11 Sep 2016

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

6 Sep 2016

SEBI seeks major changes to new KYC process

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The Securities and Exchange Board of India (Sebi) has sought major changes in the newly implemented central Know Your Customer (KYC) process. The regulator has written that several market intermediaries such as mutual funds (MFs), brokerages and even banks were facing issues adhering to the new central KYC process.

Starting August 1, the government has shifted to the central KYC process, to enable common and one-time KYC for all financial market intermediaries. Central KYC is being implemented through the Central Registry of Secularisation and Asset Reconstruction and Security Interest of India (CERSAI), an online registry promoted by the central government.

In a recent letter, the capital market regulator has demanded a slew of changes, including more time between opening a new account and making an electronic entry with the central KYC registry.

KEY SEBI DEMANDS FROM FINMIN ON KYC
Extend time-period for compliance

Make Sebi-registered know your customer (KYC) agencies a pass-through link between market intermediaries and CERSAI

Exempt existing individual clients from fresh KYC process

Use UIDAI to enable e-KYC

Allow KRAs to do KYC on behalf of mutual funds

According to the norms, every financial institution needs to file an electronic copy of a client’s KYC records with the central registry within three days of an account being opened.

In a circular in July, Sebi had mandated all market intermediaries, including brokers and MFs, to make new KYC submissions to CERSAI. Several market players made representations to Sebi, highlighting the operational difficulties under the new system.

“It is a cumbersome job, right from disclosure to verification. We have sought extension in the timeline as deadline is not sufficient to meet the requirements,” said Nilesh Shah, managing director, Kotak AMC.

To sync the new system with the earlier common KYC, Sebi has also suggested to accept KYC Registration Agencies (KRAs) as a pass-through entity between registered intermediaries and CERSAI. Under the previous KYC regime, KRAs were the most important part of the system.

To avoid duplication of work, Sebi also wants to exempt individual clients whose accounts are opened before August 1 from undergoing KYC process all again. According to Sebi, KYC details of these clients are already with the KRAs and can be used even when they approach other registered intermediary for entering into account-based relationship, Sebi said in a letter to ministry.

Sebi had allowed interportability among KRAs, to enable sharing of information among them based on client’s permanent account number (PAN). To enable online KYC, Sebi has recognition of the Unique Identification Authority of India (UIDAI). The same would leverage the Aadhaar database and ease the process of doing business, said Sebi.

Apart from this, the regulator has also asked the ministry to allow share transfer agents to do KYC on behalf of mutual funds. However, the responsibility of KYC will continue to remain with the mutual fund on whose behalf the registrar carries out the KYC, noted Sebi.

 

Source: http://www.business-standard.com/article/markets/sebi-seeks-major-changes-to-new-kyc-process-116090300579_1.html

6 Aug 2016

RBI launches website Sachet to tackle fraud

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The Reserve Bank of India (RBI) on Thursday launched a website from which anyone can obtain information regarding entities that are allowed to accept deposits, lodge complaints, and share information regarding illegal acceptance of deposits by unscrupulous entities.

 

Named Sachet, the website is expected to be helpful in coordination between regulatory authorities and law enforcement agents throughout the states so any unscrupulous money-raising activities can be curbed. Collective investment schemes (CISs) have come under the scanner and the regulators, particularly Securities and Exchange Board of India (SEBI) has cracked down on such activities after millions were duped by Sahara, Sarada, Pearl Agro, and such schemes.

 

Launching the website, RBI governor Raghuram Rajan once again warned the public not to fall prey to phishing emails that solicit money from unsuspecting people, in return for a fortune. Phishing is the activity of tricking people by getting them to give their identity, bank account numbers, etc over the Internet or by email, and then using these to steal money from them. “Please don’t fall prey for these fly-by-night operators who promise you the moon,” Rajan said. “Every day I get five or six such emails asking me the money I apparently promised … Reserve Bank does not give money. I don’t give my money to anyone,” Rajan said. The RBI governor stressed the need to stop such crime in progress and sites like Sachet will help curb that, Rajan said. Sebi wholetime member S Raman said the markets regulator has almost eliminated illegal CISs and complaints regarding these are now a trickle.

 

“The push factor behind these schemes was the agent commission. We have found that 30-35 per cent as agent commission was being given. And of course, legal loopholes were exploited too,” Raman said.

 

“The push factor we brought to the notice of the standing committee of the Parliament, which has recently submitted a report for a new legislation to the central government. One of the factors they have accepted is the existing of this push factor. And now, very soon, if the legislation is passed and when it is passed, commission of anything more than 3-5 per cent of any types of raising funds in this country will be deemed illegal,” Raman said.

 

Source: http://www.business-standard.com/article/finance/rbi-launches-website-sachet-to-tackle-fraud-116080500030_1.html

1 Aug 2016

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

22 Jul 2016

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/

14 Jul 2016

Alternative Investment Funds coming to India

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Markets regulator SEBI is learnt to be in process of creating a new category of Alternative Investment Funds(AIFs) to encourage long-term funds to use the AIF route to invest in the listed space.

