May 2003

Companies Act - Brave amendments proposed

Acting, literally?

Less-often transaction statements

Unable to stop manipulation?

top            Companies Act - Brave amendments proposed

May 2003

Once again amendments are being proposed in the Companies Act, 1956. The Companies (Amendment) Bill, 2003, was introduced in the Rajya Sabha division of Parliament on May 7. This time, though, the changes proposed appear to be in greater consonance with strict corporate governance principles than ever before. The department of company affairs (DCA) which got merged with the finance ministry recently is understood to be behind the proposed amendments.

Some key amendments endeavour to:                                                                                                          - help investors get back their monies from unscrupulous companies                                                                  - disallowing a company which is a subsidiary of another company from becoming a holding company of any other company                                                                                                                                                - restricting the number of investment companies that promoters can float                                                        - making consolidation of accounts of group companies mandatory for a holding company                                     - preventing withdrawal of application for shares by promoters in an initial public offer                                          - penalise companies for alloting shares if the minimum subscription is not received                                                                                                                                                  - putting the onus of proving proper utilisation of funds on the promoters                                                           - preventing backdoor buybacks under the Companies Act by way of amendments to stock exchanges' listing rules                                                                                                                                                      - attach bank accounts of securities market intermediaries for violations of provisions of the Companies Act                                                                                                                                                         - overhaul the disciplinary mechanism for chartered accountants, company secretaries and cost accountants                                                                                                                                             - set up a Serious Frauds Office which will have powers to investigate against—and penalise—companies                - professional companies' boards further by way of more independent directors, restrictions on appointment of promoters' relatives and a secretarial audit                                                                                                   - restricting a company's board from selling, leasing or disposing of of more than 10 per cent of the company's total assets

The amendment bill would have to be cleared by both the houses of parliament—Lok Sabha and Rajya Sabha—before it gets incorporated in the Companies Act. There are also indications that the DCA would introduce a second set of amendments in the monsoon session of the parliament.

Investors can look forward to these amendments provided the politicians approve the bill without diluting the content. There is likely to be opposition to the measures from a section of the corporate world and it would largely depend on the politicians' vulnerability to the pressures from their corporate connections.

top                            Acting, literally?

May 2003

Not surprisingly, the Securities Exchange Board of India's recent pronouncements have elements of threatening to use it new powers and yet ironically go completely soft on a past case of price manipulation.

On May 14 it issued a press statement from wherein it came across that it was initiating proceedings against six companies for failure to redress investor grievances after having been callen upon to do so by Sebi. These six companies are Arihant Cotsyn, Essar Oil, Malanpur Steel, Ojas Technochem Products, Mukerian Papers and Vatsa Corporation. The grievances pertain to complainsts such as companies delaying transfer of shares or dispatch of dividend warrants, delaying demat of shares, and not responding to other investor complaints with regard to their shares.

It was also giving a final warning to another 24 companies to redress pending investor grivenance failing which they would be proceeded against too. These 24 companies are Ace Laboratories, Ambik Proteins, Bombay Silk Mills, Enkay Texofood, Gujarat Dehyd Foods, Gujarat Fun 'N Water Park, J F Laboratories, Jayanti Business Machines, Llyods Finance, Mafatlal Finance Company, Mahadev Corporation, Mahadev Industries, Monica Electronics, Padmini Technologies, Pal Peugeot, Panchmahal Cement, Pentafour Products, Pittie Cement And Industries, Prudential Capital Markets, Rossel Finance, Sunstar Software Systems, Vikas WSP, West Coast Brewers And Distillers and Western India Shipyard.

In its statement Sebi implied that if its proceedings resulted in final orders then the companies would be subject to a penalty of Rs 1 lakh per day for the period of the failure of the companies to redress investors grievances subject to a maximum of Rs 1 crore.

If Sebi lives up to its words, investors might thus first see any of the first six companies to be fined with such high penalty amounts. Going by another recent case where Sebi concluded an investigation into one price manipulation case investors might wonder about Sebi's ability to match words with deeds.

