June 2003

A timeline of stock market events

Through the front door only, please!

Stuck with dud shares?

top               A timeline of stock market events

June 2003

Outlook Money completes five years. Among other personal finance developments, these crucial stock market events kept us on our toes:

June, 1998: Payment defaults rock BSE on account of price rigging in BPL, Videocon International and Sterlite Industries from March to May. The BSE president illegally opened the trading system to tamper with trades and Sebi later sacked him. Sebi investigations concluded that a few brokers and a common set of clients allegedly acting as a front of Harshad Mehta manipulated the prices of the three stocks.

January 4, 1999: Farewell begins for share transfer forms and share certificates in trading. The first step towards compulsory trading in demat shares was made by Sebi with a first list of 12 actively traded stocks and later expanded to 31 stocks on February 15 and so on. By March 31, 1999, about 40 per cent of all settled trades (across all stocks and not just those in compulsory list) on NSE and BSE were in demat shares. Brokerage rates start falling from 1.5 per cent to 0.5 per cent.

April 17, 1999: Nifty falls by a hefty 7.42 per cent from 1044 to 966, the highest single-day fall in Nifty during the last five years. The motivating factor for the crash: On this day the 13-month old BJP government falls as it loses a President-directed vote of confidence in the Lok Sabha. The 1999-2000 budget had not yet been passed by the parliament.

May 25, 1999: First signs of the developing war in Kargil were confirmed today with the acting Prime Minister, A.B. Vajpayee, declaring that the centre will take all possible steps to push back infiltrators in Kargil. Getting a whiff of a fast-deteoriating scenario of conflict between Indian Army and Pakistan Army, markets react nervously by falling six per cent over the next three days.

July 11, 1999: But by July 11 the Pakistan Army began a pullout from the LOC in Kargil. The market has not only rebounded but is up by 14 per cent from the May 24 level of which 4.9 per cent rise took place on July 12 itself, the first trading day after the pullout.. The rebound is also on account of global boom in the information technology and telecommunication sectors and a corresponding rub-off effect in the Indian markets. The ICE [information (technology), (tele)communication and entertainment sectors] boom has began.

July 23, 1999: To cheerlead the ongoing ICE boom, a Sebi-appointed primary market advisory committee recommended to Sebi to relax listing norms specificially and only for the initial public offers by IT, media and telecommunication sector companies. The requirement of offering 25 per cent of the shares to public is sought to be reduced to 10 per cent. Sebi gives the relaxation for IT companies a few weeks thereafter. For media and telecom companies the relaxation is given in April 2000.

October 7, 1999: Another hefty rise of 5.5 per cent in a single day on the stock market as the BJP and its allies win a majority in the freshly held elections. Also, the ICE boom is in its initial phase and gradually gathering momentum and is also beginning to attract elements of operator-driven price manipulation in select ICE stocks. BSE's badla (carry-forward system) and NSE's ALBM (automated lending and borrowing mechanism) will be one of the primary tools for the price manipulators.

December 17, 1999: Sebi bars for a period of five years 49 vanished companies and 142 of their directors of vanished companies from raising resources from the capital market, dealing in securities in any manner and associating themselves with any capital market intermediary. Some consolation for investors stuck with dud shares but their money still remains lost.

January 25, 2000: Sebi permits internet trading in the country and lays down minimum technical standards for ensuring safety and security of transactions. In Februay, the first online trade is carried out on the NSE by a NSE broker. Investors get a chance to be the free from the shackles of calling up their broker to place orders. Online trading gets set to pick up gradually over the next three years.

February 11, 2000: Fuelled by the ongoing ICE boom and its tag-along price manipulators, the stock market is overheated. Nifty is at its all-time peak of 1756. Operators cartel-driven stocks had shot up crazily in multiples of 20 to 100 times. In the build up, Sebi has only managed to tinker with price bands and volatility margins. There is not even a hint of it investigating the motives and funds source of the clients of large volume-logging brokers in abnormal price movement stocks. A perfect recipe for disaster as investors would discover a year later at a huge cost.

