March 30, 2010

life in financial markets & general: (part 1) excerpts from gilbert rist's 'the history of development' book

I have just begun reading a book that is an insightful commentary by the author of what he makes out of 'development'. His views are interesting but I will refrain from agreeing or disagreeing with him till much after I have finished reading his book and absorbing clearly all that he has to say.

But I can start giving out, in a series of posts, some brief excerpts that I find interesting. Here is the first instalment:

Excerpts from the 3rd Edition (2009) of 'The History of Development - From Western Origins to Global Faith' book by Gilbert Rist:

In 1996, when the first French edition of this book appeared, it was possible to think that 'development' was running out of steam. The future of the planet and its inhabitants, it seemed, would fro now on be seen in a more pragmatic or 'realistic' manner, far removed from the illusions of the myth of progress and the obsolete nostrums underpinning mainstream economic theory.
This is not how things have turned out. Even if ecological worries temper the once dominant optimism, the fact remains that, in North and South alike, on both left and right of the political spectrum, economic growth is still prescribed as the means to universal improvement, and this is increasing the threat to the global climate as well as the very inequalities whose reduction is held up as the desired goal. The minority who run and profit from the system therefore have no interest in challenging it; they merely assert that, despite all the evidence, wealth can be generalized to everyone on earth. Once people are brought to believe this, injustice can be presented as a merely temporary state of affairs.  ..............

The strength of 'development' discourse comes of its power to seduce, in every sense of the term: to charm, to please, to fascinate, to set dreaming, ut also to abuse, to turn away from the truth, to deceive....
....What sense can we make of the numerous debates which, for nearly fifty years, have offered a solution to the problems that majority destitution poses in the face of minority opulence? How are we to explain this whole phenomenon, which mobilizes not only the hopes of millions but also sizeable financial resources, while appearing to recede like the horizon just as you think you are approaching it?.....

March 28, 2010

life in general: criminal water-related negligence by bombay muncipality

The last few days has seen an unprecedented number of pipes supplying water to Bombay bursting and millions of litres of water being criminally wasted (see newsreports here, here & here). 

Bombay receives a large part of it its water from artificial lakes that lie 50-100 kms outside Bombay in Thane district (see table just below).

Supply, as of 2004-05,
Artificial lakes from Distance Operational to Bombay (million
where water is bought: from Bombay since: litres per day)
Vihar 28 kms 1860 68
Tulsi 32 kms 1879 18
Tansa (across 4 phases) 110 kms 1892-1948 455
Vaitama 122 kms 1957 490
Upper Vaitarna 140 kms 1972 554
Bhatsa (various phases) 110 kms 1981-1997    1365

Bombay Municipal Corporation (BMC), that is statutorily liable to maintain the water supply lines, has been tardy in the last few years in moving quickly to repair or replace old pipes. See the chart below (click on it to see it enlarged & clear) for an insight into the expenditure level on water supply lines and other civic infrastructure like roads. Water lines should have been getting more financial attention all along the last few years but it is only in the 2009-10 and 2010-11 budgets of BMC that expenditure outlays has been increased significantly. 

March 23, 2010

life in general: hindu-muslim violence in bareilly in uttar pradesh state

Bareilly is a city in Uttar Pradesh state of India with a history as interesting as most other places in India.
Early this month (March), Bareilly witnessed ugly violence between politically-motivated groups of Muslims and Hindus (read about the violence and its cause here, here, here, here and here). Properties of innocent Muslims and Hindus were destroyed due to the violence.
What I can make out is that politicians were behind the violence. Eventually, they won't get away with their dirty deeds. What I am doing in this blog post is presenting an analysis of the last 3 results of Bareilly in the national parliamentary and state legislative elections. The two graphs below (click on them to see them enlarged & clear) bring out this analysis. For a longer duration table of parlimentary election results of Bareilly see here.
It is also worth nothing the extremely high wealth of of  Bareilly's current MP (member of Parliament) as seen from the candidate affidavits filed before the May 2009 national parliamentary elections. A table giving his assets details follows below the 2 graphs.


       Self      Wife

   (In Rs lakh)
Cash 0.28 0.10
Deposits in Banks 18.00 3.75
Debentures and Shares in companies 9.38 4.40
Cars 121.35 0.00
Jewellery 25.00 33.60
Agricultural Land 250.00 12.00
Non Agricultural Land 42.20 0.00
Buildings 1271.00 195.00
Houses 739.00 100.00
Other Immovable Assets 42.98 0.00
TOTAL 2519.19 348.85

March 20, 2010

life in general: bombay! what's in a name? money extortion!

