Spectrum trading rules could have a short-term marginal respite for RCOM, if 4G entrants find it appropriate to have a short-term coverage and capacity boost as Reliance Communication (RCOM) spectrum holdings in the 850 spectrum band come up for renewal in c5 years. RCOM 850 spectrum can allow 4G entrants to have 10MHz in the attractive 850 spectrum band, allowing them to have both capacity and coverage, which incumbents may find tough to replicate in a few markets. However benefits for 4G entrants will be short term, unless they renew these radio waves as and when they are put to auction. Separately, if the pending RCOM-SSTL merger is approved, 4G new entrants can access an additional 5MHz of spectrum in 850 in eight additional markets, and this could be used for coverage.

However, the spectrum trading arrangements will be complex as they will need to meet several conditions

(a) five-year validity: RCOM spectrum comes up for renewal in five years and, therefore, any sharing or trading arrangements will be short term;

(b) one-time fee: RCOM will need to pay a one-time fee of $400m to get spectrum liberalised before it can trade spectrum in overlapping circles with 4G players;

(c) CDMA is revenue generating: RCOM CDMA spectrum is presently being used for data cards and voice, and RCOM will need to be compensated for the loss in CDMA revenues by 4G entrants over and above the one-time fee. In other words, it is not a pure upside, as RCOM will have to sacrifice present CDMA revenues before it opts for trading the spectrum

(d) regulatory support: RCOM 850 spectrum band is not contiguous in four markets, and 4G entrants don’t have contiguous spectrum in five markets where they own 850. The regulator will need to help to harmonise this spectrum and get it contiguous;

(e) separately, RCOM will need to pay $600m to the government for the SSTL spectrum before it can trade spectrum. Further regulatory support will be required to get this spectrum contiguous and harmonised.

Reiterate Reduce rating with a TP of Rs 55. We believe the upside for RCOM will not be much and, therefore, we are not making any changes to our estimates. Complex short-term spectrum trading arrangement comes with several costs.

We highlight the costs 4G entrants may have to bear to benefit from RCOM 850 via spectrum trading in the short term.

(a) One-time fee to liberalise spectrum: As stated above, RCOM’s present spectrum in most markets is not liberalised, and there is a need to pay a one-time fee of $400m before the spectrum can be used for spectrum trading. Further, RCOM will need to pay $600m to the government for the SSTL spectrum before it can trade this spectrum, assuming the merger goes through. In other words, 4G players will need to compensate RCOM for such regulatory levies to use the RCOM 850 spectrum band.

(b) Compensation for loss in CDMA revenues on subsidised migration: RCOM is using the 850 spectrum band today for voice and data cards, and once the spectrum is deployed for 4G, the 4G entrants will need to compensate RCOM for the loss in CDMA revenues or facilitate the migration of existing RCOM CDMA subscribers to 4G by subsidising devices.

(c) 10MHz spectrum will need fibre backhaul: That is not all; any network with 10MHz of spectrum will have to be backed by investment in fibre backhaul as well. This may not have been the case if it was a mere 5MHz but with 10MHz it becomes mandatory.

(d) Regulatory support to harmonise spectrum: A large part of the spectrum is with both 4G entrants, and RCOM is not contiguous in nature, so regulatory help will be needed to harmonise spectrum. This may take time as such activities require the cooperation of other telcos.

(e) Spectrum comes up for renewal in five years: RCOM spectrum in 850 markets will come up for renewal in five years and it is not necessary that 4G entrants will win the spectrum from auctions. Moreover, the current auction format allows everyone to participate in spectrum auctions and the competition will attempt to be disruptive or make the spectrum expensive for 4G entrants.

(f) Regulatory ambiguity: Present M&A norms suggest a spectrum cap at 10MHz for the 800 spectrum band.

However, the 2015 auction document published by the regulator suggests a spectrum cap as 50% of the total spectrum in the 800 band. We await more regulatory clarity on the issue. The pending RCOM SSTL merger meets the 10MHz rule in all markets but is not meeting the 50% cap in most markets (refer Figure 2).

Conclusion: The complexity of this aforesaid spectrum arrangement makes it expensive and time consuming and will leave little value in hand for 4G players to incentivise RCOM, in our view. Non-cash incentives could be easy, such as allowing RCOM to use the 4G network and allowing RCOM to sell 4G services. Such incentives may not help, as RCOM has been struggling with subscriber traction on one hand and on the other it needs to repay debt and reduce leverage. We don’t see much upside for RCOM in the current format.