June 9 and 12, 2000: Derivatives trading commences on the BSE and NSE through trading in Sensex and Nifty futures respectively. In June 2001, trading in index options starts. In July 2001, trading in options on stocks is on and finally in November 2001 stock futures trading kicks off.

February 28, 2001:  Yashwant Sinha's "dream" budget spurs the market and Nifty shoots up by 4.3 per cent to 1351

March 2001: Highly eventful and extremely volatile month for the stock market. Rumours of big bull operator, Ketan Parekh, having payment problems racks the nerves of market. The KP-scam knowledge finally comes out in the open. The Nifty falls by 3.8 per cent on 2 March, 2.6 per cent on 5 March, 2.9 per cent on 9 March and 4.5 per cent on 12 March. Amidst all this, Sebi banned short sales, a regressive step, on 8 March and sacked the president and governing board of BSE for alleged interference in surveillance and involvement with bear cartel. Investigations, though much belated, by Sebi begins now. Adding to the fuel, videotapes released by tehelka.com on 13 March shows huge corruption in the defense industry and the already-on-edge market reacts neverously by crashing 6.1 per cent but only to recover by 6.1 per cent the next day.

July 2, 2001:  Mandatory T+5 rolling settlement in 251 mainline index-based liquid stocks begins and NSE's ALBM and BSE's badla stops and from this day. Sebi had announced these measures earlier on March 20 and May 14. The Indian stock market begins a new era under the rolling settlement system and with the carryforward mechanism due to be replaced by derivatives trading. The market further moves to T+3 rolling settlement on April 1, 2002 and T+2 on April 1, 2003.

February 20, 2002:  D.R. Mehta retires from Sebi chairmanship after a very long 7-year stint that saw major regulatory upheavals and blunders. G.N. Bajpai takes over as the new Sebi chairman. He comes from LIC where he was the chairman from September 2000. Bajpai states that his fundamental priority is to build investor confidence.

April 30, 2002: As a fallout of another scandal—this time perpetrated by high-profile Home Trade and its promoter Sanjay Agarwal and co-operative banks in Maharashtra and their depositors being the primary victims—Sebi debars Home Trade from carrying out its activity as a broker and a DP. NSE and BSE follow suit.

July 15, 2002: Sebi's new initiative termed as 'electronic data information filing and retrieval' or 'EDIFAR' for short takes effect. To begin with 200 companies are required to file on the EDIFAR website—sebiedifar.nic.in—their  quarterly and financial results, annual report, shareholding pattern statement and corporate governance report.

July, 2002:  The Joint Parliamentary Committee instituted to look into the KP scam of 1999-2001 is ready with its draft report. It indicts Sebi and various other entities and points out to systemic weaknesses.

September 9, 2002: After four long years of deliberations of a Sebi-instituted takeover committee and four months after after the committee submitted its report in May 2002, Sebi amends it takeover regulations with significant changes being effected in the six-year old regulations.

October 29, 2002:  Sebi gets long overdue enhanced powers including search and seizure powers and ability to penalise upto Rs 25 crore through a presidential ordinance which clears a Securities Law Amendment Bill that amends the core legislation—the Securities and Exchange Board of India Act, 1992 and other capital market legislation.

February 17, 2003:  Sebi comes out with a new regulation on delisting titled 'SEBI (Delisting of Securities) Guidelines – 2003' in which the major change to existing listing norms of stock exchanges is one that lets investors decide the exit price through a book-building process by companies wanting to delist. Just four days earlier, Sebi had issued another legislation on listing ' SEBI (Central Listing Authority) Regulations, 2003' that brings about a CLA that will approve or disapprove listing applications of companies before they go to the stock exchanges.

top            Through the front door only, please!

