[aaykarbhavan] Business standard news updates 31-08-2012

ETFs slated to come underRajivGandhi equity savings scheme

SANTOSH TIWARI New Delhi, 30 August Exchange-traded funds (ETFs) are likely to be included in the list of avenues allowed for investments under the Rajiv Gandhi Equity Savings Scheme (RGESS) announced in the Budget. A senior finance ministry official told Business Standard the final contours of the scheme were slated to be approved in a meeting convened by Economic Affairs Secretary Arvind Mayaram tomorrow. The scheme is likely to be notified next week. "Initial public offerings, follow-on public offerings and ETFs of stocks eligible under the scheme have been listed as avenues to be allowed," he added. Investments in the top 100 stocks listed on the BSE and the National Stock Exchange (NSE), as well as in Navratna and Maharatna public sector undertakings, would be covered in the RGESS, according to the scheme finalised by the finance ministry. The official said this meant ETFs of stocks allowed for investment under RGESS, listed and traded on the exchanges, would be part of the scheme, which would include such funds floated by mutual funds. He, however, said though the Securities and Exchange Board of India had suggested allowing investments in mutual funds directly under the scheme, so far, no decision had been taken on this. For that, an amendment in the Finance Act would be required, he added. He said investment in mutual funds did not align with the basic idea of promoting equity culture. On August 17, Finance Minister P Chidambaram had indicated the ministry would soon take a decision on Sebi's recommendation to provide tax benefits to equity mutual fund investors under RGESS. A final decision in this regard is now expected to be taken by the finance minister, keeping in mind the difficulties associated with the proposal. And, if he decides to bring investments in mutual funds under the scheme's fold, the scheme would have to be reworked accordingly. RGESS was introduced in Budget 2012-13 to attract retail investment in the stock market and expand the reach of the capital markets. The scheme has been designed to provide income tax deduction of 50 per cent on investments up to ~50,000 to first-time retail investors with annual incomes of up to ~10 lakh. Initially, the lock-in period for investments in the scheme was three years. However, this might be reduced to a year in the long run. The official said after the one-year lock-in period, investors may trade among different securities, though the scheme would have a threeyear maturity period. He added permitting small investors to purchase shares only in the top 100 stocks traded on the BSE and the NSE would act as safeguards. Finance Ministry meeting to clear norms today; FM to take final call on coverage of MF investments THE FINALCALL |Plan to notify the scheme next week |IPOs, FPOs and ETFs in list of investments to be covered under the scheme |Top 100 BSE, NSE stocks and specified PSU scrips to be part of it |Sebi suggestion to include mutual fund investments a difficult proposition |50% tax deduction on ~50,000-investment by first timers with annual income below ~10 lakh under the scheme PCHIDAMBARAM Finance minister

 

