NSEL issue won't cause crash, no exposure to NSEL: IIFL

Neither IIFL, nor any of its subsidiary companies, have any exposure to NSEL, says Nirmal Jain, Chairman, IIFL. However, he feels some of its clients might have taken positions, but entirely with their own money. "As a proactive step, as far as our High Networth Individuals (HNI) clients are concerned, we had strongly advised them, almost two months before the entire episode happened, not to take any exposure,” he told CNBC-TV18.

He does not think the NSEL cash crunch will trigger a crisis or crash. Below is the verbatim transcript of Nirmal Jain's interview on CNBC-TV18 Q: What is your own exposure if any towards National Spot Exchange (NSEL)?
A: We do not have any exposure at all to NSEL. Q: Any of your subsidiary companies?
A: None of our subsidiary companies, none of our group companies, we do not have any proprietary exposure, nor have we funded any clients for the spot trading exposure or NSEL exposure. Q: But you are a member on that exchange?
A: We are member on all exchanges here. Q: You would not have any clients who would have open positions and which they have to pay in?
A: As a broker we can advise our clients, but we cannot force our clients. Some clients might have taken the positions, but entirely with their own money. As a proactive step, as far as our High Networth Individuals (HNI) clients are concerned, we had strongly advised them almost two months before the entire episode happened not to take any exposure to this. We at least did not recommend on our own, but then there are some clients who want to take on their own, you cannot stop it, because as a broker you have to honour the trades. As a matter of fact we have not funded and we do not have even a single penny of proprietary exposure to this. Q: You would not have funded, but you would have clients with funded exposures.
A: As a broker we do facilitate trade. So if clients are taking positions with their own money obviously as a broker we facilitate the trade and execute the trade. Q: Is it possible that some of them will not pay in and you may not have enough bank guarantees to cover what they may not pay in?
A: As I have said we have not funded anything. Customer has to pay in before the trade is done. We do not have any exposure whatsoever to NSEL. As far as clients are concerned we have not funded even a single penny of exposure. If at all they have taken exposure, it is with their own money entirely. Q: What is your sense? Are there a lot of clients who will not be able to pay in, not yours, but other people's? Do you see a default situation at all?
A: I think the way situation is evolving if there are some clients that have not paid obviously there will be a problem for the people who have funded or who have got into this kind of a situation.
_PAGEBREAK_ Q: Are you getting a sense therefore that there could be selling in stock markets to arrange for funds for that market?
A: To be very honest I do not have complete knowledge of what is the exposure of other brokers as well as other people in this. I personally do not think that this will by itself be a big enough problem for a crisis or crash to be caused. Other factors maybe playing on the market, which maybe far more potent than this. I maybe completely wrong, because this is not one area where I am an expert. We have not done much business in this. Q: What is the sense you are getting of the markets? Is this just a minor short covering and you are going to see more weakness?
A: I think the biggest worry the market has is the Current Account Deficit (CAD) and the rupee at this point in time. Of course we are far more sensitive to global factors because our CAD is funded by capital inflows. From that point of view of course market always runs a risk. At the same time when you look at emerging markets (EM) India is one of the better destinations. If you look at foreign investors, they are looking for opportunities to get into India and at the same time they are a bit scared of the things on currency front as well. So we have a market which will tend to be volatile and one has to be cautious in this regard. Q: The point which a lot of people are also discussing especially after the NSEL episode is that is there a similar crisis looming in equity markets? We have seen a lot of individual Future and Option (F&O) stocks fall about 40-50 percent in a matter of last 10-12 days. Some of the stocks are down 70-80 percent. So in terms of margin calls, technical problems are likely to haunt the equity markets as well going forward?
A: The market always has been vulnerable to leverage positions. I have a feeling that in the stock market in the last 4-5 years we have seen significant reduction in leverage. The problem today is of a different type. It is not a selloff happening because of leverage. The problem is that retail investors and domestic mutual funds and insurance companies are not getting any incremental money or they are not bringing in money into the market.
So even a small selling by FIIs causes market prices to come down significantly and even rumours like today's case, as your colleague was saying that market tends to overreact is primarily because the market has become very hollow or very shallow in terms of depth and that is what is a bigger problem for the market. Q: Are you getting a sense looking at the early bird results and the ones that will come with growth now slowing to 5 percent and some people unofficially ready even to lower it further that we are going to see a round of earnings downgrade?
A: It is quite likely. The earnings season is not looking very encouraging now and slowdown is real. For a long time people believed that at least consumer discretionary and staples will continue to do well, but as the investment had slowed down much earlier and with a lag we are seeing an impact on them. The impact actually transmits through employment and everything else. So the macroeconomic numbers may not look good. Having said this, the only glimmer of hope can come from two factors, one is a good monsoon and secondly if commodity prices continue to correct then India as a country stands to benefit. In particular, although crude prices have been a bit adamant but if they give in something then the entire sentiment can turnaround. Q: Retail portfolios would have been down 50-60 percent easily in last 3-4 months. Whatever little retail participation that we had looks like that is also going out. Do you see any chance of that coming back or do you think it is not coming back in a hurry?
A: I do not think it is coming back in a hurry. Retail investors as a class have been decimated significantly. There are a variety of factors that are playing on that. Even if they come back, although of course we are a broker and we would like people to invest in direct equity, but the right advice would be that at least the smaller ones should come through mutual fund. Unfortunately it will take a while for them to get their sentiment back and in an environment like this at least we cannot see retail investors coming back. At least brokers or advisers like us have been advising retail investors also to diversify their portfolio.
So typically we say that you put only 20-30 percent in equity and that is also long-term and put the rest of it in debt or other asset classes. In debt what happens that even if supposing you have some capital loss because of the volatile movement that we have seen in last 15 days, if people hold onto maturity then still they do not tend to lose the way they can lose in equity and it balances. That is what our advice has been to retail investors as well.