NSEL admitted members without KYC documents
NSUNDARESHA SUBRAMANIAN
Mumbai, 9 October
National Spot Exchange Ltd (NSEL), in the middle of a ₹ 5,600- crore
payment crisis, admitted several of its 24 borrowing members without
proper compliance with know your customer ( KYC) norms and failed in
due diligence, a forensic auditor has found.
The refusal by these 24 members to pay their dues triggered the
payment crisis in August.
During a forensic audit commissioned by the Forward Markets Commission
( FMC), it emerged " 25 buyers were introduced on the NSEL platform
over the last four years.
No due diligence of these buyers was done and buyers with very poor
credentials had been introduced into the NSEL system." NSEL admitted
several of its borrowing members such as N K Proteins, Mohan India,
Sankhya Investments, Yathuri, Namdhari Food International, Tavishi
Enterprises, Shree Radhey Trading, Metkore Alloys & Industries and
Topworth Steel and Powers, when one or more of their KYC documents
such as identity proof, address proof, details of promoter group, etc,
were not available.
These members account for about ₹ 2,700 crore or nearly half of the
total dues. Some of these such as Tavishi and Yathuri have gone
hostile. Tavishi has even initiated legal proceedings, saying it never
received the goods against ₹ 346 crore dues shown by the exchange.
In some cases, even the security deposit was not fully received. In
the case of Chandigarh- based LOIL group entities and Andhra- based
Sankhya Investments, the security deposit was only partially received.
Further, the audit also found LOIL group firms LOIL Overseas, LOIL
continental foods and LOIL Health Foods had a common director in
Balbir Singh. This was in contravention of Rule 33 of the NSEL rules.
Yet, exceptional approval was given for them to trade by the then
managing director & chief executive officer, Anjani Sinha, and his
juniors, but the grounds of this exceptional approval were not
documented, the auditor found.
The report also found no evaluation was conducted on the annual
compliance documents collected from members.
In the absence of effective monitoring, no penal actions have been
initiated. No member was ever barred or deactivated on such grounds.
FMC has issued a showcause notice based on the findings of the forensic auditor.
An NSEL spokesperson said he could not offer any comments, since the
report was confidential.
Forensic audit finds some members did not put in enough security
deposit NOT ENOUGH KNOWN
Members with incomplete KYC documentation ( Amount due in ₹ cr)
NK Proteins 929 Mohan India 605 Yathuri Associates 460 Tavishi
Enterprises 346 Topworth Steels 182 Metkore Alloys 114 Namdhari Food
Intl 53 Shree Radhey Trading 36 Sankhya Investments 7
MCX's board to get govt flavour
NSEL PAYMENT CRISIS FALLOUT NSUNDARESHA SUBRAMANIAN
Mumbai, 9 October
Nudged by the Forward Markets Commission (FMC), Multi Commodity
Exchange ( MCX) has written to five institutional shareholders to
nominate their representatives on the exchange's board.
Requests have been sent to IFCI, Bank of India, Union Bank of India,
Corporation Bank and HDFC Bank. Once the proposal is implemented,
Financial Technologies, which has been controlling the exchange, is
likely to have just one board seat.
Officials in the know said the move was independent of the regulator's
show- cause notice to the three Financial Technologies Group
directors—Jignesh Shah, Joseph Massey and Shrikant Javaglekar.
"Once these directors are appointed, MCX would have six institutional
nominees, as one director representing Nabard is already there.
Eventually, Financial Technologies will have only a single director in
the board," said a senior regulatory official familiar with the
development.
The exchange's board would have 14 directors, seven of whom would be
independent ones. FMC wants institutional representatives be nominated
for non- independent executive roles. Executive directors would be
involved in the day- to- day running of the exchange.
The restructuring is likely to give the Centre indirect control over
the exchange's affairs, with five of the six institutional
investors--- Nabard, IFCI, Bank of India, Union Bank of India and
Corporation Bank —under the administrative control of the finance
ministry.
Also, three of the seven independent directors would be nominated by
FMC. Traditionally under the control of the consumer affairs ministry,
FMC affairs have recently been brought under the finance ministry's
ambit.
In response to an email seeking comment, an MCX spokesperson said, "
FMC has given revised guidelines to reconstitute commex boards. In
order to meet its guidelines, we are in the process of reconstituting
the MCX board and have asked institutional shareholders to nominate
board representatives." The regulator's move is aimed at insulating
the regulated MCX from the troubles of National Spot Exchange Ltd
(NSEL), which has run into a ₹ 5,600- crore payment crisis. "The
restructured board is likely to bring in a new management and take
corrective steps wherever there are issues," said the official quoted
earlier.
According to the latest shareholding pattern, Financial Technologies,
the promoter of NSEL, holds 26 per cent in MCX. A few industry
officials said this holding would give Financial Technologies a
quarter of the non- independent board seats — two directors out of
seven. But Financial Technologies would still be a minority on the
board. With 26 per cent stake, however, the group would be able to
block special resolutions, as company law provisions require a
threefourths majority for a special resolution to be passed.
IFCI holds 4.79 per cent stake in MCX. With 3.06 per cent stake,
Nabard is the second largest shareholder among state- owned
institutions. While Corporation Bank owns 2.95 per cent, Bank of
India, Union Bank and HDFC Bank hold about one per cent each.
