SEBI approves new takeover code...Unveils several other measures

Capital markets regulator SEBI formally gave a green light to the new takeover regulations proposed by the Takeover Regulation Advisory Committee (TRAC). As per the proposed new norms, a company can acquire up to 25% in a company without requiring to make an open offer. The new takeover code also raises the open offer size from a minimum of 20% at present, to 26%. Under current regulations, if an investor buys more than 15% in another company, it has to make a mandatory open offer for a further 20% stake. In addition, removal of the non-compete fee will ensure that all shareholders of the target firm are treated fairly. While most of the recommendations by the C. Achuthan panel have been accepted, SEBI turned down the committee’s suggestion on the 100% open offer. The TRAC had recommended open offer for 100% of the target company's shares.

SEBI panel suggests rewriting takeover rules

A SEBI panel on takeover rules recommended a complete rewrite of regulations. The recommendations include raising the public offer trigger to 25%, from 15%; obligation on any acquirer to buy out all minority shareholders instead of just 20%; introducing the ability to control concept; doing away with non-compete fees, and improving the definition of indirect control of companies. The market regulator can exempt buyers from offers based on conditions that have been laid out. C. Achuthan, former presiding officer at the Securities Appellate Tribunal (SAT), submitted the report to SEBI chairman CB Bhave.

SEBI, IRDA seeking fast resolution of ULIP issue: CB Bhave

The Securities and Exchange Board of India (SEBI) and the Insurance Regulatory and Development Authority (IRDA) are working jointly to quickly find a legally binding resolution to the contentious issue of who should regulate the unit-linked insurance products (ULIP), SEBI chairman CB Bhave said. "We want to do move appropriate court quickly," the SEBI chief said in Singapore on the sidelines of a CII Conference on Indian Financial Markets. On April 15, SEBI moved the Supreme Court and some High Courts to guard against any ex-parte decision.

Bhave also sought to play down the tussle between SEBI and IRDA over ULIPs by saying that foreign institutional investors (FIIs) can continue to invest in existing ULIPs, which have a portfolio of over Rs920bn. There are no restrictions on investments in existing ULIPs, he said. SEBI's latest direction is against floating any new ULIPs, Bhave said. "FIIs should know what the correct position is and the correct position is that investors can continue to invest in current ULIPs and no new ULIPs are allowed," he said.

On April 12, SEBI modified its earlier directive and allowed life insurers to continue selling existing ULIPs. But the capital markets regulator barred the launch of new ULIPs by the 14 private sector life insurance firms mentioned in its original order until they seek permission from it. The IRDA reportedly rejected the toned-down version of the original SEBI order. "We will continue to approve insurance products as these fall within the ambit of insurance regulation," IRDA member R Kannan was quoted as saying.

On April 9, SEBI banned 14 life insurance companies from selling ULIPs without its approval, saying they needed to register with the regulator. On April 10, IRDA directed the insurers to ignore the SEBI order, forcing the Finance Ministry to step in. On April 12, SEBI and the insurance regulator IRDA agreed to maintain status quo on ULIPs and said they will seek a legally binding verdict on the thorny issue following the intervention of Finance Minister Pranab Mukherjee.

Why Irda seems an industry lobby and not a regulator

Jandhyala Hari Narayan, chairman of Insurance Regulatory and Development Authority (Irda), has termed the order of the Securities and Exchange Board of India (Sebi) barring 14 private life insurance companies from raising unit linked insurance plan premiums as being against public interest.

But does Hari Narayan himself, or for that matter Irda, have public interest in mind? Or are they only interested in protecting the business interests of the life insurance companies that they are supposed to regulate?

More likely they are serving the industry’s cause, much less that of investors. Here’s why:

1. Highest NAV guaranteed plans: Insurance companies have been launching and raising crores in new premium through highest net asset value (NAV) guaranteed Ulips. Ulips are investment plans carrying a dash of insurance. Typically, highest NAV guaranteed Ulips are 10-year plans. Some of these plans guarantee the investor the highest NAV they achieve for the first seven years of the plan and others guarantee the highest NAV for the entire duration of the plan.

There are a number of issues here

First, how can a regulator which claims to have “public interest” in mind clear an insurance plan that has the flexibility to invest up to 100% of the total money it collects in the stock market and yet offers a guarantee? Guarantees and stock markets don’t go together. Those in doubt can recall the case of the once much loved but now almost defunct institution called the Unit Trust of India (UTI). UTI had around Rs 17,000 crore invested in its assured return schemes and all these schemes had to be shut down in 2002 when things started to go haywire.