A news snippet in today's newspaper, here in Bombay, says that Shiv Sena wants the Bombay High Court to change its name to Mumbai High Court. The politics of name continues. I, for one, prefer to use Bombay because it adjectively describes the physical nature of the city.
'Bombay' name originated from Portuguese 'Bom Bahia' that, in English, translates to 'Fine Bay'."Mumbai' the legal name of the city since 1998 originates from Mumbadevi (a local goddess) and 'ai' is the Marathi word for 'mother'.
Extortion of money is the main reason behind name politics. No money can be extorted from the Bombay High Court judges hence the grumbling by Shiv Sena about the name.
But it is left to the imagination as to what it (and MNS as well) would have extorted from two well-known entities -- the oldest stock exchange in the country is legally called 'Bombay Stock Exchange Ltd.' (BSE) and one of the largest and oldest listed companies in the country uses the name 'Bombay Dyeing' in its factory showroom in Elphinstone Road in Bombay. I suspect the BSE would have got away by paying very little since its governing board is filled with Hindutva cronies and SS is a Hindutva outfit itself. But Bombay Dyeing would have paid a hefty amount.
Shiv Sena (SS), and its twin, MNS (Maharashtra Navnirman Sena) are largely extornists like most other political parties such as Congress and NCP. The difference is in the level of sophistication. Congress and NCP do it slyly and sophisticatedly while SS and MNS do it openly and crudely.

March 13, 2010

life in general: real india's abysmal human rights record

Like it does for most countries, Human Rights Watch organisation has articulated the state of India's human rights reasonably correctly. The first article below is what HRW has to say about India in 2009 and the second article below is what a HRW official has to say about how  in the United Nations India supports abusive regimes in the world.

Events of 2009

The ruling alliance led by the Congress Party returned to power after elections in 2009. In its first term in office the Congress-led coalition made only modest progress on rights. It has not yet addressed some of India's most pressing needs, including better training and reform of its police force; providing health, education, and food security to millions still struggling for subsistence despite the country's economic growth; ending discrimination against Dalits, tribal groups, and religious minorities; and protecting the rights of women and children.

A spate of indiscriminate bombings in various Indian cities, culminating in the seaborne-based attack in Mumbai in November 2008, which killed at least 171, and injured over 300 people, led to continued tensions with Pakistan. While the Mumbai attack was attributed to the Pakistan-based Lashkar-e-Taiba, earlier deadly bombings were blamed on Muslim and Hindu extremist groups. Under intense public pressure, the government amended the Unlawful Activities (Prevention) Act, reinstating harsh provisions from previous counterterrorism laws that had either been allowed to lapse or been repealed.

Maoist insurgents known as Naxalites broadened their attacks in 2009, resulting in increased deployment of paramilitary and police forces. Although government officials announced a "zero tolerance" policy for human rights violations during security operations against the Maoists, separatist militants, and other armed groups in various parts of the country, cases of custodial killings, torture, and arbitrary arrests continued.

These abuses occur in part because of failure by the government to properly train or modernize its police force. Police officers face dismal working conditions and recruitment lags far behind increasing duties, creating an overstretched force that is likely to take short-cuts to gain convictions. Embittered and overworked, the police regard themselves as enforcers of the law-but not beholden to it.

The government's failure to protect minorities and other vulnerable groups engenders justified grievances and contributes to militant activity around the country. At senior levels of government there is growing acceptance that Maoists are attracting supporters in part because of the state's long failure to address basic socioeconomic needs; the continued arbitrary displacement of families to make way for government-backed infrastructure, mining, and factory projects; and discrimination based on caste or ethnicity.
Justice and Accountability
India points to its independent judiciary, vibrant media, and active civil society as evidence that it is a thriving, rights-respecting democracy. Yet fundamental, structural problems remain including, most glaringly, widespread impunity for human rights violations. The government routinely fails to hold security forces accountable for abuses.

2009 marked the 25th anniversary of mass killings of Sikhs to avenge the assassination of Prime Minister Indira Gandhi by her Sikh bodyguards in 1984. A10-year security operation against Sikh militants, who were responsible for numerous human rights abuses, resulted in the arbitrary detention, enforced disappearance, and extra-judicial killing of thousands of young Sikh men for suspected affiliation with separatist groups. Many victims, witnesses, and alleged perpetrators have died in the long, fruitless wait for accountability.

In Jammu and Kashmir and in the state of Manipur and elsewhere in the northeast, many citizens have lost confidence in the state's willingness to hold perpetrators of human rights violations accountable. Kashmiris protested on the streets after the death of two women in Shopian in May, refusing to believe a police investigation would be fair. An ongoing inquiry by the Central Bureau of Investigation has calmed tempers, but the protests were symptomatic of the government's failure to address impunity. In July an unarmed 27-year-old in Manipur was shot and killed by police in a crowded market place, a killing captured by a photo-journalist. Despite widespread outrage, the Manipur chief minister initially praised the police for shooting a "militant." Only after weeks of protests did the state government order a judicial inquiry.

