Meet Mr. C.B. Bhave, the new SEBI Chief!

It's like a homecoming for Chandrasekhar (Chandu) Bhaskar Bhave, the newly-appointed chairman of India's capital market regulator. The 1975-batch IAS officer of the Maharashtra cadre was the executive director in charge of the secondary and later the primary markets between 1992 and 1996.

That was the time when the Securities and Exchange Board of India was taking its initial steps to reform the stock exchanges and putting in place systems that help in investor protection. The Bombay Stock Exchange was then known as a brokers' club and Bhave was on the board of the exchange in his capacity as a representative of Sebi.

It was during his stint in Sebi that his boss, G V Ramakrishna, banned badla. Bhave also played a pivotal role in ensuring that market players get sophisticated hedging tools and are properly regulated. Bhave maintained that the capital market regulator's primary job is to protect individual investors and simultaneously develop systems that take care of the interests of issuers -- companies and intermediaries. He also ensured that the new National Stock Exchange's surveillance systems were top class.

The slimly built Bhave, who plays tennis regularly, has a self-effacing style, but is a tough administrator. As the head of the National Securities Depository Ltd (NSDL), he revolutionised the capital market by getting market players to accept the new system of dematerialised shares and debentures. He won buyers' support by arguing that demat would eliminate bad deliveries of shares and impressed upon the sellers that this would facilitate early settlement and early payments.

Setting up of a depository that converts physical share certificates into electronic form was not at all easy. For example, the UK has still not been able to implement it. But under Bhave, NSDL set up the depository at under Rs 100 crore (Rs 1 billion), or a seventh of the original estimate, and achieved paperless trading within just three years, the fastest in the world.

All this experience will come in handy when Bhave takes over as the sixth chairman of Sebi. For, the challenges are many as the investment climate is much more dynamic now than when he was the executive director.

He is also coming in at a time when the market sentiment is not favourable for small investors and many of them have had huge losses in some of the recent high profile IPOs. Also, the Indian capital market has seen the entry of thousands of new investors into the system. Private equity players are getting stronger and more influential in the market and there is a demand to regulate them. This is an international issue and the Indian market regulator will have to face it, too.

There is a need to reform the primary market to speed up the processes as well. The price discovery mechanism, for example, is not efficient even in book-building as institutional investors are paying just 10 per cent and putting bids for 10 times of the amount they pay in IPOs.

Short selling and physical settlement in derivatives are the other issues that need to be looked into. The allotment and listing also need to be much faster. His predecessor M Damodaran has ensured that the homework for all these is ready and it is up to Bhave to "implement" them.

It's also an irony of sorts that Bhave, 57, is joining as the regulator. His organisation, NSDL, has been fighting a bitter legal battle with Sebi since April 2006, when Sebi uncovered a massive scam involving the cornering of share allotments in IPOs for small investors. In November 2006, Sebi ordered NSDL and a few others 'implicated' in the IPO scam to return Rs 115 crore (Rs 1.15 billion) in "illegal profits" made from IPO deals. Of this, NSDL's share was Rs 45 crore. NSDL appealed to the Securities Appellate Tribunal (SAT), which, in December, set aside the Sebi order, describing its action as a clear "violation of the principles of natural justice."
Sebi investigation on the IPO scam isn't concluded. So as the new Sebi chairman, Bhave will have to resolve this tricky issue. As a regulator, he cannot be seen to be hurting the interest of the organisation which he founded.

Financial Derivatives -- Identifying the lesser of the two devils..

Hello Readers!! I'm back and hey, the markets have not been too good off late! Good is the last word on your minds for the time being, right?? Heart breaking is more like it! Okay, okay, so I'm being over dramatic but the bitter truth is that events of the last 6 months have left most investors reeling from the awe with which the Sensex rose and then the shock and mouth-gaping horror at the fall it registered.. Now isn't that precisely the reason why I call this space "The SenseXXXational Ride" .. It's a gut-wrenching ride and not for the faint hearted, let me mind you!

Investors entering the market around August 2007 were gingery because the Sensex had crossed the 15,000 mark, the skeptics were crying foul warning anyone who cared to listen that a correction was imminent but with the FIIs pouring in funds like never before, India's growth story was shining brighter than ever. Then came a big blow --- the SEBI banned, or shall I say, limited the investments made by Participatory Notes (PNs). This sent the markets crashing but heck, was anyone using any common sense? No ways dear readers, the markets again resumed their upward climb and then came the final big blow, a below-the-belt blow -- Fears of the U.S. economy going into a recession sent the Sensex on a downfall .. A never ending nadir, it seemed!

Now why this big intro?? Well, these last 6 months can be distinctly divided into 2 phases -- The rise which was then followed by the fall!! Long-term investors and investors owning stocks need not worry, the markets will rediscover the Midas touch, albeit a bit later than what we estimated. It's the investors dealing in futures who were emboldened by the meteoric rise of the Sensex. The lure of doubling the money in a short time was ample to hook -- and suck -- both new and experienced investors into this black hole which not only drained their investments but also saddled them with huge losses!!

Now, those of you who cocked a nose at us simple investors dealing in ONLY shares, where are you people now?? Investing in futtures is risky, so why not hedge or atleast protect your downside? Atleast buy a put option on the futures -- if the markets fall, atleast your loss is defined or limited, to say.

I believe trading in options is safer than dealing in futures. I mean, if you have to dine with the Devil, then why not ensure that you got something to help you digest the food as well? Ok, that sounds like a shit Simili.. I will try to compose a better one next time!! :D

Even options are not without risk; however, I would assume that you will be more cautious after the recent experience with the markets! So, suppose, with the markets poised at the current levels, you expect the markets to rise, i.e, you are bullish on the markets making an up move.. So ideally, one should buy a Call option on Nifty futures (lot size 50) expiring in February, i.e. the current month. This basically gives you an option to buy 50 nifty futures at a predetermined price; but does anything come for free? Ha ha, no readers! You got to pay a small premium, say Rs. 150 for one Nifty future for a strike price of Rs. 5300/- .. So, the maximum loss you can suffer is the premium that you paid for the call option, i.e., Rs. 150 x 50 = Rs. 7500 .. Theoretically, I've assumed that the call option has an ending value of 0, i.e., at the time of expiry. However, in the real market, you will be able to get some value for the call option; hence, your maximum loss is capped at Rs. 7500/- .. The breakeven Nifty level for an investor is Rs. 5450 (strike price Rs. 5300 + the call premium Rs. 150) .. So as long as the Nifty stays above Rs. 5450, your call option will be in the money ..

Gosh I'm tired after writing this post; I hope to come out with a follow-up on this article and more complex derivative strategies in my next post! Hope you enjoy this post!