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written for Outlook Money April-June 2004 Postal scheme demat might get friendlier Consolidating investor-broker agreements Watch out: your fund manager is an insider! |
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June 2004 The demat (dematerialisation) facility in
postal savings schemes of National Savings Certificate (NSC) and Kisan Vikas
Patra (KVP) may be enhanced to offer wider availability to investors and
easier redemption option. The National Securities Depository (NSDL) will be
putting forth suggestions before the new government and the Department of
Posts (DoP) to this effect. At last, the Reserve Bank of India (RBI)
is getting specific with regard to the implementation of the recommendations
of the S.S.Tarapore committee on Procedures and Performance Audit on Public
Services – Banking Operations. The measures suggested by the committee
encompass wide-ranging improvement in the policies and practices of banks. The RBI has now set a deadline of 31 July
for banks to put together a transparent and thorough policy laying out all
operational aspects of deposit accounts. Having sent the banks the
committee’s recommendations, the RBI wants their internal committees to
take the necessary steps. As per a few of the committee proposals,
banks should: - not refuse to provide acknowledgement to
customers on their cheque deposit slips - not give undecipherable entries in
account statements sent to customers - dispatch account statements monthly and
not quarterly - give a minimum of one-month notice when
they alter charges - not avail confidential customer
information for cross selling their or their associates' products The RBI deadline for banks, though
belated, is a welcome move. Says G.Anand, a harassed customer of HSBC Bank
which took four working days to prematurely break his deposit: "Its
high time banks are held accountable for inferior services." It will put a halt to instances like that
of ICICI Bank jacking up charges from 1 April this year for non-maintenance
of quarterly average balance in savings accounts but notifying it in the
bank's quarterly newsletter which most customers received only in the second
week of April. Says Muralidharan R, joint general manager, ICICI Bank:
"Now that there is a fair prescription across all banks we will be
conscious about it and make it a standard operating procedure." The RBI has, however, not placed the
Tarapore committee report in the public domain. On a matter of widespread
importance for all bank customers it is only useful if the entire report is
laid threadbare before the public. Its counterpart regulator in capital
market, Securities and Exchange Board of India, makes it a point to make all
its committee reports public. The bottom line, however, is whether the banks will implement the suggested measures in true spirit. That can only happen if the RBI not only sticks to the 31 July deadline but also takes action for non-implementation of the committee's various proposals. Postal scheme demat might get friendlier June 2004 The demat (dematerialisation) facility in
postal savings schemes of National Savings Certificate (NSC) and Kisan Vikas
Patra (KVP) may be enhanced to offer wider availability to investors and
easier redemption option. The National Securities Depository (NSDL) will be
putting forth suggestions before the new government and the Department of
Posts (DoP) to this effect. Demat option in postal schemes began in
October 2003 in just 10 post offices in Mumbai and is currently available in
35 post offices, again in Mumbai only. Investors wanting to avail of the
demat option in their NSC or KVP investments can do so only in new issues
and not on previous ones. If you already have a demat account
containing your equity shares then you can hold NSCs and KVPs in the same
account. NSDL does not charge its DPs any custody charge on postal scheme
units in demat form and mandates its DPs not to levy the charge to investors
either. But retired individuals and other
investors who are not interested in equities, can open a special demat
account directly with any of designated post offices. No opening fee is
charged but the demat account can be used only for holding the permitted
postal scheme instruments and nothing else. There are no custody charges
either. Also, debits are not permitted in this account just as the physical
certificate can not be transferred. The last NSDL and the DoP discussed the
progress and value addition proposals was in March. Says C.B. Bhave,
managing director, NSDL: “We are very much likely to take up again with
the government our suggestion of instituting a system whereby the postal
department can send a redemption cheque a few days in advance of the
maturity date, or alternatively credit the investor’s bank account
directly on the maturity date.” At present, you have to keep track of the
maturity date and are required to go to the issuing post office with your
NSC or KVP certificate. Says Bhave: “If you go 10 days late you don’t
get an interest on those 10 days, whereas in demat mode the system keeps
