Thursday, October 22, 2009

Rising compliance cost hits broking firms' margins

At a time of a slowdown, brokerages are facing intense pressure on their incomes. Volumes are falling and brokers, in general, are a

worried lot. It is at a time like this when the regulator SEBI, with the objective of making the markets more compliant, has decided to come up with additional regulations.

Competition is intense among brokerages and there is no way broking rates could be raised. Hence, they are facing lower margins. At the same time, compliance is something that no brokerage wants to compromise on. This is largely because clients prefer dealing with a brokerage whose reputation is aboveboard.

The latest circular from the regulator says that an employee of a brokerage house has to verify and sign every new account. A direct selling agent (DSA) or a franchisee is not allowed to do it. Further, if a broking company has memberships in both BSE and NSE through two different companies, employees of only the company which is a member of the exchange can verify that form.

Most brokers work through their franchisees and have DSAs who acquire customers in smaller cities.

Another compliance requirement which has come up this year is that a copy of the signed client agreement has to be given to a client. This document often runs to 50 pages and there is a cost attached to photocopying and sending it by a courier. This could run to Rs 40-50 per client. Players like Sharekhan digitises account opening forms and sends a CD to the customer. Angel Broking, sends this form along with the account opening kit to the customers, thereby cutting down the couriering cost. An acknowledgement that needs to be given to clients for every collateral received is done through a text message.

Finally, the exchange also stipulates, margin statements need to be mailed to clients on a daily basis. Here, there is the cost of printing and couriering as well. Some smart brokers, mail this along with the contract notes to clients with the idea of cutting costs.

For the markets to be healthy, there is a need for strong compliance apart from, of course, having a watchdog. Brokers are not complaining since there are long-term benefits.

Friday, October 2, 2009

2 October 2009

2 October 2009

Many have welcomed this three-day working week, shortened by Monday's celebrations for Hindu Goddess Durga and Mahatma Gandhi's birthday today.

Particularly lawyers from AZB, Freshfields and Platinum had a long non-working weekend to look forward to after the intense Bharti Airtel-MTN merger talks collapsed.
Capital markets lawyers could also use a break. At least 17 draft IPO prospectuses were filed by a handful of firms in the last week as clients scrambled before the expiry of their March accounts.

And law firm managers deserve a holiday too. Vaish Associates made history by inking India's first best friendship with a Chinese-Singaporean firm, which is looking to attack the Indian market from Shanghai.

However, it is unlikely that the ex-ALMT partner who started up his own firm will have much rest this weekend.

The managers of Hemant Sahai and Paras Kuhad will probably have their hands full too in bedding down yesterday's merger between the firms to create PHA Advocates.

The firms' practice areas are certainly a good fit. "The merger will bring about synergies […] combining strengths of the litigation and corporate practice," comments ex-Paras Kuhad partner Bunty Jha, who left one year ago.

Others close to the firms are less charitable. Some fear cultural clashes and Hemant Sahai in particular has faced a tough year of partner defections.

Granted, managing partner Hemant Sahai has vowed to replenish his old firm's ranks aggressively and PHA has a more modern democratic management structure that they want to build on further.

But somehow the numbers do not quite stack up: will the merged firm be 50 lawyers smaller than both firms were in aggregate? And what will happen to two of their offices?

Saturday, September 5, 2009

Derivatives deals before 2006 were speculative, rules Kolkata ITAT

IT IS a ruling that could have an impact on assessments of stock market brokers and derivatives traders prior to April 2006. In variance to a Mumbai tribunal ruling, a special bench of the Kolkata Income Tax Appellate Tribunal (ITAT) recently held that derivatives transactions conducted before April 2006 were speculative, and income or loss arising from such deals cannot be offset against non-speculative losses or gains.

Tax experts pointed out that in light of the ruling, several old cases involving stock market constituents could be reopened or pending assessments could be severely hit. They expect the special bench ruling to be contested in a higher court.

