Ashish Rukhaiyar
February 4, 2011
The market regulator's new asset
A few months ago at a glittering mutual fund awards night, the chief executive of an asset management company was asked where he likes to go on vacation. The compere expected an exotic destination like Montreux or Tuscany. Pat came the reply: “My hometown in Bihar”. The answer was classic Upendra Kumar Sinha — simple and forthright. And, yes, he was on the dais to accept one of the many awards on behalf of UTI Mutual Fund.
Sinha is set to don a new hat. Come February 18, he will succeed C B Bhave as the new chairman of the Securities & Exchange Board of India (Sebi). His new office will be only a block away from his current one in Mumbai’s Bandra-Kurla Complex, but the added powers will bring more responsibilities, too.
Even before the 59-year-old industry veteran occupies the spacious eighth-floor room in Sebi’s headquarters, which offers a commanding view of the commercial hub, there is enough speculation about the stance he will take on sensitive matters like an entry-load ban on mutual funds, overhauling of regulations governing corporate takeovers and foreign institutional investors (FIIs), and ownership issues related to stock exchanges.
The disciplined Sinha, however, is not one to be swayed by biased opinions. The 1976-batch IAS officer has seen it all during his stints with the finance ministry, first as joint secretary in the banking division and later with the economic affairs division. People who know Sinha are not surprised when the government entrusts him with vital jobs related to financial markets.
“He has many qualities that will make him an asset to any institution,” says an industry veteran, who has worked with Sinha on a committee on securitisation of bonds. “He is a good listener, thinks logically and does his homework before entering any meeting. As a result, one finds it almost impossible to negate his views. And the biggest plus point is that even the government has faith in him,” he says, requesting not to be named.
The Bihar cadre bureaucrat, who has a degree in law and a master’s degree in physics, may well be a part of the mutual fund industry that has been in perpetual cribbing mode ever since entry loads were banned in 2009. But he is definitely not one among the CEOs sticking their necks out to enhance assets under management. Sinha, however, was one of the most vocal critics when Sebi barred fund houses from charging an entry load.
At a time when most fund houses found innovative ways to attract corporate money to top the monthly charts, Sinha’s UTI MF joined hands with the Bihar government to launch Mukhyamantri Kanya Suraksha Yojana to ensure education for girls. The scheme envisages developing 250 schools exclusively for them. It did not lead to a quantum jump in the assets of UTI MF, but it did work towards the aim for which mutual funds were created in the first place.
Sinha is also credited with the launch of a micro-pension scheme, targeted at low-income groups, which is believed to have attracted more than 2 lakh investors. The scheme has people from the lowest strata of society, including railway porters and dairy farm workers.
At Sebi, Sinha’s working style is not expected to be drastically different from that of Bhave, as both are known to be well versed in the workings of the market and are open to new ideas. While investors will not complain, television journalists tracking Sebi may find the going a bit difficult. Unlike his predecessor, Sinha — he is interested in Urdu poetry, especially the works of Ghalib — is not known to give exciting sound bites that can be played over and over again.
Wednesday, 9 March 2011
Sebi mulls call auction for SME bourse
Ashish Rukhaiyar
Mumbai February 3, 2011
After introducing the call auction mechanism in Sensex and Nifty stocks, the Securities and Exchange Board of India (Sebi) is mulling extending this to the proposed platform for small and medium enterprises (SMEs), although with a few changes. The regulator believes the mechanism will help in price discovery of stocks, especially those that are not much in demand.
People familiar with the development say Sebi is toying with the idea of introducing 15-minute call auction windows at regular intervals. It has proposed this in its discussions with exchanges and other market participants.
Under the mechanism, buy and sell orders are collected over a fixed period and then processed in an auction. The price at which the highest number of orders is placed is chosen. In other words, buy/sell orders are not executed immediately.
“It is believed the (call) auction mechanism will help create liquidity in the SME market, as there could be many stocks for which buy/sell orders are not in large numbers,” said a person privy to the discussions. “The SME platform is different from the main market and one auction session will not suffice. Hence, the idea is to have 15-minute windows throughout the trading session,” he added.
Susan Thomas of Indira Gandhi Institute of Development Research, in a research paper titled, “Call auction: A solution to some difficulties in Indian finance”, said, “Call auction can help deal with issues such as market opening, market closing, extreme news events and can be potentially beneficial for illiquid securities, including bonds.”
