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written for Outlook Money November 2003 |
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Ironic it may be but the seriousness of the stamp paper scam will not affect your personal finances adversely. But the government needs to own up its responsibility and buck up. November 2003 It is not very often that senior-ranking police officials are arrested and the police commissioner of Mumbai goes on leave and is then replaced. The counterfeit stamp scandal has indeed shaken the police and the police establisment. What happened. From the years 1994 to at least 2001 counterfeit stamps and stamp papers were printed, circulated and sold through agents by Abdul Telgi primarily in Bombay but also in other parts of Maharashtra and other states like Andhra Pradesh and Karnataka (see Telgi's scam and its contours). Unofficial estimates of the value of counterfeits printed and circulated peg it at around Rs 30,000 crore. In June 2002, the Pune police had seized fake stamps and stamp papers worth around Rs 3,000 crore from Telgi's agents in Mumbai. Maybe much more undetected counterfeits would have been in circulation and a major or minor chunk of that could have been sold to unsuspecting or knowing purchasers. When asked about the Maharashtra government's estimate of the stamp and stamp paper counterfeits in circulation, Nitin Kareer, inspector general of registration, based at Pune says: "From mid-1998 to mid-2002 we have detected documents worth roughly Rs 100 crore containing counterfeit stamps or stamp papers." And, Kareer adds, "almost all of it has been on those documents like insurance policies, bank agreements, share transfers, bankers notes, foreign bills where the documents do not come to us for registration." As far as documents like property agreements that are required to be registered in the government records, Kareer says there is no sign of counterfeits there, "we can trace these back to their origin; 80 per cent of property agreements are through franking and through the frank impression and the unique number we can go back to the original receipt issued towards it." The June 2002 seizure of about Rs 3,000 crore worth of fake stamps and stamp papers was just one lot. In which, according to Kareer, "roughly Rs 2,200 crore, that is about 70 per cent, was stamps and the rest stamp papers." But there could surely have been numerous other counterfeits printed by Telgi and circulated by his agents that have not been seized or detected yet. If even a quarter of them were purchased by unsuspecting or knowing purchasers and used in documents that do not go back to the government for registration then it would still be quite a big figure. Says Vinod Sampat, an advocate in high court cases and the head of an informal Registration Fee and Stamp Duty Payers Association: "Its a wild guess, no one knows for sure, but so many documents are made every day that require to be stamped or be executed on stamp paper that the figure could go into thousands of crores worth of fake stamps and stamp papers." How does the scam impact you. There are 62 instruments listed by a schedule in the Bombay Stamp Act, 1958, which require stamps or execution on stamp papers (other states' stamp acts like the Delhi Stamp Act have similar provisions). Most of them are instruments that are used primarily by business people and companies. But a few (see Documents that matter to you) would involve your personal finance deals. What happens if you have executed any of these instruments through fake stamps or on a fake stamp paper? The various Stamp Acts in the country say that no instrument as laid down in their respective schedules (lists) can be produced in any court of law as evidence if it is not properly stamped. Say, you discover now or anytime in the future that the power of attorney, that you executed with your onlne broking firm giving it the powers to debit or credit your demat account during settlement of your trades, was inadvertently executed on a fake stamp paper. Does it invalidate all the debits or credits effected by your broker in your demat account on your behalf? The answer is no. Firstly your trades should be under in question in any court of law where you are required to produce your power of attorney document as proof. Then the court may or may not discover the counterfeit nature of the stamp paper on which it is executed. If it doesn't then it gets admitted as evidence. But the court can verify the authenticity of the stamp paper. If it finds that it is counterfeit it still will not invalidate the inherent legality of your power of attorney. But as per the various Stamp Acts you will now have execute the power of attorney on an authentic stamp paper and pay a penalty. The maximum penalty is 200 per cent of the value of the fake stamp paper which in the case of a power of attorney document would be Rs 100 or