The special bench judgement was delivered in a case pertaining to a Kolkata-based assessee — Shree Capital Services — for the assessment year 2004-05. It varied with a Mumbai tribunal ruling of September 25, 2007, in case of SSKI Investor Services for the assessment year 2001-02. The Kolkata special bench ruled: “Futures and options transactions are speculative U/S 43(5). Sec 43 (5) (d) is not retrospective.” Prior to the amendment of Section 43(5) of the IT Act, there was ambiguity regarding the treatment of income or loss generated from d e r i v a t i v e s transactions. However, the ambiguity was removed by an amendment {S. 43(5)(d)} effective from April 2006, which ruled that if such t r a n s a c t i o n s were carried out on recognised stock exchanges, they would not be deemed speculative.

The Bombay tribunal had in 2007 clarified the amendment to Section 43(5) was retrospective by ruling, “Dealing in derivatives is a separate type of t r a n s a c t i o n , which does not involve any purchase or sale of shares. Therefore, a loss on account of derivatives trading cannot be treated as speculative at all.”

When contacted, most brokers said they were unaware of the special bench judgement. Currently, loss or profit from a derivatives transaction can be offset against other non-speculative profit or loss. This provides some tax relief to assessees, who deal in stock futures and options.

However, by ruling that the amendment is not retrospective, assessments pending prior to April 1, 2006 will be hit, with assessees being unable to avail of tax relief. “Although the special bench judgement practically overrules the division bench judgement, there are several other Supreme Court judgements upholding the view that any amendment which is clarificatory in nature is always retrospective,” said chartered accountant Bhupendra Shah. “Therefore, the special bench judgement is most likely to be contested further before the Kolkata High Court on that line.”

Tax experts pointed out that in light of the ruling, several old cases involving stock market constituents could be reopened or pending assessments could be severely hit

They expect the special bench ruling to be contested in a higher court

The Bombay tribunal had in 2007 clarified the amendment to Section 43(5) was retrospective

Currently, loss or profit from a derivatives transaction can be offset against other non-speculative profit or loss

Economic Times
Ram N Sahgal & Vijay Gurav MUMBAI

New Sebi norms reduce public issue time to 10 days

THE Securities and Exchange Board of India (Sebi) has notified new guidelines that, among other things, reduces the overall time period for public issues to 10 days, and seeks disclosures relating to pledged shares in the prospectus.

The new guidelines — Issue of Capital and Disclosure Requirements (ICDR) Regulations — replace the existing Disclosure and Investor Protection (DIP) guidelines. Earlier, there was no clarity on the timeframe, especially when the price band was revised.

According to a Sebi circular, ICDR regulations, while incorporating the provisions of DIP guidelines, have included “certain changes made by removing the redundant provisions, modifying certain provisions on account of changes necessitated due to market design and bringing more clarity to the provisions.”

Under the new guidelines, the option of a 75% book building and 25% fixed price issue — which was rarely exercised — has been done away with. It has to be either a fixed price issue or a book-built one. Also, companies coming out with fixed price issues would no longer need to publish the price in the draft document.

The new guidelines stipulate that the total issue period should not exceed 10 days, including any revision in the price. The earlier guidelines were not clear on this matter, especially when the price band was revised. Meanwhile, the allotment/refund period in public issues has been capped at 15 days. Previously, the allotment/refund period for fixed price was 30 days.

In another important development and in its attempt to bring in more transparency in the grievance redressal mechanism, the market regulator has directed stock exchanges to disclose details of complaints lodged by investors against trading members and companies listed on the exchange, on their website. These disclosures would also include details pertaining to arbitration and penal action against trading members.

The new regulations also give Sebi the control of the surplus money in green shoe option bank account, as this money would have to be transferred to Sebi’s Investor Protection and Education Fund (IPEF). Earlier, this surplus money was transferred to the Investor Protection Fund of stock exchanges.

Among other things, the new guidelines have also clarified the definition of employees, key management personnel, restrictions on advertisements, currency of financial statements and the documents that have to be attached with the due diligence certificate.

