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SAMIE MODAK
Mumbai, 4 December The Securities and Exchange Board of India's ( Sebi's) draft guidelines on regulating and monitoring the research analyst community are allencompassing in nature, but the target audience isn't perturbed. Large investment banks and brokering houses say the curbs prescribed in the regulations are less stringent compared to the self- regulatory framework they have already put in place. For example, several brokerages have pre- trade approval systems in place for analysts. Also, some brokerages say they have a complete ban on analysts from dealing in shares they track. Going ahead, however, these entities will have to tweak their guidelines to align them with Sebi regulations. This is what Sebi has said. Equity research analysts, both domestic and foreign, can give recommendations on stocks and sectors only after they obtain a certificate of registration from Sebi. The rationale behind the long- awaited framework is to have regulatory oversight on equity research done in the country to ensure that the advice given by analysts is in good faith and devoid of any vested interest, the regulator says. The proposed Sebi ( Research Analysts) Regulations, 2013, prescribe aminimum net worth and trading curbs, and put greater responsibility on analysts and intermediaries who provide equity research. They propose to introduce curbs on analysts while dealing in the securities they recommend. Analysts or a brokerage will also not be allowed to deal in shares of companies a month before and five days after the publishing of research reports. Also, analysts will be barred from publishing or recommending asecurity traded by them in the previous 30 days. The regulations also state that the compensation or bonuses of an analysts should not be tied to any specific investment banking or brokerage transactions. The regulations also bar an analyst or a brokerage from issuing research reports or making public appearances on companies where they act as investment bankers in IPOs or FPOs. The restriction will be for 50 days post completion of an IPO and 10 days post completion of a secondary share sale. For instance, the six investment banks handling the PowerGrid offering will not be allowed to publish a research report on the company until 10 days after the FPO is completed. As far as applicability is concerned, the regulations are primarily aimed at individuals and entities whose main business activity is equity research. The new framework applies to all three -- sell- side, buy- side and independent research analysts. It also applies to entities which employ research analysts or distribute thirdparty reports. It also mandates foreign citizens, who wish to conduct research activity on Indian securities, to set up shop in the country. In- house equity research teams at media houses have been excluded from registration, according to people close to the development. A Sebi official says journalists who give stock- specific views may not have to register, but they will have to provide disclosures on their stock holdings. Sebi has also kept out investment advisors, fund managers, proxy advisory firms, private equity and hedge funds from registration under the research analyst regulations. However, the regulator has said if these entities " make commentaries or recommendations concerning securities or public offers through public media" they will have to adhere to tighter disclosure and record- keeping norms prescribed in the research analyst regulations. Already most independent analysts who give advice for fees have registered under the Investment Advisor Regulations following a Sebi diktat earlier this year. They will now just have to follow the disclosure and other record- keeping norms. Interestingly, the regulations mention public media comprising radio, television or print media, but leave out the web. Experts say advice provided by analysts through the internet should also have similar curbs as other media. Banks, research houses cite self- regulatory framework; journalists excluded from registration but may have to disclose stock holdings ANALYST CATEGORIES & POSSIBLE CONFLICT OF INTEREST SELL- SIDE: Who: Research analysts at brokerages Profile: Publish research reports on stocks and sectors. Such reports, typically, have a price target and recommendations such as buy, sell and hold Conflict of interest risk: High. Chances of conflict of interest are high as their organisation might be doing multiple functions such as broking, investment banking. For instance, a research analyst working with a bank might be asked to give a ' buy' recommendation on a stock of a company that is a corporate client of the bank BUY- SIDE: Who: Analysts at money managers such as mutual funds, insurance companies or portfolio managers Profile: Analysts do propriety research which is circulated to senior management, which uses it for executing trades Conflict of interest risk: Low. The probability of conflict of interest is low as it is mostly for self consumption. However, it is likely the neutrality of the reports might be impacted if the analysis is aligned to money managers' goals INDEPENDENT: Who: These analysts are not associated with a brokerage or a full- service investment bank Profile: Such analysts typically have a subscription or fee- based revenue model Conflict of interest risk: Moderate. There is a fair chance of conflict of interest as the firm may ask independent analysts to provide positive views on it. There is a risk of vested interest when such analysts provide their views on the media OTHERS: Besides these, three broad categories, newspaper, news channels, wire agencies provide research analyses, either primary or an aggregation from various sources
| | Sebi diktat on analysts no sweat for research houses | |
SAMIE MODAK
