European debt crisis claims first US fin co

MF Global Files For Bankruptcy Protection

 MF Global filed for bankruptcy protection for the United States parent company on Monday, the first American financial casualty of the European debt crisis. 
    In the Chapter 11 filing in Federal Bankruptcy Court in Manhattan, the firm's parent company listed assets of $100 million to $500 million and liabilities of more than $1 billion. JPMorgan Chase is identified as the biggest creditor, with a claim of $1.2 billion as the trustee on behalf of bondholders. Deutsche Bank is the second biggest, with a $325 million claim on behalf of bondholders. As part of the bankruptcy, the Interactive Brokers Group had been expected to commit to buy the assets of MF Global, a brokerage and a primary dealer. That would be somewhat similar to what Lehman Brothers did in 2008, when its parent filed for bankruptcy but Barclays bought some of its assets. The deal appears almost certainly dead, according to people briefed on the matter. 
    The bankruptcy filing is a humbling blow for the firm'schief executive, Jon S Corzine, who took the reins of the firm in 2010 after a decade as a United States senator and governor of New Jersey. The law firm of Skadden, Arps, Slate, Meagher & Flom is representing MF Global in the bankruptcy proceedings. The descent into bankruptcy came after a week when investors fled MF Global and credit ratings agencies cut their ratings on the firm to junk status. 
    The agencies said they were concerned that MF Global lacked a sufficient capital cushion if its $6.3 billion in European debt went bad. The firm took agamble in buying the troubled bonds of Italy, Portugal, Spain and Ireland last year, calculating that they would soon recover. Faced with dwindling cash, MF Global tapped a $1.3 billion credit line last week.

MF Global chief Jon Corzine

Wipro profit flat on wage hike

Bangalore: IT major Wipro's IT services revenue in the quarter ended September 2011 stood at Rs 6,829 crore, a 7% increase sequentially and a 19% growth over the previous year. In dollar terms, the company bettered its guided revenue figure of $1,436-1,464 million for the quarter by posting revenue of $1,472 million.      However the company continues to lag its peers. Infosys's revenue in the quarter grew 8.2% sequentially, TCS's by 7.7% and HCL Tech's by 8.2%.      Wipro chairman Azim Premji said that the business environment for IT services still remains robust. He said he was part of a CEO meet in Atlanta, US, recently, where the sentiment was positive. "The cash flow positions of companies are strong. There is no gloom and doom, the reality is that corporates are willing to spend money. Companies are still looking to invest in IT in key strategic areas of differentiation," he said.      Wipro's net profit stood at Rs 1,301 crore, up 1% over the previous quarter and flat compared to the previous year. Wipro CFO Suresh Senapaty said this was mainly due to annual wage hikes and costs associated with the acquisition of the SAIC unit. The operating margin fell to 20% from 22% in the previous quarter.      The Wipro stock was up 3.2% after the results were announced but gave up the gains to close 1.7% down at Rs 366 at the BSE on Monday. The sensex closed 0.56% down.      Ankur Rudra, IT sector analyst at Ambit Capital, said the results were positive but it was too early to say if the company's restructuring efforts are yielding full results. "Apart from the financial services vertical which grew 6.3% sequentially and energy and utility at 22.9%, other key verticals remained tepid," he added. Azim Premji

US giant Omnicom will buy Mudra

Anil Ambani Will Join Advertising Giant's Global Advisory Committee

New Delhi: The $12.5-billion Omnicom Group will acquire a majority stake in Anil Ambanicontrolled Mudra Group, one of the largest domestic advertising firms, to step up growth in India, where it has lagged behind global peers like Martin Sorrell's WPP. 