How will such complex short-term spectrum sharing arrangement help 4G entrants?

We have been highlighting that 4G entrants need spectrum in the sub-1Ghz spectrum band to offset the coverage issues as in the present form they have too much dependence on the poor quality 2300 spectrum band. Even though temporary in nature, the access to the 850 spectrum band seems to be the only near-term solution available to 4G players, in our view. Access to good quality sub-1GHz spectrum on a long-term basis is not an option today. So, 4G entrants are faced with two options—either launch with a network of around 2,300, which may prevent them to have a good subscriber value proposition, or take a more short-term approach and leverage 850 using spectrum trading. That said, we highlight that access to 850.

Valuation and risks

We continue to value Reliance Communications on a DCF-based sum-of-the-parts approach. For our DCF valuation, we use a cost of equity of 14.5%, a cost of debt of 11% and a WACC of 13.6%, arriving at a fair value of Rs 40 per share for its core operations adjusted for regulatory levies. We value its real estate assets at Rs 15 per share (valuing them at a 20% discount to management estimates) as the company plans to unlock value in its real estate to cut debt. Our valuation leads to an unchanged target price of Rs 55. As this implies downside of c11% to the current share price, we reiterate our Reduce rating.

Key upside risks: ability to monetise non-core assets may allow the company to bring down leverage and will be positive for the stock price. Further approval of the merger with SSTL (which is pending now) may allow RCOM to consolidate spectrum in 800 and raise its ability to monetise overall spectrum holdings and boost near-term earnings.

In order to safeguard small investors’ interest, regulator Sebi is planning to put in place a mechanism to ensure prompt and proper disclosure of changes in credit ratings of listed firms, especially those with bad debt.

It is also looking to revamp norms for credit rating agencies, including the possibility of asking them to disclose their rating actions directly through the stock exchange platform for the benefit of investors, sources said.

Sebi is already looking into possible lapses on part of rating agencies in the wake of investors, including those investing through mutual funds, facing the brunt of huge debts turning sour for some listed companies.

Those under scanner also include the promoters and the top management of the concerned companies, as also some banks who appeared to have sold distressed debt securities to mutual funds at cheaper prices to hedge their own positions without making proper disclosure about adverse rating actions on such corporate bonds.

Some mutual funds have complained to Sebi that rating agencies were being following a casual approach in their rating actions, including for the distressed debt securities.

Any change in the regulatory framework would take place only after thorough consultations with all the stakeholders, a senior official said, while adding that Sebi is of the view that there is also an urgent need to enforce the existing regulations for credit rating agencies including the requirements to thwart any conflict of interest on their part.

The official said Sebi is looking to bring in a greater level of transparency in the way credit rating agencies work, including in their adherence to ‘Chinese Walls’ like structures between their sales and research teams.

The proposed measures include checks against any possible manoeuvring by the rating agencies in favour of their major or preferred clients while assigning ratings to them.

At the same time, fears have also been raised in the past that bad ratings may be assigned to the entities that have either fallen out of favour with the rating agencies.

Sebi is looking to instill a greater level of confidence among investors although the regulations already require credit rating agencies to keep their sales and research functions completely separated by ‘Chinese Walls’ like structures, so that income received from their clients do not affect the ratings being assigned to them.

Credit ratings are indicative of the creditworthiness and potential credit risks associated with the entity being rated. The rating agencies are regulated by Sebi, while ratings assigned by them are depended upon by both the borrowers and the lenders, when it comes to raising of funds from the capital markets.

The new listing regulations, which were notified by Sebi earlier this month, also make it mandatory for listed firms to disclose all rating actions involving them, including on their website and through stock exchange platform.

Listed companies also need to “co-operate with and submit correct and adequate information” to rating agencies.

The rating agencies also need to review the each rating assigned to a listed company with respect to non-convertible debt securities at least once a year.

The functioning of rating agencies has always been a matter of debate for possible regulatory violations, as the business model of such entities involves income realisation from the companies being rated by them.

The role of rating agencies becomes much more important during times of slowdown in macro-economic scenario, corporate earnings and the capital markets.

Industry experts say that Sebi already has a very strong set of regulations for such entities and the regulator has been very futuristic while framing these norms. However, changing business dynamics and the trends being witnessed in global markets require a fresh look at these norms.

In the developed markets of the US and Europe, a lot of regulatory thinking has gone into the potential safeguards against any possible manipulations by the rating agencies since the financial crisis of 2007-2008.

These entities had faced the brunt in a big way when many banks rated highly by them went bust during the crisis, resulting into the regulators across the world tightening their norms for such entities.

