The market remained becalmed last week, a combination of the mid-week holiday and the cricket no doubt contributing to lack of interest.
The new trading system is causing more than a few headaches for the brokers. Apart from the lack of familiarity the most serious concern is that there is no differentiation between odd lots and the main board.
Institutions are wary of entering sell orders because one or two shares may be purchased from a quantity placed on the board. This was experienced by a few institutions who had a handful of shares sold from large orders. There are minimum fees and taxes that need to be paid, even when a single share is sold and the transaction cost, when one or two shares are sold can be relatively high, which is a disincentive to trade. The system apparently has a “minimum fill” option for an order but this is apparently not working.
The IPO of Access Engineering which offered 20 million shares at Rs.25 was oversubscribed within a few hours of the opening on Tuesday. Investor interest may have been stimulated by the company’s acquisition of Sathosa Motors (SMOT) the previous week.
The motor trade enjoyed a boom after import duties were reduced in 2010 but sales have been slowing recently with the pent up demand of many years being satisfied. Rising interest rates (80% of vehicles are believed to be sold on lease), the depreciation of the currency and higher fuel prices should also curb demand for vehicles.
This week Access Engineering bought a further 17% stake in SMOT from Ishara Traders at Rs.235, the same price as the mandatory offer to increase their holding in SMOT to 77%.
Early this month, the Central Bank cut the net foreign currency positions that commercial banks were allowed to hold overnight and imposed restrictions on forward bookings. This temporarily shored up the rupee but the currency weakened again this week. State banks were seen supporting it when it threatened to break through 122.50 and it traded mostly in the range 121-122 in fairly thin trade.
The Governor of the Central Bank, Ajith Nivad Cabraal was in Qatar with an eleven member delegation from five commercial banks, including three private banks. The banks are attempting to raise foreign currency debt, with the facilitation of the Central Bank.
In February the Central Bank imposed a credit ceiling of 18% for banks funding loans with domestic deposits and 23% if the extra 5% could be financed overseas, in effect giving the banks an incentive to borrow overseas. These measures are indicative of the seriousness of the prevailing currency crisis.
Banks that do succeed in raising foreign debt, should, in theory, be able to grow their loan book faster than their peers, assuming that there is sufficient demand for credit. Private sector credit growth was estimated to be 27% in 2011 (it reached a high of 34.4% in June 2011, but slowed thereafter).
Last week Sampath Bank succeeded in raising US$ 62.5 million from a syndicate of Middle Eastern investors. Sampath Bank experienced loan growth of 35% in 2011 and was targeting a growth of 23% in 2012, the maximum allowed by the new regulations.
Meanwhile the word on the street is that state institutions have large blocks of bluechip shares that are available for sale-but only to foreigners. It appears that no stone is to be left unturned in the quest to keep the currency from depreciating further.
With foreign currency loans to pay, every decline in the exchange rate increases both the size of external Government debt and the cost of servicing it, which provides the incentive to prevent a further decline in the rupee.