The late September meeting of SEBI had some key items on the discussion agenda. That included the issue of IPO price and valuation monitoring as well as the subject of insider trading in mutual fund units by the fund managers. Here is a quick gist of the meet.

1) At various fora, SEBI chairperson Madhabi Puri Buch had committed to bringing about better disclosure for IPOs especially to help a decision on digital and new age IPOs. The SEBI meet has made it mandatory for IPO issuers to disclose key performance indicators (KPIs) for an intelligent view by investors. In addition, the company must also disclose the price at which placements were done in the last 18 months or 36 months as the case may be. Also, IPO prospectus must disclose the ratio of IPO price to weighted average cost of acquisition (WACA). IPO pricing must be certified by an expert committee.

2) Going ahead, SEBI wants credit rating agencies (CRAs) to monitor use of issue proceeds even in QIPs (qualified institutional placements) and other private placements where issue size exceeds Rs100 crore. Currently, this is mandatory only for public issues and rights issues, but with the rising instances of private placements in the last few years, SEBI wants that review to be extended to placements also.

3) The Templeton fiasco was the turning point for mutual fund regulation. In that light, the SEBI approved inclusion of mutual fund units under SEBI provisions for insider trading. IN case, it is found that KMPs at mutual funds used inside information to take an exit from the funds (as in Templeton case), it can be a case of insider trading. This monitoring will be over and above the monitoring of stock positions that is already happening. It could be a disincentive for fund managers, but will make the markets certainly safer.

4) There could be some relief for F&O traders and cash market traders going ahead. SEBI has decided to make the net settlement of cash and F&O more inclusive. One exception to this net settlement system has been upon expiry of F&O positions where netting is not permitted. Now, SEBI will allow net settlement of cash and F&O segment even upon expiry of stock derivatives. This is likely to help to better align spot and F&O segments and also reduces the additional margin pressures on traders post expiry of F&O.

5) Finally, in the case of PSU OFS (offer for sale), SEBI has decided to do away with the 60 days VWAMP (value weighted average market price) consideration for pricing of OFS. This is more so when there is likely to be change in control from the government to a private party. This could aid strategic divestments by the government.

Hard to say, but let me quickly run you through what the SEBI has permitted FPIs to do with exchange traded commodity derivatives (ETCD). Actually, in 2018, the FPIs were allowed into commodity derivative futures subject to having an underlying position. In short, naked positions were not allowed and only hedged positions. Not surprisingly, that EFE (eligible financial entities) system never took off. Now SEBI has scrapped the EFE system and has allowed FPIs to take positions in ETCD, subject to the existing limits and other limitations on the extent of participation and the products they can participate in.

For example, the FPIs would only be allowed to participate in cash settled derivatives i.e. no delivery permitted. Secondly, they must refrain from agricultural commodity derivative contracts in toto. That means, not only agri contracts but even indices with agricultural contracts must be fully avoided by the FPIs. That largely limits their choice in the ETCD market. On top of that the other limits pertaining to position limits and market wide limits applicable to the FPIs currently would continue to be applicable. In short, the freedom is coming with a lot of checks, balances and restrictions.

Would this really help volumes. Looks doubtful. Normally, the biggest participants in the commodity futures market are the mega trading houses like Vitol, Trafigura, Gunvor, Glencore etc. However, the much bigger issue on volumes in the ETCD market is the existence of commodity transaction tax or CTT. Since the time CTT was introduced in 2013 volumes have been downhill and the government has to take a call. At the end of the day, most FPIs feel that Turnover tax distorts derivatives market, and that by itself would keep them away from the ETCD segment. That needs to be addressed.

Clearly, the RBI is worried that too much of spot dollar buying the oil refiners is leading to pressure on the Indian rupee. Here is what the RBI is worried about. India imports nearly 85% of its daily crude oil needs and most of that is done by the PSU oil refiners. Crude accounts for nearly 50% of the total merchandise trade deficit each month. When they import crude, they are required to pay in US dollars. Now, these dollars have to be bought by oil companies for which they resort to spot dollar buying. They normally rush to buy dollars when rupee is weakening, so it puts further pressure on the rupee value.

If the oil companies are buying spot dollars, then this demand is being met by the RBI selling dollars. That is having negative repercussions. When RBI sells dollars in the spot market, it depletes its forex reserves, which explains why the level of the forex reserves chest in India has fallen rapidly from $647 billion in the last quarter of 2022 to just $537 billion today. That is a lot of currency chest depletion of $110 billion for a country that is a net importer with a monthly trade deficit of $30 billion. If the spot dollar buying can be reduced by the oil companies, then the pressure on rupee automatically comes done.

As a result, RBI wants that instead of buying spot dollars in the open market, oil refining companies should rely on the special credit line that has been made available to PSU oil refiners. This limit of $9 billion has been already made available through the international branches of scheduled commercial banks. RBI wants the PSU refiners to tap this line of credit since it is at extant rates, so not too expensive. This facility is offered by State Bank of India, Canara Bank, Bank of Baroda, Axis Bank and PNB. It is hoped that this would largely reduce the pressure on the Indian rupee. We have to just wait and see how it evolves.

On the last day of the previous month, the RBI announced its monetary policy which hiked the repo rates by 50 basis points, largely along expected lines. In the last 4 months, the RBI has hiked repo rates by 40 bps in May, 50 bps in June, 50 bps in August and now another 50 bps in September 2022. In short, the Reserve Bank of India has hiked by a full 190 basis points in just 4 months. That has aggressively moved the repo rates from a level of 4% to 5.9%. However, this is nowhere close to what the Fed has been doing raising by 75 basis points for 3 Fed meetings in succession. However, terminal rates could go to 6.5% now.

