SEBI & Share Market

Speaking to reporters after the one day seminar `ICC Mutual Fund Summit 2008' organised by the Indian Chamber of Commerce here on Saturday, Sebi executive director R K Nair said: "In global markets, investors have a choice. They have different load for different services. We too are working towards it."

Incidentally, entry load is a charge levied on investors by a mutual fund in case an investor decides to invest in the scheme. Open ended mutual fund schemes charge anything between 2 % and 2.5% of the amount invested under different heads like marketing cost and distribution commission.

Elaborating further, Amfi chairman A P Kurian said, the commission paid to distributors is not linked to the quality or extent of service as well as the nature or quality of advice.

On May 2, the aggregate market capitalisation of the three sectors was over Rs 12 lakh crore -- a little less than a third of India's gross domestic product last year. In the following two months, the shareholders of the leading companies in the three sectors lost over a third of their wealth. The sell-off was triggered by deterioration in macro-economic indicators and investor concerns about future economic growth.

Worst hit have been shareholders of real estate companies, whose wealth nearly halved during the period. Market capitalisation of real estate companies dipped by almost Rs 1,40,000 crore -- equivalent to the turnover of Reliance Industries in FY08. The proxy for the real estate sector was understandably DLF, which saw its share price decline from Rs 727 to Rs 394, a decline of 46%.

Banking and capital goods shares too fell sharply, losing 40% and 29% of the value, respectively. Share price of Bhel, the benchmark for the capital goods sector, fell 29%, while SBI shares have been down 40%. The reasons for the severe impact on these sectors are on account of the correlation of these industries with the benchmark indices. Capital goods, banks and real estate possess a very high beta to the index. This means that when market performs poorly, the impact on these sectors is even greater. So, while the Sensex dipped 28% in the period, capital goods, banks and real estate crashed 29%, 40% and 50%, respectively.

A review of the securities lending and borrowing system, and the status on the launch of currency futures is also listed for discussion by the SEBI board at its meeting slated on August 13.

In October 2007, SEBI had changed some of the rules relating to the issuance of P-Notes, or PNs, as they are known in the market. Following those changes, foreign portfolio investors were barred from issuing PNs with Indian equity derivatives as the underlying.

Where the underlying is equity shares, this class of investors cannot issue PNs aggregating more than 40% of their total assets under custody. Participatory notes are like a derivative instrument issued against an underlying security, which in this case is shares of Indian firms.

These are issued by foreign portfolio investors registered here to overseas investors or clients who may not be eligible to invest in the markets here or may be reluctant to disclose their identity. The holder of PNs will be able to gain from the capital appreciation of the underlying shares.

Officials close to the development said the regulator would now carry out a review to ascertain whether any further changes were called for. Considering that there has been a sustained outflow due to overseas investors selling Indian stocks over the last few months, sources said changes if any, were likely to be flexible rather than restrictive. Overseas portfolio investors have sold stocks worth over $6.5 billion since the start of 2008.

The Securities and Exchange Board of India (Sebi) on Tuesday made this amendment after it received several cases after a grey area in the regulation led to institutions forbidding nominee-directors from receiving Esops.

However, the joy of the nominee-directors could be short-lived as sources in Life Insurance Corporation (LIC) and General Insurance Corporation (GIC), which have a substantial shareholding in many large Indian companies, said they would not allow nominee-directors to accept Esops since they were government-owned bodies.

A GIC official said no government institution will allow nominee-directors to take Esops. "There will be a clamour to be on the boards of good companies if we allow this," he said.

"Hopefully by end of August, we will start the pilot project," Sebi chairman C B Bhave told reporters on the sidelines of a seminar on financial planning.

Initially, both the existing system of payment for public issues and the new alternate system will co-exist.

"We really don't know how the system works. We need to get used to it. We have to sort out glitches if there are any in the beginning," Bhave said.

Capital market regulator Securities and Exchange Board of India, or Sebi, has revamped its organizational structure by separating its investigation and adjudication wings, and assigning each to different members of its board.

Earlier, both investigation into wrongdoing and adjudication, the legal process where an arbiter reviews evidence and arguments to make a decision, were overseen by former whole-time member G. Anantharaman. But, many market participants saw a conflict of interest in this. The arrangement also potentially weakened the regulator's adjudication ability, leading to many directives being set aside by the Securities Appellate Tribunal, or SAT, the body that hears appeals against Sebi orders.

The board has been accused of not growing its watchdog and vigilance arms in line with the market and chairman C.B. Bhave has conceded this is an issue.

While newly appointed whole-time member K.M Abraham has been put in charge of investigation, adjudication has been handed over to another full-time member, T.C. Nair. The regulator has also appointed Pradnya Sarvade, former additional commissioner of police of the Anti-Corruption Bureau, as an officer on special duty to work with its investigation wing.

