THE INDEX / Necessary move

Removal of circuit-breakers: A step in the right direction

Prashant Kothari & Laxmikant Khanvilkar

SEBI’s decision to dispense with circuit-breakers on all scrips in the rolling settlement, among a plethora of important decisions taken by it on the fateful Monday to discipline the stock markets, is a crucial one. Individual stock circuit breakers will now be replaced by index-based circuit filters on the lines of advanced stock exchanges like Nasdaq.

This decision has taken many investors by surprise who fear that the volatility in markets would go up. However, volatility apart, there was one important reason for Sebi to take this decision — the ban on carry forward products.

A trader in the absence of any carry forward mechanism cannot be forced to take or give delivery of stocks traded by him. This would have happened if the stocks hit the circuit and froze there, thereby giving no chance to the trader to square off his position.

Of course, it can be argued that stocks could be borrowed from an authorised intermediary through the Stock Lending and Borrowing Scheme which will be re-introduced with effect from July 2, 2001. However, this scheme looks good only on paper since the conditions for borrowing are so stringent that only a handful of cash rich investors would be able to take advantage of it.

A few important conditions include keeping a 120 per cent margin in cash with the authorised intermediary and obtaining of a net worth certificate from a practising chartered accountant. No prize for guessing why this scheme is not popular with the market players.

There is no doubt that volatility would increase, as with the introduction of rolling settlements and removal of circuit breakers, traders will be forced to square off their positions on the very same day. However, looking at the situation from a broader angle of maintaining liquidity in the markets, this step was necessary.

Clariant (India)
Clariant (India), a leading player in the specialty chemicals business, has notched up a 5.16 per cent growth in net profit to Rs 16.28 crore in the year to March 2001.

The company’s performance rubbed off well on the Clariant scrip that hit upper limit of circuit filter in the two trading sessions after the results were announced.

But before the results came out, the scrip was knocked down to a 52-week low of Rs 67.20 on May 7, 2001.
Clariant has focused on new products and developments that ensured its market leadership in the textile chemicals and leather dyes segment. In a sluggish market, the company could notch up 11 per cent rise in turnover to Rs 286.4 crore.

Its new product range includes the biotechnology-based Bactasol package products for continuous bleaching process, optical brighteners for enhanced whiteness and product packages for wrinkle-free finishes. Most of these products have been received well in the market.

The company is virtually a debt free one. The short-term borrowing is restricted to the need-based working capital requirements for financing export that attracts concessional interest rates. Exports account for 30 per cent of total revenue.

Clariant has stepped up the purchase of finished goods. In the year to March 2001, purchase of finished goods rose by 8.67 per cent to Rs 143 crore. Yet, their share of sales has declined marginally to 51 per cent (52 per cent), possibly because of inadequate returns. Last year there was substantial drop in the sales realisation from finished goods.

This has been reflected in the lower margin on PBDT and PAT. Its PBDT/sales margin stands a tad lower at 10.5 per cent (10.7 per cent), while PAT/sales margin at 5.8 per cent (6.1 per cent). Depreciation and tax provision went up by 15 per cent each to Rs 3 crore and Rs 10.19 crore respectively.

Staff cost has also increased substantially by 16 per cent to Rs 15 crore. All these have told on profit margins.
The company is placed between growing environmental awareness and changing market dynamics.

It will have to work constantly on technology up-gradation for environment friendly products to meet consumer demand and cater to expanding market.