The concept is not new to India. Stock exchanges introduced a 15-minute pre-opening call auction session for Sensex and Nifty stocks in October 2010. While the first eight minutes are reserved for order entry, modification and cancellation, the next four minutes are for order matching and trade confirmation. The remaining three minutes is the buffer period to facilitate the transition to the normal market.
Sebi announced the draft guidelines for the SME platform in late 2009. The guidelines called for merchant bankers to perform market-making activities for three years. They also did away with the process of vetting offer documents for listing on the SME segment.
Hence, an investment banker would be responsible for due diligence and filing the prospectus with the market regulator and the exchange. An upper limit of Rs 25 crore paid-up capital has been fixed for a company to list on the segment. The companies will be shifted to the main exchange if they cross the limit. SMEs would be required to submit financial numbers on a half-yearly basis. The minimum IPO size has been pegged at Rs 1 lakh.
Mumbai February 3, 2011
After introducing the call auction mechanism in Sensex and Nifty stocks, the Securities and Exchange Board of India (Sebi) is mulling extending this to the proposed platform for small and medium enterprises (SMEs), although with a few changes. The regulator believes the mechanism will help in price discovery of stocks, especially those that are not much in demand.
People familiar with the development say Sebi is toying with the idea of introducing 15-minute call auction windows at regular intervals. It has proposed this in its discussions with exchanges and other market participants.
Under the mechanism, buy and sell orders are collected over a fixed period and then processed in an auction. The price at which the highest number of orders is placed is chosen. In other words, buy/sell orders are not executed immediately.
“It is believed the (call) auction mechanism will help create liquidity in the SME market, as there could be many stocks for which buy/sell orders are not in large numbers,” said a person privy to the discussions. “The SME platform is different from the main market and one auction session will not suffice. Hence, the idea is to have 15-minute windows throughout the trading session,” he added.
Susan Thomas of Indira Gandhi Institute of Development Research, in a research paper titled, “Call auction: A solution to some difficulties in Indian finance”, said, “Call auction can help deal with issues such as market opening, market closing, extreme news events and can be potentially beneficial for illiquid securities, including bonds.”
The concept is not new to India. Stock exchanges introduced a 15-minute pre-opening call auction session for Sensex and Nifty stocks in October 2010. While the first eight minutes are reserved for order entry, modification and cancellation, the next four minutes are for order matching and trade confirmation. The remaining three minutes is the buffer period to facilitate the transition to the normal market.
Sebi announced the draft guidelines for the SME platform in late 2009. The guidelines called for merchant bankers to perform market-making activities for three years. They also did away with the process of vetting offer documents for listing on the SME segment.
Hence, an investment banker would be responsible for due diligence and filing the prospectus with the market regulator and the exchange. An upper limit of Rs 25 crore paid-up capital has been fixed for a company to list on the segment. The companies will be shifted to the main exchange if they cross the limit. SMEs would be required to submit financial numbers on a half-yearly basis. The minimum IPO size has been pegged at Rs 1 lakh.
Sebi collects over Rs 150 cr through consent orders
Ashish Rukhaiyar
Mumbai February 1, 2011
Nearly 1,000 cases settled; Rs 29 cr recovered as disgorgement fee.
The consent order mechanism has proved to be an effective weapon for the Securities and Exchange Board of India (Sebi), helping the regulator settle nearly 1,000 cases and collect more than Rs 150 crore as settlement charges.
The recent high-profile regulatory action against Anil Ambani-controlled Reliance Infrastructure (R-Infra) and Reliance Natural Resources (RNRL) has, once again, brought to the fore the importance of the mechanism, introduced in 2007.
Consent order means an order that settles administrative or civil proceedings against an entity that may, prima facie, be found to have violated securities laws. This reduces regulatory costs and saves the time and effort spent on pursuing enforcement actions. The US Securities and Exchange Commission settles more than 90 per cent administrative/civil cases through consent orders.
Data with Sebi show that a large number of market entities facing regulatory action, including prosecution and adjudication, opt for the consent route to end the ordeal that, at times, can continue for years. Until December 31, 2010, Sebi had received 2,220 applications, of which 1,023 were approved by the high-powered advisory committee. Of these, 982 cases have been settled.
Consent orders have helped the regulator extract more than Rs 150 crore (including Rs 50 crore from Anil Ambani and five other executives of R-Infra and RNRL) as settlement charges. This money goes directly to the Consolidated Fund of India.