An IPS officer of the 1989 batch, Sarvade is known for her integrity and has earlier held several important positions in the Maharashtra police, handling cyber crime, intellectual property rights and counterfeiting. In fact, she was the head of cyber crime cell of the Mumbai Police.

With increasing concerns of foreign capital driving up real estate prices, RBI has recommended that foreign venture capital investments (FVCIs) be restricted to nine sectors (investment in other sectors being treated as foreign direct investment). It has suggested that capital market regulator SEBI set up a screening mechanism for all pending and future FVCI proposals.

The new set of restrictions will help prevent low capital base, circumvention of takeover guidelines and round-tripping of investments. Out of 58 FVCI applications pending with RBI, 22 are considered to have low capital base.

Foreign investment in the form of venture capital is accorded special concessions not available to normal foreign direct investment (FDI).

These include exemption from entry and exit pricing norms that otherwise apply to foreign investors; exemption from the SEBI takeover code for sale of shares by FVCIs to company insiders after listing; exemption from the one-year lock-in period for sale after an initial public offering (IPO) of shares purchased prior to the IPO; and exemption from sectoral FDI caps for investments in domestic venture capital funds.

India's capital market regulator, the Securities and Exchange Board of India, or Sebi, may introduce a new pricing formula for the various fund-raising windows available for cash-starved companies, to reduce exposure to volatility in a bear market.

The proposed formula will shorten the period for which the average traded price is sought in order to arrive at the issue price, said a person familiar with the development who did not wish to be named.

Apart from this, the regulator also plans to trim the time lag in a rights issue, including the notice period to shareholders, and the period between pricing and completion of these issues, the same person said, adding that an announcement regarding this could be made in the next few weeks.

The Sebi move is aimed at reducing the gap between the market price and the issue price of stocks, including for fund-raising methods such as qualified institutional placements, or QIPs, and foreign currency convertible bond, or FCCB issues.

A QIP is the private placement of shares or securities convertible into stocks by listed companies to qualified institutional buyers, such as banks, insurance companies, mutual funds and foreign institutional investors.

A rights issue allows a company's shareholders to buy a proportional number of additional shares, usually at a discount to market price, within a fixed period.

Sebi's move will help publicly listed companies tap these windows for growth funds at a time when the cost of capital is moving upward, said bankers. Some $7-8 billion (Rs29,746-33,996 crore) worth of QIP issues are pending because of pricing issues, say bankers.

Pricing formula
The existing Sebi formula, which was set to protect minority investors, fixes the higher of the average trading price of the past six months, or the average during the previous two weeks as the price of a stock in such issues. However, after the stock market slump, these windows became defunct as there was a big mismatch between prices arrived at by this formula and market prices. India's benchmark equity index, the Sensex, is down about 30% since the beginning of this year.

This is a major departure from the current practice of retail investors paying upfront the full amount for the shares they have bid for, while large institutional investors need to put up only 10% of the money. The system in vogue now is seen as discriminating against retail investors and the regulator's move is aimed at ensuring parity between retail and institutional investors.

SEBI'S move implies that a retail investor can participate in a public or rights issue, without the application money actually leaving his bank account, thus eliminating the refund process. The bank will mark a lien on the customer's account to ensure that the requisite sum is locked in until the allotment process is finalised. The money will be transferred to the company only when the actual allotment takes place. In case the allotment does not take place, the money gets automatically unlocked and is at the investor's disposal.

In May this year, the SEBI board had approved the concept of providing an alternative mode of payment in issues whereby the application money remains in the investors' account till finalisation of basis of allotment in the issue.

Participatory notes are like a derivative instrument issued against an underlying security which in this case is shares of Indian firms. These are issued by foreign portfolio investors registered here to overseas investors or clients who may not be eligible to invest in the markets here. The holder of PNs will be able to gain from the capital appreciation of the underlying shares. The compliance exercise is aimed at ascertaining whether these institutional investors -- better known as FIIs -- have been lending shares in their P-note accounts to other foreign fund houses. Overseas investors not registered with Sebi -- either out of choice or for regulatory reasons -- invest in Indian shares through the PN route.

Going by market buzz, many FIIs, which are authorised to issue PNs, have been lending shares in their inventory to other foreign fund houses for a fee. Since these transactions take place outside India, it is practically impossible for the regulator to keep track. This may well prompt the regulator to make disclosures more relevant.

For instance, FIIs are required to disclose the identity of their PN clients to the regulator, periodically. But, it often happens that by the time the disclosures reach Sebi, the beneficiary owner of those shares may have changed. In April this year, the Sebi had flagged off the securities lending and borrowing scheme through which institutional investors could lend and borrow scheme. But since inception, only 12 shares have been traded in the SLBS, with no transaction having taken place for over two and a half months.

