Other Exchanges:

While NSE introduces ETIRF from 31.8.09, BSE it appears would introduce the product through United Stock Exchange in which BSE took a 15 per cent stake recently.

Interest Rate Scenario:

The huge borrowing programme of the Indian Government has muddied the interest rate scenario. What has been exacerbating the interest rate situation is the food inflation (based on Consumer Price Index or CPI) which has been rising to alarming levels of more than 10 per cent for several months. Any pick up in credit disbursement during the oncoming festive season and credit off-take from corporate sector during the second-half of the fiscal year will put further pressure on the interest rates. With the benchmark 10-year Government Security yield hovering around 7.30 per cent, an increase of more than 30/35 basis points in the past one month; the bond market is jittery about further hardening of bond yields. The bond market has completely lost the appetite for new government paper with Banks’ SLR (statutory liquidity ratio) holdings higher by more than 300 basis points over and above the statutory levels.

The 10-year benchmark yield is expected to touch 7.50 per cent in the next few months due to higher inflationary expectations, huge government borrowing programme, loss of agricultural output of around 20 per cent during the Kharif Season on account of monsoon failure across several states in India, rising international crude oil prices and anticipated credit demand in the second half of the fiscal. However, any revival in the manufacturing sector and consequent rise in tax collections; usage of disinvestment proceeds that are kept in National Investment Fund (NIF) for reducing fiscal deficit; and huge resources of around Rs 35,000 crore that are expected to accrue to the Government’s exchequer from 3G spectrum auction to the Telecom Sector are likely to mitigate the crunch situation in the interest rate cycle in India.

The launch by NSE is ushering in a product that seems to have been timed well in the current rising interest rate scenario so that market participants can hedge their positions.

Note: Interest rate risk: If interest rates rise, the bond prices will fall. Similarly, if interest rates fall, the bond prices will go up. As such, the movement of interest rates will have a big impact on the bondholders; be it, banks, insurance companies, mutual funds or such others, including individuals. The risk that the interest rate fluctuations will affect the prices of bonds or fixed-income investments is interest rate risk.

References: RBI Report on IRF dt. Aug.8, 2008; RBI-SEBI Report on IRF dt. Jun.17, 2009; and NSE.

- - -

Disclaimer: The author is an investment analyst, equity investor and freelance writer. This write-up is for information purposes only and should not be taken as investment advice. Investors are advised to consult their financial advisor before taking any investment decisions. He blogs at:

http://ramakrishnavadlamudi.blogspot.in/

http://www.scribd.com/vrk100

Connect with him on twitter @vrk100

Posted by at No comments:
Labels: , , , , , , , ,
Subscribe to: Posts (Atom)