Second, the insurance companies in their promotional literature haven’t elaborated on how they plan to manage the guarantee. As the recent financial crisis shows, there are no holy cows in the world of finance.

Third, highest NAV guaranteed Ulips are being blatantly sold and advertised as a stock market product, giving an impression that all the money collected will be invested in the stock market and there it shall stay for the entire period of the plan, and the highest NAV will be guaranteed. Of course, no insurance company will take on the risk of having to pay off investors out of its own pockets. So it will in all likelihood have a higher exposure to equity initially and gradually move the investments into debt as the date of maturity nears.

If Irda had public interest in mind, it would never allow any of this. More so, considering it only benefits the insurance companies, who find it much easier to raise money by using the world guaranteed in their product.

Sebi does not allow mutual funds to use guaranteed returns. In fact, till sometime back mutual funds used to give indicative returns on fixed maturity plans to solicit investment. Even that has been stopped now.

2. Joining the Ulip sales pitch: Recently Irda put out advertisements in newspapers using taxpayers’ money, asking people to invest in Ulips. Is that a function of an industry lobby or a regulator which has public interest on its mind?

3. Identifying the best Ulip: Irda should work on building an infrastructure to help investors figure out which of the Ulips in the market is the best at any given point. In a mutual fund, the difference between the net asset value between two points of time can tell the investor how well a scheme has performed. This is primarily because the expense structure of mutual funds is more or less the same. The expense structure of Ulips offered by different insurance companies is widely different. Therefore, there is no way an individual can figure out which is the best performing Ulip going. This essentially ensures that insurance agents can push anything they want to. Now who does that help? Definitely not the investor!

4. Front loaded commissions: Most Ulips come with a top-loaded commission structure. This means insurance companies offer a significantly higher commission in the first two years of the policy. This has led to a situation wherein insurance agents, which include big banks, get investors to exit their existing Ulip policies once the lock-in is over, and get them to invest in new Ulips. This ensures that agents can continue to earn a high commission. As highlighted earlier by DNA Money (Guess what got Sebi’s goat?, April 13, 2010), the premium collected in latter years of insurance policies is not significantly different from the premium collected in the first year. Irda, as a good industry lobby should, has turned a blind eye towards this. In fact, spreading around the commission equally throughout the tenure of the policy will ensure that insurance agents do not go around mis-selling.

Over and above this, currently a life insurance agent is allowed to sell products only from one company. This has led to a situation where some big banks have switched insurance companies just because of more commission being offered. This obviously left a lot of current investors in Ulips in the lurch. A staggered commission structure will take care of this problem as well to some extent. But then that may not be.

5. Switching Ulips: If the Ulip an investor has invested in delivers mediocre returns, switching to another Ulip is a very expensive process. This is primarily because the commissions in the first two years of any policy are very high. So the investor has to pay the high commission all over again.

A staggered commission structure was in place, an investor could easily switch Ulips. This would ensure that insurance companies will compete on their performance as well, rather than the current situation where it is more a question of who has the better distribution system, pays higher commission and can get a bigger celebrity to endorse its product.

Mutual funds are currently not allowed to use celebrities to advertise their products.

6. ‘The commission-free structure will kill the insurance industry’: Irda chief Hari Narayan has gone on record with this statement after the recommendations of the Committee on Investor Awareness and Protection headed by D Swarup, the last chairman of the Pension Fund Regulatory and Development Authority, was released. The committee, which had members from the ministries of finance and corporate affairs, the Reserve Bank of India, Sebi and Irda, recommended that all retail financial products should go no-load and hence no-commission by April 2011. It recommended that upfront commissions given by insurance companies should fall to 7% by April 2010 and 0% by 2011. Now, that’s keeping “public-interest” in mind, for this would benefit the Ulip investor rather than the insurance company. Is Irda on the investor’s side?

via Vivek Kaul/DNA

New SEBI takeover rules may hurt Bharti-MTN deal

In a potential blow to the Bharti Airtel's efforts to create the world's third largest wireless telecom company, capital market regulator SEBI announced a proposal to alter the takeover regulations. The watchdog said that anyone holding GDRs or ADRs with voting rights of 15% must offer to buy 20% from minority holders. In an "informal guidance" in June, SEBI had said that holders of ADRs or GDRs may not have to offer to buy an additional 20% from minority shareholders unless these instruments are converted into ordinary shares.

