Sebi lays down strict rules for rejection of offer documents
BS REPORTER
Mumbai, 11 October
Capital markets regulator Securities and Exchange Board of India
(Sebi) today issued a framework for the rejection of draft offer
documents filed with it before issue of securities.
In the future, Sebi will reject offer documents if it believes
investor safety is compromised or the quality of disclosures are
inadequate or risk associated with the issue are high. Sebi Chairman U
K Sinha issued a general order in this regard, which comes into effect
immediately. This is the first time the regulator has issued such a
framework.
Sebi has set the strict rejection criteria based on the issuers
capital structure, objective for fund raising, business model or
financial performance. The regulator has said issues where ultimate
promoters are unidentifiable or where there are instances of circular
transactions for building up the capital or net worth of the issuer
will be straightway rejected Sebi has also said offer documents would
be rejected if the issue proceeds are used towards repayment of loan
or inter-corporate deposits or major portion is proposed to be
utilised for the purpose, which does not create any tangible asset. It
has further said if the time gap between raising the funds and
proposed utilisation of the same is unreasonably long, the offer
document will be rejected.
If the business model of companies is "exaggerated, complex or
misleading and the investors may not be able to assess the risks
associated with such business models", draft documents of such issuers
will also be rejected.
If there is a sudden spurt in the financial performance of a company
ahead of filing a draft offer document, there is a likelihood that the
companys offer document would be rejected.
Sebi has said the documents of issuers would be rejected if there are
pending litigations and the issuer's survival is dependent on the
outcome of such litigations.
Fertiliser subsidy payment linked to retailer receipts
CABINET DECIDES
BS REPORTER
New Delhi, 11 October The Cabinet Committee on Economic Affairs today
approved a proposal to link the release of fertiliser subsidy to
manufacturers and marketers with the acknowledgement of receipts from
retailers.
The government also raised urea prices by ~50 a tonne (~2.5 for a
50-kg bag) to incentivise retailers to give receipts through the
Fertiliser Monitoring System (FMS), which is via mobile phones.
The panel also approved a pilot project to track fertiliser sale to
farmers in 10 districts by using kisan credit cards, bank account
numbers and Aadhaar numbers. The project would be implemented by the
end of the year.
There was some confusion initially when it was reported in a section
of the media that the government would directly transfer the subsidy
to retailers. These resulted in a sudden spurt in stock prices of some
fertiliser companies by over five per cent.
Minister of State for Chemicals and Fertilisers Srikant Jena told
Business Standard the subsidy would continue to be given to
manufacturers and marketers of fertilisers. The only change was that
another level of transparency had been added to the movement of
fertilisers, before making payments.
FMS is aimed at plugging the loophole that leads to diversion of
fertiliser subsidies for industrial use and smuggling. It is
ultimately designed to facilitate direct transfer of subsidy to
farmers. Up to 30 per cent of subsidised fertilisers, mainly urea, get
diverted to non-agricultural use, Jena said, adding the subsidy would
come down indirectly if illegal use was curbed.
Todays' move adds retailers to the loop of acknowledgement. Through
mobilebased applications or via SMS, they'd have to acknowledge the
receipt of fertilisers at their shops. This data would be
cross-checked with shipment data from companies by the department of
fertilisers. Once the department is satisfied, the subsidy would be
released to manufacturers.
Currently, a major part of the subsidy (100 per cent for urea, 85 per
cent for non-urea subsidised fertilisers) is released as soon as a
company reports dispatch of fertiliser. The rest is released after
acknowledgement from the state governments that the fertiliser had
reached.
Earlier this year, the cabinet sent back a proposal by the department
of fertilisers to increase urea prices by 10 per cent. This meant
raising urea prices by ~531 a tonne. Currently, subsidised urea is
sold at ~5,310 a tonne. The prices were revised in 2010.
SPRAYING IT WIDE
~50
Per-tonne price increase ofurea by the governmentto incentivise retailers
10
Districts will be part ofa pilotprojectto trackfertiliser sale to farmers
30
%Ofsubsidised fertilisers, mainly urea, gets diverted to non-agricultural use
10
%Increase in urea prices proposed bythe departmentof fertilisers', and
was sentback bythe Cabinetearlier
~5,310
The currentprice for subsidised urea per tonne
Govt raises urea prices to get vendors into tracking system
Need to revisit DTCand GST provisions, says Shome
BS REPORTER
Kolkata, 11 October
There was a need to look again at the provisions of the proposed
direct taxes code (DTC) and the goods and services tax (GST), said
Parthasarathi Shome, director and chief executive, Indian Council for
Research on International Economic Relations.
