In this edition, we talk about SEBI’s actions to curb equity derivatives trading as well as its decisions to approve a new investment product and easier norms for passive funds. We also talk about the challenges Tata Electronics and Samsung Electronics are facing and the possible impact on India of rising geopolitical tensions.
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Addiction is easy to acquire and hard to kick. And this is true for any addiction—whether seemingly harmless ones like your morning cup of coffee to more harmful choices like nicotine and narcotics.
Why are we talking about addiction? No, it’s not because of Delhi Police seizing cocaine worth about Rs 6,500 crore in the national capital’s biggest drug bust or the growing drug abuse in India—although these are matters of grave concern.
We are talking about addiction of a different kind—futures and options trading. Indeed, F&O trading has become heavily addictive in India, especially among young people in the post-pandemic stock market bull run over the past four years.
And like other addictions, F&O trading has had major harmful effects, as regular readers of this newsletter would know.
In fact, just last week, we wrote about the Securities and Exchange Board of India’s study that showed individual F&O traders suffered a total loss of Rs 1.8 trillion over the last three fiscal years and that 93% of individual traders lost money.
SEBI and many market observers have been raising concern over the exponential growth in trading of derivatives that the legendary investor Warren Buffet calls “financial weapons of mass destruction”. While many people have equated F&O trading with gambling, Dhirendra Kumar—founder of mutual fund research website Value Research—has even called it “robbery”, highlighting the profits that institutional investors and also traders made at the expense of individual traders.
This week, the capital markets regulator finally cracked the whip to curb F&O trading.
So, what exactly has SEBI done?
For starters, SEBI has raised the minimum trading amount from Rs 5 lakh to Rs 15 lakh to Rs 20 lakh. It has also reduced the number of weekly options contracts available to trade for investors to one per exchange, effective Nov. 20. Currently, both the BSE and the NSE offer multiple weekly options contracts.
Basically, the regulator has raised the entry barrier for equity derivatives trading and made it more costly to trade.
Separately, SEBI has asked the BSE and the NSE to increase their risk management measures for equity derivatives and directed them to increase the collateral for these contracts.
What will be the impact of SEBI’s measures? To begin with, the BSE and the NSE as well as brokerage firms will be hit as trading volumes will fall. Already, BSE has decided to scrap weekly derivative contracts linked to the Bankex and Sensex 50 indices. This suggests it will retain only contracts linked to the 30-stock Sensex.
But will SEBI’s actions help F&O traders change course and kick the habit? We won’t take a punt on that!
Weigh the Risks
F&O wasn’t the only item on SEBI’s agenda this week. The capital markets regulator also approved a new asset class—or rather a new investment product—for investors that will enable them to take greater risks via a regulated product.
The SEBI board approved a proposal to allow asset management companies to offer derivatives strategies, such as long-short equity, to investors with a higher risk appetite with a minimum ticket size of Rs 10 lakh.
This new investment product is essentially placed between mutual funds, where the minimum investment amount is just Rs 500, and portfolio management services, where the minimum threshold is Rs 50 lakh.
SEBI, however, also put some safeguards for the new product. It said that these products can’t take any leverage and can’t invest in unlisted and unrated instruments beyond those already permitted for mutual funds.
In other key decisions, SEBI introduced a liberalised MF Lite framework for passively managed mutual funds with a view to lower compliance requirements, boost competition, and facilitate entry for less risky schemes. The regulator said that MF houses can now hive off passive funds under a separate entity with lower capital and fewer regulatory requirements.
SEBI also eased rules for companies looking to raise funds via rights issues to existing shareholders and decided to widen its trial of same-day settlement for investors from the top 25 stocks currently to the top 500 stocks by market cap.
Should MF investors put their money in the new asset class? We can’t tell you either way, at least not until fund houses launch such products. Even then, as we always say, understand your risk-taking ability and stick to your asset allocation.
Manufacturing Woes
Moving on to other news, the government’s ‘Make in India’ programme completed a decade last week. While the government says the programme has helped to boost the manufacturing sector, there are several arguments to the contrary. For one, the share of manufacturing in the India’s gross domestic product has remained stagnant over the past decade at 17.3%, according to the government’s own data. More worryingly, the share of manufacturing in total employment slipped to 10.6% in 2022-23 from 11.6% in 2013-14, data from the Reserve Bank of India show.
Now, we won’t deliberate on the reasons behind manufacturing’s lower-than-expected performance but two recent instances highlight the challenge the sector faces.