Bourse has asked IFCI, three public sector banks to nominate
directors; HDFC Bank to get a board seat IN THE WORKS
|After the restructuring, Financial Technologies is likely to have
just one board seat |Once these directors are appointed, MCX would
have six institutional nominees |FMC wants institutional
representatives be nominated for nonindependent executive roles |The
restructuring is likely to give the Centre indirect control over the
exchange's affairs
Sebi allows SME listing sans IPOs
BS REPORTER
Mumbai, 9 October
The Securities and Exchange Board of India ( Sebi) has allowed listing
of small and medium enterprises ( SMEs) without raising any money from
the public, a move expected to help provide an exit avenue to existing
investors.
The companies would be listed on a platform which is open only to
institutional investors and which would have a minimum trading lot of
₹ 10 lakh, according to a regulatory notification dated October 8.
Pavan Kumar Vijay, managing director at financial consultancy firm
Corporate Professionals, said the move would aid price discovery and
liquidity for the shares of such companies.
"Listing will afford companies better valuations and also help make it
easier for investors to sell their stake," he said.
Sebi has said promoters need to have at least 20 per cent stake in the company.
"Not less than 20 per cent of the post listing capital shall be held
by the promoters at the time of listing of specified securities of the
small and medium enterprises, which shall be lockedin for a period of
three years from the date of listing," the notification said.
Sebit has also put in place conditions to keep away wilful defaulters
and those who have had a run- in with regulators, according to the
notification released on Wednesday. It bars listing by companies whose
name appears in the wilful defaulters list of the Reserve Bank of
India. Sebi is also looking to keep out companies whose promoter,
group company or directors appear in the list.
Also, there should be no winding up petition against the company or
regulatory action against it for five years, said the notification.
Other criteria include not completing more than 10 years after
incorporation and revenues, which have not exceeded ₹ 100 crore.
The companies that list on the platform would also require to have
received funding or investment from at least one from a list of
eligible entities, which include angel investors, alternative
investment funds, scheduled banks or specialised international
multilateral agencies.
The list also extends to merchant bankers and qualified institutional
investors whose stake in the company would be locked in for at least
three years from the time of listing.
The exit from such an institutional trading platform will be subject
to a nod from a majority of non- promoter shareholders and the stock
exchange where it is listed.
The exit would also happen if the company has been listed for 10 years
or fulfils criteria such as revenues of more than ₹ 300 crore or
market capitalisation, which is greater than ₹ 500 crore.
The exchange can de- list the company if it fails to file periodic
filings or comply with corporate governance norms for more than a
year.
The promoters and nonindependent directors of a company, which is de-
listed for non- compliance, will not be allowed to list another
company on the platform for five years.
Companies cannot come out with an IPO while listed on the platform but
can raise capital through private placement or rights issue.
SMALL GOES BIG
Features of the new SME platform
|SME allowed to list without raising of funds |Institutional platform
to help price discovery, liquidity |Minimum trading lot of ₹ 10 lakh
|Promoter lock- in for three years |Sebi bars entities that are apart
of wilful defaulters' list or have faced regulatory scrutiny
Sebi mulls trade cancellation to prevent ' freakouts'
BS REPORTER
Mumbai, 9 October
Market regulator Securities and Exchange Board of India (Sebi) on
Wednesday proposed aframework for cancellation or annulment of trades
to deal with the growing instances of freak trades. A freak or
erroneous trade is a transaction executed either by a punching error
by amarket dealer or through malfunction of a trading system.
Currently, exchanges are empowered to annul trades and have their own
bye- laws in the absence of a regulatory framework.
To have uniformity and transparency, the market regulator, in a
discussion paper, proposed a regulatory framework for the annulment of
trades.
Sebi has said that trades that are executed shall not be annulled
under normal circumstances.
"Trade annulment should only be considered under exceptional
circumstances ( fraud, market manipulation, regulatory action or error
that impacts the sanctity of price discovery, etc). In such cases, the
exchange may also suo moto undertake examination of trades for
cancellation," Sebi has said in a discussion paper.
The regulator has said as the decision to cancel trades impacts a
large set of market users, it should only be invoked in the interest
of the market at large.
"Such traders/ investors may find themselves at the losing end for no
fault of theirs in the event such ' erroneous' trades are cancelled or
modified," the paper added.
The exchanges will have to be clearly define circumstances under which
a trade annulment request shall be accepted. The regulator has said
annulment shall be accepted if all the parties involved are in
agreement to do so.
Under the proposed regulatory framework for trade annulment, Sebi has
proposed to apply deterrent penalties in the form of fines or
suspension of trading rights of the stock broker. It has also
prescribed a time limit for accepting a request for annulment.
Typically, trades executed on exchanges are considered final. However,
in some exceptional cases, including the volume surge during Muhurat
day trading on BSE triggered by faulty algorithm, exchanges have
annulled trades.
Refusal of trade annulment also can be a contentious issue between an
exchange and a broker as seen in case of the infamous Emkay flash
crash.
RAGE AGAINST THE MACHINE
Recent freak trade incidents observed in the Indian securities market
Exchange Date Incident
BSE Oct 26, ' 11 A trading algorithm malfunctioned resulting in a
large movement in the Sensex futures in less than three minutes NSE
Apr 20,' 12 An error by a trading algorithm resulted in a fall in the
prices of Infosys futures by 19% NSE Oct 05, ' 12 On account of
erroneous orders of a stock broker resulting in multiple trades for an
aggregate value of over ₹ 650 crore, the Nifty circuit breakers got
triggered and trading in the NSE's cash market segmentwas halted NSE
Feb 01, ' 13 Malfunction of a trading software of a stock broker
resulted in erroneous orders in the scrips of Tata Motors and
UltraTech Cement
Source: Sebi discussion paper
--
CS A Rengarajan
9381011200
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