June 2003

A month after the Securities and Exchange Board of India directed stock exchanges to amend their listing agreement which would have the effect of preventing backdoor buy-backs by companies, the Bombay Stock Exchange (BSE) on 4 June made amendments to its listing agreement with companies with immediate effect. The National Stock Exchange has yet to implement the 8 May Sebi directive.

Investors have been adversely affected by instances of companies bypassing the rigours of Sebi's buy-back regulations through a glaring loophole in the Companies Act, 1956. These companies were buying back their own shares from investors by using the powers given to them under Sections 391, 394 and 101 of the Companies Act to enter into compromises and arrangements with their creditors and shareholders. These sections of the Companies Act did not require compliance with Sebi's regulations and were treated by the courts as independent of Section 77A which required it.

In addition to Sebi's buy-back norms' rigours, Section 77A had laid down restrictions on buy-backs by companies. These included a buy-back limit of 25 per cent of equity capital and the requirement of special resolution by shareholders authorising the buy-back. Section 77A was incorporated in the Companies Act in 1999 and did not supersede the older sections 391 and 394.

As a result a company could still go by the older sections and buy back their shares without any stringent requirements. Two high-profile cases were that of Sterlite Industries that adopted the Section 391 route early last year and that of Godrej Industries which did the same later on.

The loophole has now hopefully been plugged. Sebi's directive to stock exchanges requires amendments in the listing agreement between the companies and the stock exchange which will have the necessary effect. A company will now have to seek approval of the stock exchange before filing any scheme to any court under sections 391, 394 and 101 of the Companies Act. The company also has to ensure that any scheme of arrangement or reduction of capital presented to the courts will not violate or override the other provisions (like Section 77A) of Companies Act, Sebi legislations (like SEBI Act, 1992, Securities Contracts (Regulation) Act, 1956 and the Depositories Act, 1996) and regulations (like the ones on buy-back of shares).

Investors, however, will have to rely upon the stock exchanges to grant approval to the companies for their applications to courts under the three sections such that if it involves buy-back of shares then the company necessarily complies with Sebi's buy-back norms and section 77A of the Companies Act. While Sebi will also be responsible to monitor stock exchanges on this there is always a possibility of investors getting shortchanged by an errant stock exchange. Of course, there is always the possibility of the same happening where Sebi has direct powers.

top                     Stuck with dud shares?

You will be justified to be concerned because you have no choice to exit the equity market if you own dud shares.

June 2003

At an investor meet organised by National Securities Depository (NSDL) at Bombay's Ghatkopar suburb on April 26 something unexpected happened. After NSDL's presentation was over and during the question and answer session, investors posed intense queries and quite a few of these left the NSDL officials present there stumped and groping for answers.

One of these was particularly unique. An investor was pointing out that he had shares in 10 companies which had been delisted from the stock exchanges and he wanted to exit from the equity market by closing his demat account but couldn't. He said that his depository participant (DP) would close his demat account only if he had zero balance in his demat account and he couldn't achieve that because the 10 companies were delisted and he could not sell his shares.

The problem.  In the pre-depository days when investors held physical share certificates and they had legal ownership of those shares if the share certificate had their name as the last transferee on it. If a company was not being traded, or had got delisted, or had simply vanished the investor could just tear off the share certificates or sell it as scrap.

But you can't do that in the depository system. The moment you enter it—that is, the moment you sent even a single physical share for dematerialisation which may or may not have yet got credited in your demat account or buy a single share from the secondary market that is credited in your account—you are in it till such time you are able to dispose off the shares and have a zero balance in your demat account.

It is yet possible to achieve a zero balance if you rematerialise your shares (that is re-convert to physical shares) but this option is no good either. As there is a high probability that a delisted or illiquid has if a company has disappeared from the financial world's radar then who will rematerialise your shares? Even if there is a pretense of a company there is no surety of it rematerialising your shares within weeks if not months or years.

