SEBI's clause call: No misuse of client funds by brokers

The Securities and Exchange Board of India (SEBI) will consider revamping key clauses in the client-broker agreement to prevent stock brokers from misusing client funds.

The dramatic crash in the stock market at the beginning of this year and the ensuing liquidity crisis led to misuse of client funds by many broking firms. Acting on this, SEBI had formed an informal committee — comprising senior officials from both exchanges, brokers, and investors’ representatives — in June 2008 to address the issue. “The committee has sent its recommendations to SEBI to make the agreement more investor-friendly and less cumbersome. It is very likely that some changes will come through,” said a person familiar with the development. In the current structure, an account opening form, known as ‘Individual Client Registration Form’, has boxes which the investor has to tick depending on whether he wants to trade in cash, derivatives or debt markets. There have been instances, where brokers have ticked the derivatives option after the client has filled in the form, and then used his account to punt in the market. To curb this practice, SEBI is considering introducing different colour pages in the form so that the investor knows what he is applying for, and the broker will not be able to make changes later on. The committee has proposed reducing the number of signatures to be done by clients in the agreement. If implemented, the agreement will henceforth require just half-a-dozen signatures as opposed to nearly 20 signatures at present. After the agreement is signed, brokers will be required to give the copy of the agreement, signed by both parties, to clients. Currently, the form has a section titled “adjustment of balance in family accounts”, which gives a room to the broker to adjust the outstanding balance of two family members against each other without the consent of the other client. That will no longer be possible, once the new agreement comes into effect. The committee has recommended a provision to have a prior consent from the member on the form to do so. Further, the committee has said that the broker should be compulsorily required to make the account ‘zero balance’ every quarter by exchange of cheques so that disputes don’t go beyond three months. This should be accompanied by a balance confirmation from the client with signature at the end of every financial year. It is also recommended that there should be separate forms — one having mandatory requirements by SEBI and other with optional conditions stipulated by the broker. Currently, stipulations are mixed in one form, which also includes certain conditions not mandated by regulator, but incorporated by the broker as a safeguard against potential legal action by the client. Sources said that initially, brokers on the SEBI panel were resisting these moves, as these would involve more time and costs, besides making them more accountable to their clients. But due to increasing cases of client-funds misuse coming to light, brokers had to bow down to pressure from other committee members.

WHAT ARE BFSI COMPANIES?

Banking, Financial Services and Insurance (also known as BFSI) is an industry name. This term is commonly used by IT/ITES/BPO companies to refer to the services they offer to companies in these domains. Banking may include core banking, retail, private, corporate, investment, cards and the like.

Financial Services may include stock-broking, payment gateways, mutual funds etc. Insurance covers both life and non-life. A lot of data processing, application testing and software development activities are outsourced to companies that specialise in this domain.

Satyam's Experiment In Stupidity

Nobody takes shareholders for a ride – that’s the message that’s gone out loud and clear to the owners and promoters of Satyam Computers, one of India’s biggest IT companies. A corporate fiasco that began as little as a day ago has ended abruptly with the Board of Satyam throwing in the towel against a vastly growing majority of their own shareholders.Satyam’s decision to acquire Maytas Infra Limited was a very difficult decision to swallow for the shareholders. Questions were asked about the need of the acquisition. More importantly, how exactly was the company justified in spending a lot of money on a family owned company?

Satyam knew that they would not in any way have it easy in acquiring Maytas - an infrastructure company owned and operated by members of the same family that also runs Satyam Computers. Satyam did in fact play safe and announced the Maytas acquisition plan a day earlier late in the evening after the markets had closed because had they done so a few hours earlier the stock would have been hammered.

Nonetheless, the stock was hammered anyway and the impact of the announcement had the uppermost management of Satyam in crisis control mode. Satyam’s stock listed on the New York Stock Exchange was beaten down by half its market value.

Fearing the same reaction a few hours later on the Indian stock markets, Satyam’s home bourses; the company immediately realized the extent of the damage they had caused and announced that they had decided to drop the plan to acquire Maytas.