The BSE Sensex gained 608.7 points to 26,218.91 over the past week. (Photo: PTI)

Stock markets may see volatile trading sessions in a holiday-shortened week ahead amid derivative contracts expiry and would take cues from foreign investors’ investment trend and movement of the rupee, say experts.

Markets would remain closed on Friday for Bakri Id.

“Though there’s no major data lined up this week, market may remain volatile as traders will roll over and unwind their positions in futures & options (F&O) segment because of scheduled derivative expiry of September contracts on Thursday,” said Jayant Manglik, President, Retail Distribution, Religare Securities.

Further update on monsoon and currency move would also influence domestic bourses to some extent. “So, traders should keep an eye on them for further cues,” he added.

“Movement of the index in the near term will depend on crude oil prices, movement of the rupee against the dollar and global market sentiment. Market may remain volatile ahead of expiry of derivative contracts. RBI’s monetary policy review is scheduled for September 29, which will pave the way for market movement in the near term,” said Vivek Gupta, CMT Director Research, CapitalVia Global Research.

The BSE Sensex gained 608.7 points to 26,218.91 over the past week.

Since the beginning of the year, foreign portfolio investors (FPIs) have made a net investment of Rs 23,961 crore in equities and Rs 37,654 crore in debt markets.

“Going forward, with the US Fed event out of the way for now, investors’ focus will shift back to global economic growth challenges in general. In the case of Indian equities specifically, all eyes will now be on the next RBI monetary policy scheduled for September 29.

“However, in the immediate short term, market is expected to be volatile in the wake of the September 2015 series F&O expiry,” said Hitesh Agrawal – Head Research, Reliance Securities.

In late 2013, the BSE had upgraded its technology platform to BOLT PLUS, which is based on the global giant Deutsche Boerse’s trading architecture. (PTI)

Leading stock exchange BSE expects the speed of trade on its platform to rise to 20 micro seconds in the next few months, from 200 micro seconds currently.

With trading speed touching 20 micro seconds, the BSE would also become the top three fastest stock exchanges in the world, its Managing Director & CEO Ashishkumar Chauhan said.

“BSE’s high speed BOLT PLUS system is already the fastest trading platform in the country with a response time of 200 micro seconds for trade executed on it. We will take it to 20 micro seconds in the next few months,” Chauhan told PTI.

He is here to attend the global investors’ meetings addressed by Finance Minister Arun Jaitley.

Increasing the trading speed to 20 micro seconds will “put the Indian stock market on the global map and the BSE will become one of the top three fastest stock exchanges in the world”, Chauhan said.

The high speed or algorithmic trading refers to orders on bourses that are generated using high-frequency and automated execution logic.

In late 2013, the BSE had upgraded its technology platform to BOLT PLUS, which is based on the global giant Deutsche Boerse’s trading architecture.

More than 900 brokers with over 1,00,000 branches and millions of retail investors are on the BOLT PLUS system.

Global investors are looking at India for potential growth opportunities and over a period of time, foreign institutional investors have been showing increased interest in the Indian market.

Meanwhile, the Securities and Exchange Board of India (Sebi) is making efforts to increase retail participation in the Indian stock market — which has given returns of more than 15 per cent compounded rate year after year on a long-term basis.

Since the beginning of the year, FPIs have made a net investment of Rs 23,961 crore in equities and Rs 37,654 crore in debt markets. (PTI)

Foreign investors have pulled out over Rs 4,600 crore from the capital markets since the beginning of this month primarily on account of various global and domestic factors.

Outflows are unlikely to continue as the US Federal Reserve maintained status quo on interest rate, which may give the Reserve Bank of India some headroom to lower its key lending rate, according to some analysts.

The latest pull-out follows a record net outflow of Rs 17,428 crore from equities last month. That was the highest net outflow by foreign portfolio investors (FPIs) in a single month since 1997.

The segregated data prior to 1997 was not available.

FPIs have withdrawn a net of Rs 3,560 crore from equities, while they pulled out Rs 1,050 crore from the debt markets during September 1-18, taking the total to Rs 4,610 crore (USD 695 million), according to depositories data for this month.

Market experts attributed the huge outflows to sustained global risk-off trend along with concerns over economic slowdown in China and currency devaluation by the world’s most populated country.

Besides, China’s weak PMI and lower GDP growth dampened sentiments in India.

Since the beginning of the year, FPIs have made a net investment of Rs 23,961 crore in equities and Rs 37,654 crore in debt markets.