    The US advertising and communication services giant said it will have Reliance Group chairman Anil Ambani sit on its International Advisory Committee to gain from "his vast experience in the international business community". 
    Prior to this transaction, Reliance Group held 90% stake in Mudra and Omnicom's DDB Worldwide held 10% control which it bought way back in 1993. The American advertising behemoth, which runs agencies like BBDO and TBWA, will the option to increase its stake at a later stage under the deal. The value of the deal was not shared by Omnicom Group. Mudra through its various networks handles brands like Asian Paints, Aircel, Air India, Volkswagen, Philips among others. 
    "This acquisition is an important step in achieving Omnicom's strategy to extend and deepen our presence in rapidly growing markets. Mudra is widely acknowledged as an outstanding company with impressive creative product and expertise in a broad range of disciplines. Mudra's innovation and depth of talent will strengthen our business capabilities not only in India but around the world," said John Wren, president & CEO, Omnicom Group. The majority stake purchase in Mudra would help expand business activities into areas like public relations and retail capabilities, Wren added. 
    Talking to TOI, Madhukar Kamath, CEO, Mudra Group, said, "We have gained significant strength from the DDB network. This development will further cement our strategic partnership and create market dominance for Mudra." He added, "last year the group had outlined a vision for the year 2020 which will be pushed by having a perfect partner. We want to make this a decade of explosive growth for Mudra." Omnicom has been upping its profile in India in the past five years. In 2007, it started DDB Mudra, Tribal DDB, Rapp and DDB Health & Lifestyle after which it launched the group's global media agency OMD and creative agency BBDO India. 
    A Reliance Group spokesperson said: "We are delighted to extend our strategic partnership with Omnicom Group, strengthening ties that were established more than 20 years ago. Our chairman Anil Ambani is pleased to be joining the Omnicom International Advisory Committee, as part of thisenhanced relationship." 
    Mudra Group, with about 1,100 people and 26 offices, is spread across four agency networks — Mudra India, which is focused on branding and communication; DDB Mudra, which works on influence and behavioural change; Mudra Max, deal with integrated engagement and experience and Ignite Mudra which is focused on partnerships for entrepreneurs. 
    The global advertising behemoths are increasingly looking to size up a bigger chunk from the India market as the Western markets saturate. This year, Publicis Groupe CEO Maurice Levy told TOI, the French communications group is reviewing its India strategy with the aim of tripling the size of its business here.

Anil Ambani

Absence of decision-making in govt biggest concern: Premji

Bangalore: The complete absence of decision-making in the government, coupled with corruption, is the biggest challenge facing the country, Azim Premji, chairman of IT major Wipro, said on Monday. 

    At a press meeet to announce the Q2 results of Wipro, Premji responded to a question on what he thought were India's biggest concerns. "There are governance issues, but we are 
hearing a little less of that compared to a month ago. There is complete absence of decision-making among leaders in the government," the billionaire entrepreneur said, warning, "If prompt action is not taken, the country will face a setback. You must appreciate how serious it is." 
    Last month, Premji was among a group of eminent personalities who had, in an open letter to national leaders, expressed concern over governance deficit, as reflected in the uncovering of a series of scams. "We are alarmed at the widespread governance deficit almost in every sphere of national activity, covering the government, business and institutions. Widespread discretionary decision-making has been routinely subjected to extraneous influences," they said.
Core sector growth slows to 2.3% 
    Growth in the country's eight key infrastructure sectors slowed in September because of decline in coal, natural gas and fertiliser output, raising fresh concerns about the state of the industrial segment, which has been hit by rising interest rates and input costs. Data released by the government has showed the core sector grew 2.3% in September, slower than the 3.7% growth in August. In September 2010, the core sector had grown 3.3%. In the first six months of 2011-12, the growth rate stood at 4.9%, slower than the 5.6% registered in the same period last year. P 22 PM's reaction to letter positive, says Premji 
Bangalore: In a letter to political leaders last month, a group of eminent personalities, including Wipro chairman Azim Premji, had expressed concern over governance deficit. 
    "Possibly, the biggest issue corroding the fabric of our nation is corruption. This malaise needs to be tackled with a sense of urgency, determination and on a war footing," the group had said. The others in the group included Mahindra & Mahindra chairman Keshub Mahindra and HDFC chairman Deepak Parekh. 
    The group also wrote a letter acknowledging the existence of a "strong nexus between certain corporates, bureaucrats and power-brokers" and suggested a number of reforms in areas such as the judiciary, police, land acquisition and environmental clearances. Asked about the government's response to the letters, Premji said, "As far as the open letter is concerned, the reaction of the Prime Minister has been positive in terms of taking it on record."

RAISING ALARM: Premji calls for prompt action

list of 100 Fastest Growing Small Companies that could be future giants.

SMALL & STARRY-EYED

Every investor dreams to have a future Infosys or Titan Industries in her portfolio. But choosing the right gems out of over 5,000 listed companies is no mean task. Take heart, ET Intelligence Group has done the job for you. 

