Readying comexes to take on defaulters

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Lax risk management rules have been cited as one of the reasons that led to the NSEL debacle. It is, therefore, not surprising that the current commodity market regulator, the Securities and Exchange Board of India, is focusing on the risk management rules in the commodity exchanges. Early this month, it released a circular that tightened the rules for collecting trading margins on commodity derivative contracts and for contributions to the Trade Guarantee Fund (TGF).

Here, we take a closer look at the changes made to the manner in which the TGF is maintained by the exchanges.

As its name denotes, this fund is used to guarantee the settlement of all bona fide transactions of the members of the exchange. This is the corpus that is used to protect the interest of investors, if there is a large default, thus acting as the primary means of building confidence of investors towards the exchange.

Guaranteeing performance

The TGF is built through various components: a) yearly contribution of the exchanges. This was typically 5 per cent of the gross revenue every year. b) The security deposit paid by members to the exchanges, which is also called the Base Minimum Capital (BMC), c) all the penalties paid by the members to the exchanges in settlement-related issues, d) interest earned by investment of the fund balance in the TGF e) less the amount utilised for meeting the shortfall in member defaults in a year.

The yearly contribution of the exchange and the base minimum capital of members accounts for almost 90 per cent of the TGF. For instance, the TGF balance towards the end of June 2016 was ₹258 crore. Of this, contribution of the exchange accounted for ₹105 crore and BMC (cash as well as non-cash component) was ₹129 crore.

Recent tweaks

SEBI has, through the circular issued on September 1, sought to fortify the TGF maintained by commodity exchanges. This is done in three ways,

One, the BMC or the security deposit paid by members who clear non-algo trades has been increased from ₹10 lakh to ₹25 lakh. Members who also clear algo trades shall, however, continue to maintain BMC of ₹50 lakh. The higher amount of security maintained with exchanges will go towards increasing the TGF. Further, interest earned by investing this incremental amount will also be useful to exchanges.

Two, changes have also been brought about in the contribution made by exchanges to the Trade Guarantee Fund. Currently, the extent of risk is to be assessed every quarter and funds are transferred to the TGF to enable the exchange to handle the risk. The transfers were, however, capped at 5 per cent of the turnover of the exchanges, net of income tax paid. SEBI has now stipulated that the exchanges need not limit themselves to 5 per cent of their turnover in transferring money to this fund.

 

If the risk of default arises, say, if there is a global crash in commodity prices, then the exchange can transfer much more funds, to brace itself for member defaults.

Three, rules regarding usage of funds in the TGF, in the event of a default, have also been clearly spelt out. SEBI has termed it the ‘default waterfall’.

If a member defaults from payment, then the funds withdrawn from the TGF shall be in the following order – first the security deposit paid by the defaulting member to the exchange (BMC) shall be used to repay clients, then insurance if any, will be claimed. If these are not sufficient, then 5 per cent of the corpus in the TGF can be used for meeting the default. The ulitisation of the TGF shall also follow a certain order; penalties and investment income shall be used first, then exchange contribution to the fund and finally the funds of non-defaulting members shall be used, on a pro-rata basis.

If the default is so huge that even these fall short, ₹100 crore shall be left in the TGF and the remaining paid out. After all this, if there are still some dues remaining, the clients will have to take a pro rata haircut.

The tweaks are welcome and could help in tackling an NSEL-like fiasco in future. But SEBI should also make sure that there are regular audits of the TGF, perhaps on an annual basis, to ensure that these rules are followed by the exchanges.

Source: http://www.thehindubusinessline.com/portfolio/real-assets/readying-comexes-to-take-on-defaulters/article9096891.ece

FinMin revises criteria for recapitalisation of PSBs

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State-owned banks looking forward to the next round of capital infusion will need to fulfill a new set of criteria, including credit recovery, as the finance ministry has revised the recapitalisation norms.

The second tranche of capital allocation for the current fiscal would be based on cost of operations as well as recovery and quality of credit on the basis of risk weighted assets, sources said.

Only those lenders that fulfil the criteria post third quarter (October-December) results of the current fiscal will be eligible for the second round of funding, sources added.

The money was allocated last fiscal on the twin principles of ensuring 7.5 per cent common equity tier 1 (CET 1) at the end of the 2016 and growth capital to five major banks.

The government in July had announced the first round of capital infusion of Rs 22,915 crore for 13 banks.

“75 per cent of the amount (Rs 22,915 crore)…Is being released now to provide liquidity support for lending operations as also to enable banks to raise funds from the market,” the finance ministry had said in a statement.

“The remaining amount, to be released later, will be linked to performance with particular reference to greater efficiency, growth of both credit and deposits and reduction in the cost of operations,” it had said.

The first tranche was announced with the objective to enhance their lending operations and enable them to raise more money from the market.

Out of the Rs 22,915 crore, State Bank of India (SBI) was provided Rs 7,575 crore followed by Indian Overseas Bank (Rs 3,101 crore) and Punjab National Bank (Rs 2,816 crore).