Sub-brokers may not require Sebi stamp

SUB-BROKERS in the stock market are likely to be exempted from the requirement of registering with the capital market regulator before starting their operations as per a proposal under consideration of the finance ministry and the Securities and Exchange Board of India (Sebi).

The move is to promote self-regulation through an industry body under the supervision of Sebi, said an official who asked not to be named. Other than registration, all other market operations will, however, be directly regulated by Sebi, he said.

The proposal is also in line with the recommendations made on Wednesday by the committee on investor awareness and protection chaired by Pension Fund Regulatory Development Authority (PFRDA) chairman D Swarup. The panel suggested a self-regulatory organisation (SRO) to be called the Financial Well-Being Board of India for all investment advisors cutting across products, regulators and markets. The proposed body will also ensure that a set of common standards are followed by all investment advisors.

There are about 50,000 subbrokers now and the number is growing, making it difficult for Sebi to dedicate time and resources for something that could be done at the industry level. “The first level of due diligence of sub-brokers can be done by an SRO, under Sebi’s supervision,” said the official. That is, assessing the eligibility, qualifications and the statutory requirements for operating as a sub-broker will be done by SRO.

The proposal indicates that the government’s plan to rely more on self-regulation by the industry stays so only under the statutory regulator’s supervision and only at the level of filtering new entrants. The global financial crisis had shown that excessive self-regulation may boomerang.

Source :

Economic times 5-Sep-2009

Gireesh Chandra Prasad NEW DELHI

Monday, February 2, 2009

PR-SEBI Board Meeting

PR No. 73/2009 SEBI Board Meeting
The SEBI Board meeting held in Mumbai today took the following decisions:

(i) Listed companies to declare dividend on per share basis only
It has been decided to amend the listing agreement to provide that listed entities shall declare dividend on per-share basis only. At present, there is no uniformity in declaring dividend. Some companies declare dividend on per share basis and some as a percentage of face value of the shares. Declaration of dividend as a percentage of face value has the potential to mislead the investors in case face values of the shares of two companies are different.

(ii) Timelines for bonus issues reduced
It has been decided to reduce the period for completing a bonus issue to 15 days, where no shareholders’ approval is required as per articles of association of the company and to 60 days where shareholders’ approval is required as per Articles of Association of the company. At present, in terms of the DIP Guidelines, listed companies are required to complete a bonus issue within a maximum period of six months from the date of approval of the issue by the Board of the company.

(iii) Time frame for announcing the price band for Initial Public Offering (IPO) shortened
It has been decided to amend the DIP Guidelines to enable the issuer company making an IPO to declare the floor price/ price band at least two working days before the date of opening of IPO subject to wide dissemination of price band through newspaper advertisements, availability in websites etc. The issue advertisements shall also disclose the financial ratios calculated for both upper and lower end of the price band. At present, in terms of the DIP Guidelines, in case of an IPO, either the floor price or the price band is required to be disclosed in the Red Herring Prospectus (RHP) i.e. about two weeks before the date of opening of the IPO.

(iv)Review of preferential allotment guidelines for warrants :
It has been decided to amend the DIP Guidelines to increase the upfront margin to be paid by allottees of warrants to 25%. At present, in terms of DIP Guidelines, the allottees of warrants are required to pay a margin of 10% as upfront payment at the time of allotment.

(v) Relaxation of pricing norms - Satyam Computer Services Ltd.(Satyam)
The SEBI Board examined the request of Satyam Computers Services Limited for exemption from certain provisions of SEBI (Substantial Acquisition of Shares and Takeovers) Regulations 1997. The Board recognized the special circumstances that have arisen in the affairs of the company and concluded that the issue needs to be dealt with in the general context. Accordingly it was decided to appropriately amend the regulations / guidelines to enable a transparent process for arriving at the price for such acquisition.
The above measures will be effective from the date of amendment to the Regulations / DIP Guidelines / Listing Agreement.