    The phrase "nothing succeeds like success" might be a cliché, but when it comes to demonstrating the success nothing quite succeeds like growth. It is the growth in revenues and profitability that validates the correctness of a business strategy or a robust business model. Better still, if this is achieved consistently over a period of time. Both large corporates and the smaller ones have their own set of growth stories. Still the limelight is never the same. Bigger companies are always the ones that are talked of more and corner the bigger share of attention. After all, their growth into biggies has already confirmed their success. However, as they say, 'the great thing in the world is not so much where we stand, as in what direction we are moving.' Going by this logic, we feel it is important to celebrate the growth stories even of smaller companies. They may be standing low on the ladder, if size were a criteria, but their consistent growth indicates that they are moving in the right direction. They hold the potential to become India 
Inc's poster boys in years to come. 
While the ubiquitous disclaimer about future's uncertainties is definitely in order 
here, we recommend investors cherry pick 
companies from our list based on their individual research. Such investments 
could prove immensely fruitful over 
next the few years. 
THE STREET SHOW 
Last one year has been bad for the stock market and in times like this small and mid-cap companies tend to suffer the most. However, that was not the case with our last year's list of 100 Fastest Growing Small Companies. Between last and this October BSE Small Cap lost 36%, BSE MidCap fell 27% and BSE Sensex slipped over 15%. However, three in every four companies from the 2010 list of Fastest Growing Small Companies have outperformed the BSE Midcap Index in this period, while 52 companies have performed better than the BSE Sensex itself. One in every three companies gave a positive return during this period. It is worth noting that this performance is calculated based on monthly average prices and not point-to-point comparison. 
THE STAR CAST OF 2011 
The list of Fastest Growing Small Companies remains, as usual, a representation of varied sectors from auto ancillaries, pharma & FMCG, chemicals to packaging and mining. Only about half the contenders of last year could make it to the list this time. In a few cases this was on account of the company's inability to continue to perform well. However, quite a few had to lose their rankings due to the raised bar. The list this year is topped by Ester Industries, maker of polyester film, which made a dashing entry into the list, thanks to the runaway prices of its final product. Zydus Wellness, our last year's topper maintained its momentum to secure the second place. While National Peroxide and Mayur Uniquoters improved their last year's rankings to take third and fourth places, respectively. A brief analysis of our 10 toppers follows the main story for readers' easy reference. 
ACTION & DIRECTION 
One of the key challenges in compiling this list was to weed out unsound and potentially dubious candidates. This is important because one can't worship growth just for the sake of it. 
We tried to achieve this by putting strict parameters for companies vying to enter the list. Only companies qualifying on all these accounts were considered for ranking. As such, making it to the ranking is itself quite an achievement. 
The first thing considered was the debt-equity ratio — the gauge of leverage. Any company with a reading of above 1.5 in last three years was dropped for being too leveraged. Similarly, interest coverage ratio, indicating the ability to service the debt, had to be above 5 for three consecutive years for the companies to make it to the list. 
The next criterion considered was the return on capital employed (RoCE). RoCE is a measure to figure out how efficiently a company utilises its capital invested in the business. Too low a return and the company could end up in a debt-trap. Hence, companies that could get RoCE of above 15% for the past three years were only considered. Additionally, companies unable to generate positive cashflows from operations for at least two of the past three years were removed. Finally, the revenue benchmark to qualify as a small company was raised to 1,200 crore or below for the current financial year to accommodate the overall growth and inflation against 1,000 crore or below in the previous year. At the lower end, companies with a market capitalisation below 100 crore were excluded.

Top 10 Companies

ESTER INDUSTRIES 
FY11 saw the demand for polyester film — also known as BOPET film — move up strongly on products such as mobile touch screens, LED televisions and solar panels. The prices soared as supply failed to keep pace, enabling companies to make a killing. However, as supplies grew, BOPET prices came down substantially. Ester Industries' June 2011 quarter net profit tumbled 81% y-o-y. This means the company is unlikely to maintain its feat next year. However, with its capacities more than doubling last year there will be a substantial volume growth.