Firms rush for NCDs ahead of RBI policy SAMIE MODAK Mumbai, 30 August A slew of non-banking financial companies (NBFCs) have lined up their non-convertible debenture (NCD) offerings ahead of the Reserve Bank of India (RBI) policy review on September 17. NCD issues worth more than ~2,000 crore are likely to hit the market in two weeks. The Mumbai-based India Infoline Finance Ltd (IIFL) has already announced the launch of its ~500 crore NCD issue, while Religare Finvest Ltd, Muthoot Finance Ltd and Shriram City Union Finance Ltd have received the Securities and Exchange Board of India (Sebi) nod to raise ~500 crore each through NCD issues. In addition, SREI Infrastructure Finance Ltd, too, has got Sebi nod for a ~150-crore issue. Experts say firms are scrambling to hit the market before the RBI monetary policy meeting to tap the demand from investors who are expecting the central bank to cut interest rates. Fall in interest rates, typically, results in capital appreciation in the value of bonds. Also, favourable response to the ~600-crore NCD issue of Shriram Transport Finance last month, has given much confidence to companies and bankers to launch their offerings. NBFC firms are trying to attract investor interest by offering 150-250 basis points (bps) more than corporate bonds with similar tenures. IIFL, whose NCD offering opens on September 5, has a coupon rate of 12.75 per cent on six-year bonds, about 135 bps more than the 11.4 per cent offered by Shiram Transport Finance last month. However, experts said IIFL being an unsecured issue yields on offer are higher, while it could be slightly lower for the forthcoming issues as all of these are secured NCDs. "Typically unsecured bonds carry higher interest rates. Like in our case also, we are offering 12.75 per cent interest rate, which I guess would be typically 100-125 basis points higher then what secured bonds with similar kind of rating would have fetched," said Nirmal Jain, chairman, IIFL. In the event of liquidation, secured bond holders get preference as they are paid out of realisation of security, while unsecured bond holders get paid before any money is paid to the equity shareholders. Turn to TSI, Page 2 >FUND RAISING SPREE NCD issues worth over ~2,000 cr are likelyto hitthe marketin the nexttwo weeks Issue size (in ~cr) India Infoline Finance 500 Shriram City Union Finance 500 MuthootFinance 500 Religare Finvest 500 SREI Infrastructure Finance 150 Source: Sebi Click here to read more...Turn to TSI, Page 2 Click: Article continued from…Firms rush for Firms rush... their capital adequacy ratio. Experts said not-sofavourable prospects of other asset classes will ensure the supply of paper coming into the market get absorbed by investors. Akhil Mangla, executive vice-president, ECL Finance, said: "Investors are getting out of equities due to the volatility and commodities such as gold seemed to have peaked. Real estate is clearly not for the small investors. Given these circumstances, there is a clear demand for debt instruments with high coupon rates. Firms are keen to tap this demand." Currently, 'AA-' rated corporate bonds with tenures of three to five years are quoting at yields between 10 and 10.22 per cent. Mangla added the expectations that RBI would cut interest rates in its next policy was also driving up the demand for such issues. Funds raised through NCDs help NBFC firms grow their lending book. As such funds qualify for Tier-II capital, it allows companies to boost >FROM TSI, PAGE NSE models SME bourse on global peers BS REPORTER Mumbai, 30 August The National Stock Exchange (NSE) is all set to take on the Bombay Stock Exchange (BSE) in the small and medium enterprises (SME) segment. The NSE, which will make its debut in the space nearly five months after BSE saw the listing of the first SME IPO, has modelled the platform on the lines of London's Alternative Investment Market (AIM) and the NASDAQ of the US. To ensure higher market participation, NSE says it has worked to create an eco-system and will allow companies with strong fundamentals to list on its platform. Even though grading for SMEs is not mandatory, NSE emphasis that SMEs opt for it, will instill confidence among investors. NSE has a tie-up with rating agency CRISIL. Ravi Tyagi, the head of NSE's SME project said, their emphasis will not only be on the number of IPOs but on a strict check on quality of companies. "Initially, we are ready to hand hold SMEs and facilitate them with means that will ensure high investor participation. We want to ensure that companies coming on our exchanges are run by a professional management team." The first IPO on Emerge, as NSE calls its SME platform, will be a ~21-crore issue by Chennai-based Thejo Engineering, which opens for subscription on September 4. The IPO has been graded 5/5, indicating strong fundamentals of the company. According to Sebi, SMEs are allowed to raise as less as ~5 lakh and up to ~5 crore. Any company whose post-issue capital has a face value of between ~50 lakh and ~10 crore can list on the SME Exchange. Companies with post-issue capital exceeding ~10 crore but less than ~25 crore can choose to list on either the SME Exchange or the main exchange. Companies with capital of over ~25 crore will have to list on the main board. Another strategy by NSE to boost investor confidence is to see that every SME has nominated investors, mainly institutional players. "Institutional players invest after adequate due diligence. If we ensure that every SME on our platform has institutional players as stake holders, it would be that much efficient for other small investors," Tyagi said. NSE has played a role in setting up an alternate platform for SMEs to raise funds ahead of listing, known as India Venture Board. It is supported by many venture funds . "Behind IVB is the belief that there is a need for significant increase in the flow of venture capital and early stage investments in India. This is not only critical for the country but also for the overall equity ecosystem; a surge of innovation-based high-growth enterprises will provide feeder stock