Laws such as article 197 of the Criminal Procedure Code and the Armed Forces Special Powers Act provide legal protection for members of the security forces who violate human rights. The problem of de jure impunity is likely to be exacerbated by December 2008 amendments to the Unlawful Activities (Prevention) Act, which expand the already vague definition of terrorism, authorize search and seizure with few safeguards, and double periods of pre-charge detention to 180 days, 30 of which may be in police custody. The use of draconian laws such as the Maharashtra Control of Organised Crime Act, which allows confessions to police to be used as evidence despite it being evident that they are coerced, is a cause for serious concern, as are efforts by other states such as Gujarat to enact similar legislation.

While India claims that its National Human Rights Commission ensures the protection of rights, the commission often defends government behavior, lacks sufficient resources to conduct its own investigations, and is not empowered to investigate violations by the army. State human rights commissions are even more poorly equipped and vulnerable to political pressure.
Conduct of Security Forces
Militants in many parts of the country have been responsible for large numbers of killings. Nearly 2,000 people, including over 500 civilians and 350 security personnel, were killed by militants in 2009, while over 1,000 civilians and nearly 40o security personnel were killed in 2008. At the same time nearly 2,000 alleged terrorists have been killed since January 2008.

The Indian government and militants in various parts of the country are locked in a vicious cycle of violence. Cases of arbitrary arrest, torture and forced confessions by Indian security forces are common. The use of "fake encounters"-in which people are taken into custody and shot, with officials falsely claiming that the deaths occurred during an armed exchange-are a continuing cause of serious concern. Police torture is also common, including in counterterror operations. Some Indian Mujahidin suspects, blamed for a series of indiscriminate bombings in Bangalore, Ahmedabad, Jaipur, and Delhi in 2008, have claimed that they were tortured and forced to make false confessions, as have Hindu militants arrested for bombings in Malegaon, Maharashtra.
Violence against Minorities

Following attacks on Christians in Orissa in 2008, mob attacks on churches and other Christian institutions, apparently instigated by Hindu extremist groups, occurred in several states. While some of the alleged perpetrators of the Orissa attacks have been arrested, there has been little success in containing Hindu extremists.
Women's and Girls' Rights
The rights of women are often neglected. A 2005 UN study estimated that two-thirds of married women in India suffer domestic violence. Female infanticide and sex-selective abortions are the primary causes of skewed sex ratios and reflect the unequal share of resources made available to women and girls in areas such as access to education, food, and medical aid.

In part because of healthcare system failures, tens of thousands of Indian women and girls die each year in childbirth and pregnancy. More suffer preventable injuries, serious infections, and disabilities. Recent data show that more than a fourth of maternal deaths worldwide take place in India. The country's maternal mortality ratio is many times that of Russia, China, and Brazil, and a girl who reaches reproductive age in India is 100 times more likely to die from such causes than a girl in the developed world.
Access to Education, and Child Soldiers
Millions of children in India have abysmal educational opportunities. While the constitution provides for free and compulsory primary education, actual delivery remains patchy. High numbers of students are out of school for reasons that include poverty (with millions of children still employed in hazardous and other "worst forms" of labor), gender discrimination, early marriage, poor quality of teachers and curriculum, and lack of basic facilities. Many are further affected by internal conflicts. For instance, the education of tens of thousands of children has been disrupted by the Maoist conflict, with the Maoists bombing remote government schools and government security forces occupying and using schools as long-term outposts.

The Maoists admit that it is standard practice to recruit 16 and 17-year-old children in their forces; they have used children as young as 12 in some armed operations.
Sexual Orientation and Gender Identity
In a positive development, the Delhi High Court in July ruled that section 377 of the Indian Penal Code can no longer be used to treat consensual homosexual conduct between adults as a criminal offense. While the ruling was challenged in the Supreme Court by a few groups and individuals, the Indian government decided not to oppose the verdict.