Late last week, a Tata Electronics plant in Tamil Nadu that makes components for Apple Inc.’s iPhones caught fire. While no employee suffered any serious injuries, the fire forced the company to suspend production.
The Tata Group company is one of the major suppliers for Apple in India, along with Taiwanese giant Foxconn, and is critical to the US tech company’s attempts to diversify its supply chain away from China. But the fire could hamper those efforts, more so because it comes right ahead of the festive season.
While Tata Electronics is looking to resume partial production, South Korean electronics giant Samsung is facing a different challenge. For the past one month, over 1,000 of the 1,800 workers at Samsung’s Tamil Nadu factory have been on strike demanding higher wages and recognition of a union.
The strike has continued even after Samsung warned that it would fire the striking workers. The situation worsened this week when police detained more than 900 workers for organising a street protest, before releasing them a day later.
As India enters the festive season, resolving the strike is crucial for Samsung as the factory makes TVs, refrigerators, and washing machines, and accounts for almost 20% of the company’s India revenue.
Geopolitical Tensions
Talking about the festive season, what could spoil the holiday mood this year is the flaring up of tensions in the Middle East after Israel launched a ground offensive in Lebanon and Iran fired dozens of missiles at Tel Aviv.
How does growing tension in the Middle East affect India? Well, for one, thousands of Indians live and work in the Middle East, mostly in the UAE and Saudi Arabia but also in other countries including Israel.
Also, fears of an escalating conflict pushed crude oil prices 5% higher on Thursday, taking year-to-date gains to 8%. To be sure, oil prices are still about 10% lower from a year ago, but any further rise in tensions could push crude higher. That will have multiplier effects across the world including in India, which imports more than 80% of its crude oil needs.
Higher oil import bills will also push up inflation, negating the efforts of the Reserve Bank of India and other major central banks over the past few years. This, in turn, might prompt the RBI to think twice before cutting interest rates. The US Federal Reserve, meanwhile, is widely believed to be course for a second rate cut in November, although opinion is divided whether it will reduce rates by 25 basis points or go for a 50-bps reduction again.
Another impact of geopolitical tensions is growing demand for safe-haven assets like the US dollar. This, in turn, will put pressure on the rupee, which is already near all-time lows. A weaker rupee will push up India’s export bill further. All these worries weighed heavily on investors towards the end of the week, pulling the stock markets sharply lower.
Market Wrap
Broader markets slumped this week, hurt by geopolitical tensions and SEBI’s F&O curbs. The 30-stock Sensex as well as the 50-stock Nifty slipped more than 4.5% each in the holiday-shortened week—markets were closed Wednesday for Gandhi Jayanti.
Only a handful of Nifty stocks managed to defy the trend and ended in the green. These included JSW Steel and Infosys.
Index heavyweight Reliance Industries led the decline, falling almost 9% during the week. Lenders such as Shriram Finance, Axis Bank, Bajaj Finance and Bajaj Finserv were among the major losers and sank more than 7% each.
These were followed by auto stocks such as Hero MotoCorp, Bajaj Auto, Eicher, Maruti Suzuki and Tata Motors, which all fell more than 6%. Other stocks that lost more than 5% during the week included BPCL, Asian Paints, Tata Consumer, Apollo Hospitals and engineering giant Larsen & Toubro.
Other headlines
- India’s manufacturing output growth in September slows to eight-month low: PMI data.
- India’s infrastructure output falls by 1.8% in August, first contraction since February 2021.
- India’s current account deficit widens to $9.7 billion in April-June from $8.9 billion year ago.
- India’s fiscal deficit during April-August reaches 27% of full-year target.
- Govt collects Rs 1.73 trillion in GST in September, up 6.5% year on year.
- Govt appoints Ram Singh, Saugata Bhattacharya and Nagesh Kumar to RBI’s monetary policy committee.
- RBI says noticed irregularities in gold loan industry, asks lenders to take correction action.
- RBI data show banks’ loan growth moderated in August amid slowdown in credit card debt.
- Dabur forecasts drop in revenue for July-September quarter.
- Marico projects high single-digit revenue growth in July-September quarter.
- Anil Ambani-led Reliance Group to build solar, hydro projects in Bhutan.
- Vardhman Group’s 82-yr-old chairman SP Oswal duped with fake Supreme Court hearing.
- Bharti Airtel pays Rs 8,465 crore to partially settle 2016 spectrum dues.
- Tata Power to invest Rs 1.2 trillion in renewable energy in Rajasthan over 10 years.
That’s all for this week. Until next week, happy investing!
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