Here are some key takeaways from the policy statement by the Monetary Policy Committee (MPC).

· The repo rates were hiked by 50 basis points for the third policy in succession. While the latest hike took it from 5.40% to 5.90%, the rates have gone up 190 basis point since May 2022 and are a full 75 bps above the pre-COVID levels of 5.15%.

· On unerring signal from the RBI is that the terminal rate, which was originally estimated at 6% may not go to well above 6.5% with most of the hike front ended in 2022 itself. However, this has to be looked at in the context of the rate of inflation.

· The hike in the repo rate also hiked the standing deposit facility (SDF) rate, which is 25 basis points below the repo rate. That now stands at 5.65%. The SDF is what was originally known as the reverse repo rate.

· Just as SDF rate is pegged 25 bps below the repo rate, the bank rate and the marginal standing facility (MSF) rate are pegged 25 bps above the repo rate. That stands hiked to 6.15%, with implications for borrowing costs and hinting at higher EMIs on loans.

· RBI has inflation forecast at 6.7%, despite inflation in August going back up to 7%. RBI is obviously betting on a more robust Kharif and Rabi output this year to temper food inflation, which has been the real cause of rising CPI inflation.

· However, the RBI has lowered the real GDP growth estimate for FY23 from 7.2% to 7.0% and this largely on the back of global macro headwinds, including distinct fears of a global recession; apart from rate hike fears and the rising geopolitical risks.

· The decision to hike rates by 50 bps was unanimous with all the 6 participants assenting to it. However, on withdrawal of accommodation without impacting growth, Jayanth Varma continued to vote against the resolution suggesting that the RBI for now should purely focus on controlling inflation and not digress worrying about growth.

It was a weak market performance on Monday after a moderate to flat start. The Nifty tried to open strong but failed to hold on to higher levels. At the close on Monday, the Nifty ended nearly 207 points lower at 16,887.35. The 17,000 level of the Nifty continues to be a strong resistance and could prove decisive in its future moves.

In terms of market structure, the breadth of the market as measured by the advance decline ratio or the A/D ratio was largely unfavourable at 8:42. In fact, even the intermittent bounces were not too convincing and were met with selling. Apart from the Adani group shares, even the auto stocks and consumer stocks came under a lot of pressure on Monday.

Foreign investors were net buyers in equities to the tune of Rs.591 crore even as the domestic funds and LIC sold stocks worth Rs.423 crore on Monday. The numbers were hardly conclusive but it is good to see FPIs start off on a positive note in October after the rather disappointing show in September when FPIs sold $2.3 billion in last 8 sessions.

In terms of global markets on Monday, the Dow surged by 765 points while the tech laden NASDAQ was up 240 points as markets adapted to the new rate regime. The SGX Nifty is sharply higher by 248 points in early trades and hints at a very strong opening for the markets. The sharp rally in the Nikkei, Japan should also help sentiments.

The global markets have rallied on Monday and that is likely to rub off on Indian markets on Tuesday, as is evident from the SGX Nifty cues. However, there are still some major concerns for India. For instance, the supply cut in crude by OPEC is likely to push the rupee to beyond 82/$ which could eventually trigger more FPI selling. The short term outlook does look bleak for the markets and a lot would depend on whether the Nifty can really sustain above the 17,000 levels decisively with the support of volumes.

On Monday, the rupee fell by almost 53 paisa from Rs81.35/$ to Rs81.88/$. It has been trading pretty close to the 82/$ mark and is now expected to breach that barrier and weaken further. On Monday, the trigger for the sharp fall in the rupee came after OPEC and Russia decided to cut crude supply by 1 million bpd. However, the bigger concern is that India may not be included in the global bond indices in 2022. That is likely to result in unwinding of the opportunistic flows that came into India on inclusion expectations.

Motherson Sumi Ltd, as you are aware, had announced a bonus issue in the ratio of 1:2 i.e. one share for every 2 shares held. The record date for the bonus eligibility has been fixed as 05th October, so the stock has already gone ex-bonus as on 04th October. Now even if investors buy the stock of Motherson, they do not get the bonus shares. That is because only had they bought it by 03rd October they would have gotten it into their demat accounts by 05th October evening to be eligible for the bonus shares. The 1:2 bonus means that an investor holding 100 shares of Motherson Sumi Ltd will have 150 shares post bonus.

Let us understand how the bonus will be given effect to your futures position. In this case, the adjustment factor would be 1.50. This is how the futures positions would be adjusted for the bonus. Firstly, 1 lot of 4,500 shares would now transform into one market lot of 6,750 shares. This will be your impact irrespective of whether you are long or short on the Motherson futures. The adjusted purchase price would be divided by 1.50. To sum it up, if you were long on 1 lot Futures (4,500 shares) at Rs120 pre-bonus, , then post bonus, the position will be 1 lot futures (6,750 shares) at an average price of Rs80.

Let us now turn to how the bonus issue would impact the options contracts. To begin with, the strike price of the option will be adjusted by dividing old strike price by adjustment factor of 1.50. Then the adjusted positions in options will be derived by multiplying the number of contracts pre-bonus by the factor of 1.50. To sum it up, if you were long on 1 lot of Motherson Sumi (4,500 shares) call option of strike price 105, after the bonus adjustment, you would be actually long on 1 lot of Motherson Sumi (6,750 shares) but in this case it would be at a revised strike price of Rs70.

There is just one point to remember when we are talking about adjustment of futures for the bonus issue. In order to avoid differences arising due to rounding off the adjusted settlement price, all open positions in futures of Motherson will be marked-to-market (MTM) on October 04th based on the daily settlement price. Now, the position would be carried forward at the adjusted value. From 05th October, daily mark to market (MTM) settlement of futures contracts will continue as per the regular procedure followed.