[aaykarbhavan] Business standard news updates 22-8-2012

Sebi cracks down on misuse of Esops

NSUNDARESHASUBRAMANIAN &SAMEER MULGAONKAR New Delhi/Mumbai, 21 August The Securities and Exchange Board of India (Sebi) has cracked down on the misuse of Employee Stock Option Plans (Esops) and other employee benefit schemes by promoters. In its latest board meeting, the regulator decided such schemes would not be allowed to make purchases from the secondary market. "Such schemes will be restrained from acquiring their shares from the secondary market," the Sebi decided last week. An employee stock option gives directors, officers or employees the benefit or right to purchase or subscribe at a future date securities offered by the company at a predetermined price. In the absence of any express provision in the companies' law or Sebi guidelines, companies use both fresh issuances and secondary market purchases to accumulate shares for these schemes. Some employee welfare schemes accumulated a disproportionate amount of shares from the market, evoking fear among some analysts that these schemes, originally devised to encourage employee participation in creating shareholder value, were used by promoters as vehicles to "reduce float in the market and increase control surreptitiously". There were also reported instances where the schemes borrowed heavily from group entities to finance share purchases. Ashvin Parekh, national leader, Ernst & Young, said, "Such schemes often become vehicles to disguise real wealth or income. The latest move suggests that Sebi is going to be strict in the implementation of the guidelines." The employee benefit schemes by listed companies are governed by Sebi (employee stock option scheme and employee stock purchase scheme) guidelines, 1999. According to a BS Research Bureau study of listed companies that have declared their shareholding patterns as of June 30, there were over a hundred companies that had employee welfare schemes as shareholders. Of these, 15 employee welfare schemes had holdings of over five per cent in their respective companies. L&T Employee Welfare Foundation, which holds 12.14 per cent in diversified major Larsen & Toubro, is the largest such scheme. Esop trusts with high holdings include PSPL ESOP Management Trust, which holds 8.67 per cent in Persistent Systems. Patel Engineering (8.66 per cent), B2B Soft Tech (5.18 per cent), Solix Technologies (4.72 per cent) and Agrotech Foods (4.01 per cent) also have significant holdings by employee welfare schemes. Pavan Kumar Vijay, managing director, Corporate Professionals, said, "Esop trusts have a specific purpose. They are meant to hold shares on behalf of employees. These trusts should not be used as portfolio managers for promoters." Earlier this month, the Canada-based Veritas Investment Research pointed out how Indiabulls' employee welfare trust (EWT), an Esop trust of the Indiabulls group, held a huge chunk of shares in Indiabulls Real Estate. According to Veritas, EWT was formed in October 2010 and soon after bought some 26.8 million shares of Indiabulls Financial Services (IBFSL) at a cost of ~480 crore. It also purchased 39.7 million shares of Indiabulls Real Estate during FY11 and FY12. In response, Indiabulls had said the EWT was not a 100 per cent subsidiary and operated at an arm's length through independent trustees. "IBFSL has maintained a very healthy practice of grant of Esops to employees even before it went public in 2004. The Esop scheme of the company is in line with the other leading housing finance companies and NBFCs," Indiabulls had said. Parekh said regulatory guidelines on the timeline for non-compliant schemes to fall in line were expected. "If everyone unwinds in one go, there could be some impact on the market. They might have to phase it out," he said. Restricts buying by schemes from secondary market FIXING AGREYAREA |In the absence of express norms, companies use secondary market buys to accumulate shares for Esop schemes |Some employee welfare schemes have accumulated a disproportionate amount of shares from the market |Analysts fear these schemes are used by promoters as vehicles to "increase control surreptitiously" |Sebi has decided such schemes would not be allowed to make purchases from the secondary market

 