to bigger venture capital and private equity funds and finally to the public markets," says the website of IVB, which also carries the logo of NSE and SIDBI The BSE's SME platform, till now, has helped five companies raise ~33 crore. This apart, five other companies will soon launch their IPOs on BSE. Tyagi says there are four SME IPOs, which are in different stages of getting finalised. According to rough estimates, there are more than three million SME companies in the country, which account for nearly 50 per cent of industrial output and over 40 per cent of India's total exports. Stock exchanges (SEs) will witness intense competition as they attract them to list on their platforms. No-frills demataccount suited forirregularusers NEHAPANDEYDEORAS & TANIAKISHORE JALEEL Angel Broking Executive Director (Operations) Santanu Syam says for many investors, maintaining a demat account is a pain because of the charges. The costs, such as maintenance and statement charges, make them the most expensive globally. Obviously, Securities and Exchange Board of India's (Sebi) move to introduce nofrills demat accounts have been greeted with much enthusiasm amid players though it means a higher cost for the depositories. This is because many irregular investors simply chose to close down the account and shifted to less cumbersome instruments such as fixed deposits or physical gold. This, along with the one page know-your-customer document that was introduced in January for opening of demat accounts, will make investing in stocks and gold exchange-traded easier. For an individual, the new charges are quite low. There won't be any annual maintenance charge (AMC) for balances of zero to ~50,000. The no-frills account will charge ~100 for a balance of ~50,001-Rs 2 lakh. Presently, depository participants (DPs) such as banks and brokerages charge anywhere between ~300 and ~500 as AMC regardless of the amount in the account (see table) . While there could be a loss of revenue to depositories, Syam feels depository participants revenues may not take a hit. "The loss of revenue on losing customers is much more than rationalising of account servicing charges. This way at least customers can be retained," he says. In fact, many investors may just keep accounts dormant and use them when overall markets or gold ETFs are doing well. Many opted for physical gold because of the cumbersome process and cost factor – something that Sebi has eliminated. Prithvi Haldea of Prime Database echoes Syams thoughts. "Most depository participants have other bigger businesses such as banking or brokerage services. Hence, low margins in the demat business may be a negligible hit," he says. Standalone depository participants will certainly be impacted though there arent many such firms, he says. However, some disagree that things will improve substantially. Because existing demat accounts holding, with less than ~50,000, will get automatically converted into a BSDA (basic service demat account) from October 1. Thus, the business for depository participants will be impacted. So, if a depository participant earned ~300 from your account a year, he will lose that once your account becomes nofrills. K V S Manian, group head, retail liabilities & branch banking at Kotak Mahindra Bank feels it is too early to quantify the impact, but there will certainly be some, as the existing accounts earn much more than three times the charge prescribed for BSDA. "In the short term, the loss in revenue will impact business, though it will be small," says Ajay Menon, chief operating officer at Motial Oswal Financial Services. Participants are working on possible solutions to the revenue loss. Sebi has also given possible solutions. For one, it says if the value of holding in BSDA exceeds the prescribed limit, the depository participant may levy charges as applicable to regular accounts. And banks/brokerages shall reassess the eligibility of the demat account holder at the end of every billing cycle and ask eligible account holders to shift to BSDA. "This apart, banks may opt to send only a half-yearly or yearly account statements to accounts which do not transact often unlike Sebis suggestion of a quarterly statement. Additionally, there are chances of increasing the charges on non-BSDA. There could also be an additional cap of the number of transactions such accounts can do, beyond which you will be charged like a regular account (Sebi put a cap of holding value of over ~2 lakh)," says apublic sector banker. Unfortunately, industry experts do not see this initiative gaining traction. For investors to turn to equities, it takes good market or a good initial public offer, neither of which is happening right now. While depositories will take a hit, volumes might make it up for the loss The no-frills banking experience In 2005, the Reserve Bank of India (RBI) also proposed no-frills banking accounts. Account holders could maintain zero balance. In addition, the first cheque book was free and subsequently ~5 was levied on every cheque leaf. However, such accounts have not helped banks to spread reach, neither have too many people entered the banking system through these routes. According to public sector bankers, the incremental number of accounts through the no-frills option is barely one per cent. In fact, even the apex banker was not-too-happy with the banks as these accounts remained mostly on paper and no transactions took place. In fact, RBI has told bankers recently to remove the no-frills tag from these accounts since it seemed like a stigma. Instead, they have asked to call it basic savings bank accounts. Name Account Annual maintenance Additional account opening* charges (~) statements (~) ICICI Bank Nil 500 ( 450 for e-statements) 20 SBI Nil 400 (350 for e-statements) 30 Angel Broking Nil 300 25 IIFL Nil 555 (one-time) or ~250 a year Nil GeojitBNP Paribas Nil 400 25 No frills accounts Nil Up to 50,000 = Nil up to 25 50, 001 to 2 lakh = 100 *Stamp duty of ~20 and stamp paper of ~50 for power of attorney. Source: Company websites

 

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