Established presence in Capital Market

Derivium Tradition Securities (India) Private Limited (DTSIPL) is promoted by Tradition Group and Mr. Kunal Shah and Mr. Ashish Ghiya. Tradition Group is the interdealer broking arm of Compagnie Financière Tradition and one of the world's largest interdealer brokers in over- the counter financial and commodity related products represented in over 29 countries. Its day – to-day operations are managed by its directors Mr. Kunal Shah and Mr. Ashish Ghiya. Mr. Kunal Shah is a finance professional with over two decades of experience in debt capital markets involving credit origination, fixed income portfolio management and advisory. Mr. Ashish Ghiya is an investment banker and has over two decades of experience in Indian currency, interest rate & credit markets. DTSIPL was incorporated in 2003 by Mr. Ashish Ghiya & Mr. Kunal Shah, and is a SEBI registered stock broker and a member of Bombay Stock Exchange (BSE), National Stock Exchange (NSE) & Metropolitan Stock Exchange (MSEI). DTSIPL has grown from being a G-Secs & Bond intermediary to a full-fledged Investment Bank providing services across origination, intermediation, advisory and distribution. DTSIPL has strong transactional relationship with more than 1300 institutional & corporate clients and is also an exchange broker in the Interest Rate Futures (IRF) segment of the NSE, BSE and MSEI & FIMMDA accredited broker for OTC interest rate derivatives. It earned total operating income of Rs. 15.53 Cr. and its networth stood at Rs. 24.52 Cr. as on December 31, 2022. DTSIPL benefits from the established presence in the Indian capital markets and long-standing relationships with various clients. DTSIPL functions as an intermediary for its clients to buy and sell debt securities, both Government and private. Its network and market intelligence enable it to offer solutions to its clients which mostly comprise banks, mutual funds, insurance companies, foreign portfolio investors, provident and pension funds as well as semi-institutional clients like wealth management companies, corporates, family offices. Besides DTSIPL, the promoters floated Genev Capital Private Limited in 2018 which will be functioning as a as a market maker and book runner for G-Secs, SDLs, Government guaranteed debt & highly rated corporate bonds on a matched principle basis. Going forward, DTSIPL will be mostly focusing on its broking and investment banking services with limited trading arrangements for specific clients. Acuité believes that Derivium Tradition group’s presence in the domestic capital market and established relationships with marquee clients and investors should support its business risk profile over the near to medium term.
 

 Strength of  underlying structure

The structure being assessed envisages an aggregate borrowing limit of Rs. 100.00 Cr. in the form of cash credit from the bank secured by pledge of underlying bonds and securities. The underlying securities will be government securities and corporate bonds rated AA+ and above within overall limit of Rs. 100.00 Cr. The bank has also stipulated differential margin for different category of securities to be purchased under this arrangement. The government securities purchased by the company will be held in a designated Constituent Subsidiary General Ledger (CSGL) Account and a joint depository participant account for corporate bonds, which will be duly pledged to the bank. The limits as sanctioned by the bank stipulates purchase of only Government securities and Corporate bonds rated AA+ and above.
The joint holding of the account facilitates for strict monitoring at the lenders end with respect to transactions. The bank stipulates margin requirement in the range of 5 percent to 12.5 percent (depending on the nature of the security i.e. lowest margin for risk-free securities like G-Sec). The stipulations also include the options available to the lender in case of a margin shortfall. The securities pledged against which funding would be provided is restricted to Government securities and Corporate Bonds rated AA+ and above and requires its inclusion in the lenders bank pre-approved list thus providing an effective mitigation of credit risk at the initial stage of selecting securities for trade purposes. The structure further provides for shorter duration of the securities held like in case of securities outstanding in CGSL account for more than 30 days would not be reckoned while calculating drawing power. Hence, the exposure to credit risk is limited to the period the security is held and the structure facilitates for a shorter duration.
Acuité believes that the structure sanctioned by the lender provides for adequate covenants to safeguard the interest of the lenders. The lenders have adequate buffers available to initiate corrective action and mitigate the risk arising out of any adverse market movements. The strict adherence to the sanctioned terms and conditions (as advised by the lender to DTSIPL vide letter dated October 25, 2021) is central to the rating.

Decline in the transactional value of securities & subdued profitability

Derivium Tradition Securities India Private Limited’s business performance is linked to the level of activity in the bond markets which in turn is linked to the overall economic activity. During FY2022 total transactional value (buy and sale) of securities stood at Rs. 9,537.67 Cr.  as  against Rs. 12,684.06 Cr during FY2021. Further, the transactional value declined to Rs 3,195.92 Cr. during 9MFY23. The decline in transactional value as compared to previous years was on account of overall market activities in wholesale debt market as a result of dip in overall market volumes and pressure on interest rates. DTSIPL’s profitability was in turn impacted due to the decline in the overall transactional value, the PAT stood at Rs. 1.68 Cr during FY2022 as against Rs. 6.99 Cr during FY2021. Further, the PAT stood at Rs. 0.41 Cr during 9MFY23.

Acuité believes that DTSIPL’s earning profile, its business operations would remain susceptible to inherent risks in capital market and overall economic environment

 Susceptibility of performance to optimal management of credit and market risks

The volumes in the debt capital market are influenced by economic cyclicality and other macroeconomic factors such as GDP, growth rate, inflation, movement in interest rates and policy actions adopted by RBI. DTSIPL generally engages into buy and sell transactions on behalf of its clients which comprise provident and pension funds, mutual funds, banks, family offices etc. Most of the purchases of the securities are simultaneously sold to its clients. As a prudent strategy, DTSIPL prefers to minimize the holding period in respect of any securities which significantly mitigates the associated credit risk and market risk. However, since a complete matching and synchronization of purchase and sale orders may always not be feasible, DTSIPL will always be required to maintain certain inventory at any point of time. This exposes the company to certain credit and market risk. The risk assumed by DTSIPL depends on nature of the security, volatility in the price of the security and the period of the holding. The timely churning of the portfolio also becomes important. Occurrence of significant credit events such as credit cliffs i.e. sharp deterioration in credit quality, may often result in a material decline in the bond prices and impact the liquidity of the counter. Such events could also trigger demands for accelerated payments by lenders in case of pledge-based borrowings. Besides trading of bonds, the company also has revenue streams from broking business, which is linked to the level of investment activities in the markets and also to the other factors such as regulatory environment. Since the investments held by the company are offered as collateral in this structure of pledge-based borrowings, the continued acceptability of the investments and margin requirements also have a bearing on the financial flexibility of the company. Besides market related factors, changes in bank’s policies regarding the investments offered as collateral can also impact the performance and financial flexibility of the company. Acuité believes that the ability to manage the tradeoff between various risks such as credit risk, market risk and operational risk and the returns is critical to the maintenance of a stable credit risk profile.