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George Cherian & Raghu Mohan
Mumbai, Nov 1: The Industrial Development Bank of India (IDBI) has decided to trade in the secondary market for equities. The financial institution has earmarked Rs 500 crore to this end, to be pumped in to the market over the next two months.
Till date, IDBI had stayed away from secondary market equity trades though nothing in its articles of association had prevented it from doing so. The institution's foray into secondary market deals is based on the belief that good times are around the corner, and picking scrips at current lows, blesses it with a chance to cash-out at a later date.
Analysts see this move by IDBI as an attempt to bail out the badly hit US-64 scheme of the Unit Trust of India (UTI). They feel that this is the best way in which IDBI, the chief promoter of UTI, could help the trust. The entry of IDBI into the secondary market as a buyer would enable UTI to reduce its high exposure in equities without affecting its already low net asset value (NAV). Given the present market scenario,analysts feel that this is a better option of supporting UTI rather than by having banks and FIs subscribe to US-64 units as was informally suggested by the finance ministry.
IDBI follows in the footsteps of other state-run financial intermediaries like the State Bank of India and Bank of Baroda: both had recently announced plans to invest in the secondary market for equities within the 5 per cent limit. Extant Reserve Bank regulations permit banks to invest in stocks up to five per cent of their incremental deposits mobilised in the previous year. Financial institutions are, however, not required to conform to this stipulation.
Traditionally, IDBI and ICICI have been picking up stocks from the primary market as a strategic investment. They also take equity exposure in those corporates to which they extend substantial term loans.
Among the banks, the State Bank can have the largest exposure in the stock market as it is in a position to invest a little above Rs 1,100 crore in the secondary equitiesmarket. The total investible funds available to the banking system in equities is around Rs 5,000 crore based on the aggregate deposit growth to the tune of Rs 96,000 crore in 1997-98.
For the beleagured bourses, IDBI's latest initiative, may came across as a pep-up pill. Sensitive indices tell a sorry story despite healthy half yearly results posted by companies in the software, fast moving consumer goods (FMCG), and pharmaceutical sectors.
SBI launched secondary market operations in equity during the last week of April, 1998 with the central board of the bank approving a detailed stock investment strategy. SBI is investing in both the demat segment as well the usual paper-based market. This was the first time that the country's largest commercial bank had purchased stocks from the secondary market.
Bank of Baroda also decided in April to aggressively invest in the secondary market for equities in 1998-99. The bank said that it would become an active investor, both through Unit Trust of India as wellas on its own in the depository segment of the stock exchanges. On a rough estimate--based on provisional figures for 1997-98--BoB will have about Rs 250 crore for investment in secondary markets.
SBI insiders described the exercise as a "trial run" which would be converted into full-fledged secondary market operations later. The bank has been making purchases in a few blue chip counters.
Though the SBI move was expected to open the floodgates to investments by commercial banks in the stockmarkets, not many banks have as yet ventured into this arena.
SBI has said that it will step up its investment in the secondary market during the course of 1998-99.
The bank is also set to launch its stockbroking subsidiary, SBI Securities Ltd, in the next few weeks. The Asian Development Bank has picked up a stake in the stockbroking outfit.
Copyright © 1998 Indian Express Newspapers (Bombay) Ltd.
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