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.