International Role
India has failed to adequately use its considerable influence to address human rights problems in other countries or to be a human rights promoter at the United Nations. India has played a negative role at the UN Human Rights Council, siding with a bloc that opposes strong action to address violations. As India's regional and global influence grows, it needs to modernize its foreign policy to reflect its status as the world's largest democracy.
In the past India was a strong opponent of apartheid in South Africa, supported the democratic opposition in Burma, and backed groups demanding democracy in Nepal and Bangladesh. But officials now often use the language of "non-interference in the internal affairs" of other countries to defend their inaction. In part, this reflects India's growing strategic concerns about China's role in the region, which has strongly invested in Burma and Pakistan and is expanding its influence in Nepal, Bangladesh, and Sri Lanka.
India claims that it needs good relations with its neighbors to counter threats to national security by groups operating across borders. It wants Bangladesh, Burma, and Pakistan to arrest and prosecute separatists. In particular, it wants the international community to pressure Pakistan to end tacit protection of groups blamed for attacks like the one in Mumbai in November 2008.
Key International Actors
India's rapidly growing economy and increasing importance as a trading partner has meant that its domestic human rights record rarely elicits serious international scrutiny, including from the US, the country with the greatest external influence.
After a visit to India in March 2009, UN High Commissioner for Human Rights Navanethem Pillay called upon the government to bridge the gap in implementing "national laws and policies that promote and protect human rights and seek to support the most vulnerable." She also sought repeal of laws such as the Armed Forces Special Powers Act "that breach contemporary international human rights standards" and encouraged India to welcome the visits of UN special rapporteurs. India is yet to act on those recommendations. India has also not responded to international recommendations that it more effectively combat caste- and religion-based discrimination.
India has been repeatedly urged to play a greater role in advancing human rights and protecting civilians in Burma and Sri Lanka. While India claims that it privately raises such subjects with the governments concerned, Indian officials say little publicly and do not play a leadership role in protecting

India’s Slippery Moral High Ground
by Meenakshi Ganguly, senior South Asia researcher at Human Rights Watch
February 3, 2010
Western colonialism collapsed after the Second World War, leaving much of the world in shambles, resources looted, and people suppressed and impoverished. As Indians know all too well, borders of newly independent states were often carelessly drawn, leading to violence that plagues us generations later. Those most affected by these decisions never had a voice at the high table.
Decades later, new faces have gathered at that crucial table. India, left traumatised and unable to fully celebrate its freedom from colonial rule in 1947 because millions had perished or been displaced, has become a visible and vocal negotiator. In a recent instance, minister of state for environment Jairam Ramesh claimed that India played a constructive role in the climate change conference in December, as it could speak for the G-77, the BASIC (Brazil, South Africa, India and China) group and the industrialised nations. Few agreed, sadly. Depending on their politics, critics either said India had been obstructive or that it compromised too much.
Unfortunately, much of India's foreign policy remains shrouded in a similar lack of clarity. India often ends up considered either an obstruction or a cop-out.
In Burma, for example, India has moved away from supporting the democracy movement and honouring detained Opposition leader Aung San Su Kyi to deciding that economic and security concerns take precedence. India's business-as-usual relations with the repressive military regime have been widely criticised. Indian diplomats respond that activists like to complain without understanding how nuanced diplomacy works.
However, what remains baffling is what exactly India can claim to have gained from supporting one of the most abusive regimes in the world. India has not won significant access to Burma's energy reserves and is regularly beaten by China at the finishing line. The Burmese military has not cooperated consistently with efforts to contain rebels in India's Northeast. Nor has India been able to undercut China's influence with the junta. Yet, in October, India voted against a United Nations General Assembly resolution to protect human rights in Burma. The resolution was passed with 92 votes in favour. Of the 26 that voted against, India was in the company of countries such as Syria, Zimbabwe, China, Libya and North Korea - not quite the best examples of the democracy Indians celebrate so much.
There are other, equally odd decisions. India rightly joined the world in condemning Sri Lanka's abusive Tamil Tigers. But many believe that when the Sri Lankan Army committed apparent war crimes and caused unimaginable human suffering among civilians caught up in the conflict, India did not speak out forcefully enough. In May 2009, at a special session of the UN Human Rights Council, India opposed a resolution criticising abuses by both sides; the weak resolution adopted instead largely commended the government. In June 2009, A. Gopinathan, India's permanent representative to the United Nations in Geneva, responded shockingly to concerns about Sri Lanka expressed by Navanethem Pillay, UN high commissioner for human rights, suggesting that her office may have been motivated by its own agenda or that "of some states, or unrepresentative or unaccountable organisations". Ms Pillay, a South African of Indian origin with a full understanding of apartheid and colonialism, would instead have expected the support of the world's largest democracy.
India is a part of the Kimberley Process Certification Scheme (KPCS), an attempt to end the trading of diamonds unearthed in conflict zones, known as "blood diamonds". Human rights groups have made repeated appeals to suspend Zimbabwe from the process for continuing human rights abuses and widespread smuggling in the Marange diamond fields after the government of Zimbabwe failed to comply with the recommendations of a KPCS review mission. India, chair of the group's participation committee, was in a strong position to influence the decision to suspend Zimbabwe but instead agreed to its empty promises that it would adopt compliance measures.
There are indications that significant numbers of raw Marange diamonds have already been channeled to India's large diamond cutting and polishing industry. Why is India willing to risk tainting the reputation of its domestic industry by championing the Mugabe regime?
India is keen not just to gain a greater say in global policy discussions, but also a permanent seat on the UN Security Council. For India to present a compelling case for its candidacy, it needs to focus on its obligation to protect individual rights.
Yet at the Human Rights Council and General Assembly and in backroom diplomacy, India is often on the side of abusive regimes, blocking, slowing down or voting against efforts to protect rights.
India now has a voice and it should use it to speak for many that still do not. It cannot allow its uneven domestic human rights record to come in the way of becoming a robust and moral champion to hold all states - including powerful ones that often escape scrutiny - to account. No nation can claim a perfect record, as the United States has displayed with great success since 9/11. Ironically, India is now often mimicking the behaviour it has so long decried in other countries.
Caprice or strategic and economic gains are the legacy of colonial history. India may have won its place at the negotiating table, but if it wants to be respected it should not display the same behaviour that caused it such suffering in the past.
In Burma, the generals have promised elections this year. India should insist that they release all political prisoners, allow the Opposition freedom to contest and campaign, and establish an independent and impartial election commission (one of India's own most prized institutions), or the poll will be considered a sham. India should call upon Sri Lanka's recently re-elected President Mahinda Rajapakse to initiate a reconciliation process that ensures civil and political rights for Tamils and other minorities, to end the repression of media and dissident civil society, and to support an impartial international investigation into all allegations of war crimes.
New Delhi has appointed a highly respected former diplomat as the new national security adviser. Shivshankar Menon should recommend that the government take these first steps as proof of India's vision and commitment to protect the rights of every citizen of the world.
Otherwise, despite the promise of trade and a robust economy, it will find itself alone, or in the company of those most disliked by the world community.