What had happened in New York was only the beginning because on the Sensex and the Nifty; Satyam’s stock was mercilessly drubbed into the sub-200 levels for the first time after a year. By the time the session closed,the stock had closed thirty percent lower leaving the management especially the Board of Directors with an important lesson to heed their own shareholders.

Shareholder opposition to the Maytas acquisition has been eminent for quite a while but their reaction to the company’s enforcement was definitely underestimated by Satyam.

Right from the morning of December 17, 2008 Satyam’s shareholders; big investment, mutual fund houses and average small investors systematically dumped their shares and continued to do so even after they learnt that the Maytas acquisition plans had been cancelled. It was clearly a lesson to Satyam from their shareholders.

There was definitely no need for Satyam an IT company to acquire Maytas-an infra development company. The fact that it was a family owned company that would cost 1.6 billion dollars to Satyam made things worse. If Satyam indeed felt the need to diversify into other fields, then many other choices were available.

It’s been an episode that has definitely embarrassed Satyam and has once again raised the question of Corporate Governance. Satyam in fact went ahead and said that they did not even need shareholder approval to acquire Maytas. It’s been this attitude that’s led to the fall in their share price.

Tata Tele to now write off Rs1,648 crore

Tata Teleservices Ltd (TTSL), which has written off Rs5,141.28 crore, will write off Rs1,648 crore more as it goes ahead with the third leg of its capital restructuring programme which comes in the wake of a November announcement by NTT DoCoMo Inc. that it was paying $2.7 billion (Rs13,070 crore) for a 26% stake in the company.

A recent petition to the Delhi high court related to its restructuring plan that it will use gains of Rs1,648.74 crore from revaluing its equity investment in listed subsidiary Tata Teleservices (Maharashtra) Ltd, or TTML, to write off more book losses and unabsorbed depreciation. TTSL isn’t listed on the exchanges.The company has till 15 March 2009 to complete this restructuring. All such schemes have to be approved by high courts, according to India’s Companies Act.

TTSL has explained that its investment in 714.3 million TTML shares, which was valued at Rs387.05 crore or about Rs18 per share, was in September revalued at Rs28.5 per share, based on six-month average market prices on the National Stock Exchange (NSE).

Following the revaluation, this investment has grown to Rs2,035.80 crore, an appreciation of 426%. Its not ascertain when TTSL made this investment in TTML, which was earlier known as Hughes Ispat Ltd.

According to TTSL’s petition, it has received an approval for the restructuring scheme from 19 of the 33 equity shareholders accounting for 99.75% of the company’s shareholding. TTSL’s earlier plan had envisaged halving its equity capital to Rs3,173.57 crore and using Rs1,967.71 crore from its share premium account to write off past losses and unabsorbed depreciation.

TTSL’s losses increased from Rs8,547.49 crore as on 30 September 2007 to Rs9,177.17 crore as on 31 March. As on 30 September, TTSL held a 37.65% stake in TTML with associates such as Tata Sons Ltd, the group’s main holding company, holding the remainder of the combined 66% stake held by promoters, according to data on BSE’s website.

TTSL, which services 30.2 million subscribers through a network based on wireless technology standard CDMA, said in a recent presentation that its subscriber base was growing at a compounded annual growth rate of 80%. The company’s subscriber base represents 9.2% of the 325.7 million mobile users in India.

The company explained in its petition that the move to cancel part of its share capital, which was already lost on account of accumulated losses, was to have a balance sheet that “depicts a more realistic capital employed which is fairly represented by the value of productive assets on the balance sheet.”

THE 3 STEPS PROCESS FOR THE SCHEME OF RESTRUCTURING.

Losses as on: 30 Sep 2007 - Rs8,547.49 cr.

Losses as on: 31 Mar 2008 - Rs9,177.17 cr.

STEP 1: Amount available from extinguishment of share capital:- Rs3,173.56 crore.

To write off book losses of Rs1,586.78 crore. ...and unabsorbed depreciation of Rs1,586.78 crore.

Balance Nil.

STEP 2: Available in the share premium account:- Rs1,967.71 crore.

