The ongoing Satyam saga and questions over the quality of corporate governance in Indian companies have raised concerns amongst players in the market; this is reflected in extremely low volumes in the cash segment of the National Stock Exchange as well as the Bombay Stock Exchange.
Volumes on the NSE are now as low as they were in April 2007 and way below the three-year average. For instance, on Monday, the exchange witnessed a turnover of around 6,818 crore; on Tuesday, it improved marginally to touch Rs 7,081 crore. The three-year average daily turnover, on the other hand, stands at Rs 11,000 crore.
At the BSE, things are worse as the volumes in the past two days have been around Rs 2,600 crore. This, while the three-year average daily turnover at the exchange is Rs 4,900 crore. Since futures and options (F&O) turnover on the BSE has been negligible, the exchange will take a huge hit on profitability through operations.
The 30-share Sensex of the Bombay Stock Exchange (BSE) closed the day at 9,100.55 points, down by 229.02 points, or 2.45%. The broader S&P CNX Nifty of the National Stock Exchange (NSE) lost 49.60 points, or 1.74%, to end the day at 2,796.60 points.
Analysts had earlier expected the insurance sector and mutual funds to prop up the markets, as they were said to be sitting on a pile of cash. “The cash pile in these domestic institutions will get invested in the equity markets as the global and domestic economic situation become clearer,” Siddhartha Sanyal and Abhishek Singhal of Edelweiss Securities had said earlier.
However, the domestic economic sphere in the ensuing period became muddy. The Satyam fraud, and the fact that the market regulator will conduct a peer audit review of index-based companies, which could lead to more skeletons in the closet, has kept many investors off the market.
Nandan Chakraborty, head, research of Enam and Sachchidanand Shukla, economist with Enam, are of the opinion that while strong flows from the insurance sector are still a hope, confidence is at a low due to corporate governance issues.
However, they reckon that this development, while being tragic, is not a permanent dampener, as India has decent regulatory infrastructure.
Meanwhile, foreign institutional investors (FIIs) are playing a contrarian game. In at least six instances, barring the three days when the Sensex slide could be attributed to the Satyam debacle,
FIIs were seen selling when the markets were positive and buying when they were down. For instance, FIIs were net buyers at Rs 444.80 crore on the day the Satyam scam broke and the Sensex tanked by 749 points.
“We are looking at value picks and do have an active trading strategy that evolves with the market. Yes, we do pick stocks when our trigger prices are met,” said a senior member of an FII. At the moment, there is a narrow band trading strategy being implemented, he added. Meanwhile, a study carried out by FE indicates that out of the 26 Sensex companies whose data is available, 16 companies have seen a decrease in FII stake in the third quarter ended December 31, 2008. The highest decrease in FIIs’ stake was seen in the case of Tata Steel, followed by Ranbaxy Labs, Hindalco Inds and SBI.
Going ahead, analysts expect the situation to improve once the cloud cover over Satyam clears. Analysts at Edelweiss reckon that insurance and mutual funds will see strong subscriptions this quarter, especially in March, due to tax-savings driven investments.
“We expect fresh subscriptions of around $3.2 billion in insurance funds in the first quarter of 2009. Mutual funds currently have $4.3 billion in cash, which is around 18% of their AUMs,” said analysts at Edelweiss. This liquidity, they noted, is likely to get absorbed primarily in the secondary equity market, as primary issuances will be insignificant.