Sebi has also been able to collect nearly Rs 29 crore as disgorgement amount from those named in the IPO (initial public offer) scam. The amount collected has been distributed to the victims of the scam. Sebi has also garnered a little over Rs 1 crore for itself in the form of legal and administrative charges.
Experts say the consent route helps the regulator overcome the long-drawn process involving the regulator, the appellate tribunal and the judiciary.
“The consent mechanism enables Sebi to extract punishment without actual proof of wrongdoing, short-circuiting a decade-long process to a few weeks,” says Sandeep Parekh, founder, Finsec Law Advisors. “Also, as Sebi can (and does) impose a higher quantum of settlement fee and disgorgement, in exchange for a ‘without admitting or denying guilt’ plea, it allows effective payment to the victims of the harm done,” adds Parekh, who has earlier served as executive director (legal) at Sebi.
The acceptance of consent orders can be gauged from the fact that entities file consent applications even after their cases have moved to the Securities Appellate Tribunal or the high courts. The consent terms in such cases, technically known as ‘compounding’, have to be approved by the respective authorities looking into the cases. Nearly 70 such cases have been disposed by Sebi.
Lawyers, however, say the regulator should be more forthcoming with details in the order, which often leaves a lot of questions unanswered. A common criticism is that the accused entities are allowed to escape with a monetary penalty or disciplinary action that does not justify the nature of the offence.
“An area where the process can be reformed is details in the consent order,” said a lawyer specialising in securities law. “Ideally, the order should contain more details of the charges, so that people are not under the impression that a person got away lightly,” he said.
Mumbai February 1, 2011
Nearly 1,000 cases settled; Rs 29 cr recovered as disgorgement fee.
The consent order mechanism has proved to be an effective weapon for the Securities and Exchange Board of India (Sebi), helping the regulator settle nearly 1,000 cases and collect more than Rs 150 crore as settlement charges.
The recent high-profile regulatory action against Anil Ambani-controlled Reliance Infrastructure (R-Infra) and Reliance Natural Resources (RNRL) has, once again, brought to the fore the importance of the mechanism, introduced in 2007.
Consent order means an order that settles administrative or civil proceedings against an entity that may, prima facie, be found to have violated securities laws. This reduces regulatory costs and saves the time and effort spent on pursuing enforcement actions. The US Securities and Exchange Commission settles more than 90 per cent administrative/civil cases through consent orders.
Data with Sebi show that a large number of market entities facing regulatory action, including prosecution and adjudication, opt for the consent route to end the ordeal that, at times, can continue for years. Until December 31, 2010, Sebi had received 2,220 applications, of which 1,023 were approved by the high-powered advisory committee. Of these, 982 cases have been settled.
Consent orders have helped the regulator extract more than Rs 150 crore (including Rs 50 crore from Anil Ambani and five other executives of R-Infra and RNRL) as settlement charges. This money goes directly to the Consolidated Fund of India.
Sebi has also been able to collect nearly Rs 29 crore as disgorgement amount from those named in the IPO (initial public offer) scam. The amount collected has been distributed to the victims of the scam. Sebi has also garnered a little over Rs 1 crore for itself in the form of legal and administrative charges.
Experts say the consent route helps the regulator overcome the long-drawn process involving the regulator, the appellate tribunal and the judiciary.
“The consent mechanism enables Sebi to extract punishment without actual proof of wrongdoing, short-circuiting a decade-long process to a few weeks,” says Sandeep Parekh, founder, Finsec Law Advisors. “Also, as Sebi can (and does) impose a higher quantum of settlement fee and disgorgement, in exchange for a ‘without admitting or denying guilt’ plea, it allows effective payment to the victims of the harm done,” adds Parekh, who has earlier served as executive director (legal) at Sebi.
The acceptance of consent orders can be gauged from the fact that entities file consent applications even after their cases have moved to the Securities Appellate Tribunal or the high courts. The consent terms in such cases, technically known as ‘compounding’, have to be approved by the respective authorities looking into the cases. Nearly 70 such cases have been disposed by Sebi.
Lawyers, however, say the regulator should be more forthcoming with details in the order, which often leaves a lot of questions unanswered. A common criticism is that the accused entities are allowed to escape with a monetary penalty or disciplinary action that does not justify the nature of the offence.