BANKING, REALTY POWER LEAD GAINERS

Beaten down sectors of banking, real estate and power were the lead performers during early trade. Banking index on the BSE was up 7.4 percent, whose surge was

contributed by heavyweight and largest bank State Bank of India which rose 6.23 percent to 1,484.75 rupees and largest private sector lender ICICI Bank Ltd., that surged 9.18 percent to 722 rupees.

Realty index was 7.27 percent up, caused by upward movement in major scrips like DLF Ltd. which rose by 8.31 percent to 491.90 rupees & Unitech Ltd. which rose 8.56 percent to 170.50 rupees. Power sector index also surged by 6.68 percent with leading energy player Reliance Infrastructure Ltd. gaining 8.63 percent to 998.60 rupees.

ICICI Bank Ltd. was the top performer on the Sensex-30 pack followed by Reliance Infrastructure. State-owned heavy electrical company Bharat Heavy Electricals Ltd. gained 8.45 percent to 1,732.55 rupees, and second largest private sector bank HDFC Bank Ltd. gained 8.15 percent to 1,190.05 rupees. Billionaire Anil Ambani controlled Reliance Communications Ltd. surged 7.56 percent to 503.55 rupees.

Broader market breadth was positive as 82.17 percent shares from 2,176 trading shares gained, while 27 out of 30 Sensex shares zoomed, and 96 out of BSE-100 shares were higher.

The Securities and Exchange Board of India has decided to have two sets of disclosure norms in the listing agreement of debt securities.

The regulations, to be announced shortly, will stipulate minimal incremental disclosure requirements for listed companies. For all others, the disclosures will have to be detailed.

The argument is that listed companies are already complying with the stringent disclosure requirements. If these issuer are making detailed disclosures, they should be only relevant to debt. Even for first-time issuers trying to list debt securities, the disclosures will not be as detailed as an equity listing agreement.

Sources familiar with the developments said the differential disclosure norms under the listing agreement for the bond market will not only ease the process, but will also save time and cost for companies.As such, market experts opine that rating is a sufficient discipline.

Supposing a issuer de-lists its equity from the exchange and plans to list its debt, then it will have to automatically comply with more stringent disclosure norms.

A PMS fund manager said: "It is relatively easier to get approvals for PMS services than VC funds. With a PMS registration, these funds will be able to invest in listed and unlisted companies without really having to disclose much about their investments."

Violating relevant Sebi PMS rules, most of these funds are targeting live real estate projects, which are facing tough times as a result of lower sales and higher borrowing costs.

"Overseas funds stand to benefit greatly from this arrangement as VC funds investing into India no longer enjoys tax pass-through benefits, even if they are registered in tax havens like Mauritius or Cayman Islands.

However, the modus operandi of bringing in money to India is not very clear as of now," said a Mumbai-based wealth manager.

Companies with global operations and having a large number of subsidiaries will benefit as they feel a month's time is too short to submit the consolidated results.

Sebi today proposed changes to certain provisions of clause 41 of the listing agreement after considering the views of its committee on disclosures and accounting standards.

Companies are, however, divided on the actual impact of the proposal. While Ravi Nedungadi, president & CFO, UB Group, said it appears to be "reasonable and beneficial", K Sridharan, chief financial officer of Ashok Leyland, said it won't have much of an impact. "The one-month time frame was adequate as only unaudited results have to be submitted," he said.

Plans to launch India's first Shariah compliant mutual fund have hit a roadblock with the stock market regulator Sebi (Securities Exchange Board of India) taking its time to give the go-ahead.

Market talk is that Sebi is not comfortable with a fund that would focus only on a particular community or religion.

Delhi-based Taurus Asset Management, along with Mumbai-based Islamic investment specialists Parsoli Corporation, had filed an application to launch an Islamic fund in October last year. But nine months after the prospectus for the Taurus Parsoli Ethical Fund was filed, a Sebi go-ahead is no where in sight.

Zafar Sareshwala, MD and CEO, Parsoli Corp, confirmed that Sebi had some issues on the religious aspect, but is confident that the regulator will give a go ahead as its doubts had been addressed.

"Taurus has explained and assured the regulator that it should not go by the theme of the fund. We will invest in NSE- and BSE-listed Indian companies," Sareshwala told DNA Money. He, however, refused to give a time frame for the launch.

Waqar Naqvi, chief executive, Taurus Asset Management, denied that Sebi has rejected the application. "Sebi is considering it. Delay seems to because this is the first one of its kind in the country," Naqvi said in an email reply.

Shariah forbids Muslims from receiving interest payments and from investing in companies involved in the production or sale of pork, alcohol, tobacco, pornography, gambling and non-Islamic structured finance or life insurance.