thereabouts. Is your home agreement in danger. But the biggest impact would be felt if the value runs in thousands. Which is the case with the stamp duty you pay towards the purchase of your home property. For instance, in Mumbai, for a Rs 15 lakh home one has to pay about Rs 70,000 as stamp duty. And if the stamp duty paid on such a home purchase has reached a crook instead of the government then you may have to shell out a neat Rs 2,10,000 (Rs 70,000 towards a fresh execution on an authentic stamp paper and Rs 1,40,000 as penalty). But a few things are required to happen before you face this loss potential. Firstly, if paid the stamp duty for your home agreement by issuing a cheque or pay order to the superintendent of stamps (or any such relevant government authority) and got your agreement franked or stamped at a government-authorised stamp office then you would not be stuck with a counterfeit. Says Mahesh Shah, senior manager (public relations) at Housing Development Finance Corporation, one of the largest retail home loans company in the country: "Most of the recent agreements of our borrowers are franked." State governments had introduced franking machines a few years ago and allowed the payment of stamp duty to be made through franked documents instead of through the purchase of stamp papers. Says Kareer, "In franked documents the frank number is generated from various parameters specific and unique to that agreement and therefore can not be duplicated. When any impression is being franked it is logged and we have mechanisms of checking the data pertaining to every such transaction." Secondly, whether you got your home agreement stamped or franked you are still required to get it registered with the registration department of the state government (and even pay a registration fee which in Mumbai is around 2 per cent of the property value). So even if in the past you paid the stamp duty by executing your home agreement on a stamp paper you would have still presented it for registration. Before approving your registration the government officials verify the authenticity of the stamp paper and if yours was on a counterfeit you would have already been appraised of it and action taken on it. But in the case of past home loan agreements, says HDFC's Shah, "many of the earlier ones which were executed on stamp papers and which were sent for registration have still not come back registered." So, check if you took a home loan 5-7 years ago and ther registration is not yet done. But again you need to have executed it on a stamp paper (when there was no option of franking it) which that you bought from a licensed stamp vendor or an unauthorised tout and issued a cheque (or paid in cash) in the name of the licensed vendor or the unauthorised tout instead of the government. Yet you can still cut your losses. Says Maharastra government's Kareer, "the state government made its stand clear last year itself that wherever purchases were made through bonafide stamp vendors and they have turned out to be counterfeits then the liability is on the stamp vendor. But if you bought the stamps or the stamp papers from non-licensed persons on a doorstep delivery basis or at a discounted rate then you did it on a malafide basis and you will have to bear the re-payment and penalty." It is not clear whether other state governments have adopted a similar stance. Should you do anything. With regard to your already-executed legal agreements, "keep mum", says advocate Sampat who further says "let the 1500-odd officials in the stamp department (which generates Rs 3,600 crore revenue every year) carry out proper investigations." Says Kareer, "we can't say whether individuals can sit quiet and assume that their instrument are in order; once the investigations are fully over then a stand on this can be finalised." For future cases, be careful. Says Sampat, "it is our responsibility to ensure that we get a good stamp paper, stamp or frank, and not get lured by the touts either for convenience or by discounts." What happens now. Telgi succeeded in his scam partly on account of the attraction of corporates and individuals to buy stamps and stamp papers from touts. This attraction was there because of severe shortage at government counters and very long queues. So, says Kareer, "the lesson of this scandal is that retailing has to be better." Kareer spells out the measures taken or being taken: - we have increased the number of franking machines; there are now 230 all over Maharashtra with an additional 150 with financial institutions for their own usage - we placed a proposal with the Department of Posts last year or so to have post offices act as distribution channels, talks are on with regard to commission and modalities. - we have been in talks with banks since two years with the same objective; we even got the Reserve Bank of India to clarify to banks through a circular that