track of the maturity dates and can intimate these to postal department in
advance.” About 2000 investors have subscribed to
new issues of NSC or KVP in demat form. If NSDL’s suggestion of automatic
redemption is accepted by the new government then they and future investors
will benefit when their investments mature six years later. Another NSDL suggestion to the government is to expand the services to post offices outside Mumbai and also consider making it mandatory for new NSC and KVP issues from those designated post offices to be in demat form. But Bhave is conscious of the fact that “this is a segment of the market that is not necessarily aware of the demat facility and it will have its initial hesitation.” But given the current benefits and the potential value additions holding your NSC or KVP investment in demat form could be a worthwhile choice. June 2004 Net FII (foreign institutional investor) selling didn't start on the first meltdown day on 14 May when the market fell steeply by eight per cent and the net sales by FIIs was the highest ever at Rs 604 crore. It had started two weeks before and four days after the first phase of voting in the elections—on 30 April. On that day the net sales was Rs 332 crore. Starting that day and by 20 May, the FIIs had pulled out a substantial investment of Rs 3,300 crore. This year, till April, FII net purchases were averaging Rs 4,700 crore per month. What was behind the FII sales? Says Prasad Nalam, chief investment officer of Sundaram mutual fund: "It was hot money was going out." But there are no clear answers yet whether it was Indian hot money (which had come in heavily through the backdoor FII route) which was going back. FIIs do not comprise only of overseas mutual funds and pension funds. Overseas investment companies and private companies are also registered as FIIs with Sebi. Some of these FIIs purchase shares but it is against derivatives deals (in the form of participatory notes that with overseas corporate entities. Sebi had made public the figures pertaining to such investments in December last year but stopped thereafter. As per Sebi figures, as of November 30, the FII net investments in the form of such back-to-back derivatives deals amounted to 26 per cent (Rs 24,000 crore) of total net FII investments of about Rs 90,000 crore. Sebi's own investigation in August last year had revealed that of the many overseas corporate bodies with whom the FIIs were entering into derivatives deals there were 31 which had Indian-sounding names. Was this the Indian hot money and was it meant to keep the markets propped up uptil the elections? As the voting for the elections began, were they the ones who started pulling out? Only a Sebi investigation can reveal the true picture behind the heavy FII selling and the earlier heavy FII buying. But is Sebi investigating? June 2004 With futures and options trading on indices and stocks, investors have got the choice to hedge their investments during highly volatile times. Given the fact that most investors are invested in a portfolio of stocks rather than one stock or two the two best instruments for hedging are index futures and index options. Both serve the same objective but through slightly different results. Trading volumes in derivatives are heavily concentrated on the National Stock Exchange with very little volumes registered on Bombay Stock Exchange's derivatives segment. The index futures and index options on the NSE are on two of its indices—its main 50-stock S&P CNX Nifty and an information-technology-specific 20-stock CNX IT. As most portfolios have an element of diversification you have to use Nifty futures and options. To use either for hedging you have to trade at a minimum market lot of 200 Nifty which is the size of one contract. No physical delivery of shares is involved in it. Index futures. If you use Nifty futures for hedging you have to sell Nifty futures. Say, Nifty is at 1500 and the Nifty futures contract is trading at, say, 1490. You sell 200 Nifty. You take an exposure of Rs 2,98,000 which means you need to have a portfolio of close to Rs 3,00,000 to carry out this hedge. If you have a much lower value portfolio then it will not make sense. If you a larger portfolio then you can trade in the corresponding multiples of 200 in Nifty. Say your fears of a market crash come true and the Nifty crashes by 13 per cent to 1300. As most diversified equity portfolios tend to co-relate closely with the index movement your portfolio of Rs 3,00,000 would have eroded by Rs 39,000. But your 200 Nifty futures trade is squared off at 1300 and you make a profit of Rs 38,000 [200 x (1490-1300] that almost covers your loss on your portfolio. Inversely if the Nifty goes up by 10 per cent to 1650 then your portfolio would appreciate by Rs 30,000 but your futures trade would lose you Rs 32,000 [200 x (1650 – 1500)]. Thus when the markets go up 10 per cent you don't get any of it and when it crashes by 13 per cent you don't suffer any of it. You are protected on the downside but miss out the upside. This strategy is very useful if you want none of the loss from any market fall but do not mind foregoing gains