March 10, 2010

life in financial markets: it kicks off at last. a global equity product on nse

In my 19Aug09 blogpost I had broken the news of how NSE was very close to introducing a global equity product on its domestic trading platform.

Well, the news has broken now. Read below yesterday's (Wednesday, 10 March 2010) joint press press release of NSE and CME (Chicago Mercantile Exchange). It talks about NSE being licensed the use of S&P 500 index and Dow Jones Industrial Average index in futures contracts (only, options contracts not yet) on the two indices in its equity derivatives trading segment, and NSE's Nifty index being licensed to CME to use in futures (only, options contracts not yet) contracts in CME's equity derivatives trading segment.

So, Indian investors will be able trade in futures (but not options) on S&P 500 and DJIA and American investors will be able to traded in futures on Nifty index.

Although the new products are welcome I am disappointed that it is the only two. I would love to trade through a NSE broker on the NSE trading platform international ETFs (exchange traded funds), particularly the ones on green energy. NSE needs to tie up with other index providers and exchanges where those ETFs are listed and traded.

The CME-NSE press release:

Stock Exchange of India (NSE), the largest stock exchange in India, and CME Group, the world's leading and most diverse derivatives marketplace, today announced cross-listing arrangements, including license agreements covering benchmark indexes for U.S. and Indian equities. The parties have also entered into a Memorandum of Understanding with respect to other areas of potential cooperation, including related to development and distribution of financial products and services.
Under the cross-listing arrangements, the S&P CNX Nifty Index (the Nifty 50), the leading Indian benchmark index for large companies accounting for 22 sectors of the Indian economy, will be made available to Chicago Mercantile Exchange (CME), for the creation and listing of U.S. dollar denominated futures contracts for trading on CME, and the rights to the S&P 500® and Dow Jones Industrial Average™ (DJIA®) will also be made available to NSE for the creation and (subject to regulatory approval) listing of Rupee-denominated futures contracts for trading on NSE. The license to the Nifty 50 from NSE's affiliate India Index Services & Products Ltd. (IISL), which is exclusive to CME Group within the Americas and Europe, is in addition to the existing licensing arrangement between Singapore Exchange Ltd. (SGX) and IISL. The sublicenses to the S&P 500 and DJIA indexes, which are exclusive to NSE for Rupee-denominated futures contracts traded within India, are being made available via sublicenses from CME Group and each of Standard & Poor's and Dow Jones, respectively.
"Indian financial markets have gone through a phase of rapid growth in the past few years," said Ravi Narain, MD & CEO, NSE. "Our products are traded by institutional investors worldwide, making the Nifty 50 one of the more widely traded global products. This association with CME Group will make the Nifty 50, and, over time, potentially other products across various India-related asset classes, available to a much larger community of traders and investors. At the same time, investors in India will have access to new exchange traded products that reflect some of the world's most widely traded equity indexes. This will improve portfolio choice for Indian investors by widening the array of assets that they can hold in their portfolios."
"These agreements with NSE, India's largest stock exchange, represent another example of CME Group's commitment to expand our global offerings and services to our customers," said Terry Duffy, Executive Chairman, CME Group. "These arrangements will allow us to expand on our benchmark equity index product suite and provide our customers with access to a futures contract that is based upon the leading benchmark index reflecting the Indian equity markets."
"Our new partnership with NSE is an integral part of our global growth strategy," said Craig Donohue, Chief Executive Officer, CME Group. "In addition to our existing partnerships or investments in Brazil, Dubai, Korea, Malaysia, Mexico and Singapore, our NSE partnership will further expand our customers' access to the most actively-traded foreign markets, while also increasing access for global investors from within these regions to CME Group products and services. As the world's 12th largest and one of the most rapidly growing economies, India is an important part of our efforts to develop strategic partners in key growth markets."
"We see this as a very exciting development that marks the coming of age of Indian financial markets," added Mr. Narain. "This will go a long way in achieving our vision of supporting economic growth in the country by making Indian financial products available globally and meeting the needs of our investor community for global products."
"S&P Indices has a successful, twenty-seven year relationship with the CME Group in the U.S. futures market, and a strong ten year association with the NSE in developing stock market indices in India," says Alexander Matturri, Executive Managing Director at S&P Indices. "We are certainly pleased to be working with both of our longtime exchange partners to help Indian investors gain greater access to the U.S. equity markets as determined by the S&P 500, an index with nearly $1 trillion directly indexed to it."