“An area where the process can be reformed is details in the consent order,” said a lawyer specialising in securities law. “Ideally, the order should contain more details of the charges, so that people are not under the impression that a person got away lightly,” he said.
Sebi board to skip Jalan report
Ashish Rukhaiyar
Mumbai January 31, 2011
Final decision on Takeover Code unlikely at Feb 7 meet.
The Bimal Jalan Committee report will have to wait for some time to get the regulatory nod. The board of the Securities and Exchange Board of India (Sebi), scheduled to meet on February 7, has not included it in the agenda. While the Takeover Code will be the highlight of the board meet, a final decision is unlikely due to the finance ministry’s reservations over certain issues.
According to people familiar with the development, Sebi officials need more time to deliberate on the recommendations of the committee, formed to review the ownership and governance of market infrastructure institutions (MIIs), including stock exchanges, depositories and clearing corporations.
“There are certain issues (in the Jalan report) on which consensus has not been reached and some more time is required for discussions,” said a person privy to the developments. “It will be placed before the board only after the regulator is through with its own share of deliberations,” he added on condition of anonymity. This will also be the last board meeting for chairman C B Bhave if he does not get an extension. His three-year term ends on February 17.
The Jalan report, among other things, has recommended capping profits of MIIs, allowing only banks and public financial institutions as anchor investors and not allowing these institutions to list. Ever since the report has been made public, there has been a lot of diverse feedback from industry participants, with many opposing most of the recommendations.
Meanwhile, the Sebi board will take up the pending Takeover Code, discussions on which remained “inconclusive” during the last board meet held on October 25, 2010. People familiar with the development, however, say a final decision will probably not be taken as the finance ministry is yet to take a final call on issues such as the quantum of the open offer, etc.
The Achuthan committee, which has framed the proposed regulations, has said the acquirer should make an open offer for all the remaining shares, as against the current practice of 20 per cent.
Early this month, Sebi whole-time member K M Abraham had said on the sidelines of a conference that a final decision on the code would take more time. “It will probably take one or two more board meetings to arrive at a decision,” he had said, while refusing to give a specific timeline.
Reports suggest the regulator will also discuss the issue of further reduction in the timeline for initial public offers (IPOs) from the current 12 days to seven days and the framework for the rights issues of Indian depository receipts. Bhave, incidentally, has reiterated his aim of cutting the IPO timeline to one week on several occasions during his tenure.
Mumbai January 31, 2011
Final decision on Takeover Code unlikely at Feb 7 meet.
The Bimal Jalan Committee report will have to wait for some time to get the regulatory nod. The board of the Securities and Exchange Board of India (Sebi), scheduled to meet on February 7, has not included it in the agenda. While the Takeover Code will be the highlight of the board meet, a final decision is unlikely due to the finance ministry’s reservations over certain issues.
According to people familiar with the development, Sebi officials need more time to deliberate on the recommendations of the committee, formed to review the ownership and governance of market infrastructure institutions (MIIs), including stock exchanges, depositories and clearing corporations.
“There are certain issues (in the Jalan report) on which consensus has not been reached and some more time is required for discussions,” said a person privy to the developments. “It will be placed before the board only after the regulator is through with its own share of deliberations,” he added on condition of anonymity. This will also be the last board meeting for chairman C B Bhave if he does not get an extension. His three-year term ends on February 17.
The Jalan report, among other things, has recommended capping profits of MIIs, allowing only banks and public financial institutions as anchor investors and not allowing these institutions to list. Ever since the report has been made public, there has been a lot of diverse feedback from industry participants, with many opposing most of the recommendations.
Meanwhile, the Sebi board will take up the pending Takeover Code, discussions on which remained “inconclusive” during the last board meet held on October 25, 2010. People familiar with the development, however, say a final decision will probably not be taken as the finance ministry is yet to take a final call on issues such as the quantum of the open offer, etc.
The Achuthan committee, which has framed the proposed regulations, has said the acquirer should make an open offer for all the remaining shares, as against the current practice of 20 per cent.
Early this month, Sebi whole-time member K M Abraham had said on the sidelines of a conference that a final decision on the code would take more time. “It will probably take one or two more board meetings to arrive at a decision,” he had said, while refusing to give a specific timeline.
Reports suggest the regulator will also discuss the issue of further reduction in the timeline for initial public offers (IPOs) from the current 12 days to seven days and the framework for the rights issues of Indian depository receipts. Bhave, incidentally, has reiterated his aim of cutting the IPO timeline to one week on several occasions during his tenure.