from any market rise. Index options. An options strategy will get you both—protect from a fall and retain an upturn. But it comes at a cost. To implement it you have to buy Nifty put options which gives you right but not the obligation to sell Nifty at a particular strike price. Say, you buy 200 Nifty put option at a strike price of 1500 when the spot Nifty is at 1500. You pay a premium to the seller. Strike prices are fixed but premiums are freely traded in the market and vary. Say your Nifty put purchase comes at a premium of Rs 80 and you pay Rs 16,000 for your 200 Nifty puts. If the Nifty crashes 13 per cent to 1300 your Rs 3,00,000 equity portfolio loses about Rs 39,000. You exercise your put option to sell Nifty at 1500 and make a profit of Rs 40,000 [200 x (1500 – 1300)] on it. But after reducing it by your premium payment of Rs 16,000 and you have a net gain of Rs 24,000. But it does not fully cover your portfolio loss of Rs 39,000. Your downside protection is limited by the premium amount. But you get to keep gains from an upturn. A 10 per cent Nifty rise to 1650 makes your portfolio grow by about Rs 30,000. You suffer no loss on your put options simply because you have no obligation to exercise it and you leave it un-exercised. But your premium of Rs 16,000 is a definite outgo. Your net gain is still Rs 14,000 which you get to keep. Its a good idea to use index futures and options for hedging yourself during volatile times. May 2004 Its a given in the secondary market. When you buy shares from the secondary market through your equity broker you pay and you get the shares in your demat account within four working days. Over the years the trading and settlement systems on the stock exchanges have been fine-tuned and improved to such an extent that investors can today rely on it without much bother. The same, however, can not be said for the primary market. The recent spate of initial public offers (IPOs), public issues and offers for sale brought forth a plethora of problems from delayed allotments and refunds to receipt of physical shares instead of demat shares. Hundreds of crores worth of shares have been collected by government and other companies through their public issues or offers for sale. But the system has tended to fail investors on many occasions. Hassled investor. The biggest and most recurring problem since years has been the delayed receipt of refunds. Take the case of B. K. Beri, a retired businessman, who, among other issues, had applied in the recent Rs 1,630 crore GAIL (India) offer for sale of 8.4 crore shares held by the government that took place in early March. Says Beri "I applied for 30 shares but was allotted 16 shares." While Beri got the credit for 16 shares in his demat account by the due date 25 March he received the refund cheque for the balance 14 un-allotted shares a month later. "The registrar, MCS, must have the dispatched the refund cheque very late, I got it on 23 April even though the date on the cheque was 25 March." Beri was among the 3.37 lakh retail investors which had collectively bid for 4.1 crore shares but who were eligible to receive 2.1 crores, or 25 per cent of the issue size, in allotment. The refund amount for his 14 un-allotted shares was Rs 2,586. Overall, the company had to refund about two crore shares to retail investors and at a rate of about Rs 185 per share (at a five per cent discount for retail investors to the issue price of Rs 195) the total amount of the refund cheques would have been Rs 370 crore. This is not all. In the high-networth individual (non-institutional) investor category, about 2,200 investors had applied for 5.8 crore shares but were eligible to be allotted only 2.1 crore shares. The balance 3.7 crores would have been refunded by MCS, registrar to GAIL (India)'s issue, and at a price of at least Rs 195 it would have amounted to Rs 721 crore. Thus, a total sum of approximately Rs 1,090 crore had to be refunded back to individual non-institutional investors. What if most of such huge refund amounts reached many investors late? Beri lost out on the interest for 29 days. Assuming that the entire refund amount of Rs 1,090 crore was credited into the receiving investors' bank accounts late by an average of 15 days, it works out, at the savings deposit rate of 3.5 per cent, to an interest sum of Rs 1.56 crore that the investors collectively lost. A questionnaire sent to MCS seeking information on the delay in refund orders in the GAIL (India) was not replied. ...and still some more. Add this to the delays in the other primary market issues in recent weeks and the figure becomes colossal. A.R. Wadiwala applied in the Power Trading Corporation offer for sale by the government in the first week of March. The due date for listing was 25 March but it was delayed by a week. But the refunds took further time. Says Wadiwala who did not get any allotment in the issue: "I got my refund cheque a month after the due date for listing and that too only after I rigorously followed up with the registrar " Wadiwala was lucky. He followed up with the registrar, MCS, over the phone and managed to get his