March 08, 2010

life in financial markets: govt. of india's revenues & expenses

In the last couple of years the revenues and expenditure figures of the central government of India has been like this (click on the image below to see it enlarged & clear):

If one removes the vast amounts of borrowing by the government the twin pictures of revenues & expenditure would look like this (click on the images below to see them enlarged & clear):

March 07, 2010

life in financial markets: delivery-based settlement in stock-futures&options

Yesterday (Saturday, 6 March), the Securities and Exchange Board of India, after its latest board meeting, had, as it does after most board meetings, a press conference to announce the decisions made in it.

One of the decisions made to allow the stock exchanges in the country to have delivery-based (or physical) settlement in futures and options contracts on individual stocks. Uptil now, Sebi's rules permitted the exchanges to have only cash-settled futures and options contracts.

I think a delivery-based settlement of stock futures-options is better than cash settlement. Sebi's leeway to stock exchanges on this matter should have come back many years back. Anyway, it is better later than never.

It is upto to the National Stock Exchange of India now to use this new-found freedom to either replace its existing cash-based settlement of stock futures-options with delivery-based settlement or have a mix of both based on pre-fixed parameters.

As long as 8 years ago, in April 2002, when I was with Outlook Money magazine I had written about the need to have delivery-based settlement.

Here is what I wrote then:

Sebi delays derivatives reforms

Dealing in futures and options on stocks turns hazardous as Sebi drags its feet on making options and futures on stocks settle by delivery instead of cash.

April/May 2002

Any trade in the stock market carries behind it an objective. It could be to invest for the long-term or to implement a very short-term view or to take advantage of arbitrage opportunities. Whatever objective you are trying to achieve through your trade in the market you surely do not want any systemic flaws to hit you adversely.

Today, however, if you are using the derivatives market you are faced with one such serious systemic flaw. The futures and options contracts on stocks are currently settled by cash instead of delivery giving rise to difficulties for those who are using these two derivative products for achieving their objectives.

In options on stocks settlement takes place when a in-the-money options contract is exercised—voluntarily before expiration (as allowed in American-style options which applies on National Stock Exchange and Bombay Stock Exchange) or automatically on expiration date. When the option buyer exercises his option through his broker the stock exchange assigns it randomly to a option seller in the same options contract. The option seller pays his broker in cash the difference between the strike price (at which he sold the options contract) and the exercise settlement price (closing price of the underlying stock on the day of exercise).

The other way to settle options is through delivery. On exercise, the call option seller will deliver shares and a put option seller pays money which is then passed on to the respective option buyers. Similarly, in stock futures contracts, today, the settlement which takes place on the expiration date is through paying or receiving the difference in cash instead of through an exchange of shares and money.

Mrugank Sanghvi, an investor, was recently affected adversely due to the cash method of settlement. On February 18, when Hindustan Lever was trading a little below Rs 240 in the cash market, he sold 1000 HLL March call option of strike price 240 at a premium of Rs 10 on the NSE. His view was that HLL would not rise beyond Rs 250 and so the option will not be exercised and he would stand to profit Rs 10 from the premium received.