they can take up sale of stamps and stamp papers and also install franking machines Is the government serious about ensuring that there are no connivances of government officials with crooks at government printing presses and machine auctions (why auction at all the old machines which are sensitive? why not just scrap them into pieces?. What about the government's role in creating artificial shortages? No answers are forthcoming on these but Kareer mentions that "some counterfeiting is inevitable, that even the Euro currency which authorities claimed had 35 security features has been counterfeited." Kareer feels "counterfeit as such is not an issue but whether the system is efficient enough and poses strong deterents to counterfeiting is important." So, are the state governments becoming efficient and deterring crooks? Given past track records of such claims coming to naught one unfortunately can not take the government on its word. Insider trading done without intent to derive secret personal gain has become legal if one goes by the latest ruling of a statutory securities market tribunal. November 2003 Never mind if investors are put to an unfair disadvantage but as long a company promoter or any other insider (as defined under insider trading regulations of the Securities and Exchange Board of India) does not incur any unfair advantage he is free to indulge in insider trading. This will be the effect of a November 3 judgement by C.Achuthan, the presiding offer of one-man Securities Appellate Tribunal (SAT) (the statutory body to which persons or entities aggrieved by Sebi's orders can appeal to) in the case of a Sebi's order against Rakesh Agrawal, managing director of Baroda-based ABS Industries. In June 2001 Sebi chairman D.R.Mehta had passed an order using powers under the SEBI Act, 1992 and SEBI (Insider Trading) Regulations against Agrawal. The order implicated him for insider trading in the shares of ABS Industries between 9 September 1996 and 1 October 1996 and asked him to deposit Rs 17 lakh each with the investor protection funds of National Stock Exchange and Bombay Stock Exchange to compensate investors. The Sebi chairman order also issued directions to its prosecuting officers to initiate prosecution under the Section 24 of SEBI Act which makes any contravention of SEBI Act and Sebi regulations liable to a punishment of imprisonment of upto three years. Agrawal appealed the SAT contested Sebi chairman's order. Achuthan gave his ruling on this appeal wherein he rejected Sebi's implicating Agrawal for insider trading but did not interfere with Sebi's intent to launch prosecution against Agrawal under Section 24 of SEBI Act. In his ruling Achuthan contended that action under insider trading cases can be taken only if the insider has derived a personal profit from indulging in trading based on unpublished sensitive information. He contended that Agrawal's purchase of ABS Industries' shares was in order to facilitate the entry of Bayer AG (which acquired 50.97 per cent stake in ABS during October-December 1996) and not for personal gain. This is a remarkable ruling. When the said purchase was taking place in September 1996 by Agrawal for the purpose stated by Achuthan the market was not aware of it. Had this important fact been disclosed to the market the share price would have tended to rise sharply. But there was no disclosure by Agrawal. Even without it, the share price of ABS Industries had sharply risen from Rs 48 in August 1996 to Rs 82 in October 1996. The deal between ABS Industries and Bayer AG was made public on 1 October 1996. On 30 October ABS Industries made a preferential of 60 lakh shares at Rs 70 per share of which 55.8 lakh went to Bayer AG. Bayer made up the 50.97 per cent acquisition by taking the balance shares through an open offer of 20 per cent of the share capital to the company's shareholders at Rs 80 per share. The open offer was completed in December. It was ostensibly to ensure that there was no shortfall in the open offer and its subsequent failure that Agrawal started buying the shares in September 1996. Agrawal's ostensible idea was that if the shareholders did not submit upto the required 20 per cent shares then he would offer the shares that he was buying. SAT's Achuthan has found this to be an acceptable intent and said that it was not based on deriving a secret personal gain. The fact remains, however, that the price discovery process was adversely affected because the sensitive information was not in the public domain and as a consequence investors selling their shares during September 1996 stood to realise possibly a lower price than they otherwise would have had the disclosure of Agrawal's purchases been made to the market. By basing insider trading solely on whether a secret personal gain is derived by an insider on trading on unpublished sensitive information SAT's ruling has opened up a dangerous