Gossip & Tales: Adani Like Targeted Report Against Another Corporate? SEBI's Regulatory Play

Another Corporate On The Hit List?
On the lines of US-based short seller Hindenburg and OCCRP, a UK-based background screening company has submitted a report against a Delhi-based promoter family that owns ayurvedic and FMCG brands. The report has been submitted to an Indian financial services entity, which is desperate to prove to SEBI that the promoter family was not fit and proper to make an open offer. The financial services entity is likely to submit the report to SEBI and it is not clear if any part of it will be leaked to the media or made public. The chief of the financial services company has been trying to thrawat the open offer and was also deboarded from a flight to London earlier this year. The promoter family on the hit list of the report has been a household name in India even since they founded the ayurvedic and FMCG company. The family also has interests in financial services, insurance and owns an IPL cricket team.

SEBI's Timing Of Hindenburg Show Cause Notice
Just when the Hindenburg saga had started fading from the public memory, SEBI gave it a new lease of life and brought it back in the news with its mundane show cause notice (SCN) to the US-based short seller, 18 months after the incident and six months after the Supreme Court's review of the matter. The SCN that was sent when the Parliament session was ongoing, more than achieving anything else, once again gave ammunition to the opposition parties to target the incumbent government and Prime Minister Modi with Adani jibes. Opinion columns in media perceived to be anti-BJP government suggested that the government was trying to shoot the messenger via SEBI. But insiders say even New Delhi was flummoxed as to why SEBI came out with the SCN 18 months after the incident? More interestingly, SEBI's silence for many months on the role of veteran banker Uday Kotak in the short-selling operation, which came out after the SCN, raises further questions. Sources also suggest that a report by the Enforcement Directorate in the matter, which was submitted to SEBI, is yet to be made public.

Who Decides Winners And Losers In the Stock Market?
In the past 10-12 years, discount brokers like Zerodha took away huge market share from brokerage entities backed by banks that charged high commissions. In the process, investors and traders benefitted as broking commissions fell to near zero with the entry of discount brokers. But a new rule by SEBI will overturn everything -- cost of trading will rise for retail participants and entities backed by banks like ICICI, Kotak, HDFC, Axis etc will once again start making higher profits. Recently, SEBI directed stock exchanges to stop giving discounts to brokers based on their higher volume churn. Currently, exchanges charge slab-wise fees from stock brokers based on their turnover. The higher the trading volumes a broker generates, the lower is his fees to exchange. Brokers like Zerodha were using this to give discounts to retail investors and traders on brokerage commissions. In fact, for the past few years, retail investors could do delivery-based trades in markets with discount brokers without paying any brokerage. But if brokers do not get discounts from exchanges, Zerodha founder Nitin Kamat has said they will have to start charging brokerage from retail players too. As a consequence, broking arms of banks are the clear winners since banks are still allowed to promote 3 in 1 accounts and this way they can charge higher brokerage and still attract more clients. Further, it would also mean that trading volumes on NSE fall as it was giving higher discounts than BSE. Also, as the discount on higher volumes go away, high frequency trading (HFT) volumes that are liquidity providers for derivatives will vanish since their margins are wafer thin.

Further, a blow to derivatives volumes in India is likely from SEBI's proposal to hike lot sizes of derivative contracts to Rs 20 or Rs 30 lakh from the current contract size of Rs 5 lakhs. SEBI also plans to hike margin requirements for contracts that are near expiry. While NSE is not listed, all this is likely to impact BSE share price negatively. But credit must be given to SEBI chief Madhabi Puri Buch, who may be successful in curbing excessive speculation in derivatives by India's retail investors. Yet, simply doing away with weekly expiry would have been a better patch to curb gambling.

Wearing Two Hats?
A video of SEBI chief Madhabi Puri Buch has gone viral wherein she is seen praising Motilal Oswal Financial Services (MOSFL) for creating a strong brand recall value. "Motilal Oswal is a very strong equity brand," says Buch in the video. In the meantime, Financial Times London ran a story recently praising SEBI chief Buch and detailing her efforts to curb excessive derivative volumes and market gambling. In the same story, the FT report also detailed how small traders in India were into stock market gambling. The story starts with MOSL's head of trading Chandan Taparia training hundreds or thousands of participants and small traders to play derivatives - which is now mainly considered as gambling by the SEBI chief.