In tune with market developments, the Board decided to amend the Takeover Regulations to provide that where the ADR/ GDR holders are entitled to exercise voting rights on the shares underlying GDRs /ADRs by virtue of clauses in the depositary agreement or otherwise, open offer obligations shall be triggered upon crossing the threshold limits, SEBI said in a statement. "If you are holding an ADR or GDR with voting rights, you have to make an open offer," said SEBI Chairman C.B. Bhave.

Bharti's proposed takeover of MTN involves issuance of GDRs to the South African telecom firm and its shareholders, which would add up to 36% of the Indian company. But, Bharti said it would seek exemption for MTN from making an offer. In a statement, India’s largest mobile phone firm said that the deal structure with MTN would be fully compliant with laws in both countries. "All relevant approvals, including exemption from open offer from SEBI if required, would be sought at an appropriate time," it said.

Bharti has extended the negotiation deadline twice to buy a 49% stake in MTN, offered a slew of concessions recently to seal a US$23bn deal that would have 200 million customers. The deadline to conclude a deal is September 30.

The Finance Ministry formed a four-member committee to meet South African officials who are visiting India this week to discuss the Bharti-MTN deal. Finance Minister Pranab Mukherjee said that the Indian Government backs the proposed merger of Bharti with MTN, but would require full convertibility of the Indian currency and the resolution of legal issues. India does not have full convertibility on the capital account.

South African officials told Indian policymakers that the latest change in takeover rules would make it difficult for MTN to complete its merger with Bharti. South African officials, who met SEBI, RBI and Finance Ministry officials in Mumbai, sought exemption from a clause that mandates the purchase of a 20% stake from minority holders if an entity’s stake in a company touches 15%.

SEBI clears Tech M open offer for Satyam

Venturbay Consultants Pvt Ltd and Tech Mahindra Ltd. announced that the last date by which Letter of Offer will be dispatched to the shareholders has been revised to June 9 from the earlier scheduled date of June 3. Furthermore, last date of withdrawal by shareholders has also been revised to June 26 from the earlier scheduled date June 27. Dates for all other activities of the schedule remains unchanged. The announcement was made by Kotak Mahindra Capital Co., the lead manager to the offer. Tech Mahindra has made the open offer for acquiring an additional 20% stake in Satyam at a price of Rs58 per share. The total cost will be Rs11.55bn. The Securities and Exchange Board of India (SEBI) has cleared the open offer for Satyam by Tech Mahindra. However, the capital market regulator has asked Tech Mahindra to share with the company’s stakeholders the information Satyam had provided to the bidders.

Sebi bars GHCL promoters

For filing false shareholding details.

The Securities and Exchange Board of India (Sebi) has barred the promoters of soda ash maker Gujarat Heavy Chemicals (GHCL) from dealing in securities for allegedly violating various securities market laws including insider trading rules.

Those barred include chairman Sanjay Dalmia, managing director Ravi Shanker Jalan and company secretary Bhuwneshwar Mishra. There are 43 others who also cannot trade in securities until further orders.

The Sebi found the company guilty of filing false shareholding information of the promoters repeatedly over the four quarters of 2008. In fact, in the last three quarters of the year, the overstatement was by over 100%.

While the actual promoter shareholding according to the data given by the company's registrar was 19.4%, 18.02% and 18.74% at the end of June, September and December 2008, the company had informed the exchanges that the promoters held 40.4%, 40.3% and 38.32%, respectively during these periods.

Sebi said GHCL had misled the investors which is a serious offence by a listed company and its management.

Sebi plans to extend trading hours

To align the domestic bourses with international markets

Market regulator Securities and Exchange Board of India (Sebi) today, 19 March 2009, proposed to extend trading hours in exchanges to align the domestic bourses with international markets and asked various stakeholders for their opinion by 10 April 2009.

Among the advantages noted by the regulator are incorporating information flowing from different time zones, markets becoming efficient with quick assimilation of data, attracting global trading interest and enabling participants to take longer positions.