Mumbai, 4 December The Securities and Exchange Board of India's ( Sebi's) draft guidelines on regulating and monitoring the research analyst community are allencompassing in nature, but the target audience isn't perturbed. Large investment banks and brokering houses say the curbs prescribed in the regulations are less stringent compared to the self- regulatory framework they have already put in place. For example, several brokerages have pre- trade approval systems in place for analysts. Also, some brokerages say they have a complete ban on analysts from dealing in shares they track. Going ahead, however, these entities will have to tweak their guidelines to align them with Sebi regulations. This is what Sebi has said. Equity research analysts, both domestic and foreign, can give recommendations on stocks and sectors only after they obtain a certificate of registration from Sebi. The rationale behind the long- awaited framework is to have regulatory oversight on equity research done in the country to ensure that the advice given by analysts is in good faith and devoid of any vested interest, the regulator says. The proposed Sebi ( Research Analysts) Regulations, 2013, prescribe aminimum net worth and trading curbs, and put greater responsibility on analysts and intermediaries who provide equity research. They propose to introduce curbs on analysts while dealing in the securities they recommend. Analysts or a brokerage will also not be allowed to deal in shares of companies a month before and five days after the publishing of research reports. Also, analysts will be barred from publishing or recommending asecurity traded by them in the previous 30 days. The regulations also state that the compensation or bonuses of an analysts should not be tied to any specific investment banking or brokerage transactions. The regulations also bar an analyst or a brokerage from issuing research reports or making public appearances on companies where they act as investment bankers in IPOs or FPOs. The restriction will be for 50 days post completion of an IPO and 10 days post completion of a secondary share sale. For instance, the six investment banks handling the PowerGrid offering will not be allowed to publish a research report on the company until 10 days after the FPO is completed. As far as applicability is concerned, the regulations are primarily aimed at individuals and entities whose main business activity is equity research. The new framework applies to all three -- sell- side, buy- side and independent research analysts. It also applies to entities which employ research analysts or distribute thirdparty reports. It also mandates foreign citizens, who wish to conduct research activity on Indian securities, to set up shop in the country. In- house equity research teams at media houses have been excluded from registration, according to people close to the development. A Sebi official says journalists who give stock- specific views may not have to register, but they will have to provide disclosures on their stock holdings. Sebi has also kept out investment advisors, fund managers, proxy advisory firms, private equity and hedge funds from registration under the research analyst regulations. However, the regulator has said if these entities " make commentaries or recommendations concerning securities or public offers through public media" they will have to adhere to tighter disclosure and record- keeping norms prescribed in the research analyst regulations. Already most independent analysts who give advice for fees have registered under the Investment Advisor Regulations following a Sebi diktat earlier this year. They will now just have to follow the disclosure and other record- keeping norms. Interestingly, the regulations mention public media comprising radio, television or print media, but leave out the web. Experts say advice provided by analysts through the internet should also have similar curbs as other media. Banks, research houses cite self- regulatory framework; journalists excluded from registration but may have to disclose stock holdings ANALYST CATEGORIES & POSSIBLE CONFLICT OF INTEREST SELL- SIDE: Who: Research analysts at brokerages Profile: Publish research reports on stocks and sectors. Such reports, typically, have a price target and recommendations such as buy, sell and hold Conflict of interest risk: High. Chances of conflict of interest are high as their organisation might be doing multiple functions such as broking, investment banking. For instance, a research analyst working with a bank might be asked to give a ' buy' recommendation on a stock of a company that is a corporate client of the bank BUY- SIDE: Who: Analysts at money managers such as mutual funds, insurance companies or portfolio managers Profile: Analysts do propriety research which is circulated to senior management, which uses it for executing trades Conflict of interest risk: Low. The probability of conflict of interest is low as it is mostly for self consumption. However, it is likely the neutrality of the reports might be impacted if the analysis is aligned to money managers' goals INDEPENDENT: Who: These analysts are not associated with a brokerage or a full- service investment bank Profile: Such analysts typically have a subscription or fee- based revenue model Conflict of interest risk: Moderate. There is a fair chance of conflict of interest as the firm may ask independent analysts to provide positive views on it. There is a risk of vested interest when such analysts provide their views on the media OTHERS: Besides these, three broad categories, newspaper, news channels, wire agencies provide research analyses, either primary or an aggregation from various sources | | Source Business line NSEL: Financial Tech may not get another chance to quiz audit firm SURESH P. IYENGAR MUMBAI, DEC. 4: Financial