To write off book losses of - Rs983.85 crore. ...and unabsorbed depreciation of - Rs983.85 crore.

Balance Nil.

STEP 3: Original value of investment: Rs387.05 cr.

Value of the investment after proposed revaluation:- Rs2,035.80 cr.

Difference between the original value and the revaluation:- Rs1,648.74 cr.

To write off book losses of - Rs1,307.21 cr. ...and unabsorbed depreciation of - Rs341.53 cr.

Balance Nil.

Manipulators also feels the heat of meltdown

According to the latest intelligence report from the government which tracks the economy and markets, very few such operators have been able to make profits in the steep downturn by using short-selling and buy-back routes. What’s more, given the liquidity squeeze, a new kind of blame game has started between promoters and manipulative brokers who had an eye on jacking up stock prices of some companies. Interestingly, the report has also cited instances where promoters of companies have accused such cartels of selling shares in their companies without their knowledge. For instance, the promoter of a Mumbai-based education services company has accused one such cartel of selling a huge quantity of the company’s shares in mid October without his knowledge, the report said.

Also, the report has mentioned the names of two companies, one each in steel and real estate, as those in deep financial strait. According to the report, the Mumbai-based diversified conglomerate has already incurred losses to the tune of $1.5 billion in its steel business alone. It has further said that the group is starved of funds to develop new businesses. Similarly, the report has pinned the blame of the hammering down of stock prices of a top real estate company as the handiwork of a large business house in India for allegedly taking over the company itself. It has also warned how a few Ahmedabad-based stock manipulators, in collusion with promoters, are planning to shore up the prices of five companies.

Disney raises stake to 50 pc in UTV Software

Walt Disney Company (South East Asia) has raised its stake in UTV software to more than 50 % and has become the majority shareholder of UTV Software Communications. Walt Disney recently acquired about 20 % of UTV shares from the open market and increased its holding in the company to more than 50 %. Earlier, its shareholding was 37 %. This made Walt Disney the first Hollywood studio to have majority shares in an Indian entertainment company. The shareholding of UTV and Walt Disney in UTV Software Communications has increased to 83.25 %. In February, Walt Disney had invested $190 million in UTV Software and increased its stake from 14.85 % to 37.29 %. According to UTV sources, though Walt Disney is now a majority partner of UTV Software Communications, its equation in the company will remain unchanged. As per an agreement reached with UTV founder, Ronnie Screwvala, Walt Disney will not claim more than 3 seats it already has on the UTV Software 12-member board. Also, it will not use its voting rights till 2012, but may amend if needed. An industry source revealed that Disney might have taken advantage of the market slowdown to buy UTV software's 23 % additional shares in the open market at a cheaper rate and if this continues Walt Disney may look to delist UTV Software in some time nearby, giving an open offer to UTV's minority shareholders. Surely I foresee the great future of UTV Software ahead. 
Currently UTV trading at Rs. 227, maybe by or after 2012 Disney may offer delisting.

INVESTORS GAIN LITTLE IN BUYBACKS

If stock prices movements are an indicator, then investors are not happy with buybacks or share repurchase programmes initiated by companies. While the consensus view is that buybacks are positive as they are usually an indication that the company's management thinks the shares are undervalued, shares of none of the 11 companies whose share buybacks are open have gone up after the initiative was started, data shows- Stocks of Reliance Infrastructure, SRF, Rain Commodities and DLF have fallen by as much 35-60% from the day the buyback was open and most companies have seen their stock value erode by an average 40% in the same period. All the buybacks are to be done through open market purchase. Though on the day of announcement, stocks might have usually reacted positively, stock prices of the same companies have mostly fallen by as much as 10-50% in the period between the buyback intention was first announced and when it actually started. "What's in it for the ordinary investors, if the company is buying back at the prevailing price? Only the promoters appear to benefit from this peculiar situation as they are indirectly increasing their stake (since bought back shares will be extinguished) and that too without using their own funds. Companies such as Amrutanjan, Godrej Consumer, EID Parry and Ipca Labs announced buyback plans in the last two days alone. While its true that shares of most companies are available at steep discounts (40%-80%) vis-a-vis their January peaks, since most of the purchases are done through open market, nonpromoter entities hardly stand to benefit from the scheme of things. "Certainly, its a good time from a valuation perspective. But whether investors are appreciating (buybacks) or not, is a judgement on individual companies which is again dependent on many factors . The maximum buyback price in cases such as Reliance Infrastructure (Rs 1600), DLF (Rs 1100), SRF (Rs 160) or HEG (Rs 350), practically becomes a non-benifical