RBI tightens norms for securitisation of loans by NBFCs

PRESS TRUST OF INDIA Mumbai, 21 August Reserve Bank of India (RBI) today tightened the non-banking finance company (NBFC) securitisation norms by stipulating that a non-banking finance company will have to retain at least 5 per cent of the loan being sold to another entity. The revised guidelines, issued by the RBI also stipulate that NBFC cannot sell or securitise a loan unless three monthly instalments have been paid by the borrower. These stipulations, the central bank said are aimed at checking "unhealthy practices" and distributing risk to a wide spectrum of investors. Giving details of the guidelines, RBI said a loan up to two years can be securitised only after payment of three monthly instalments by the borrower. The limit for loans between two and five years is six monthly instalments and above five years, 12 monthly instalments. With regard to minimum retention requirement (MRR) for securitisation, the guidelines said the NBFCs selling loans will have to retain five per cent of the amount if the loan is for less than two year period and 10 per cent if it is of over two years. The originating NBFCs, it said should disclose to investors the weighted average holding period of the assets securitised and the level of their MRR in the securitisation. They should also ensure prospective investors have readily available access to all materially relevant data on the credit quality and performance of the individual underlying exposures, cash flows and collateral supporting a securitisation exposure, RBI said. Newallotmentnorms to change IPO play SAMIE MODAK Mumbai, 21 August Though the Securities and Exchange Board of India's (Sebi) decision to change the allotment process for initial public offerings (IPO) is aimed at providing allotment to all retail applicants, it may have some unintended consequences. Market experts say the new process will lead to a sharp drop in average application size, encourage multiple applications during popular issues and hurt IPO financing. The new allotment process gives preferential allotment to all investors in the retail category irrespective of the application amount. Under the erstwhile process, allotment was first made on proportionate basis and then on lottery basis. For IPOs, which will be hugely oversubscribed, all retail applicants will be given uniform allotment of one lot. This will act as a disincentive for investors to bid for more than one lot, say experts. "It will make sense to apply for just one lot, someone who bids more will be at a loss, especially for issues that get good response," said Arun Kejriwal, director, Kejriwal Research and Investment Services. Take, for instance, the ~660-crore IPO of the Multi Commodity Exchange (MCX), which had received retail subscription of more than 24 times and had garnered over 700,000 applications. Investors who had applied with application amounts of ~2 lakh got guaranteed allotment, while only one investor out of 30 who had applied for one lot got allotment on the basis of a lottery. In similar cases, under the new allotment system, someone who bids just one lot will be on equal footing with someone who applies for maximum lots. Prithivi Haldea, chairman and managing director of Prime Database, said only a handful of issues get MCX-like responses, but largely issues won't get filled with just small applications. "Only half of the issue might get filled with small applications, rest of it will get divided with investors who apply for more shares," he said. Experts said investors will now be encouraged to put in multiple applications to get higher allotment of IPOs that are likely to see huge retail interest. "Very clearly it will make better sense to apply for just one lot through multiple accounts of family members. Applying with a higher amount will work for IPOs that don't see very high subscription," said Kejiriwal. Under the new process, once allotment is made to all applicants the balance amount will be divided between investors who bid for more than one lot. The new system is also likely to hurt the IPO financing business, say experts. Currently, a lot of retail investors opt for funding to bid for the highest application amount of ~2 lakh. However, to bid for just one lot worth just ~10,000-15,000 hardly anyone will go for financing, they say. At present, the average application amount for IPOs is approximately ~1 lakh, which experts say, is likely to come down sharply. Investors will bid for fewer shares; IPO financing to take a hit DECODING THE NEW ALLOTMENT SYSTEM Changes |One lot to be worth between ~10-15k, up from earlier ~5-7k |Minimum allotment of one lot to all retail applicants, wherever possible |Balance shares to be allotted on proportionate basis |In case of huge oversubscription, lottery system to be followed Impact |Most investors likely to bid for single lot |Will encourage multiple applications |IPO funding will take a beating |Bulk of applications will come few hours before closing   Small town financial advisors not enthused by Sebi's moves CHANDAN KISHORE KANT Mumbai, 21 August Independent Financial Advisors (IFAs), a strong link between asset management companies (AMCs) and potential investors, especially in the smaller cities of the country, are not excited with the tweaks made by the capital markets regulator, Securities and Exchange Board of India (Sebi) last week to increase penetration of mutual fund products. Rather, they termed the steps as a "drop in the ocean". In its quick check with small IFAs spread across the country, Business Standard ,found out that majority of financial advisors have lost a significant chunk of their revenues from selling mutual funds. Though frustrated, they said they wanted a clear and concrete road-map for the industry. Sanjeev Sharma, an Indore-based IFA, says, " Amfi aur Sebi ko cheezein clear rakhni chaahiye. Jab aap kuchh change karo to hamein samay lagta hai adjust karne mein. Ek saal beeta nahi ki fir se parivartan ho jata