refund. Most investors, especially those hailing from Mumbai, are forced to visit the registrar offices to just get their cases noticed by the registrars. When a regular investor in IPOs, Kavita Verma (name changed on her request to avoid harassment by the registrar in future IPOs), did not get any allotment or refund in the Indraprashta Gas issue in December last year and visited the registrar Karvy Consultant's office in Mumbai she was blankly told to come after 15-20 days. She says "The officials do not pay attention to you when you speak to them lightly and when you are forced to raise your voice they notice but then deliberately delay your case more." The ONGC offer for sale by the government proved to be a big hassle for many investors. Delhi-based I.J.S.Bassi, an engineer and consultant, had applied in the retail category for as many shares as would come in Rs 49,000 (his application amount) at the cut-off price. Based on the final allotment criteria he should have got a firm allotment of 60 shares. But he didn't. Other investors who were allocated allotments had started receiving credits in their demat accounts from 29 March morning itself. Within that the problem of over-allotment had affected the high-networth individual investor category which had resulted in a reversal of the credits in all (including retail category) investors' demat accounts and a consequent rectification by the next day. However, Bassi never received any credit in his demat account. A week passed and he had not received any refund either. His hassles had started. Says Bassi "For three weeks I was following up; three letters and a telex to the Mumbai head-office of MCS, the registrar to the issue, elicited no response". He even wrote a complaint letter to Sebi and even the Minister of Disinvestment, Arun Shourie but never received any response from either. It was as late as 7 May when Bassi finally got a post from MCS. It contained a refund cheque but no allotment notification and no reason was specified for the rejection. Says Bassi: "The cheque was back-dated to 5 April but the postal date on the letter was 27 April which can only lead me to think that the people in the registrar are not working in a straight manner." When asked whether he will protest the non-allotment Bassi says "I am a senior citizen and have had enough of this ONGC issue problem." Delays in refunds are the most worrisome of investor complaints but not the only one. In the Rs 230 crore public issue of Bank of Maharashtra in March some investors were shocked when they received physical share certificates on allotment (from MCS, the registrar to the issue) instead of a credit of demat shares in their demat accounts. Verma was among those investors and she was forced to get the physical shares dematerialised. "It took 15 days to get the shares dematerialised." Mistakes in refunds and allotments also occurred in some cases. It happened with a client of Ghalla Bhansali, a NSE broker-firm. According to its director Mukesh Dedhia: "Her refund cheque in GAIL (India) issue came in the name of her father-in-law who had also applied separately; on enquiry it was found that was an error in data entry at the registrar's end." Are there solutions. The improvements in secondary market trading and settlement over the last many years were driven by technology and high standards of professionalism with the National Stock Exchange leading the way. The regulator Securities and Exchange Board of India contributed its bit by mandating the market to move to faster rolling settlements. If the primary market has to follow suit Sebi would have to take an initiative. Unlike a single entity like the NSE which led the secondary market reforms, the primary market has multiple and scattered participants—issuers, registrars and merchant bankers. Many problems are systemic and need a regulatory push to get sorted out. For instance, the solution to delayed refund orders is simple: direct electronic credits to investors' bank accounts. States M.L. Soneji, director (capital market, F&O, WDM, IPO and investigation), NSE, in his personal capacity in a January 2004 edition of NSE's monthly newsletter: "Like, in a book building issue, the securities are getting directly credited to the beneficiary account of the allottees, it is imperative to directly and electronically credit the refund amount to savings bank accounts specified by the applicants in their application forms since most banks now offer a facility of ECS (electronic clearing service)." Another concern among investors that needs to be addressed urgently is the fairness in the basis of allotment, particularly in issues that are heavily oversubscribed and allotment can not be made to all applicants. Says Wadiwala: "Are they giving allotment to preferred applicants?" Authorised brokers and agents get commissions from the issuer companies only if the applications having their stamps get allotment. This leaves a door open for lead managers and registrars to be influenced to commit undesirable acts. In the post-issue process every application is checked for validity. Invalid applications are rejected