Sanghvi already had HLL shares in his portfolio which he was willing to deliver in case HLL went above Rs 250 and his option was exercised by the buyer. But he knew he could do not do this since options are cash settled. Sanghvi, therefore, instead went for the equivalent of holding HLL shares. He bought 1000 HLL March futures which was trading at Rs 240 at that time. He thought that if his options got exercised beyond Rs 250 then the loss he would incur on account of that would be offset by an equivalent amount of profit he would earn from squaring off his futures position. His net profit would remain as Rs 10—the amount received as premium on selling the option.

Option-buyers can exercise their option anytime between 9.55 am and 3.50 pm on the NSE and the exchange assigns it randomly to option-sellers after 3.50 pm. The settlement price is the closing price of the underlying and the NSE calculates the closing prices of all its stocks as the weighted average of the last 30 minutes of trading of the day.

On March 1, HLL closed at Rs 262.83 and some buyers of call option exercised their option contracts. On the morning of the next trading day—March 4—Sanghvi found that he was assigned with one such exercise. His loss on his options contract was Rs 22.83 (settlement price Rs 262.83 minus strike price Rs 240) which he was required to pay in cash. But by now spot HLL price and HLL March futures price were down. Sanghvi sold his futures at Rs 250 thereby getting a gain of Rs 10. As a result, he incurred a net loss of Rs 2.83 (loss on options Rs 22.83 minus premium received Rs 10 minus profit on futures Rs 10).

This upset all his calculations since his futures was supposed to fetch a profit equivalent to the loss on his options, and his net profit was to be Rs 10. Says Sanghvi: "Had the settlement been in delivery I would have been required to deliver shares on the call option being assigned to me. In that case, I would not have bought the futures at all since I had HLL shares in my portfolio which I would have used for giving the delivery." This way Sanghvi would have retained the amount of Rs 10 he received as premium and he would have replenished his portfolio by buying HLL shares any time again in the future at a price favorable to him.

Traders in stock futures contracts are exposed to the same risk. You may buy spot and sell futures in a stock with the intention of pocketing the difference between a higher futures price and a lower spot price. But on expiration date which your futures would be settled in cash difference and you would be required to sell the shares bought separately instead of just delivering it against your futures contract settlement. On expiry date, you will run the risk of selling the shares in the spot market at a price different from the futures settlement price since the latter is the closing price of the stock in the cash/spot market which in turn is based on a weighted average of trades in the last 30 minutes of trading hours, and the former is the price you get when you sell towards the close of trading hours. Plus, you would incur additional transaction costs.

When options on stocks was introduced in July last year on the NSE and BSE the Securities and Exchange Board of India had specified that the contracts would be cash settled for an initial period of six months. Same was the case when stock futures commenced in November last year.

Nine months are now over since options on stocks commenced. But Sebi has not asked the stock exchanges to the settle the contracts by delivery. When asked about the delay, A.Satyanarayana, Sebi spokesperson says: "I do not know the reasons for the delay but the matter is being considered by the Sebi board."

The stock exchanges, in the meanwhile, are ready with their systems awaiting the green signal from Sebi. Says Sanjiv Mehta, CEO of BSE's derivatives segment: “Based on the existing framework the BSE is ready with its systems to settle stock options by delivery”. But the existing framework will undergo fine-tuning by Sebi. Says Raghavan Putran, director, business operations, at NSE: "Our clearing software has the capability to incorporate any new specifications received from Sebi and then it will take only three weeks for us to test it thoroughly before going live with it."

March 04, 2010

life in journalism: the regressive practice of giving awards

In the last decade, the number of award cermonies being held by business media organisations, whether business magazines or business news channels, to hand out all kinds of awards to companies and individuals has risen so much that it has now touched the dangerous mark.

Whether it is the Best Companies Awards, the Best CEO Awards, the Best Banks Awards or the Best Mutual Funds Awards, these awards have nothing journalistic about them. Yet, publishers and editor-in-chiefs, force the journalists working for them to work on these awards the methodology of which is not even decided by the journalists but outsourced to external agencies.

I think journalists should focus only on breaking news stories or analytical feature stories. In these stories, good work done by a company or an individual can receive mention. But to say that company 'XYZ Ltd' or individual 'ABC' is the best in the industry is distortion.

But the day is also near when a vast majority of readers and viewers will recognise the nonsense of awards and give it a complete miss when it comes to taking their important business/financial decisions. Perhaps, it is already happening to a significant extent, but media editors and publishers are choosing to turn a blind eye to it.

March 03, 2010

exchange of stakes

Last week, I wrote (in the magazine I write for, presently) about change of shareholders of the National Stock Exchange of India and the Bombay Stock Exchange. It has interesting information and details.