In India, the equity cash market and exchange-traded derivatives market is open between 9:55 IST to 15:30 IST. While exchange-traded currency derivatives market operates from 9:00 IST to 17:00 IST, exchange-traded commodity futures market operates from 8:00 IST till 23:30 IST.

SEBI - Handbook of Statistics

SEBI - Handbook of Statistics

Sebi removes curbs on P-notes

Sebi to review the entire framework of FII investment in India

The market regulator Securities & Exchange Board of India (Sebi) today, 6 October 2008, removed some restrictions on indirect investments in Indian shares by foreign portfolio investors. Sebi chairman C.B. Bhave said restrictions on issuing participatory notes (P-notes) where the underlying asset is a derivative, have been removed.

Sebi has also scrapped a rule which said P-notes could only account for up to 40% of the value of assets held by a foreign fund. Bhave also said the entire framework for FII participation needs to be reviewed and that the curbs were no longer considered necessary.

P-notes are issued by foreign funds registered in India to unregistered overseas investors.

SEBI to follow SEC - ban short selling on Fin Stocks ?

"We are assessing the current market situation and closely monitoring the trading pattern. We will wait for a couple of more days before taking any decision."

Before a sharp recovery today, the domestic benchmarks fell over 10 per cent in four trading sessions on the back of massive short selling.

The share of the largest private sector bank, ICICI Bank, was hammered on news of its high debt exposure to Lehman Brothers. The stock fell over 20 per cent this week and touched a 52-week low of Rs 515 on the Bombay Stock Exchange on September 16.

SEBI eases fund raising for India Inc

The Securities and Exchange Board of India (SEBI) announced that it had decided to cut the timeline for Rights Issues, to enable companies to raise funds much faster from their shareholders than earlier. The Rights Issues can now be completed in 43 days as against 109 days earlier. SEBI is also undertaking a review of the entire Rights Issue process so as to curtail the time taken to complete the offerings. "This will reduce the market risk faced by investors and issuers and will ensure faster turnaround of money for investors," SEBI Chairman C.B. Bhave said during a media conference in Mumbai after a Board meeting.

The regulator also revised the pricing norms for qualified institutional placement (QIP) and preferential allotment to qualified institutional buyers (QIBs). The floor price for QIP will now be based on the 2-week average with the relevant date being the day on which the board meets to take the decision to open the QIP. The floor price is currently based on the higher of the average of the weekly high and low of the closing prices of the shares during the 2 weeks or 6 months preceding the relevant date. "In the current market volatility it will not be practically possible to sell shares as per the current pricing formula," Bhave said.

On the issue of Participatory Notes (PN), Bhave said that the regulator did discuss the issue and considered the data for the past 10 months, but decided to maintain a status quo on the matter. "Based on the data available with us, the board did discuss PNs, as decided earlier, but no decision has been taken," the SEBI chairman said while adding that the issue would be reviewed at a later stage.

Among other decisions approved at Wednesday’s meeting were carrying out amendments to submission and publication of financial results, besides procedural changes relating to scheme-wise annual report for mutual funds.

SEBI bans entities and individuals on fake buyback

Market regulator Securities and Exchange Board of India (SEBI) on Monday banned eight people and six companies, including SMR Universal Infotech, from trading for two years in a case involving false advertisement regarding buy-back of shares in 2002.

These entities have been primarily accused of committing a "fraud on shareholders (of SMR) by first issuing misleading advertisement when they were not eligible or required to make commitment of buy-back as also their failure to take any conclusive action thereon," SEBI said in its order.

The entities banned by SEBI from trading for two years include SMR Universal Softech, Net Axis Software, Laxmi Agro, Mega Channel Computers, Golden Palms India and Fore C Software, besides Pradeep Kumar Jain, I Srinivasan, Mubeen-ur Rehman, A X N Prabhu, K R Kumaresan, S Moorthy, R Palaniappan and K Prakash.

Pointing out that the motive behind the advertisement was to deceive the investors by way of disseminating false information, SEBI said: "The process of announcing buy-back of shares and its subsequent withdrawal must have resulted in pecuniary loss to the investors who were influenced to purchase shares on the basis of advertisement."