INDIA IN RECESSION ?........NAAAAA

US went into recession followed by Britain and European nations even the Asian countries were not speared by this global recession. Hong Kong also slipped into recession in the 3rd quarter as on 15th NOV 2008, as global economic slowdown took its toll on the financial hub, Hong Kong’s gross domestic product fell 0.5% from the previous quarter on a seasonal adjustment basis, following a fall of 1.4% in second quarter.

European nations which became Euro Zone from the year 1999 and introduced Euro € as its currency, also faced the recessions. The 15 European countries faced this situation first time in ten years since being in euro zone. They recorded -0.2% growth rate in the second quarter of the year. If the growth rate in Europe goes to negative, constantly for two quarter it is officially pronounced recession in Europe.

Generally recession is identified as- continues fall in GDP for two consecutive quarters of the country is termed as recession in that country.

But whereas in India, there is no question of recession but will definantely slowing down for a bit. With inflation down to 8.40 per cent, the Reserve Bank is expected to cut policy rates, repo and reverse repo, along with a fiscal stimulus package by the Government, to spur economic growth. The Indian economy grew by 7.6 % in the first half of the fiscal from 9.3% a year ago, and analysts predict further slowdown in the remaining period of this fiscal. Data released by the Central Statistical Organisation on 28 th of Nov 2008 showed that all the eight economic sectors that contribute to the gross domes-tic product (GDP) recorded a lower growth year-on-year. The slow-down in the services sector — which accounts for nearly 60% of the output — was milder than expected, The economy expanded by 7.9% during the first quarter, taking the first-half GDP growth to 7.8 %. Economists had been expecting second quarter GDP to grow 6.9%,

Growth in manufacturing during the second quarter almost halved year-on-year to 5%, and was down 60 basis points compared with the preceding quarter. Growth in agriculture slipped to a two-year low of 2.7%, raising concerns about its potential impact on food inflation, which continues to rise despite falling headline inflation.

Tata Tele sets off losses of Rs5,141 crore,....Biggest write-off by an Indian firm; two-step capital restructuring to help company achieve profitabili

Tata Teleservices Ltd, or TTSL, the country’s sixth largest phone services firm, has started restructuring its capital by writing off Rs5,141 crore in losses and unabsorbed depreciation, according to excerpts from proceedings of shareholders meeting, in what is the largest such set-off by any Indian firm.

The restructuring, which was approved at an extraordinary general meeting of shareholders on 8 September and is pending approval from the Delhi high court, will potentially help the company achieve profitability faster.

This is the second occasion in the telecom sector’s recent history that such a large write-off is being executed; the first being in 2005 when Reliance Industries Ltd’s then subsidiary Reliance Infocomm Ltd, now called Reliance Communications Ltd, or RCom, wrote off Rs4,500 crore as part of a split between the Ambani brothers. RCom is now run by younger brother Anil Ambani’s Reliance-ADA Group.

According to the TTMLs profit-and-loss statement for fiscal 2008, the Tata phone firm had losses of Rs9,177.17 crore, including carried forward loss of Rs7,363.41 crore. Most of the losses were on account of increased capital expenditure for capacity building as the company expanded its subscriber base to nearly 30 million, as of end-August data from industry lobby Association of Unified Telecom Service Providers of India.

As its network expands and it gains customers in India, the world’s fastest growing phone services market by customers, TTSL has reduced annual losses to Rs1,813.76 crore for the period ended 31 March 2008, against Rs2,062.52 crore in the previous year. Revenue also increased to Rs5,377.90 crore for fiscal 2008, a rise of 15.70% over Rs4,647.80 crore in the year to 31 March 2007.