Here is what I wrote:

Exchange of stakes
The unlisted shares of Indian stock exchanges continue to attract attention of international and domestic investors
- Feb 2010

The unlikely hunting ground for private equity and investment management companies, the unlisted shares of stock exchange companies in India, is again getting active. An institutional investor from the Middle East is keenly scouting to pick up a stake in the National Stock Exchange of India (NSE), according to a source close to the potential transaction.

This investor, and other potential interested ones, has very little choice but to buy their required stake from an existing shareholder of the stock exchanges. The central government rules for foreign investments in infrastructure companies in the services sector such as stock exchanges restrict the maximum stake in stock exchanges to 49% -- of which upto 26% can be through foreign direct investment route and upto 23% can be through the portfolio route of Securities and Exchange Board of India-registered foreign institutional investors.

The last major stake change had happened on the NSE in June 2009 when a global private equity investment firm, Norwest Venture Partners Mauritius (NVPM), bought 950,000 shares (representing a 2.11% stake in the total equity capital) from IL&FS Securities Services whose stake in NSE reduced to zero as a consequence.

With this transaction the foreign holdings on NSE has gone up to 28.11%, of which only NVPM's investment is through the FII route. Since then, 20.89% stake is available to FIIs to pick up from other existing shareholders of NSE. The foreign holdings on the Bombay Stock Exchange were 25.65% as of August 2009.

Domestic investors—institutional, corporate and individual—, too, have shown an interest in picking stakes on the two exchanges (see table). The most prominent one has been Hospet-based mining company, MSPL, and its chairman-cum-managing director, Narendra Baldota, in his personal capacity. The two, together, picked up a 0.91% stake in the NSE between August 2008 and September 2009 (post-September 2009 shareholding data of NSE and BSE were not available).

MSPL also holds a 1.17% stake in BSE. BSE also a new significant shareholder called Bombay-based Blue Star Diamonds Pvt Ltd take 1.03% stake, ostensibly from an individual investor, Bombay-based Anuj V Mehta (see table below).

Major sellers of NSE's shares, during August 2008-September 2009, LIC, IFCI and Stock Holding Corporation, are likely to the first targets for the Middle Eastern investor. It is, however, not clear whether this investor has any connections with Dubai Financial Group Llc that already has a 3.9% stake in the BSE since over two years.

Expect a lot of action in this unlikely hunting ground.

Unlisted shares of stock exchange companies are proving to be an attractive ground for active financial investors

Shares** (million) % of total eq. cap. Post-sale/purchase stake (%)
Changes in NSE's shareholding from Jul '08 to Sep '09:

Major* sellers:

IL&FS Securities Services 0.95 2.11 0.00
Life Insurance Corporation of India 0.43 0.95 11.49
IFCI 0.13 0.28 5.16
Stock Holding Corporation of India 0.12 0.25 3.08
Rambhabhen U Tanti (from Pune) 0.08 0.18 0.00

Major* buyers:

Norwest Venture Partners

Mauritius 0.95 2.11 2.11
Narendra Baldota (of MSPL) 0.22 0.49 0.49
MSPL Ltd (Hospet) 0.19 0.42 0.42

Changes in BSE's shareholding from
Aug '08 to Sep '09:


From Caldwell Asset Management Inc

Inc to Caldwell India Holdings Inc 4.02 4.96 4.96

Major* sellers:

Anuj V Mehta (Bombay-based) 1.06 1.03 0.00

Major* buyers:

Blue Star Diamonds Pvt Ltd (Bombay-based) 1.06 1.03 1.03

Shares** (million) % of total eq. cap.

Top 10 NSE shareholders as of Sep '09:

Life Insurance Corporation of India 5.17 11.49

State Bank of India 4.70 10.44

Infrastructure Devp. Finance Co.

Stock Holding Corporation of India 3.08 6.86

IFCI 2.32 5.16

NYSE Group 2.25 5.00

GA Global Investments Ltd (Cyprus)

GS Strategic Investments Ltd 2.25 5.00

SAIF II-SE Investments Mauritius Ltd

IDBI Bank 2.24 4.98

Top 10 BSE shareholders as of Sep '09:

Deutsche Boerse AG 5.10 4.96

Singapore Exchange Ltd 5.10 4.96

State Bank of India 5.02 4.88

Life Insurance Corporation of India 5.02 4.88

Acacia Banyan Partners Ltd 4.02 3.90

Dubai Financial Group LLc 4.02 3.90

Caldwell India Holdings Inc 4.02 3.90

Atticus Mauritius Ltd 4.02 3.90

Bajaj Holdings & Investment 3.01 2.92

MSPL Ltd 1.20 1.17

* where pre-sale/post-purchase stake is
than 0.17%

** face value Rs 10 per share

***face value Rs 1 per share & post-12:1 bonus
issue in
NSE - National Stock Exchange of India

BSE - Bombay Stock Exchange