Sebi eases norms for IDRs, fast track issues

Minimum application value in IDR cut from Rs 2,00,000 to Rs 20,000

Securities & Exchange Board of India (Sebi) today, 29 November 2007, issued eligibility norms for fast track follow-on public offerings (FPO)and rights issues. Sebi Disclosure and Investors Protection (DIP) guidelines presently enable a listed company, which satisfies certain specified requirements, to prepare a draft offer document containing rationalised disclosures, as against comprehensive disclosures for an IPO. The draft offer document is, however, processed by Sebi and stock exchanges in a manner similar to that of a draft IPO document.

However, according to Sebi, such companies can now proceed with follow-on public offering/rights issue by filing a copy of the Red Herring Prospectus (in case of book built issue)/Prospectus (in case of fixed price issue) registered with the Registrar of Companies or the letter of offer filed with designated stock exchange, with Sebi and stock exchanges.

The market regulator has also eased guidelines on issue of Indian Depository Receipts (IDRs). Presently, Sebi (DIP) guidelines provide that only qualified institutional buyers (QIBs) can apply in an IPO of IDRs. But following the latest amendments, all categories of investors to apply in IDR issues, subject to at least 50% of the issue being subscribed by QIBs, and the balance being made available for subscription to other categories of investors at the discretion of the issuer.

Sebi has also reduced the minimum application value in IDR from Rs 2,00,000 to Rs 20,000.

Sebi has also made income tax permanent account number (PAN) mandatory in public and rights issue. Until now, PAN was mandatory for application value exceeding Rs. 50,000.

The market regulator has also said that a company can issue shares to retail investors and retail shareholders provided the discount does not exceed 10% of the price at which shares are issued to other categories of public

SEBI - RPL Probe ?

Kidding ? Does SEBI have any guts to even send a notice to RIL

The buzz is that a well known investment guru has gone short on RPL at various dizzy -was he involved with the promoters ?

Let the operators have a gala time and let informed investors make money!

What are your views, Do you hold RPL ? Why do you think it deserved to go up the way it went up ? Are you planning to hold on ? Leave a comment and let us know.

Disclosure - Don't hold RPL, Reliance Industries

(Comments have to be manually approved and may not appear immediately )

SEBI probe on RPL?

India’s stock market regulator is probing the movement of Reliance Petroleum Ltd’s (RPL) share over the past few weeks. The share rose by 76% between 22 October and 1 November when it touched a high of Rs295 in intra-day trading on the Bombay Stock Exchange (BSE), and fell by 18% between 5 November and 6 November after the National Stock Exchange (NSE) barred derivatives traders from taking fresh positions in RPL futures.
A senior official of the Securities and Exchange Board of India (Sebi), who did not wish to be named, confirmed that the capital market regulator has called for trading data from stock exchanges and is “looking into the matter”. “I can’t share with you any information at this point as this is confidential,” the official added. He said Sebi routinely looks into stocks that show unusual movements.

It is the stock market regulator’s job to investigate sharp and sudden movement in share prices, but such investigations, by themselves, do not imply any wrongdoing.

RPL’s stock fell 2.96% on Tuesday on BSE to close at Rs198 even as the exchange’s benchmark index Sensex fell 0.6% to close at 19,127.73.
Between 1 November and 6 November, substantial positions were built in RPL futures on NSE, as a result of which the prescribed marketwide position limit was breached.
A futures contract is an exchange-traded one requiring the delivery of shares at a specified price on a specified future date.

The marketwide position limit is defined as 20% of a company’s free-float capital, or shares available for trading.

In RPL’s case, the marketwide position limit was 180 million shares. Over four trading sessions between 1 November and 6 November, the open interest in the RPL futures more than doubled from 86 million shares to 171 million shares.
This was accompanied by a drop of 25.3% in RPL’s share price from its intra-day high of Rs295 on 1 November, the day open interest started building up significantly, to Rs220.35 on 6 November.

Normally, a drop in share price accompanied by a build-up in open interest suggests that traders are taking fresh short positions.

People taking a short position are essentially taking a negative view on the stock. For instance, a person who went short on a certain company when its shares were trading at Rs290 can wait till the settlement date, say 29 November, when its price is down to Rs190, and then buy the shares (since he has already sold it at Rs290, he makes a profit of Rs100 a share). Or, this person can wait for the share price to start going down and buy back an equivalent amount of shares as he has sold, squaring his position.

Open interest is the outstanding position traders have in the futures and options market. Most of the outstanding position in RPL futures were in the near-month series—the futures contract set to expire this Thursday, 29 November.