There should be fresh consultation over DTC and the structure of GST
was not being put together in an ideal way, he said. "Construction of
GST is not happening the way it should. We should have a GST that
makes sense, and (where) goods and services are treated equally." GST
and DTC are expected to be implemented by April 2013. The two tax
reforms have already missed April 2011 and April 2012 deadlines.
Shome, who also heads an expert committee set up by the Prime Minister
to address foreign investor concerns on the much-dreaded General
Anti-Avoidance Rules (GAAR), made these comments at an interactive
session organised by the Merchants' Chamber of Commerce.
Suzlon runs outof options
JITENDRAKUMAR GUPTA
Mumbai, 11 October
Suzlon Energy Ltd's woes have increased after its bondholders rejected
its request to extend the time for the redemption of foreign currency
convertible bonds (FCCBs) of $221 million (~1,160 crore), due to
mature this month. The speculation that Suzlon might default and go
for liquidation saw the share price fall 5.1 per cent intraday before
closing down 2.1 per cent at ~16.20. While domestic bankers are
expected to provide some support lowering chances of a default,
experts do not rule out an extended period of subdued financial
performance for the company.
Suzlon, as of June 2012, reported total net debt of ~13,017 crore.
This includes FCCBs of ~3,641 crore, a part of which, worth $360
million (about ~1,895 crore today), was redeemed in July. With the
help of 45 days extension, earlier bonds were financed through the
fresh borrowings, sale of assets and internal accruals. But now, the
company is again in the news for the redemption of FCCBs of $221
million due this month. This time, the bondholders have rejected an
extension of the timeline.
Experts believe this could theoretically lead to a default and there
is a possibility that the bondholders might file for liquidation of
the company. Suzlon has been buying time from the bondholders so that
it could tap fund sources, including cash from its European subsidiary
REpower, sitting on cash of about ~1,700 crore, realisation of dues
from debtors of ~1,000 crore, raising low-cost funds abroad and
garnering resources through sale of assets.
While the company is still negotiating with the bondholders, given its
current situation, there is little possibility that funds could be
arranged from internal sources. With market sentiments subdued,
raising funds through the equity route will be difficult. Hence, the
best possible way could be fresh borrowing, say experts.
Here, Suzlon's domestic lenders like State Bank of India are
reportedly willing to look for ways to restructure its debt to help
meet its obligations. Domestic banks have large exposure to the
company. Experts believe some settlement will work out because
liquidation is not in anybody's interest and could take even more time
than the company is asking from its bondholders.
"In a most likely scenario, the company will have to borrow more
funds, which the domestic banks could help in to some extent, and will
be able to pay to the bondholders," says S P Tulsian, an investment
expert. In that case, the debt might not go up because old loans will
be swapped for new ones, but interest cost will go up if the fresh
borrowing is rupee-based.
This would provide some time to Suzlon, and once liquidity improves
(through realisation of debtors, cash from REpower and asset sales),
it could pay back banks' debt. Nevertheless, while this could help
avoid the crisis, Suzlon's financial condition is set to remain
critical as a result of higher interest costs and weak business
environment.
Analysts believe the journey is going to be tough. They expect
weakness in demand to continue in some of its key markets like the US
and Europe, impacting volumes and revenues. Suzlon had earlier
targeted to achieve consolidated revenue of ~27,00028,000 crore, which
analysts believe will be difficult. This translates into volumes of
about 4,500 Mw (assuming realisation of ~6.2 crore a Mw) or 36 per
cent growth compared to last year, which is not going to be easy.
And, given the estimated net interest cost of ~1,500-1,550 crore (at
11.5-12 per cent of debt) this year on a profit before interest of
~1,480 crore leading to losses, it is likely that FY13 could be the
third consecutive year that Suzlon will report losses. Clearly, it's
imperative that Suzlon takes serious steps to cut debt. Otherwise,
even if it manages to postpone the issue for now, the debt ghost will
come back to haunt.