Even as Sebi threatens to take tough action it goes soft on a price manipulation case pertaining to the rigging of Cyberspace stock. As per a May 20 press statement Sebi has let off—with just a warning to be careful—a broker Prabodh Artha Sanchay whom it found to be guilty of price manipulation in the stock.  

Sebi gives the impression that price manipulation by brokers and company promoters is much less serious than a company's failure to address investor grivenances.

top                      Less-often transaction statements

Fortnightly statements was a kind of safeguard for your demat account. Making it monthly will make it less so

May 2003

National Securities Depository (NSDL) has changed its byelaws and rules such that your depository participant (DP) will henceforth send you transaction statements on your demat account once a month instead of fortnightly.

Since inception, NSDL has provided for mandatory transaction statements to be sent by DPs to investors once every fortnight when the demat accounts see any debit, credit, pledge or freeze activity. This had the effect of making you receive a transaction statement within 15 days (plus extra days for postage) of you carrying out any market or off-market purchase or sale or any pledge (or invoke or revocation thereof) or account-freeze (or de-freeze) instruction. Now—with effect from June 1—make that 30 days plus postage time.

So if you trade on, say, the second calendar day of a month you would earlier get a transaction statement by the 15th (or 19th if you add 4 days for transit time in post) while the amended NSDL rule will now make you receive that statement in the first week of next month.

This does not bore well for investors. Says Aunali Rupani, an active investor: "An increased time lag between my trades and transaction statement from 15 days to a month will put me at a tad-higher risk of delay in detecting errors or unauthorised (by me) activity in my demat account."

The other depository in the country—Central Depository Services—has been allowing for mandatory monthly transaction statements since its inception. So while the two depositories are now on par with each other with regard to this aspect, investors on both bear equal but potentially adverse risks.

Says C.B. Bhave, managing director, NSDL: "Sebi had approved CDSL's rules including the bit about monthly transaction statements. Its implication was one of the reasons for market perceiving NSDL to be expensive as our DPs were required to send fortnightly statements and that entailed higher costs. Ideally, we would want the period to be uniform at 15 days across all depositories but since that was not happening we are unfortunately being pressurised by regulatory differences to change our rule."

It would be better for investors if Sebi makes both depositories follow the fortnightly rule. Till that happens—if at all—investors should be on alert with respect to activity in their demat accounts. Your DP can still provide you with fortnightly—or even weekly—statements but at a price. If that price is reasonable opt for it. Alternatively, consider a DP which has a web presence and allows its investor-clients to check their accounts online anytime.

top                        Unable to stop manipulation?

In a telling remark on the government's perception of manipulation-prevention ability of the stock exchanges and their capital market regulator, the finance minister, two months after he had announced the long term capital gains tax exemption in his budget, has limited the exemption to only 500 companies that form part of the BSE-500 index of Bombay Stock Exchange and new initial public offers.

In his budget proposals the finance minister made transfer of equity shares by investors from March 1 of this year to March 1, 2004 exempt from payment of any long-term capital gains tax arising after the usual holding period of minimum one year as applicable to long-term gains. The idea behind it was encourage investors into fresh equity investments so that the stock markets may move up.

The budget speech took place on February 28 and the purchase date for this exemption was kicking in immediately from the next day—March 1. Soon thereafter there was a realisation that the broad meaning of transfer of equity shares included off-market transfers including those by way of gift and hence there was a good chance of the exemption being misused by investors. So the finance ministry clarified that the exemption will apply to gains arising from transfer of only those shares which were bought through trades on the stock exchanges.

The fear of misuse did not go away though and another one was envisaged whereby stock market operators would rig up prices of easily-riggable illiquid stocks and then claim long-term capital gains tax exemption a year later. This fear has prompted the finance minister to limit the exemption to BSE-500 index stocks. To most investors who avoid picking illiquid stocks this change would not matter much since their investments would have anyway been limited to the top 100-200 liquid stocks.

But the government's move would still not completely deter potential manipulators since only about 100-200 stocks of the BSE-500 can be termed as liquid in its truest sense. Whats worse is the implication that stock exchanges and Sebi are perhaps not capable of deterring price manipulation through surveillance and margins. This despite the recent joint parliamentary committee's report on the Ketan Parekh-induced scam that burst open in early 2001.

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