On 6 November, nearly 95% of the total futures positions were in the near-month series, which essentially means that a large number of people (or, more accurately, a large number of positions) were betting on the price of the stock to fall, just like it did.
It is this phenomenon that Sebi is investigating because the large number of positions would suggest that there were too many bets being placed that the RPL stock would fall.

In a press release issued late on 26 November, RIL said it had sold 180.4 million shares, or 4%, in RPL, bringing down its holding to 70.99%.
The sale raised Rs4,023 crore, at a price of Rs223 a share.

FIIs get a breather on P-Notes

Sebi to fast-track registration; proprietary sub-accounts have to register.

Securities and Exchange Board of India Chairman M Damodaran stood his ground on restricting the use of participatory notes (P-notes) by foreign institutional investors, but made two important announcements.

The first is to allow proprietary sub-accounts of foreign institutional investors (FIIs) — i.e. sub-accounts that are formed to invest their own money — to issue P-notes provided they apply to register themselves with Sebi in the next 24 hours.

The second is to put registration of FIIs on the fast track. Addressing FII representatives from all over the world through a video conference, Damodaran, however, said the issue of offshore derivative instruments by other sub-accounts of FIIs will not be possible after the changes it proposed last week come into force.

The Sebi board is scheduled to meet on October 25 to take a final decision.

“We will allow the sub-accounts of FIIs to apply for a full licence if they are used for their own trading, and will process the applications in about a week,” Damodaran said.

Other unregistered investors using derivatives to invest in stocks will have to unwind in 18 months, he added.

The Sebi chairman also said more than one entity from an FII can also be eligible for registration.

Unregistered investors, including hedge funds, have invested a cumulative $88 billion in Indian stocks. The government does not permit hedge funds to directly buy equities, so they use derivatives to invest.

Proprietary sub-accounts are different from other sub-accounts, which are largely corporate structures or special purpose vehicles formed in tax havens by unregistered investors, with FIIs investing the money on their behalf.

FIIs were of the view that they are already registered and hence there should not be any ban on P-notes issued by their own sub-accounts.

On the issue of speeding up the procedure for registering FIIs, Damodaran said Sebi had cleared 16 applications today, setting to rest the perception that the regulator delays registration of FIIs.

One of the proposals cleared was of Citibank’s application for a proprietary sub-account.

He also said that the Sebi board will review the registration procedures in its next board meeting and will consider broadening the list of various categories of investors that can come in as FIIs and invest here.

The regulator may also review the one-year track record period needed for getting FII registration.

Damodaran made it clear that P-notes are here to stay for long, but with limits. “We believe that the responses we have on board at this point of time are adequate for us to take the process forward,” Damodaran said.

In its proposal, Sebi had proposed limiting the issuance of additional P-notes, and capping the amount that can be issued by each broker.

The regulator proposes to set a limit of 40 per cent of assets under custody for issuing new notes. Brokers who exceed the limit will need to pare their outstanding notes. Brokers who have issued less than the limit may do so at an incremental rate of 5 per cent of their assets under custody.

The Sebi chairman, however, did not agree that the FII registration norms are slow and said clearance is pending in many cases as the applications are either incomplete or because the Sebi board has yet to take a decision on allowing that category of investors to register as an FII.

In many cases, it has been found that the custodians have not forwarded the applications to Sebi.

FIIs have bought a record $19 billion of Indian securities this year, more than double last year's $8.9 billion. More than half has been invested in the month since the US Federal Reserve cut interest rates.

ONE STEP BACK

Sub-accounts owned by FIIs to invest their own money, can issue proprietary notes provided they apply for registration with Sebi in the next 24 hours. FII registration put on the fast track Sebi cleared 16 applications on Monday

SEBI nervous about P-Notes

Markets have pronounced their judgment. After the mayhem in the stock markets last week, there’s no doubt they’ve condemned the Securities and Exchange Board of India’s (Sebi) move to regulate participatory notes (PNs). And they’ve done it in the way they know best, by voting with their feet to pull the Sensex down 7.83% (1,492 points) in just three trading sessions after the regulator made its draft proposal on regulating participatory notes public. But markets are fickle creatures. So while market reaction is important, it is seldom a good measure of long-term policy soundness. Hence it would be inadvisable to pay undue attention to it.