ZYDUS WELLNESS 
Zydus Wellness, the 350-crore FMCG arm of Zydus Cadila group, has a strong product portfolio with an underlying health plank. The company has invested heavily on building its brands such as Sugar Free, Nutralite and EverYuth. Despite a subdued performance in the June quarter, the company's business continues to hold the promise of strong growth. Sugar Free is India's largest-selling low-calorie sweetener with an 86% market share. EverYuth range of skin-care products enjoy their leadership position in the scrubs and peel-offs category despite competition from MNCs and other Indian players. However, the company is facing intense competition in the face-wash category. Growing at over 20%, the company is poised to achieve its target of 500-crore revenue by 2013-14

NATIONAL PEROXIDE 
Improvement in the prices of chemical hydrogen peroxide helped the industry leader National Peroxide in FY11. The company achieved 49% jump in revenues and 255% in net profits, while its production improved 11.4% to 71,826 tonne. The company expanded its hydrogen peroxide capacity by 24%, for which it had to shut down its plant in the April-June quarter for 70 days. Even after commissioning the plant, the commercial production could begin only from September 2011 onwards. This is set to affect its numbers in the first half of FY12. However, the second half of FY12 onwards it will enjoy the full benefits of expanded capacity.

MAYUR UNIQUOTERS 
Mayur Uniquoters is India's leading manufacturer of artificial leather and supplies to domestic automakers such as Maruti, Tata Motors, Hero MotoCorp,M&M, etc, and footwear makers such as Bata, Liberty, Action, etc. It has continued to grow well over last few years without leveraging its balance sheet and is one of the few companies giving quarterly dividends. The company has started supplying to overseas automakers such as Ford and Chrysler and is trying to enlist with GM, Toyota, BMW and Mercedes Benz. The company has maintained its position in the 100 Fastest Growing Small Companies list for second consecutive year and has proven a multibagger in last one year. It appears well placed to continue its steady growth in coming years.

SANDUR MANGANESE 
Sandur Manganese & Iron Ore is India's secondlargest manganese ore miner and also operates a ferro-alloys plant with almost all its 2,000-acre mining land in Karnataka. The company benefited from the improved pricing scenario in FY11 although its sales volumes dipped on export ban in Karnataka, high freight costs and 20% export duty imposed on iron ore. The company's June 2011 quarter numbers were hit by Supreme Court's blanket ban on mining activity in Karnataka. This factor is likely to weigh on its overall performance of FY12 like other mining companies and could make it difficult to maintain its position in the list next year.

LUMAX AUTO TECHNOLOGIES 
Lumax Auto Technologies is an auto-component maker supplying transmission and steering components, body and chassis and electrical components. Growing production of automobiles by both Indian and foreign players, a buoyant replacement market and rising costs have benefited Lumax. It is a debt-free, cashrich company and is planning to add two more plants to the existing six facilities in Maharashtra. Its entry into infrastructure lighting, although small at present, could safeguard it from cyclicality of the auto industry in the future.

WABCO INDIA 
WABCO India, now a 75% subsidiary of WABCO Holdings of the US, is a supplier of auto components to commercial vehicles industry. A significant revival in Indian commercial vehicles industry, thanks to investments in development of road and infrastructure, enabled it to post a strong revenue growth. As investments in roads grow with more and more private participation, the long-term growth trajectory will remain strong for the commercial vehicle segment. However, in the shortterm, cyclicality in the commercial vehicle market and rising raw material costs could be a concern.

ECLERX SERVICES 
Mumbai-based KPO operator eClerx has benefited from the buoyancy in the demand from the global financial market. Despite talks of a global slowdown, eClerx reported a strong sequential growth of over 6% in the five out of the six quarters ended September 2011, validating success of its business model. PBDIT margin above 33% shows that the new business did not come at the expense of profitability. This has helped in offsetting the impact of higher taxes due to minimum alternate tax on SEZ income. The company offers critical back-end services to the financial sector, which are not affected by the movement of business cycles. This should keep the company going during tough times.

HAWKINS COOKER 
Hawkins Cookers is seeing a huge demand for its products but was unable to meet it because of labour issues at its plants. Last year, the company's net sales grew 17%. The profit declined due to higher raw material prices. But now most of the labour issues have been resolved and input prices have come down from their peak. Hence the company will be able to run its plants more efficiently and higher growth can be expected. Besides, the company is financially sound with high return ratios, strong cash flows and low debt.