The restruc-turing plan includes reducing Rs1,967.71 crore from its share premium reserves on the balance sheet by writing off Rs983.85 crore of book losses (through wiping out share premium) and Rs983.85 crore of unabsorbed depreciation.

In a simultaneous move, TTSL plans to halve its equity share capital from Rs6,347.15 crore to Rs3,173.57 crore, by reducing Rs1,586.78 crore from its book losses and Rs1,586.78 crore against unabsorbed depreciation.

The capital restructuring will enable the Tata Sons Ltd subsidiary to hasten dividend plans and perhaps make it more attractive for a foreign strategic telecom partner to pick up stake. TTSL is an unlisted entity.

Writing off losses enhances TTSL’s dividend paying capacity, one expert said, but its benefit will have to weighed against the minimum or alternative tax benefits the company enjoys as a result of the losses. “One has also to see whether the dividend capacity is really useful at a time when further investments are called for,” said Vivek Gupta, partner at BMR Associates, an audit firm.

This move “right-sizes the balance sheet”, said Girish Vanvari, executive director at KPMG, a management consultancy and accounting firm. Share capital, reserves and surplus add up to a large net worth and bloat the balance sheet. Also, he added, “companies cannot declare dividends till they wipe out accumulated losses”.

WHAT IS ISLAMIC BANKING?

a) Islamic banking does not involve transaction of payment or taking of interest, thus cannot maintain the SLR in government bonds which are Interest bearing.

b) Loans are given on Profit/loss sharing basis.

c) Mortgages are based on cost plus profit mark up as opposed to interest based loans.

d) Banks buys an asset and sells it at higher price to client on deferred payment basis.

e) If the bank goes bust, according to Shariah, the depositor is advised to share the loss, though in countries like U.K the bank is legally bound to pay back deposits.

WHY NOT ISLAMIC BANKING FOR INDIA?

As government grapples with the global liquidity crunch, Islamic banking could offer a way to bring fresh funds into financial mainstream. But while the rest of the world is opening up this avenue, India still has barriers.

Raghuram Rajan committee on Banking Sector Reforms in its reports recommended introducing Islamic Banking in India.

Islamic banking is also known as Interest-free banking. Interest free banking offers new possibilities to bring in the excluded citizens into the formal financial system.

a) Interest free banking is that the investor/lender does not get interest, but gets compensated through a form of profit sharing.

b) This involves equity based financing, and risk sharing basis.

c) When a conventional bank gives loan it takes zero risk as the loan is to be repaid with interest irrespective of whether the business succeeds or fails.

d) In Islamic banking if the borrower makes a loss, then the loan liability is mitigated as the bank will share the loss. And if borrower makes a profit he’ll have to share it with the lender at a pre-determined ratio.

e) Britain with a population of approx. 2 million Muslims has already had 6 Islamic banks 3 of which started in 2008. U.K Financial services authority (the UK’s equivalent to SEBI) sees Islamic banking not as a threat but as an opportunity for economic growth.

f) India have world’s second largest Muslims population of 154 million has lack of Islamic banking.

g) There is at least Rs. 5000 Crore of unclaimed interest in Kerela alone

h) According to estimates, globally assets worth of $300 billion are under management of Islamic banking and this is set to cross $1 trillion by the year 2013.

i) The problem in India on Islamic banking is politics. Any step towards this would be interpreted as “Favoring Muslims”

j) Besides politics there are also regulatory barriers, a bank in India cannot raise deposits without promising a specified rate of return to its depositors, but under Shariah, returns can only be determined on profit.

k) In India banks have to maintain a Statutory Liquidity Ratio (SLR) which involves locking up a portion of funds either in cash, gold or in government securities. Cash does not give any return, government securities are interest bearing which is prohibited under Shariah

l) The other problem involve restriction on equity investment by bank in India (the prime investment avenue in Islamic system) & trading (Islamic mortgages the main source of Islamic bank)