The other lenders, which have got commitment of capital infusion are Bank of India (Rs 1,784 crore), Central Bank of India (Rs 1,729 crore), Syndicate Bank (Rs 1,034 crore), UCO Bank (Rs 1,033 crore), Canara Bank (Rs 997 crore), United Bank of India (Rs 810 crore), Union Bank of India (Rs 721 crore), Corporation Bank (Rs 677 crore), Dena Bank (Rs 594 crore) and Allahabad Bank (Rs 44 crore).

The capital infusion exercise for the current fiscal is based on an assessment of need as per the compounded annual growth rate (CAGR) of credit growth for the last five years, banks’ own projections of credit growth and estimates of the potential for growth of each PSB, it had said.

Finance minister Arun Jaitley in his budget speech for 2016-17 had proposed to allocate Rs 25,000 crore towards recapitalisation of PSU banks. “If additional capital is required by these banks, we will find the resources for doing so. We stand solidly behind these Banks,” he had said.

 

Source: http://www.mydigitalfc.com/economy/finmin-revises-criteria-recapitalisation-psbs-539

FPI equity buys in India touch $5.4 bn this year

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Foreign portfolio investors (FPIs) have bought equities worth $5.4 billion in the Indian markets in 2016 so far, according to data obtained from Bloomberg. This makes India the third biggest destination for FPIs after Taiwan and South Korea which have seen inflows of $13.6 billion and $8.1 billion, respectively, reports fe Bureau in Mumbai.

 

Thailand ranks fourth with foreign inflows of $ 3 billion followed by Indonesia which received foreign investment worth $ 2.8 billion. In 2016 so far, the Sensex gained 7.44% and Nifty50 gained 8.73%.

Gr1

Source:

http://www.financialexpress.com/markets/indian-markets/fpi-equity-buys-in-india-touch-5-4-bn-this-year/349325/

SEBI proposes changes in ITP norms to attract more firms

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The Securities and Exchange Board of India (Sebi) on Friday proposed changes to the Institutional Trading Platform (ITP), to draw more companies to it. Comment on the discussion paper has been invited till August 14.

Introduced in 2013, the platform allows companies, particularly in information technology (IT), to list without necessarily doing an Initial Public Offer of equity. So far, only around 40 companies are listed on the ITP platforms of the BSE or the National Stock Exchange.

IT companies to qualify on this platform need Qualified Institutional Buyer (QIB) shareholding of at least 25 per cent; other companies need 50 per cent. Sebi has proposed to expanded the definition of QIBs to investors such as family trusts and individual foreign investors. Also, to do away with the 25 per cent cap on single investors listed on the platform.

Further, it proposes to reduce the minimum institutional investor participation, from 75 per cent to 50 per cent. Also, to increase the ceiling on allotment to individual institutional investors from 10 per cent to 25 per cent to a single entity. Sebi has also proposed to make market making compulsory for a minimum of three years for an issue size of less than Rs 100 crore.

More important, it has proposed to ease trading lots on the ITP platform from Rs 10 lakh to Rs 5 lakh. Interestingly, Sebi has also proposed to rename ITP as  ‘high-tech start-up & other new business platform’.

Source: http://www.business-standard.com/article/markets/sebi-proposes-changes-in-itp-norms-to-attract-more-firms-116072901316_1.html

India central bank relaxes rule for Basel III liquidity coverage ratio

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The Reserve Bank of India relaxed Basel III-mandated liquidity coverage ratios for banks, allowing the sector to apply an additional one percentage point of the deposits they currently hold as government bonds under their statutory liquidity ratios (SLR).

Banks can now apply up to 11 percent of their deposit base held as SLR – or government securities that banks must hold with the RBI – from 10 percent earlier when calculating their liquidity coverage ratios to meet Basel III requirements, the RBI said in a statement on Thursday.

Liquidity coverage ratio is a capital measure mandated under Basel III norms requiring banks to maintain highly-liquid assets, including government securities, to meet any sudden short-term outflows.

 

RBI/2016-17/25
DBR.BP.BC.No.2/21.04.098/2016-17

July 21, 2016

All Scheduled Commercial Banks
(excluding RRBs)

Dear Sir,

Basel III Framework on Liquidity Standards – Liquidity Coverage Ratio (LCR), Liquidity Risk Monitoring Tools and LCR Disclosure Standards

Please refer to our circulars DBOD.BP.BC.No.120/21.04.098/2013-14 dated June 9, 2014, DBR.BP.BC.No.52/21.04.098/2014-15 dated November 28, 2014 and DBR.BP.BC.No.77/21.04.098/2015-16 dated February 11, 2016 on ‘Basel III Framework on Liquidity Standards – Liquidity Coverage Ratio (LCR), Liquidity Risk Monitoring Tools and LCR Disclosure Standards’.

2. Presently, the assets allowed as the Level 1 High Quality Liquid Assets (HQLAs) for the purpose of computing the LCR of banks, inter alia, include Government securities in excess of the minimum SLR requirement and, within the mandatory SLR requirement, Government securities to the extent allowed by RBI under Marginal Standing Facility (MSF) [presently 2 per cent of the bank’s NDTL] and under Facility to Avail Liquidity for Liquidity Coverage Ratio (FALLCR) [presently 8 per cent of the bank’s NDTL].