The only other way to close one demat account is to transfer your shares to another demat account but you still remain in the depository system. You might not have a problem with the depository system per se but being in it involves a cost which you are legally liable to pay. Almost all DPs charge annual maintenance fee that ranges from Rs 100 to Rs 700 across the DPs. And that amount you have to pay every year forever.

Even if you want to just exit out of dud stocks (but which you are not able to) but stay invested in liquid stocks you still have to bear custody charges for the dud ones. NSDL currently charges its DPs a custody fee of Rs 6 per ISIN (the unique number allocated to each issue of securities) per year while DPs take around Rs 6-Rs 10 from investors.

So these are the recurring charges you pay for a stock that may not be worth even one rupee. Upendra Ghia, an investor, is facing such prospects and more with his and his family's demat accounts. He has two demat accounts in his name and multiple others in his family members' names (including jointly) with two different DPs. While he had started off with having his demat account with one DP then for convenience sake recently opened demat accounts in his and family members' names with another DP.

Ghia's investments are spread across his demat accounts with the two DPs. And a part of his investments are in dud or illiquid stocks. "I had these old shares in the physical form the prices of which were down in the dumps but as an investor you have the occasional hope of realising a good price later", says Ghia. In the last three years when almost all trading began to occur only in demat form and the physical shares trading window option became as good as meaningless Ghia had to necessarily dematerialise these shares.

Stuck forever. Ghia is not worried about being stuck with dud shares as much he is about being stuck with a demat account that he can not close as and when he wishes to. Says he: "Of my two sets of demat accounts if in future I want to close down I will have a problem." The annual maintenance charges and custody fees will then seem like an unnecessary burden. Points out another investor, Nishith Shah, who saw one of the stocks in his portfolio get delisted four months ago: "I am in printing business and like in business you suffer losses in investing too, it's a part of the game; but you can not be mentally free if you are forced to pay for a bad investment forever."

Even if you are an investor wisely investing in equities for the very long term and picking sound stocks only, you can face such a quagmire. Because in any time horizon extending beyond 15 years there is a fair chance of at least two or three sound stocks out of your diversified long-term portfolio too going bust. And if by then you have reached retirement age and if you want to realise all your equity investments you will be stuck with your demat account and its recurring costs because of these dud stocks.

Any way out?  Says S.S. Bharwani, director in Satco Securities, a NSE member-broker: "For one dud stock that I owned, I wrote to NSDL that I would like to gift the shares to them but spare me of the additional costs in holding it in the depository system." But obviously you can't even gift your dud shares for who would want to be saddled with the problem thereafter? No, not even NSDL; they surely did not accept Bharwani's offer.

The two depositories can not allow their DPs to close demat accounts which have some shares in it. Various provisions of the Depositories Act, Sebi's depository regulations and the Companies Act wouldn't permit it. An amendment in the legislative framework allowing for investors to voluntarily disown share ownership appears to be the only way. A query sent to Sebi chairman, G.N. Bajpai, on whether Sebi is seized of this matter, evinced no response.

On the custody fee front, at least it, NSDL could switch stop charging DPs a custody fee and the DP's won't charge investors either. But that is not likely to happen going by NSDL's response to investors in the investor meet in Mumbai on April 26. Even if NSDL were to change its rate structure the annual maintenance charge levied by all DPs on investors is beyond its control. And DPs would resist any move to prevent them from charging annual maintenance—liquid or illiquid stocks notwithstanding—since they incur running expenses in operating every single demat account.

Bharwani offers an interesting way out: "Close any bank account that may be linked to your demat account, then stop paying your DP and tell them they can keep the shares if they want." Do not, however, try this route for the DP is legally empowered to recover its fees from you. The only way out is to hope for Sebi to take an initiative to resolve this issue. Otherwise it can soon become a quagmire for many investors. Mild frustrations expressed in the April 26 NSDL-investor meet can easily snowball into something serious for everyone concerned. 

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