Technologies, which missed an opportunity to cross examine Grant Thornton on Tuesday, may not get another chance to do so. Ramesh Abhishek, Chairman, Forward Markets Commission (FMC), said Financial Technologies had already been informed that the time for cross examination would not be extended beyond December 3. "Joseph Massey had appeared on Tuesday (November 3). The three individuals (Jignesh Shah, Joseph Massey, Shreekant Javalgekar) have not even asked for more time. After Thursday's cross examination, the Commission will decide the matter," he said. Asked how soon a decision was expected, Abhishek said the Commission cannot commit on how long it would take to pass an order. Based on the audit firm's forensic report, the four members including Jignesh Shah, Joseph Massey, Shreekant Javalgekar and Financial Technologies were issued show cause notices by the commodity market regulator FMC, to prove their 'fit and proper' criteria to be associated with the functioning of exchanges. Responding to the show cause, all the four members sought permission to cross examine Grant Thornton and a time was fixed on December 3. Cross examination
According to sources, Massey claimed that the cross examination could not happen as their lawyers were engaged in the Court. He provided five alternative dates next week for consideration. Last week, Grant Thornton had posed a similar request seeking two weeks time, but the market regulator turned it down and fixed the meeting for December 3. Criteria
The 'fit and proper' criteria of these four members is under question after the National Spot Exchange, promoted by Financial Technologies, failed to settle trade worth Rs 5,600 crore. All these members held key positions in NSEL. The commodity market regulator is expected to pronounce its verdict early next month. Once declared not 'fit and proper' by the FMC, all the four former directors of MCX would not be able to associate themselves with any exchanges. Though they have the right to appeal against the decision in the appropriate court, it may have an impact on Jignesh Shah-owned Financial Technologies, which has interest in many commodity exchanges abroad. suresh.i@thehindu.co.in More arrests likely, says Economic Offences Wing OUR BUREAU MUMBAI, DEC. 4: The Economic Offences Wing of the Mumbai police said it is considering disbursing money on a pro-rata basis to the affected investors of the National Spot Exchange Ltd payment scam, even before a chargesheet has been filed. Joint Commissioner of Mumbai police Himanshu Roy on Wednesday said that usually liquidation of assets is carried out only after a chargesheet is filed. However, this is a standalone case involving large number of investors, "who have pressing needs, so we are considering liquidation," he said. The payment would be done from the properties, bank accounts and other assets of the accused. On Tuesday, the Economic Offences Wing (EOW) had attached the assets of Jignesh Shah, promoter of National Spot Exchange Ltd (NSEL), Joseph Massey, former chief executive officer of MCX Stock Exchange Ltd; Shreekant Javalgekar former chief executive officer and managing director of Multi Commodity Exchange of India Ltd (MCX); and Shankarlal Guru, former Chairman of NSEL, in connection with the scam. Roy said that the EOW was determined to take the case to its logical conclusion and in the coming days more arrests are likely to be made in the case. The Securities and Exchange Board of India has also been informed about the attachment of shares of Jignesh Shah and other directors of NSEL in various companies, he said. NSEL investors also met Roy on Wednesday and asked the police to take action against Javalgekar, as they alleged that he was the main financial controller of MCX, NSEL and Financial Technologies, and was fully aware of all the issues in the companies. Roy said he would look into the matter. rahul.wadke@thehindu.co.in (This article was published on December 4, 2013) Keywords: Economic Offences Wing, Mumbai police, With Rs 2,673 cr dues, Kingfisher is top defaulter: Bank staff union OUR BUREAU | | AIBEA lists out top 50 bad loan accounts KOCHI, DEC. 4: Kingfisher Airlines tops a list of 50 top loan defaulters drawn up by public sector banks. The list, released by the All-India Bank Employees Association, says Vijay Mallya's now-defunct airline owed Rs 2,673 crore to public sector banks. The list was released by the trade union ahead of its December 5 'All-India Demands Day' against what it calls the corporate loot of public money and to press for stringent measures to recover bad loans from corporate borrowers. According to the union, Winsome Diamond and Jewellery Company, with dues of Rs 2,660 crore, is the second highest defaulter, followed by Electrotherm India Ltd at Rs 2,211 crore. Some of the other big-ticket defaulters are: Zoom Developers (Rs 1,810 crore), Sterling BioTech (Rs 1,732 crore), S. Kumars Nationwide (Rs 1,692 crore), Surya Vinayak Industries (Rs 1,446 crore), Corporate Ispat Alloys (Rs 1,360 crore), Forever Precious Jewellery and Diamonds (Rs 1,254 crore), and Sterling Oil Resources (Rs 1,197 crore). The union, in a statement, pointed out that bad loans in public sector banks had crossed Rs 1,64,000 crore. "In the name of reforms and liberalisation, banking regulations are being de-regulated; one of the adverse effects of this is the increase in bad loans in the banks where big borrowers take loans (which) they do not repay," the union said. 'Kick out bad loans before they kill the banks' is the slogan the union will highlight during the December 5 demands-day observance. Much ado about independent directors SHINOJ KOSHY PREETHA S. Independent company directors cannot really affect the board's functioning. The new law fails to grasp this. The Companies Act, 1956 ("1956 Act") and Clause 49 of the Listing Agreement ("Listing Agreement") deal with the concept of 'independent directors' with respect to listed companies. While the listing standards mandated the listed companies' board to include independent directors, neither the Listing Agreement nor the 1956 Act precisely defined the duties, roles and liabilities of an independent director. The Companies Act, 2013 ("2013 Act"), on the other hand, attempts to crystallise the role of independent directors, aimed at ensuring higher standards of independence. Detailed provisions