immediately and only valid applications qualify for further process in allotment. But, states Soneji in his article: "Neither the reason for non-allotment nor the reason for rejection is made known under the present system of allotment." The solution, according to Soneji's article, is to evolve a totally transparent mechanism where every application should be codified for the exact reason they are rejected before are processed further and where after further processing the allotment is not made. Will Sebi step up and do something. Sebi has not taken any action against issued any statement specific to rising investor complaints in the primary market. But it has set up a 12-member task force of market participants and asked it to review the overall present market infrastructure, identify the deficiencies and recommend solutions. Hopefully, the primary market problems will be addressed by this task force. But since no time frame has been set for the task force to submit its report there might be a long wait involved. In the meanwhile, investors need to play their part too when applying in the public issues. Says Dedhia: "At times the investors provide incorrect demat account and bank account details and face problems in allotments or refunds." Filling up physical application forms for every public issue is a cumbersome process and till such time Sebi or the market comes out with a better and alternative ensure that there are no mistakes in the details you provide in the forms. Further, investors need to keep in mind that the offers for sale by the government-owned companies are not regulated by Sebi. So, when Power Trading Corporation, delayed its listing by a week or when ONGC mistakenly over-allotted shares to high-network investors, Sebi could do nothing. Investing in primary market issues is an option. As an investor in shares you have the entire gamut of listed companies in the secondary market to invest in. If you find the problems in the primary market too severe for your comfort avoid it and invest in existing companies listed on the stock exchanges. Consolidating investor-broker agreements May 2004 The next time you switch your broker you would not have to fill in multiple registration and agreement documents with your new broker. The Securities and Exchange Board of India is considering streamlining the various legal papers that need to be signed when you open your account with any broker. It circulated draft proposals to the public recently and is expected to issue a circular effecting the changes. Almost all investors deal through brokers who are members of the National Stock Exchange or Bombay Stock Exchange both. Further, both the exchanges have two trading segments—one for cash where you buy and sell shares and the other for derivatives where you enter into futures and options contracts on stocks or indices. When investors want to exercise the option of dealing on either exchange and either trading segment they usually deal through a broker which has membership on both exchanges and both segments. At present, when you approach such a broker you have to sign multiple client registration forms, client-broker agreements and risk-disclosure documents. The proposed change will do away with the multiple sets. You will have to sign just one client registration form which contains your personal details, bank account information and your photograph. Presently, the broker can ask you to sign on four registration forms—one each for NSE's and BSE's cash and derivatives segments. Similarly, instead of four, you will have to execute two client-broker agreements—one for NSE's two trading segments and one for BSE's two trading segments— (earlier you had to execute four). These are the most important documents as they define the rights and obligations of the broker and the investor. They act as crucial supporting documents in any future dispute with the broker. The risk-disclosure document will become uniform across all exchanges and trading segments and you will have to execute just one instead of four. Says Satish Menon, chief operating officer of Geojit Financial Services, a member of NSE and BSE: "Investors will find it a relief not having to sign on so many stamp papers and reading more than 20 pages and the same points four times over." However, investors should read the contents of all agreements they sign with their brokers. The new change will bring down the number of pages they have to read but they should read them carefully. May 2004 The capital market regulator, Securities and Exchange Board of India (Sebi), is unable to find out itself if there is anything wrong with the health of the securities market. So it has appointed a 12-member committee to tell it. Headed by P.J. Nayak, managing director of UTI Bank, and christened 'Securities Markets Infrastructure Leveraging Expert (SMILE) Task Force' the committee comprises of the heads of two exchanges—NSE and BSE, one depository—NSDL, two banks—ICICI Bank and Citibank, one mutual fund—DSP Merrill Lynch, one merchant banker—SBI Capital Markets, one software development vendor—Tata Consultancy Services, one solicitor