As Wednesday opened limit down trading was halted for the day. I decided I would expand stop losses to 20% from peaks, and exit all leveraged positions. When the market opened, I had futures of Axisbank and HDFC bank, both of which opened horribly down. When I squared off, I was down Rs. 60,000(!) and really needed a miracle. Suzlon energy hit my expanded stop loss at 1575 and I squared that one too, giving me a net profit on that trade of around Rs. 200 a share (bought at 1381), about 15% profit in a month.
I managed to buy Jai Corporation, a stock that's been upper circuiting all this while. In the madness some people sold it too. Another stock I picked up was Mudra Lifestyle - great results and I expect the stock to double in a year. Yes, not really a trading call, but one needs the long movers as well.
As the market started recovering, I sold one of the protective puts I owned - Nifty 5100 for a small profit. I also initiated a new long call option at Nifty 5500, bought at 92 some of which i traded out within the day for a 9K profit.
I then closed the day with two open positions - NIIT Technologies at 359 and Reliance Industries at 2639(both on the futures). NIIT Tech was bought because IT was the only sector that performed well, adn this was the weakest stock in that sector for the day, and I figured it will catch up the next day. Reliance was a pure momentum call for working with results today.
I closed Wednesday with a huge loss, about 9% down.
Thursday was interesting. NIIT Tech opened hugely up, and kept moving upwards. I sold it at 402, giving me a profit of 43 per share = Nearly 25,000 on a lot of 600. (This is for an investment of about 80,000 as margin).
Reliance hovered around 2800 when I set a mental stop loss of 2750, close by to cover a rapid fall. Also my overnight Nifty 5500 calls were hugely profitable so I sold them out at 250 or so. And my earlier purchased protective puts at 5100 were in bad shape (obviously) so I exited some of them.
Then the Nifty started to fall. I first took out Reliance at 2750, gathering a 110 Rs. gain on a lot of 150 - about 16,000 return in one day for a margin of 80,000. To cover any positive impact from results I bought a Reliance 2800 call at Rs. 85 per share. Set the stop loss on that to Rs. 50 (Options need WIDE stop losses)
The Nifty then seemed to settle at 5550 so i thought perhaps it's best to work with a strong stock, and chose the SBI future at 1800. It immediately retraced to 1780 when I sold and saw Rs. 5,000 vanish just like that!
I now had nothing left on futures, only a few 5100 puts which were increasing in value as the market went lower. All stocks were keeping above their expanded stop losses. Just before close I bought Nifty 5700 calls at Rs. 25 each.
At close of day today I was up over 7% nearly recovering all the losses of Wednesday. I have only two open F&O positions: Nifty 5100 put and Nifty 5700 call. If it swings wildly in any direction, I'll end up making money.
Stocks wise: Sintex has dropped 10% to 400, Reliance is at 2539, JaiCorp is still heating the upper circuit at 1248 (buy price: 887 and 1189). IGate is hovering at 202, Praj Industries is down to 196 (buy: 228) and Mudra is down about 5% at 80.
Marked to market, I am up 28% on the whole portfolio. The index is up about 19% in te same time, so I've done slightly better. Let's see how the rest of the month goes.
The SEBI note and why FIIs are creating a fuss
Categories: Commentary
Let's see a little more into what this whole SEBI rule is about, which has spooked the markets. But first, a little history.
Foreign Institutional Investors, or FIIs, are a class created by SEBI (why, I do not wholly understand) and that consists of "non domestic institutional investors" meaning they don't need to adhere by (Know-your-customer) KYC norms or the level of regulation of the domestic folks (DIIs). But FIIs did have disclosure norms on how much they invested etc. and of course they had to register with SEBI. Mostly these people came from tax havens like Mauritius for saving capital gains tax.
Some other foreign institutions did not want to even register with SEBI. So SEBI bent backwards and said, fine, you can come through an existing FII who will create a "sub-account" for you.
Then some hedge funds and pension funds decided they would not even go and become a sub-account (which does have SOME regulation, to be honest). So FIIs said, tell you what, let's buy in the Indian market, and we'll give you a participatory note based on what we buy. We'll put out a price to the note every day and that will reflect the dollar value of the "underlying" meaning whatever we issued the p-note against.
SEBI, overlooking all the negatives of this approach, said ok to p-notes. Now, FIIs dont have to reveal who the p-note buyer is (because effectively the FII holds the security)
Now P-Notes could be used for equity shares or for debt (bonds etc.) But FIIs also started issuing it on derivatives (stock/index futures and options). This is a little unfair because Indian citizens under RBI laws can't invest on margin when they invest abroad (that's how you trade futures) - but then when was life fair.
Now SEBI has realised that a large amount of the copious inflow of dollars has come against P-notes issued against derivatives. So SEBI wants to remove any p-notes based on derivatives, completely. And it wants to restrict all p-notes to a certain % of the FII's total limit.
The specification is: no new p-notes after Oct 25 against any derivatives. Existing such notes have to be terminated within 18 months. And in general, p-notes must not exceed 40% of the FIIs total assets under control in India.
Meaning, it's telling the hedge funds, come forth and get registered with us directly, if you want to do derivatives. And the KYC norms will apply.
That's the long story, and the reason for spooking the markets is that this rule unsettles things for a while. Still, it's not all that bad, because when they say "you can't do it anymore" it doesn't quite mean that.
What it means is - (SEBI saying) listen, you got them p-notes, right? So go ahead and keep them for 18 months from oct 25. At the end of 18 months, you can unwind the underlying derivatives. You can't issue any NEW p-notes based on derivatives. You can't issue more than 40% of your total investment as p-notes.
Problem is: these FIIs that issue p-notes are brokers, like Merrill Lynch and Morgan Stanley. Hedge funds want to route their business through these brokers only (some very incestual relationships here) but now they can no longer do so if they want to invest in derivatives, and they really want to. Hedge funds love derivatives for the leverage provided. So what can they do? They can come and register in India, and deal through the ML/MS offices in India.
But the relationships are between the US offices of the hedge funds and the US offices of the brokers! The hedge fund managers give the brokers (in the US) business, so they get pampered by getting tickets to ball games, parties, cruises etc. If they start dealing with Indian brokerages, won't it remove them from the 'special' lists? I think *that* is the biggest problem. After all, hedge funds can easily register as FIIs themselves, and put a few blokes here to take care of the regulation and disclosures. Big deal. But now the big issue is that they have to change brokers, and they're complaining.
Obviously the foreign brokers themselves are unhappy because they lose the fat margins they used to make on the p-notes. And Indian brokers are happy because now they will get a piece of the foreign investor pie.
The markets have overreacted to what is a correct course of action, and have tanked quite a bit. Don't bother. This will correct itself in a week. Some good buying opportunities will come, just avoid the folks that have been taken sky high already like REL, RPL and so on. Whatever you do, keep your stop losses ready, but widen them a bit for such overreactions.
Posted in Commentary