hai, jo sahi nahi hai (Amfi and Sebi should keep things clear. It takes time to adjust in a new business model, but rules get tweaked in a year which is not good)." The sentiment is reflected by a Patna-based advisor Manu Mehrotra, who says, "I have upgraded my office and invested in technology to service my clients but people are used to free financial advice which is not helping us. By increasing 30 bps (basis points) in expense ratio, its not going to increase penetration of mutual fund products." He adds that investors must pay as advisors need to be remunerated for their services. Last week, Sebi allowed AMCs to charge an extra 30 bps as expense ratio provided the new fund flows from beyond the top 15 cities make up 30 per cent of the overall assets. Though none of the AMCs have yet called upon IFAs about how they plan to take things further, the latter said they would prefer increment in their trail-commissions rather than a rise in upfront commissions. Bikaner-based Suresh Modi, who lost more than 80 per cent of his mutual fund business over the last few years, says, "I get 5-10 basis points (bps) as upfront commission. But my trail commission is around 50 basis points. It would be better if AMCs increase the trail to 80 bps." Other advisors echo Modis opinion. Moreover, they say that if trail goes up they would like to retain clients for a longer period of time, which will be good for all stakeholders. Currently, on an average, upfront commissions to IFAs range between 10 bps to 50 bps (though in some cases it is as high as 1.5 per cent) while the trail stands in the range of 30 bps to 80 bps. The demand by IFAs for higher trail has also found takers in the industry. Chief executives say they will be in a better position to take a call on the same once Sebi brings out the fineprint of the measures announced last week. Sanjay Sachdev, chief executive officer (CEO) of Tata Mutual Fund, says, "I am in favour of higher trailcommission. Though, as of now, I cannot make any commitment till things get clear." Agrees Akshay Gupta, CEO of Peerless MF. According to Dhirendra Kumar, chief executive of Delhi-based mutual fund tracking firm Value Research, "Higher trail-commission is quite a legitimate demand from IFAs. It will help retain funds for longer period. I believe, distributors should not only get higher trailing commissions on the new flows but also on the existing fund mobilisation." Indores Sharma, rightly points out, "We will keep trying to adjust with new norms and service our clients for longer-term if trail goes up." Independent Financial Advisors seek higher trail commissions; mutual fund executives agree LACKS CONVICTION Frustrated financial advisors said theywanted a clear and concrete road-map for the indust Tribunal asks Sebi to expedite investigations PRESS TRUST OF INDIA Mumbai, 21 August The Securities Appellate Tribunal (SAT) has asked capital market regulator Sebi to complete its probes within a "reasonable" timeframe, more so when entities can suffer losses due to interim orders passed against them. Hearing an appeal against an interim Sebi order barring certain entities alleged to be involved in manipulation of an IPO, SAT said the tribunal is "conscious of the fact that in an investigation involving a large number of parties, we cannot bind the Board by a timeframe within which investigation can be completed." However, "it goes without saying that this time has to be areasonable one, more so when the entities are debarred from dealing in the market which adversely affects their business," SAT said in an order dated August 14, 2012. The Tribunal observed that the investigations in this particular case is going on since May 2011 and Sebi "needs to act as expeditiously as possible". In a separate order as well, passed on the same day, SAT said it sees "no reason why the Board (Sebi) cannot pass an order expeditiously", while hearing an appeal against an interim order of December 2011. Both the investigations are related to irregularities in separate initial public offerings (IPOs) and SAT has dismissed both the appeals, while asking Sebi to expedite its probe in both the cases. One of the two cases relates to Sebi's investigation in the alleged manipulation of the IPO of PG Electro Plast Ltd. According to the initial investigation report, a large number of entities, including Nimbus Industries Ltd are alleged to be involved in the manipulation of the IPO. An independent director of Nimbus Industries, Bharat Bachubhai Merchant, had approached SAT against Sebis exparte ad-interim order dated December 28, 2011, prohibiting the appellant, amongst others, from buying, selling or dealing in the securities market, in any manner whatsoever, till further directions. The said ex-parte ad-interim order also served as a showcause notice as to why action may not be initiated against Merchant and others. Merchant filed his reply to the show-cause notice on February 29, 2012 and a personal hearing was granted to him by Sebi on May 3, 2012. "The grievance of the appellant is that although a period of three months has elapsed after grant of personal hearing, no final order has been passed and the appellant is not able to operate his demat accounts due to the said impugned order. The appellant has therefore prayed that the impugned order be set aside or in the alternative the Board may be directed to pass a final order within such time and on such terms as may be deemed proper," SAT said. "We have heard the learned counsel for the parties for some time. Since the matter is at the investigation stage and a personal hearing has already been granted, we are not inclined to interfere in the matter at this stage," SAT said. "However, keeping in view the fact that the process of personal hearing is already complete, we see no reason why the Board cannot pass an order expeditiously," it observed.

 

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CS A  RENGARAJAN,, B.Com ,FCS, LLB, PGDBM
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