firm—Amarchand Mangaldas and Suresh Shroff, the head of Clearing Corporation of India and a professor from IIT. This group has been asked by Sebi to review the present market infrastructure, identify the deficiencies and recommend solutions that incorporate best practices, hardware, software, business continuity plans and technological interfaces. Sebi also wants to know what the group thinks of diversification of the market into commodities and forex trading. Sebi's way of working includes setting up of committees to look into various aspects of the market. It has had many. For instance, there has been a delisting committee, a primary market advisory committee, a takeover committee and many more. From past experience investors should be wary of much good coming out of the latest one. Sebi does not spell out the criteria for selection of committee members nor pre-determines the frequency and number of meetings required. The same is true for the new committee on market infrastructure. It is difficult for investors to place confidence in committees if Sebi is not transparent on the rationale behind the composition. Apprehensions that undesirable market intermediaries get themselves into the committees need to be addressed by Sebi. In the committee reports there is almost never any information on the dates of meetings and attendance record of the members. This makes it difficult to gauge the quality and quantity of the committees work. For instance, there is a need to know how many meetings took place and when, and whether any committee member failed to consistently attend the meetings. Will the new market infrastructure committee operate in the same non-transparent manner? May 2004 From about April 23 to about May 21, for the first time in our stock market, a company will be openly and legally making market purchases of its own shares to what-is-esoterically-termed-as 'stabilise' its market price. Such purchases would otherwise be construed as manipulating the share price of a stock. ICICI Bank, which completed its public issue offering on April 7 and get the new shares listed on the National Stock Exchange and Bombay Stock Exchange on April 23 is the one which will be indulging in so-called 'market stabilisation' of its post-listing market price. The bank's issue was for Rs 3,050 crore at a final offer price of Rs 280 per share and was oversubscribed by 5.8 times. The issue had a 'green shoe option' of Rs 450 crore for the purpose of 'market stabilisation'. It was the first time any company was using this option since August 2003 when the Securities and Exchange Board of India amended its 'Disclosure and Investor Protection' (DIP) guidelines for initial public offers (IPOs) and public issues. Among the amendments was the addition of a new detailed clause on 'green shoe option'. A 'green shoe option' is the option to allot shares in excess of the public issue offering. Such an over-allotment option was first used by an American company, Green Shoe Manufacturing Company, in its 1960 offering in the US securities market and hence the name. Over-allotment happens only when the issue is over-subscribed. The received subscription amount allocated towards the over-allotment is then used in the immediate post-listing period to buy own shares from the secondary market in order to shore up the share price above the price at which the IPO or public issue is offered. Such market purchases are made only if the market price falls below the offer price. The purchases may or may not take place depending upon the post-listing market price of the shares. Hence an uncertainty exists. In the normal allotment the shares issued are new and lead to an increase in the share capital of the company. Shares under the over-allotment or 'green-shoe' portion have to be allotted at the same time as the normal allotment itself. But for this the company does not issue new shares. Under Sebi's DIP guidelines, the company has to borrow shares from its promoters and transfer these shares to the allottees under the 'green-shoe' portion which can not exceed 15 per cent of the issue size. Post-listing, uptil a maximum period of one month, whatever shares are purchased from the secondary market in order to shore up the market price has to be returned back to the promoter. Only if fewer shares have been purchased and there is a shortfall between the already-allotted 'green-shoe' portion shares and the purchased shares, the company issues new shares to meet the shortfall. These shares are then are returned to the promoters. For these new shares issued, the company gets to keep at the rate of the offer price the remaining proceeds against the over-allotment and the surplus, if any, has to be transferred to the investor protection funds of the stock exchanges. As per Sebi guidelines, the market purchases have to be done by a 'stabilisation agent' which has to be appointed out of any of the lead book runners to the issue. Further, the borrowing of shares for the purpose of over-allotting has to be through an agreement with the promoter and the details of this have to be disclosed in the prospectus to the issue. The