loophole that promoters or operators would not hesitate to exploit. Not a good sign for investors surely. FIIs—a conduit for domestic operators? Sebi rejects the contention that Indian money is coming back via the FII route but fails to back it up with adequate explanation November 2003 Admitting that it was reacting to a news report in a financial daily that non-resident Indians contributing almost 40 per cent of foreign institutional investor (FII) investment in listed equities the Securities and Exchange Board of India in its press release of October 30 released for the first time a break-up of the categories of investors that make up for FII investments. There has been a long-standing concern about funds from domestic sources (via non-resident Indians) were being routed through the foreign institutional investor (FII) portfolio investments in the equity markets. Such indirect routing would enable the Indian sources to avoid close scrutiny under Securities and Exchange Board of India's more stringent regulations for domestic investors. Any investment body (mutual funds, insurance companies, private companies etc) outside India can get itself registered with Sebi as a FII if it meets the criteria laid down under Sebi's regulations on FIIs. There are presently 513 FIIs registered with Sebi and their net investment was Rs 84,000 crore as of October 31. Sebi's released figures on FII investment break-up as of September 30 (when their net investment stood at Rs 72,965 crore) show that 29 per cent came from mutual funds, 15 per cent from investment companies, 12 per cent from private companies, 29 per cent from nine other categories and 16 per cent from a category titled 'Others' by Sebi. Given such a break-up Sebi said "the news item in question referring to the NRI contribution forming nearly 40 per cent of the FII investment is therefore conjectural in nature" Sebi appears to have missed the point and its own figures show interesting revelations. The 'Others' category which is left unexplained by Sebi takes up 16 per cent of total FII net investments. These could be a conduit for Indian funds. So could five other Sebi-defined categories—'investment companies', 'private companies', 'investment adviser', 'investment trust' and 'investment fund and investment management companies'—which collectively account for 39 per cent. That makes it a total of 55 per cent which are likely sources of Indian funds being re-routed back. The concerns of possible manipulation of the stock market through domestic operators channeling their operations through the FII route still remains. By rejecting them prematurely without adequate clarifications on the various FII categories Sebi has only lived upto its image of being an inefficient and weak regulator. Get share dividends and bonuses faster November 2003 It was long overdue. The Securities and Exchange Board of India has asked the stock exchanges to bring down the notice period companies are required to give for book closures and record dates from 30 days to 15 days. What this means is that companies having got shareholders approval in an annual—or extra-ordinary—general meeting to declare dividends, or issue of rights or bonus shares, would now have to wait 15 days instead of 30 days to begin the process of dispatching the dividends or issuing the shares. The book closure is a period of a few days and the record date is a one day when the company stops any transfer of shares between shareholders and prepares the list of shareholders to whom it then dispatches the dividend warrants, rights entitlement, or issues the bonus shares. In the old days when trading and settlement on the stock exchanges was in physical shares, the notice period (time gap between the company announcing to the exchanges about its shareholders meeting's dividend or rights/bonus resolutions and the book closure or record date) was to allow for investors in the midst of a long trading cycle (uptil seven years ago it was of 14-days duration and uptil 3 years ago it was a 7-day cycle) to receive their bought shares on settlement and then send it along with a physical share-transfer form to the registrar of the company for getting it transferred in their names. Only then would they have been able to receive the dividends, rights entitlements or bonus shares. During the 14-day trading cycle era, the notice period used to be as long as 60 days, 45 days when it was 7-day trading cycle and the last reduction took place in April 1999 when Sebi, through stock exchanges, brought it down to 30 days for demat shares. But today in a almost-fully demat environment and rolling trading cycles of T+2 where you buy shares and they are credited in your name in less than a week's time. Sebi's long-overdue notice-reduction move to bring it down to 15 days thus still provides for that one extra week. But something is better than nothing and hence it is a welcome step. |