(vi) Investor Protection and Education Fund (IPEF):
The Board approved regulations for governance of IPEF. The fund may be credited by:
i) contribution as may be made by the Board to the Fund.
ii)Grants and donations given to the Fund by the Central Government, State Government or any other entity approved by Board for this purpose;
iii)Proceeds of foreclosures of deposit/innovation of bank guarantee/sale of the securities kept in the escrow accounts by an acquirer in case of non fulfillment of its obligations under the Securities and Exchange Board of India (SAST) Regulations, 1997.
vi.(a) The Fund shall be used for investor protection and promotion of investor awareness and education. The Fund would be utilized for the following purposes in particular:-
i) Educational activities– seminars, training, research and publications – aimed at investors;
ii) Awareness programmes through media – print, electronic or otherwise – aimed at investors;
iii) Funding investor education and awareness activities of Investors’ Associations recognized by SEBI;
iv) Aiding SEBI recognized investor associations to undertake legal proceedings in the interest of investors in securities that are listed or proposed to be listed;

February 2, 2009

Thursday, December 11, 2008

Sebi broadens definition of insider in new norms

Any Person Connected With A Co In The Past Or Present & Recipient Of Price-Sensitive Information Is An Insider

CAPITAL markets regulator Sebi has tightened its insider-trading norms by broadening the definition of the term insider to include any person who is and was connected with a company and is the recipient of pricesensitive information. The regulator has now amended its regulations to prohibit trades by a designated insider within a short period of six months. What this implies is that an insider cannot enter into an opposing transaction within a period of six months. In other words, if a company insider has acquired, or been allotted shares of his own company, he cannot sell shares of that company for the next six months from the time of purchase or allotment.

The new stringent norms are aimed at curbing the misuse of price-sensitive information, especially by those working at senior positions in listed companies.

The new regulations, which have been notified, now define an insider as any person who is, or was, connected with the company, or is deemed to have been connected with the company. Further, an insider will also include a person who is reasonably expected to have access to unpublished price-sensitive information of the company, or has received, or has had access to such price-sensitive information. Dependents of all those who are defined as insiders will also now come under the ambit of regulations.

Under the new rules, there is an also an absolute prohibition on such persons from taking positions in derivative transactions in the shares of the company at any time. In the case of subscription to initial public offers (IPOs), a designated insider will have to hold their investments for a minimum period of 30 days.

Early this year, Sebi had proposed the introduction of short-swing profits generated through inside information. As a corporate governance measure, which aligns the interests of a company’s shareholders to that of the company’s insiders, it had proposed this additional regulation based on the practice prevalent in the US. Under the new regulations, Sebi will proceed against those violating the rules on the basis of its statute book rather than the earlier proposal, under which unjust gains made by an insider were to be surrendered to the company. In a bid to curb the abuse of privileged corporate information, Sebi had initially proposed that company insiders would have to return any profits made from the purchase and sale of company shares to the company, if both transactions occur within a six-month period.

Sebi has also brought dependents of designated insiders under the ambit of the new rules.

Sebi open to sharing board agenda with public

SEBI on Thursday signalled its intention to ensure greater transparency in the working of the regulator, with its decision to place details of the agenda of the board in the public domain. The Sebi board has also decided to adopt a code of conduct to avoid a conflict of interest, involving members of the board, reports Our Bureau in Mumbai.

This code will be put up on the Sebi website, shortly. All these decisions were taken unanimously. The move to share the board agenda — reckoned to be the first in the sphere of public policy-making in the country — could well put pressure on other regulatory agencies and those engaged in public policy to open up their decision-making process to greater public scrutiny. Starting from the next board meeting, Sebi will list out the agenda papers submitted to the board on all policy issues and the minutes of such meetings.

This is expected to be done within a few days of the meeting. The agenda papers of Thursday’s board meeting will be in public domain by December 15, for instance. “When we demand transparency from the world, we also ought to do the same. People will be able to get a sense of what went into the decisions taken by us,” a senior official who did not want to be quoted said.