Sebi to soon release guidelines for trade in foreign indices
Ashish Rukhaiyar
Mumbai January 11, 2011
The regulator may mandate a minimum market capitalisation of $100 billion.
The Securities and Exchange Board of India (Sebi) will soon come out with a regulatory framework for allowing Indian stock exchanges to launch derivatives based on indices abroad. Sebi will lay down the finer contours related to market capitalisation, number of stocks in the indices and their weights.
According to people familiar with the matter, the regulator wants stock exchanges to introduce derivatives only in indices that have a minimum market capitalisation of $100 billion and are broad-based. In other words, Sebi plans to put in place comprehensive norms that will serve as the base for all future alliances between Indian and foreign exchanges.
“The complete framework has been decided and will be announced soon,” said a person privy to the development, on condition of anonymity. “While it (overseas index) should have a minimum m-cap (market capitalisation) of $100 bn, there should be at least 10 stocks in the index. Further, most of the stocks should have substantial weights in the index.”
This will be important step, as Indian stock exchanges are trying hard to bring home some of the leading overseas indices, to garner higher market share. Globally, some of the biggest bourses like the Chicago Mercantile Exchange (CME) and the Singapore Stock Exchange (SGX) offer trading in a number of foreign indices.
Flurry likely
Industry players believe exchanges will be quick in launching futures contracts based on foreign indices once the norms are notified. It is almost an year since the National Stock Exchange (NSE) entered into cross-listing arrangements with CME and the London Stock Exchange (LSE). The norms will provide investors an opportunity to place bets on markets like the US and the UK.
Under the arrangement with CME, NSE has exclusive rights for trading in the S&P 500 and the Dow Jones Industrial Average rupee-denominated futures contracts for trading in India.
This is being made available to NSE via sub-licences from the CME Group, Standard & Poor’s and Dow Jones, respectively.
NSE has also signed a letter of intent with the LSE for getting the FTSE 100 in India. “As part of the letter (of intent), both exchanges declared their intent to explore the feasibility of an agreement whereby FTSE Group may licence the FTSE 100 Index to the NSE, and whereby the NSE may licence the S&P CNX Nifty to London Stock Exchange Group for the purpose of issuing and trading options and other index contracts,” says the NSE release dated July 28.
Incidentally, the market capitalisation of S&P 500 is a whopping 11.83 trillion, according to data available on Bloomberg. Similarly, DJIA commands a market capitalisation of $3.71 trillion. The London-based FTSE 100 also features among the world’s largest indices, with market capitalisation of $2.58 trillion.
MCX Stock Exchange (MCX-SX) has also entered into a tie-up with FTSE to facilitate creation of international investment products, including international FTSE indices, to be listed and traded on MCX-SX. It is, however, currently in a state of flux, as its equity segment is yet not operational.
Mumbai January 11, 2011
The regulator may mandate a minimum market capitalisation of $100 billion.
The Securities and Exchange Board of India (Sebi) will soon come out with a regulatory framework for allowing Indian stock exchanges to launch derivatives based on indices abroad. Sebi will lay down the finer contours related to market capitalisation, number of stocks in the indices and their weights.
According to people familiar with the matter, the regulator wants stock exchanges to introduce derivatives only in indices that have a minimum market capitalisation of $100 billion and are broad-based. In other words, Sebi plans to put in place comprehensive norms that will serve as the base for all future alliances between Indian and foreign exchanges.
“The complete framework has been decided and will be announced soon,” said a person privy to the development, on condition of anonymity. “While it (overseas index) should have a minimum m-cap (market capitalisation) of $100 bn, there should be at least 10 stocks in the index. Further, most of the stocks should have substantial weights in the index.”
This will be important step, as Indian stock exchanges are trying hard to bring home some of the leading overseas indices, to garner higher market share. Globally, some of the biggest bourses like the Chicago Mercantile Exchange (CME) and the Singapore Stock Exchange (SGX) offer trading in a number of foreign indices.
Flurry likely
Industry players believe exchanges will be quick in launching futures contracts based on foreign indices once the norms are notified. It is almost an year since the National Stock Exchange (NSE) entered into cross-listing arrangements with CME and the London Stock Exchange (LSE). The norms will provide investors an opportunity to place bets on markets like the US and the UK.