EVERONN EDUCATION 
Education services provider Everonn Education has reported strong buoyancy over the past three years backed by sound return and liquidity ratios. Its stock has, however, plummeted 44% from the year-ago level following the judicial action against its erstwhile MD in early September. 
The company has appointed new leadership and has ensured the soundness of its business fundamentals. In the past one month, its stock has recovered from the lows of 228 to the current level of 380. Its performance under the new leadership in the next few quarters will be crucial to restore the investor confidence.

I-banking biz may take a big hit in ’11

BUZZ MISSING ON DEAL STREET

M&A Fee Likely To Come Down To $375M From $700M in 2010 As Mega Deals Dry Up

Mumbai: India's investment banking revenue may halve as the big deal-makers face one of the worst droughts in 2011. This year's I-banking earnings comprising of merger and acquisition (M&A) advisory and equity capital market fees is seen sharply down at around $375 million compared to nearly $700 million in 2010, according to initial industry estimates. 
    The investment banking units of Morgan Stanley, Bank of America Merrill Lynch and Standard Chartered may end up with revenue between $40-50 million topping the list, according to banking and head hunting sources briefed on the numbers. Indian firms such as Kotak, Avendus, JM Financial and Edelweiss could show up with revenue in the vicinity of $25-32 million in 2011, sources added. 
    The overall investment banking fees of $350-375 million does not include financing and structured solutions business, and debt capital market revenue which is fairly robust for firms like Kotak. 
    "This is worse than the 2008 economic crash. We are headed for significant yearend churn especially in some European banks," said a senior MNC banker who did not wish to be quoted. Several global I-banks have seen exits of senior executives in the past six months and this could accelerate with the bonus season nearing, which would indicate the people strategy of these banks in turbulent times.
    Many investment banking exits figured senior honchos, often people at the level of managing director. This, head hunters said, was not surprising as most of these posts with MNC banks carried remuneration of $400,000 and more excluding bonus. I-banking units of the global banks have anywhere between 10 to 20 members who are managing directors, directors and vice presidents. The number is higher in the case of larger Indian firms like Kotak and Edelweiss with anywhere between 25 to 30 members, but lower cost structures compared to international peers. 
    "The first six months of the fiscal has been a difficult period for deals," said Ashok Wadhwa, CEO of Ambit Holdings Pte. "We grew at an average of 18 deals a year but this time we just did four deals," he said. M&A activity witnessed 158 deals in July-September quarter this year, which is the lowest deal count recorded in a quarter since 2009, said consultancy firm Ernst & Young. By value, it declined 68% to $5.2 billion compared to $16 billion in the year-ago period. 
    "It is a good time for an organization to redefine the team," said Sunit Mehra, MD, Hunt Partners, a recruitment firm. "It would help them to be better equipped to manage the future." Some smaller MNC banks have unleashed business realignment trying to unlock synergies between corporate and investment banking for deal origination, which has been attempted in the past with varying success. 
    Globally, Wall Street bellwether Goldman Sachs reported a loss of $393 million during the third quarter of 2011 as uncertain global economy took its toll on the investment bank. The Indian units of some European banks may have to share the pain as their parents emerge battered from the Eurozone crisis and the ongoing bail out efforts. 
    The unfolding scenario is possibly an opportunity for domestic boutiques to tap the MNC talent in a reversal of trend witnessed five years ago, when Goldman Sachs and Lehman Brothers built their teams projecting Indian investment banking revenue to be at least $1.2 billion by now. 
    Ex-Standard Chartered investment banking MD Sunil Mehra joined Mape Advisory, while Anand Rathi brought in former BNP Paribas honcho Praveen Chakravarty, who took a sabbatical to advise Nandan Nilekani's UID project, as CEO. Yes Bank recruited Vishal Puri from a London based boutique. Earlier this year, Bank of America Merrill Lynch saw the exits of MDs Promit Ghosh and Raj Kataria who later joined deal industry veteran Rajeev Gupta to kick off an investment bank initiative. 
    There are others like Varun Bajpai, a former Macquarie honcho, who are talking to domestic corporate houses to start-up financial service firms revolved around nonbanking finance companies, or some even preferring to take up a corporate job with the big conglomerates and the hottest emerging companies.