promoter-lender can not charge any thing for shares lent and moreover the shares returned to it are subject to the three year lock-in period applicable towards promoters contribution. In the case of ICICI Bank there are no promoters to the bank as per its prospectus. For the purpose of over-allotment it has borrowed shares from one of its largest shareholder, Life Insurance Corporation (which held 4.8 crore shares in the bank as on 13 March amounting to a 7.9 per cent stake) having a stake of , which when returned will still be subject to a three year lock-in. At the ICICI Bank's offer price of Rs 280 it will be issuing about 10.9 crore new shares under the normal allotment and borrowing about 1.6 crore shares from LIC to allot under the 'green shoe' portion. LIC will not receive any interest for shares it lent and further when the 1.6 crore shares are returned to it within a month from listing on 23 April it will be subject to a three year lock-in (see flowchart). It is premature to say the 'green shoe' option and the post-listing purchases-based support of the market price is in the best interests of investors and shareholders. The post-listing market support of the share price is viewed by some as the legalised version of price manipulation. Internationally, companies have been using it for a long time but it is understood that international regulators are presently thinking of reviewing its utility for shareholders. Watch out: your fund manager is an insider! April 2004 On March 31 the Securities and Exchange Board of India on 31 March passed an order affirming the ban it had imposed on Samir Arora, former fund manager of Alliance Capital mutual fund, from dealing in the securities market for five years on 9 August 2003. In the final order passed by whole-time Sebi member, T.M. Nagarajan, stated that Arora in violation of Sebi's regulations had indulged in fraudulent and unfair trade practices and also in insider trading. With respect to the insider trading charge, Sebi's order concluded that Arora was an insider as per its insider trading regulations. This was since he was an employee of Alliance Capital Asset Management (ACAM) and asset management companies, investment companies and market intermediaries and their employees and directors are deemed to be insiders by the definition of an insider under Sebi's regulations. The premise is that these entities and individuals have access to unpublished price sensitive information. Thus, if you are investor in a mutual fund, then you should note that your fund manager is an insider and if he, based on any access to unpublished price sensitive information, he executes transactions in the market then he can be in violation of Sebi's regulations. In case of Arora, Sebi found him to have sold shares of Compaq-promoted Digital Globalsoft in May 2003 prior to the company's merger with HPISO in the wake of worldwide merger of Compaq and HP. According to Sebi, Arora traded because he had unpublished information of the merger ratio. In June 2003 when the merger ratio was announced by the company the stock price came down substantially. The equity schemes managed by Arora benefited but since Arora stood to gain also by way of enhanced bonus on better performance of his schemes, Sebi found him guilty of insider trading. Even as Arora, as an employee of ACAM, has been charged Sebi has yet to take any action against ACAM which is also an insider under Sebi's regulations. While an enquiry on ACAM is currently underway Sebi should finish it without further delay. Most mutual funds and their fund managers buy and sell shares actively based on price-sensitive information. Is Sebi actively investigating their trades to see whether they are based on unpublished information or not? ONGC allotment fiasco—mistake or mischief? April 2004 The next time you invest in any offer for sale by the government be alert to the fact that a fiasco in the transfer of shares could work against your interests for a few days. Investors who applied in the offer for sale of the government shares in Oil and Natural Gas Corporation learnt this the hard way. In the offer for sale of 14.25 crore shares of ONGC by the government, about 5.7 crore shares (40 per cent) was fixed for institutional investors, 2.81 crore shares (20 per cent) was reserved for high networth individual (HNI) investors and retail investors each and 1.4 crore shares (10 per cent) for company employees and existing shareholders each. At a price of Rs 750 for non-retail investors and Rs 712.50 for retail investors, the government got about Rs 10,500 crore from selling its shareholding in ONGC through the offer for sale. Though the offer for sale was not regulated by the Securities and Exchange Board of India, the government had assured of completion of the finalisation of the allotment and transfer of shares within 15 working days of the closure of the bidding through book-building process. With the bid having closed on 13 March, the registrar to the offer for sale, MCS, started crediting demat accounts of investors with the allotted shares on 29 March. But there was a serious problem. Among