Under the arrangement with CME, NSE has exclusive rights for trading in the S&P 500 and the Dow Jones Industrial Average rupee-denominated futures contracts for trading in India.
This is being made available to NSE via sub-licences from the CME Group, Standard & Poor’s and Dow Jones, respectively.
NSE has also signed a letter of intent with the LSE for getting the FTSE 100 in India. “As part of the letter (of intent), both exchanges declared their intent to explore the feasibility of an agreement whereby FTSE Group may licence the FTSE 100 Index to the NSE, and whereby the NSE may licence the S&P CNX Nifty to London Stock Exchange Group for the purpose of issuing and trading options and other index contracts,” says the NSE release dated July 28.
Incidentally, the market capitalisation of S&P 500 is a whopping 11.83 trillion, according to data available on Bloomberg. Similarly, DJIA commands a market capitalisation of $3.71 trillion. The London-based FTSE 100 also features among the world’s largest indices, with market capitalisation of $2.58 trillion.
MCX Stock Exchange (MCX-SX) has also entered into a tie-up with FTSE to facilitate creation of international investment products, including international FTSE indices, to be listed and traded on MCX-SX. It is, however, currently in a state of flux, as its equity segment is yet not operational.
Sebi revisits interest rate futures norms to enhance volumes
Ashish Rukhaiyar
Mumbai January 7, 2011
Wants banks to perform the role of market makers to boost investor participation.
The Securities and Exchange Board of India (Sebi) will soon unveil amendments in guidelines governing interest rate futures (IRF), which have seen close to nil volume. According to people familiar with the development, the regulator wants banks to perform the role of market makers to enhance liquidity and investor participation.
Interest rate futures is an exchange-traded derivative instrument for hedging against interest rate risk. Only the National Stock Exchange (NSE) offers trading in IRFs, launched for the first time in 2003. IRFs are based on a notional 10-year government (GOI) bond, bearing a notional seven per cent interest rate coupon, payable half-yearly.
“The regulator wants banks to act as market makers, as they are the biggest players in the IRF space,” said a person familiar with the development. “Market making is a tried and tested method and is likely to boost IRF volumes. It will, however, be a part of a regulatory overhaul, as the current mechanism has certainly not worked,” he said, on condition of anonymity.
A committee is framing the new IRF guidelines and contract specifications. It has representation from Sebi and the Reserve Bank of India. It is believed the new guidelines will be announced after the new chairman takes over in February.
The IRF market has proved a tough nut to crack for regulators. It was launched for the second time in September 2009, but volumes are still the biggest concern. On most days in the recent past, only a single token trade has been executed on NSE.
Market players feel market making isn’t enough and many issues will have to be revisited. A large section has been demanding cash settlement.
“Market making works in a ‘driven’ market and is not order-driven,” says Jayesh Mehta, MD & country treasurer, global markets group, Bank of America. “Today the underlying bonds itself are not trading enough and in a basket of deliverables, where the price is determined by formula, it is fine when all bonds are trading. Today, the buyer does not know what will get delivered and since these bonds don’t trade, theoretical pricing would be way different from the actual price. The solution is to move to single securities contract.”
It is widely believed the uncertainty over liquidity of the underlying bond is holding back players. There are concerns that one can just dump the illiquid bonds at the time of settlement.
The current regulatory framework allows participants to settle the contracts with delivery of GOI securities with a tenor between nine and 12 years. The tenor of deliverable grade securities was fixed between 7.5 years and 15 years at the time of the launch of the segment.
Mumbai January 7, 2011
Wants banks to perform the role of market makers to boost investor participation.
The Securities and Exchange Board of India (Sebi) will soon unveil amendments in guidelines governing interest rate futures (IRF), which have seen close to nil volume. According to people familiar with the development, the regulator wants banks to perform the role of market makers to enhance liquidity and investor participation.
Interest rate futures is an exchange-traded derivative instrument for hedging against interest rate risk. Only the National Stock Exchange (NSE) offers trading in IRFs, launched for the first time in 2003. IRFs are based on a notional 10-year government (GOI) bond, bearing a notional seven per cent interest rate coupon, payable half-yearly.
“The regulator wants banks to act as market makers, as they are the biggest players in the IRF space,” said a person familiar with the development. “Market making is a tried and tested method and is likely to boost IRF volumes. It will, however, be a part of a regulatory overhaul, as the current mechanism has certainly not worked,” he said, on condition of anonymity.