The Listing Agreement required at least one-third of the board where the chairman of the board is a non-executive director or half of the board to comprise independent directors, if the chairman is an executive director. But the 2013 Act relaxes this requirement by mandating only one-third of the board (of public listed companies) to comprise independent directors. In addition to the qualifications prescribed under the Listing Agreement the 2013 Act also prescribes detailed qualifications for the appointment of an independent director. Some of these qualifications include: (i) he/she should be a person of integrity, relevant expertise and experience; (ii) who is or was not a promoter of the company or its holding, subsidiary or associate company; (iii) who is not related to the promoters or directors in the company, its holding, subsidiary or associate company; (iv) who has or had no pecuniary relationship with the company, its holding, subsidiary or associate company, or their promoters, or directors during the two immediately preceding financial years or during the current financial year; (v) none of whose relatives have or had pecuniary relationship or transaction with the company, its holding, subsidiary or associate company, or their promoters, or directors amounting to 2 per cent or more of its gross turnover or total income or Rs 50 lakh or higher amount which may be prescribed, whichever is lower, during the two immediately preceding financial years or during the current financial year. Built-in checks
The overall intent behind these provisions is to ensure that an independent director has neither any pecuniary relationship with, nor any monetary interest in the company. In addition, the 2013 Act, unlike the Listing Agreement, sets forth stringent provisions with respect to the relatives of the proposed appointee. Several other restrictions, including prohibition on the issuance of stock options to independent directors, have been built into the 2013 Act to ensure that there is no financial nexus between the independent director and the company. Apart from the restriction on stock options, the remuneration of independent directors has also been limited to sitting fees, reimbursement of expenses for participation in the board and other meetings and profit related commission as may be approved by the shareholders. Every independent director should give a declaration of independence at the first meeting of the board and thereafter at the first meeting of the board in every financial year or whenever there is a change in the circumstances which affect his/her status as an independent director. The 2013 Act also sets forth a clear demarcation between a nominee director and an independent director, by stipulating that an independent director will be a director other than a lender or an investor's nominee director. It seems listed companies would have to comply with the requirements stipulated under both, which would eventually require many listed companies to revamp the existing processes. Areas of conflict
Some of the potential areas of conflict between the Listing Agreement and the 2013 Act are that while the Listing Agreement states that an independent director must not "have any material pecuniary relationship" or transaction with the company, the 2013 Act states that an independent director "must not have had any pecuniary relationship." The proposed disqualification arising from any pecuniary relationship in the previous two financial years under the 2013 Act may be unreasonably restrictive. There may be situations where a pecuniary transaction of the proposed independent director does not affect the director's independence. The 2013 Act will also bring in a new provision regarding limitation of liability of independent directors. Liability under the 1956 Act was attributable only to "officers in default", wherein independent directors were not covered within its ambit and hence did not impose any liability on them for the actions of the board. The 2013 Act, on the other hand, expands the scope of "officers in default" and provides for liability of independent directors. However, such liability is limited to acts of omission or commission by a company which had occurred with his knowledge. The 2013 Act is a positive step towards setting higher standards of integrity and independence for independent directors. However when examined critically, it seems that while expanding their roles and defining their liabilities, the 2013 Act fails to recognise that independent directors have a very limited ability to affect the functioning of a board. Their most effective tool is to record a dissent or indeed resign from the board which may force a company to follow best practices in corporate governance. In addition, a closer scrutiny of the specific norms pertaining to independent directors in the 2013 Act indicates that certain provisions exhibit a conflict with the Listing Agreement as discussed earlier, necessitating the requirement of suitable changes to be effected in the Listing Agreement, to ensure that it continues to apply along with the 2013 Act. (The authors are with Nishith Desai Associates) (This article was published on December 4, 2013) Keywords: Companies Act, Listing Agreement, independent directors, listed companies |
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