India Inc Puts up Worst Profit Growth in 5 Qtrs

High input costs, interest rate spike keep Sept quarter growth at just 4.4%

    Net profit growth at India Inc slowed dramatically in the just ended quarter as raw material costs and interest charges zoomed, an analysis of corporate results released so far shows. Results for about 494 companies shows that they posted a combined net profit growth of just 4.4%, the worst in the past five quarters. Sales grew at a much better pace, 27%, but operating profit margins fell, while financing costs, including forex losses, jumped 53%. This restricted the growth in profit before depreciation and tax (PBDT) at just 8%. The rupee depreciation was a key factor that impacted profit in a big way as companies with foreign currency loans faced a steep jump in interest costs besides mark-tomarket losses. Among those hit were MRPL, Chennai Petro, United Phosphorous, Sintex and Idea Cellular. The deteriorating business environment and rising input costs impacted the performance of Exide Inds, JSW Steel, Crompton Greaves. Cairn India's profits halved as it provided for one-time payments to ONGC. On the other hand, the infotech industry posted a mere 9.6% yearon-year growth in net profit according to the aggregates of 39 IT firms. Interest rate sensitive industries such as real estate, construction, consumer durables turned out to be underperformers. Similarly, weak market conditions and steep raw material costs took a toll on steel, auto ancillaries, textiles and packaging industries. One out of every five companies posted a loss in the September 2011 quarter. One out of every 10 posted a loss versus a profit in the yearago September quarter. The number of companies able to grow their profits from last September quarter at 217 was only slightly higher than those unable to do so. The better performers include Ultratech Cement, Petronet LNG, Hindustan Zinc, Torrent Power, Grasim Industries. In spite of the rising interest rates and worries about NPAs, a number of banks were able to improve numbers compared with the year ago period. The profit of BoM jumped 92%, while IndusInd Bank, Syndicate Bank, Federal Bank, YES Bank, HDFC Bank and Axis Bank posted 25%-plus growth. But some other public sector banks, such as UBI, disappointed. A few industries including cement, chemicals, diamond & jewellery, entertainment & media, FMCG, pharma, Infotech and capital goods were able to post numbers better than the previous quarter. A number of key results are yet to come, which could change the aggregate readings considerably. However, the weak undertones in the industry and economy are becoming more evident. The leading infra and engineering major L&T reduced its order intake guidance for FY12 on slowing investment. India's official GDP growth target has already been revised to 7.6% from initial 8% by the RBI, while the soaring subsidy bill, thanks to high oil prices and weak rupee, means the fiscal deficit target of 4.6% will be missed.

Re Slide Leaves a Hole in Currency Traders’ Pockets

Broking houses, proprietary desks dealing in currency derivatives suffer as bets go awry The unexpected and steep decline of the rupee in September has caught many traders in the currency market on the wrong foot. These traders had placed bets that the rupee would not fall below 47 to 48 against the US dollar through futures and options contracts. But their forecasts went awry when the rupee slid to 50.  The repercussions of such blundered bets in the forex futures and options segment have been severe, resulting in closure of subsidiaries of many broking houses and proprietary desks dealing in currency derivatives. Clients of the five large retail broking houses had to cough up an aggregate . 600 crore for the losses, and the activity in this segment has dwindled.  The unanticipated dollar rush led by the flight of money from riskier assets, including emerging markets in September that drove down the rupee, tossed a spanner in the works for these traders. They had bought rupee futures at around 47 to 48 on the hopes that there would be a rebound after the rapid decline from around 45. "Many clients were forced to square off their positions at a loss because of the rupee's sharp fall to 50," said DK Aggarwal, chairman and MD, SMC Investments & Advisors, a subsidiary of SMC Global Securities.  Exposure to derivative trades such as futures is done by putting a margin or paying a premium for an option to buy an asset (call) or to sell one (put). Putting a margin or a premium allows a trader to lever himself by paying just a fraction of an asset value. Losses Mostly in Currency Futures  For instance, around 5% overnight margin on currency futures allows a person to lever himself 20 times. In stock futures, this margin can be between 15% and 20%.  While losses of retail traders were mostly in the currency futures segment, the savvier proprietary or prop desks took a hit on their options positions. These prop traders did not speculate on the direction of the rupee, instead they placed bets on the volatility of the currency, which is done by using a combination of rupee option contracts. Implied volatility (IV) — a measure of traders' expectations of risks in the markets immediately — is a key aspect for calculating options premium.  So, when uncertainty is high, IVs tend to shoot up, causing a surge in options premium.  IV of currency options, which was in the range of 2.5 to 4 in July and August, shot up to around 12 in September.  Though these prop traders were ready for the jump in IVs, they did not expect the measure to go up to 12. Many of these traders sold volatility (or sold the combination of call and put options) when IV was around 8. "The spike in vols over 8 was beyond their wildest of imaginations. The rise was so rapid that they found it difficult to square up positions. Many proprietary desks have been wiped out, as even a movement of one percentage in the currency can make a huge impact," said Dharam Chand Sethia, trader at Kolkata-based Kredent Brokerage, which runs a proprietary desk.  "When vols are 1.5-2% on a daily basis against a normal 2-2.5% per month, no strategy will work in a trade that's highly leveraged," said Hitesh Daga, director, Mumbai-based Hrim Finance, which runs a proprietary book and a jobbing desk. Severe losses have sucked volumes out of currency options. "Where options OI (open interest) was 50% of overall market open interest, it's now just 10%," said Daga.  "The rollover from October to November has been lower than that in the preceding month because of the losses. This has also cut the open interest as many people squared off at a loss and did not roll over," said Aggarwal.