In ~ crore FY11 FY12 Q1' FY13
Revenue 17,879 21,082 4,747 Operating profit 1,047 1,821 -257
Profitbefore interest 390 1,160 -435 Interest 1,375 1,655 494
Netprofit -1,324 -479 -849 Netdebt 9,142 11,129 13,017
Source: Company RISING DEBT, WEAKPERFORMANCE
While bankers are expected to provide some support, experts do not
rule out an extended period of subdued financial performance
Tulsi Tanti, chairman and managing director of Suzlon Energy
Don'tpanic, there are options Holding illiquid stocks?
TANIAKISHORE JALEEL &NEHAPANDEYDEORAS
Earlier this week, Bombay Stock Exchange (BSE) and National Stock
Exchange (NSE) issued a notice stating more than 2,000 scrips have
turned illiquid in the September quarter. The exchanges asked
investors to "exercise additional due diligence" while trading in
these stocks.
BSE has named scrips such as Kirloskar Industries, Mafatlal
Industries, Networth Stock Broking and so on. NSEs list includes Ansal
Housing Construction, Aditya Birla Money and Zenith Computers. There
are 5,000-listed companies on the BSE, while the NSE has about 1,500
on its platform.
An illiquid stock is one which is hard to sell if you are looking to
exit. You might have to sell an illiquid stock for less than the
current market price. Hence, illiquid scrips pose higher risks to
investors.
Stocks with higher promoter shareholding will have higher chances of
being illiquid as the free float (shares available for trading) in the
market is less. Multinational companies could also face the same
problem.
On the other hand, the market is seeing less liquidity also because
the volumes being traded have dropped. On BSE, the total turnover was
~2,570 crore in September last year. This year the month saw volumes
drop to ~2,263 crore.
A sharp fall in mid- and small-cap stocks, as compared to larger ones
has also led to the increase in the number of illiquid stocks. And,
most of the scrips named by the exchanges are smaller stocks. Between
July 2011 and September 2012, the Sensex has been trading in atight
range (fallen 1.1 per cent). The fall seems lesser due to the sudden
uptick in the markets on the back of big-bang reform announcements by
the government. In comparison, the BSE small-cap index declined close
to 14 per cent.
"The mood among retail investors is quite pessimistic and nobody's
interested in buying small-cap stocks as these tend to burn their
fingers in bad times. Investors are looking for safer bets like select
large-cap stocks. Small companies, which don't have a robust business
model, are being shunned," says Alex Mathews, head of research at
Geojit BNP Paribas Securities.
If you are holding one of these stocks, financial experts say, do not
panic. "The stock exchanges have only warned investors as many of
these stocks have seen very sharp movements. Typically, when investors
buy these stocks they have a target price or time period in mind.
Stick to it and exit only on completion of the target set," says Arun
Kejriwal of Kejriwal Research and Investment Services.
There are chances that during the corporate earnings season there
might be a spurt in prices of these scrips. This could be an opportune
time to exit, Mathews suggests. "And if you do want to buy these
scrips, make sure you buy it in small quantities as it is easier to
sell in small number," he explains.
Ideally, retail investors should not venture into these stocks, says
Kejriwal. "Yes, these stocks (smaller ones) give very good returns
when they rally, but the reverse rally can be equally bad.
Importantly, you need to be perfect with your entry and exit time for
these stocks, which very few people can get right, that too, not
always. Fundamentally good stocks, like large caps, return slowly over
time. But, the smaller ones will give stellar returns once in a
while," he says.
Sebi has mandated the exchanges to give a list of illiquid scrips
every quarter. Many, like Kishor Oswal, chairman and managing director
of CNI Research, feels this is killing the depth of the market and
leading to stocks turning illiquid.
For instance, you are not allowed to buy more than 10 per cent of the
volume of a stock. Today, a stock called Networth saw only 100 shares
traded, which means you could not have bought more than 10 shares. If
you wanted to buy 1,000 shares, you would have had to wait for the
volume to jump to 10,000 shares. Such stocks rally on the smallest
trigger and hit the upper circuit. Result: Investors are stuck again.
You could exit on completion of your set target or on spurt in the stock price
Typically, when investors buythese stocks, theyhave a target price
ortime period in mind. Stickto it and exit onlyon completion of the
target set"
ARUN KEJRIWAL
Kejriwal Research and Investment Services
--
.
-
CS A RENGARAJAN,, B.Com ,FCS, LLB, PGDBM
Company Secretary, Chennai
email csarengarajan@gmail.com
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