3. It has been decided that, in addition to the above-mentioned assets, banks will be permitted to reckon government securities held by them up to another 1 per cent of their NDTL under FALLCR within the mandatory SLR requirement as level 1 HQLA for the purpose of computing their LCR. Hence, the total carve-out from SLR available to banks would be 11 per cent of their NDTL. For this purpose, banks should continue to value such reckoned government securities within the mandatory SLR requirement at an amount no greater than their current market value (irrespective of the category of holding the security, i.e., HTM, AFS or HFT).

Yours faithfully,

(Ajay Kumar Choudhary)
Chief General Manager

Source: http://www.reuters.com/article/india-cenbank-lcr

IPOs of start-ups in India: Retail investors participation may get cleared

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Retail investors might soon be allowed to participate in the initial public offerings (IPOs) of start-ups with the Securities and Exchange Board of India (Sebi) planning to scrap the Institutional Trading Platform (ITP) for these firms. The move comes after the platform failed to witness a single listing since it was launched last year.

Sources privy to the development said instead of providing an exclusive platform for start-ups, Sebi is now planning to allow start-ups to list on the regular platform. However, some relaxations would be provided  in terms of disclosures and compliance norms. Sebi is planning to amend both the Issue of Capital and Disclosure Requirements (ICDR) and Listing Obligations and Requirements (LODR) regulations, accordingly.

As per the regulations relating to Capital Raising and Listing on Institutional Trading Platform regulations for start- ups, only institutional investors and high-net worth individuals (HNIs) are allowed to trade on ITP and the minimum ticket size was `10 lakh. Retail investors were not allowed to invest in such issues as the markets regulator felt small investors should be safeguarded against a higher level of risks associated with the platform.

Several start-ups have expressed concerns about the liquidity on ITP. Further, not even a single company has filed for an IPO on the special platform till date. Hence, Sebi wanted to review the regulations and address the concerns raised by the start-ups,” said a member of Sebi Primary Markets Advisory Committee (PMAC).

Allowing start-ups to list on the regular platform would also address the concerns regarding the minimum institutional ownership clause in the regulations. As per the current regulations, to be eligible to raise funds via an IPO, 50% of the pre-issue capital of the company must be held by qualified institutional buyers (QIBs). In the case of e-commerce and technology start-ups, 25% of the pre-issue capital should be owned by institutional investors.

In August 2015, the regulator had announced a new set of listing regulations for start-ups operating in the e-commerce space in sectors such as information technology (IT), data analytics and biotechnology.The regulations provided several relaxations to start-ups keeping in mind the unique nature of the industry including removal of caps on the money spent by start-ups on publicity and advertisements as they need to spend much more for such purposes.

Infibeam, an e-commerce company that went for an IPO in the current calendar year, chose to list on the main board instead of the ITP. Although the company filed its draft prospectus with the regulator before the ITP was announced, the company had a choice to migrate, subsequently. According to investment bankers, the company didn’t choose ITP because of concerns about the platform.

 

Source:http://www.financialexpress.com/markets/indian-markets/ipos-of-start-ups-in-india-retail-investors-participation-may-get-cleared/323787/

Bandhan Bank reduces microfinance loan rate

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Bandhan Bank on Monday reduced its lending rate for micro loans by 0.6 per cent, bringing down the interest to 19.9 from 20.5 per cent.

This is the third time the bank has reduced its interest rate for such consumers. Immediately after the microfinance institution transformed itself into a bank last August, it had slashed the rate by 1.4 percentage points or 140 basis points (bps), effectively reducing the rate to 21 per cent. In April this year, the rate was reduced by another 0.5 per cent or 50 bps for micro-small-scale sectors, making it 20.5 per cent.

With the latest round of lending rate reduction, Bandhan Bank has pared is micro loan rate by 2.5 percentage points or 250 bps in three stages in less than 11 months since it started operations as a universal bank.

Chandra Shekhar Ghosh, the bank’s chairman and managing director, said: “With the transformation of the micro-lending institution into a bank, the cost of funds has come down so we can afford to lower the interest rates. This reduction will benefit the micro-small scale industry who finds it tough to arrange for their funds.”

Since its launch, the bank has mobilised close to Rs 15,000 crore of deposits.

According to Ghosh, this will not only help attract more people opting for loans, but it will ease their financial burden as well. The cost impact on the bank is stated to be favourable with this decision.

Micro loans are generally granted for 1-2 years.

Currently, Bandhan Bank operates across 29 states and Union Territories through a network of 688 branches, 2,022 doorstep service centres and 237 ATMs with more than 8.77 million customers being served by a team of 21,000 employees. The Kolkata-headquartered bank’s savings bank account interest rate is six per cent for balances above Rs 1 lakh and 4.25 per cent for balances up to Rs 1 lakh. For term deposits, the maximum interest rate offered is 8.25 per cent for one to three years, with an additional 0.5 per cent for senior citizens.

Source: http://www.business-standard.com/article/finance/bandhan-bank-reduces-microfinance-loan-rate-116071800513_1.html