THE INDEX / Unequal field

Stock Lending Scheme: Long time before it goes retail

Prashant Kothari & Dhruv Rathi

A lot of action took place at Sebi during the past week. The regulator has decided to lift the ban on short sales effective July 2, while the decision regarding ban on deferral products has been postponed till next week.
Sebi, surprisingly, also took a decision on the reintroduction of the stock lending and borrowing scheme (SLBS) with effect from July 2, the day rolling settlements were introduced.

The regulator has once again supported the big players by taking this decision. These players would now be able to borrow a large number of shares from the custodian, sell it in the market, thereby creating a panic and then buy back the shares at a lower price a few days later. The decision has facilitated the hold of such players on the market.

There has been a lot of hue and cry about the misuse of badla in the so called bear hammering by the bear cartel. However, if badla has been misused so has SLBS been. It would have been better if this scheme would have been allowed after a few months by which time the markets would have stabilised.

What is more surprising is that Sebi has banned one carry forward product but has allowed the other (SLBS). This step in essence goes against the interest of the small investors as it is fraught with built-in-discrimination.

An institutional investor would be able to short sell in the market by using the borrowed shares. However, a small investor has no option to carry forward his position and will have to compulsorily square off his short position within the same day.

Even though a small investor is allowed to borrow shares from an intermediary, the conditions attached are not favourable, which discourages him from using this mechanism for trading in the markets.

Experts are of the opinion that the banning of deferral products should be effective from October-November. This will not only provide an opportunity to the small investors to carry forward their short positions through badla but will also give time to the stock lenders to reach the retail clients albeit at terms favourable to them.

GE Shipping
Great Eastern (GE) Shipping, the largest shipping company in the private sector benefited from a sharp rise in freight market in the last six months that helped its profit to soar to a new high. Its total income during the year to March 2001 grew by 10 per cent to Rs 1,007 crore. The major contribution came from charter hire revenue which rose by 55 per cent to Rs 557 crore.

However, freight and demurrage charges was declined a tad lower to Rs 263 crore. The company had a judicious mix of its fleet: Crude tankers, product tankers and bulk carriers. Crude tankers account for 22 per cent of total tonnage of 16 lakh DWT. Voyage charter segment expanded rapidly. The Clarkson Suezmax Index improved from 280 in 2000 to 378 in 2001 and the Clarkson Aframax Index from 210 to 320 respectively.

Product tanker market also improved and the Clarkson Clean Index rose from 134 to 209. The company’s bulk carriers account for 30 per cent of total tonnage. In 2000-01, the Clarkson Panamax Index improved from 100 to 114. The growth in income exceeded that of expenses even as most overheads declined.

Salaries and wages rose by 9.8 per cent but other expenses, such as repair and maintenance, direct operating expenses and other operating expenses declined by a little over 10 per cent.

In effect, total expenditure declined by 3 per cent to enable operating profit to rise by 28.6 per cent to Rs 474 crore. The company provided Rs 21 crore against diminution in value of investment and property.

In the last quarter to March 2001, freight and demurrage charges rose by 98 per cent to Rs 110.30 crore. The charter hire income during the same quarter was higher by 82 per cent at Rs 76.43 Crore. The buoyancy in the market may not last much longer beyond this year.

In the long run, the freight market will adjust downwards when more ships become operational even as the old ships are pressed into service beyond their age.