the high networth individual investors who applied for more than Rs 50,000 worth of shares a unknown number of investors received shares in their demat account on the morning of 29 March to the full extent of their application though they were not supposed to. They were over-allotted the shares by MCS. An alert went out from the market immediately. The National Securities Depository (NSDL) froze the shares by about 3 pm of that day and reversed it soon thereafter. It is not clear on whose instructions the freeze and reversal was carried out. Some of the over-allotted investors had already sold the shares by then. It is not clear whether any of them moved shares from their demat account (to their broker's clearing member pool accounts for settlement) before the freeze took effect from about 3 pm, but those who did not were faced with having sold shares that they could not deliver. As a result, their sold shares came under auction and they had to bear the loss in the difference between the higher auction price and the price at which they originally sold. It was only after two days that the right-allotted amount of shares were credited again to the HNI investors demat accounts. There were also reports of delays and non-allotment of shares to the retail investors who were supposed to receive confirmed allotments since their collective subscription to the offer for share was less than the 20 per cent reserved for them. Those among these investors who did not check their demat accounts first whether they had received the credits or not but sold their shares also suffered auction losses. On an average, every day, during the week after 29 March, 4 lakh shares of ONGC were not delivered and auctioned off on the NSE and BSE collectively. It is not clear whether the over-allotment by MCS was due to mistake or mischief. Arun Shourie, the disinvestment minister in the government, was reported to state that the matter could have probably got of control at the registrar's end due to the large size of the issue. Queries sent by Outlook Money to Sebi chairman, G.N. Bajpai, and Sebi whole-time member, A.K. Batra, were not responded to. Sebi is, however, reported to have initiated an investigation in the matter although there is no official confirmation from Sebi. NSDL cuts custody fee marginally April 2004 The National Securities Depository Ltd has belatedly, and yet marginally, reduced the custody charge it charges its depository participants from Rs 6 per ISIN (number allocated to each class of security—equity or debt—of a company, based on a international securities identification numbering system) per year to Rs 4. This takes effect from April 1. Other charges remain unchanged. Impact on investors. The DPs who charge you anywhere between Rs 6 and Rs 12 per stock (ISIN) per year in your portfolio would probably follow suit and bring it down to between Rs 4 and Rs 10 per year. When applied to a diversified portfolio comprising of, say, 15 stocks then the annual custody fee you pay your DP could come down from an existing Rs 90-180 to Rs 60-150. Impact on NSDL. The reduction in custody fee would not affect NSDL much. There are currently about 51 lakh demat accounts across all NSDL-registered DPs. Nine months back it was about 37 lakh. The NSDL does not reveal charge-wise revenues, but if one took the average number of accounts for the last one-year period to be about 40 lakh and if on an conservative average there are 10 ISINs per demat account at any given point throughout the year then, at a rate of Rs 6 per ISIN, NSDL would have received from its DPs Rs 24 crore as custody fee. If NSDL registers an average number of demat accounts of 55 lakh in the next one year then at its new custody fee rate of Rs 4 per ISIN would fetch it Rs 22 crore. If NSDL charged companies instead of DPs. Since DPs charge anywhere between what NSDL charges them and double that sum based on the above estimates they would be making a profit of anywhere upto Rs 24 crore (last year) or Rs 22 crore (coming year) on the custody fee alone. If, instead, NSDL were to recover custody costs from companies instead of DPs then the DPs would not be able to levy any custody fee on investors. An internal Sebi group had recommended in early February that NSDL levy on companies, instead of DPs, a one-time custody charge of 0.1 per cent on the market capitalisation. Across all companies, and at current market capitalisation of about Rs 10,00,000 crore, this would work out to a one-time receipt of Rs 1,000 crore by NSDL. This is a prohibitive cost that companies would balk at paying and which is probably why the Sebi board has not approved of the group's recommendation. But, instead, if the one-time target sum of Rs 1,000 crore is split into annual charges across an estimated life-span of 50 years then it would amount to Rs 20 crore per year. This is very close to the custody fee charge of Rs 22 crore (as calculated above) that NSDL would be receiving from DPs in the next year. For the companies this would amount to just 0.0022 per cent on the total market capitalisation which would not prohibitively expensive for companies. |