The more important question is, how will posterity judge the regulator. And here the consensus opinion, once the hullabaloo has died down, will be far more forgiving. The reason is that Sebi’s proposals are in the long-term interests of the market. To understand why it is necessary to look beyond and see why is the Indian stock market out of bounds to PN-holding investors. Is it cussedness on the part of the authorities? Red tape? No. Because if that were so, we would not have more than 1,500 FIIs and close to 3,500 sub accounts registered with FIIs. Rather, the reason why some investors resort to the PN route is because they are unwilling to comply with simple regulatory requirements.

Today, any entity regulated overseas can register as an FII in India. There are no onerous obligations. All it entails is some minimal disclosures about track record, top five investors and other such details that investors should normally not have any problems disclosing. The basic distinction between funds that come through the PN route and through FIIs, therefore, is that there is no audit trail in the case of the former. There is no knowing either the quality of the money or the ultimate beneficial interest. Which is why when FIIs and PNs come to dominate the market—75% of the floating stock is reportedly now in FII hands, with as much as 52% of the assets under custody of FIIs being in the form of PNs—there is reason for concern.

Like the dog that did not bark in Silver Blaze, Sherlock Holmes’ story of the racehorse that disappeared, the existence of a class of investors unwilling to comply with simple disclosure requirements is reason to doubt its motives. More so when the rise in the number and amount of PNs outstanding has gone in tandem with the ‘excessive’ rise in the Sensex. Admittedly, it is always difficult to say at what point a market is over-valued. But there’s no denying the Sensex has run up faster than warranted by historical trends.

In such a scenario, any regulator would have reason to be anxious and want to know more about the players in the market that is all. In this, SEBI is not unique. The US Securities and Exchange Commission is just as nervous of hedge funds. And if it has not acted as yet, it is only because US markets are highly developed and can deal with the large capital flows.

But as the subprime crisis has shown, even deep, well-developed markets can be laid low, especially when there is lack of transparency. So imagine how much more havoc could be caused by lack of transparency in the Indian context. Merely saying the market reflects underlying fundamentals does not make it so. The reality is that the best of markets is not immune to sudden surges of capital, inflows or outflows. Each extracts a price—inflows, in terms of a sharp appreciation of the domestic currency or if that is a no-no, of a surge in liquidity that can be as damaging. Sudden outflows, however, are far more destabilising. They can set economies back by years, as the East Asia experience showed. Do we want to go the same way? The answer must be an unequivocal ‘no’.

FIIs can rollover PNs up to 18 months

In a bid to calm the investors, market regulator Securities and Exchange Board of India (Sebi) today said Foreign Institutional Investors would be allowed rollover Participatory Notes in derivatives market, provided it does not exceed the 18-month limit.
“It is made clear that there is no proposal to bar an Overseas Derivative Instrument (ODI) contract expiring this month or in the following months, being renewed provided the renewal does not go beyond 18 months,” Sebi said in a clarification to its draft discussion paper on ODI that includes Participatory Notes (PNs).
The Sebi clarification clears the air of uncertainty over the fate of renewal of PNs that are due to expire this month or will expire in the coming months.
SEBI had yesterday invited public comments on its proposal to restrict with immediate effect, issuance of PNs in derivative markets by FIIs and their agents.
As per the proposals, FIIs and their sub-accounts are required to wind up the current ODI position over 18 months, during which Sebi will review the position from time to time.
Sebi has sought comments from public by 20 October on its discussion paper, which Finance Minister P Chidambaram today said will become regulations “with or without some modifications.”
Sebi’s clarification came after the Sensex crashed by over 1,700 points within minutes of commence of trading, leading to closure of the markets for an hour. The markets, however, have recovered considerably after an assurance by the Finance Minister that there is no proposal to completely ban Participatory Notes.

Important Notes for the day!

Don't panic if Udayan tries to scare you :) .. Ooh Aaah, he will squeal

Remember

Don't watch CNBC, the more you see, the worse it is for your body :)

Sell on rises, not on dips

No doubt, its a huge negative looking at the amount of money invested through P-Notes

Funny situation for hedge funds, first they short, then they panic cover, now they have to panic sell

It's a Chidu induced correction, made enough money I suppose

It's only recommendations, Chidu may ask SEBI to reconsider

If you are a newbie who invested on tips, you will pay the market the 'fees' for doing so, you will come out a better investor

Don't PANIC seeing RED


PASS this on to friends who you think are at risk of a heart attack :)