 

Sources privy to the development said the Securities and Exchange Board of India (SEBI) will reclassify the existing category III into two groups – one comprising long-term funds like pension funds and the other consisting of hedge funds and other arbitrage funds who look to invest on a short-term basis.

 

Further, SEBI is also expected to consult the government in providing a ‘pass through’ status to the new category of AIF on par with Category I and Category II AIFs. According to legal experts, this categorisation would help the long-term overseas funds to receive a favourable tax treatment in the AIF space as currently they are taxed on par with arbitrage funds.

 

As per the current tax regulations, any investments made in listed companies which are held for more than 12 months are termed long-term investments, while others are called short-term investments. Capital gains tax is applicable only for short-term investments and investors needn’t pay any capital gains tax in case of long-term holding.

 

However, if a fund invests in the listed space through the AIF route, irrespective of the nature of holding, the investor would be taxed at uniform slab applicable for category III AIFs.

 

“Current SEBI AIF regulations are like one size fits all. Category III AIFs comprise several types of short-term and long-term funds and the purpose of each of them is different. However, the tax they are paying is the same. Long-term funds would rather take the direct route or would invest via P-notes instead of AIFs,” said a lawyer.

 

These measures are a part of efforts made by SEBI and union government to promote AIFs. During the union budget 2015, the government had provided pass-through status for Category I and Category II AIFs. Last November, the government had allowed foreign funds to invest in AIFs through the direct route.

 

In the last two years, inflows into AIFs have witnessed a significant increase. According to a SEBI data, cumulative funds raised via the AIFs as on March 31, 2016 was `22,691.18 crore — a fourfold increase compared to `5,847.5 in Q2FY15.

 

According to Jay Gandhi, Partner at Shardul Amarchand Mangaldas, the SEBI AIF regulations have found great traction in the market in a relatively short period of time. “The AIF regulations have permitted investment managers great flexibility in structuring various kind of fund structures targeted at specific segments of the investor community,” Gandhi said.

Source: http://www.financialexpress.com/markets/alternative-investment-funds-coming-india-heres-need-know/314881/

18 Jun 2016

SEBI cross with UB over Mallya’s board seat

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The Securities and Exchange Board of India (Sebi) is not pleased with United Breweries (UB) allowing Vijay Mallya to continue on its board of directors, despite being tagged a wilful defaulter.

Mallya is chairman of the board of Bengaluru-based UB. Several banks have formally declared him a wilful defaulter and under new Sebi norms (late last month), any individual so tagged is barred from holding a board position in a listed company.

“Mallya should have stepped down as UB chairman and from its board, following Sebi’s new regulations. (We) are keeping a watch on the board functioning,” said a Sebi official, requesting anonymity.

IN TROUBLED WATERS

SEBI’s new curbs on wilful defaulters

  • New rule bans wilful defaulters from taking any board positions
  • Disallow defaulters from setting up market intermediaries
  • Defaulters would not be allowed to take control of other listed company
  • No wilful defaulter shall make a public announcement of an open offer for acquiring shares or enter into any transaction
  • Sebi’s rule disqualifies Mallya from various posts he holds at the moment

The regulator could soon initiate action if UB is in violation of the corporate governance norms, said the official. The regulator is believed to have also raised questions on the role of independent directors on UB’s board.

UB refused to comment on an email query sent to it.

Earlier this year, Mallya had resigned as chairman and managing director of United Spirits, as part of a deal with the company’s new owner, Diageo. Mallya, however, continued to serve on the board of other companies, including UB. Diageo now owns 55 per cent of USL and Mallya had stepped down from the board in February, for a $75 million payoff.

From the March quarter shareholding data, Mallya holds 8.08 per cent in UB in his personal capacity. Another 22 per cent in UB is owned by his group companies.

Heineken acquired a 37.5 per cent stake in United Breweries in 2008 through its takeover of Scottish & Newcastle and has since increased its holding to 42.4 per cent.

The banks say Mallya had given personal guarantees, apart from pledging his stake in UB Group companies, to raise funds for his now-grounded Kingfisher airline. This resulted in Mallya losing control over his liquor empire to global players — Diageo in spirits and Heineken in beverages.

Mallya reportedly left India on March 2, allegedly to escape enforcement action by multiple probe agencies and Indian banks, to which he owes Rs 6,963 crore in loans. In March, a consortium of lender approached the Supreme Court to stop Mallya from going abroad but he’d left; on April 18, a court in Mumbai issued a non-bailable arrest warrant against him.

Last week, the enforcement directorate had attached United Breweries Holdings and Mallya assets worth Rs 1,411 crore in Mumbai, Bengaluru, Coorg and Chennai. He was also declared a proclaimed offender early this week.

This was issued in response to a plea by the Enforcement Directorate on April 15 before the special court hearing cases under the Prevention of Money Laundering Act, 2002. There were allegations on him that he transferred Rs 4,000 crore ($590 million) to tax havens.

Source: http://www.business-standard.com/article/markets/sebi-cross-with-ub-over-mallya-s-board-seat-116061600885_1.html