The Hindu Business Line : We favour stock lending: Sanjiv Shah

The Executive Director of Benchmark Asset Management, Mr Sanjiv Shah, feels that if one is an absolute return player and doing arbitrage, then this is a great time.

He further adds that the derivative markets have matured in India. Mr Shah is in favour of allowing stock lending in the market because that allows the market to stabilise much better than what one would expect in a normal condition where one cannot sell the stocks by borrowing them.

Excerpts from CNBC-TV18's exclusive interview with Mr Sanjiv Shah:

While it has been gut wrenching for traders, you people might be making a lot of money now from the arbitrage funds?

When one is an absolute return player and doing arbitrage, this is a great timebecause one gets opportunities to go long, buy stocks and sell futures. Suddenly, in the last two days, one got an opportunity to unwind those trades for example, State Bank of India.

Our investors obviously make good money out of this when juicy bits come in. I heard somebody saying that the brokers couldn't do trade, people couldn't put in buy trade because of margins.

But institutions like us have an advantage at this point of time because we can get in and when people are not buying we can easily buy futures and give an advantage to our customers.

It is huge and it shows that the derivative markets have matured in India and when restrictions are gone, we hope for a few more restrictions to go. .

What sort of returns do you think you might end the month with, given what has happened?

Easily about 15-16 per cent of returns are expected. If the markets do well today, then I will not be surprised if one hits 17-18 per cent. And this is an opportunity in a volatile time and if the volatility remains we get opportunities not just once.

One can get an opportunity possibly every week. We do not want volatility to be there but at the end of the day, our clients make money when markets are volatile.

Yesterday, index futures were down 50-60 points. We just had to buy the index futures and sell the stock futures even though the stocks futures are at discounts. One nearly made 30 points that is nearly a per cent on the market, they are taking single penny risk that is huge and that again provides stability to the Index futures market in that sense.

One thought on how much more effective this product could have been if you had a real vibrant stock lending mechanism. You made an example of SBI, if you could borrow SBI stock, sell it and then buy the futures you would have made a killing?

Absolutely, no question about it. Take an example of SBI; I have talked about Rs 40-50. What would have happened was that physically we would have borrowed the stocks, sold the stocks and bought the futures. That would have narrowed the gap, the investors would have made money and the imbalance, which we see in the market, would have completely gone.

That's why I'm in favour of allowing stock lending in the market because that allows the market to stabilise much better than what one would expect in a normal condition where one cannot sell the stocks by borrowing them. .

As an observer, any thoughts on the margin requirement on the F&O side and whether anything could be done from a systemic perspective to elevate the kind of problems people must have faced in the last couple of days?

I think the exchanges are doing a great job because at the end of the day one has to ensure that the guys who are trading have to pay up margins but the system beyond the exchange, which is the banking system is not up to it.

At the end of the day, if one has cash and if the cash does not flow into the exchange or the cash does not flow out from the exchange, and then there will be systemic problems. This needs to be resolved quickly and if this is not resolved then one will keep seeing volatility because the volatility, which one saw yesterday was because of people not being able to pay up margins even if they had cash.

Have you been getting fresh money into your arbitrage funds?

Yes, because people do see the arbitrage available and they keep calling us and we do see flows coming in. We do expect the trend to continue because of the markets.

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