Currency Futures Trading may be Extended till 7 pm

Currency traders may be in for longer working hours if the government has its way. The ministry of finance is understood to be backing a proposal to extend trading hours for currency futures, even though exchanges and brokerages are divided on the subject. 

The issue cropped up at a recent meeting between exchanges and finance ministry officials, where it was suggested that trade timings should be extended by two hours to 7 pm. The proposed move, some felt, would help traders respond to global markets. 
It was also proposed that FIIs and NRIs should be allowed to trade in currency futures. "Since RTGS (or electronic money transfer) is allowed up to 7:30 pm, payment and settlement issues can be taken care of without causing additional burden on the banking system. Also, it was debated whether to allow for FII participation in the currency segment since they are allowed to hedge by entering into over-the-counter currency derivative contracts. The issue will be taken up with the Reserve Bank of India," said a person familiar with the discussion. 
Sources said there is no consensus on the issue. "Not all exchanges want longer hours. They also differed on the issue of FII participation. Some felt that it could increase market volatility and would tantamount to de facto convertibility of rupee," according to a person present at the meeting. The proposal has not gone down well with brokers. In fact, they feel equity market timing should be reviewed as no visible benefits have accrued by opening the market early. 
However, sections think that a slice of the offshore trading volume, where global investors punt or hedge on rupee, may shift to India if trading hours are extended. According to Bank for International Settlements (or, BIS), almost half ofthe turnover in currency derivatives (linked to the Indian rupee) happens offshore. "Why only in the evening, we need to push in both directions rather," said Ajay Shah, professor at Delhi-based National Institute of Public Finance and Policy. "In the morning, before India opens, the NDF (or non-deliverable forward) market in Hong Kong and Singapore is discovering the price of the rupee. To compete with this, we should start couple of hours earlier at 7 am, and keep the market open till 8 pm to connect with US market," he said. Non-deliverable forward (NDF) is a cash-settled, short-term forward contract on a foreign currency; since rupee cannot be delivered abroad, the contracts are settled in dollar. As per BIS data, NDF market for the rupee exists in Singapore, Hong Kong, New York and London. The two Asian centres accounted for around 27% of the total (offshore and onshore) dollar-rupee market. FIIs can trade the rupee on NDF markets like Singapore, Dubai, Australia and the UK. At present, FIIs and NRIs are directing the business to the offshore market. "There is no point inblocking them from the onshore market," he said. 
Among other exchange traded derivatives, commodity futures trading takes place till 11:30 pm. This has been the case for the past eight years and there has been no problem in clearing and settlement, said a market participant. Similar to currency derivatives, future prices in commodities like gold and silver are closely linked to global markets. These should be available for trading for a higher timeframe," said an analyst. 
All key US data that influences dollar come in the evening when most Indian markets are closed. Longer currency trading hours could make use of such data, though a strain on brokerages. 
According to Kaushal Sampat, president & CEO — India, Dun & Bradstreet Information Services, "The extension of trading hours will align the domestic markets with those in Europe, the Middle East and the US. Investors will thus be able to trade at a time when key markets are open, thereby paving way for higher volumes and more alignment with global markets." However, the additional burden that this may impose on the system, in terms of back office processing work and bank settlements, remains an area of concern, he said. 
apurv.gupta@timesgroup.com