A committee is framing the new IRF guidelines and contract specifications. It has representation from Sebi and the Reserve Bank of India. It is believed the new guidelines will be announced after the new chairman takes over in February.
The IRF market has proved a tough nut to crack for regulators. It was launched for the second time in September 2009, but volumes are still the biggest concern. On most days in the recent past, only a single token trade has been executed on NSE.
Market players feel market making isn’t enough and many issues will have to be revisited. A large section has been demanding cash settlement.
“Market making works in a ‘driven’ market and is not order-driven,” says Jayesh Mehta, MD & country treasurer, global markets group, Bank of America. “Today the underlying bonds itself are not trading enough and in a basket of deliverables, where the price is determined by formula, it is fine when all bonds are trading. Today, the buyer does not know what will get delivered and since these bonds don’t trade, theoretical pricing would be way different from the actual price. The solution is to move to single securities contract.”
It is widely believed the uncertainty over liquidity of the underlying bond is holding back players. There are concerns that one can just dump the illiquid bonds at the time of settlement.
The current regulatory framework allows participants to settle the contracts with delivery of GOI securities with a tenor between nine and 12 years. The tenor of deliverable grade securities was fixed between 7.5 years and 15 years at the time of the launch of the segment.
Sebi ban cleans up FII space
Ashish Rukhaiyar
Mumbai January 05, 2011
The capital market regulator’s ban on certain foreign institutional investor (FII) structures is helping weed out non-genuine overseas investors. In the recent past, many FIIs have surrendered registration, while a number of sub-accounts have converted themselves into registered institutional investors.
According to the Securities and Exchange Board of India (Sebi), 24 FIIs and 130 sub-accounts have applied for surrendering registration after the new norms. In all, 188 non-compliant FIIs and 336 sub-accounts are barred from taking fresh positions in the Indian market. They, however, can retain positions or sell off/unwind.
According to experts, the list of entities opting for surrender will swell in the coming days, as overseas investors serious about investing in India will restructure and seek direct registration. They say that some entities will use the participatory note (PN) route to invest rather than restructure.
“It’s a combination of three factors. Some entities that have surrendered their memberships would be those that were never active in India. In other words, India did not feature as a large allocation country,” said Siddharth Shah, principal and head (fund formation), Nishith Desai Associates.
“Many others converted their sub-accounts into registered FIIs, thereby surrendering their original sub-accounts, whereas some entities surrendering their registration would opt for the PN route. The Sebi move has led to a clean-up, encouraging dormant players to surrender,” he added.
In April 2010, Sebi asked FIIs to stop using the complex structures of protected cell companies and segregated portfolio companies. In addition, it said the investor base be broadbased in case of multi-class share vehicles (MCVs). The deadline was September 30.
Protected cell companies are entities with several cells within the same vehicle. A cell has its own assets, liabilities, capital, dividends and accounts. Each cell functions as an independent unit within the overall set-up and the debtors and creditors of each cell have no claims against the assets or liabilities of another cell.
An MCV is a structured entity where investors in each class have different contractual agreements with sub-accounts with regards to investment strategies, liabilities and fund manager.
Incidentally, after Sebi’s restrictions on PNs in 2008, MCVs had become popular with hedge funds and a large number of individual investors. The notional value of investments in equities through PNs was as high as 35 per cent in January 2008. This fell to below 15 per cent in December 2008. At present, the number is below 14 per cent.
Mumbai January 05, 2011
The capital market regulator’s ban on certain foreign institutional investor (FII) structures is helping weed out non-genuine overseas investors. In the recent past, many FIIs have surrendered registration, while a number of sub-accounts have converted themselves into registered institutional investors.
According to the Securities and Exchange Board of India (Sebi), 24 FIIs and 130 sub-accounts have applied for surrendering registration after the new norms. In all, 188 non-compliant FIIs and 336 sub-accounts are barred from taking fresh positions in the Indian market. They, however, can retain positions or sell off/unwind.
According to experts, the list of entities opting for surrender will swell in the coming days, as overseas investors serious about investing in India will restructure and seek direct registration. They say that some entities will use the participatory note (PN) route to invest rather than restructure.
“It’s a combination of three factors. Some entities that have surrendered their memberships would be those that were never active in India. In other words, India did not feature as a large allocation country,” said Siddharth Shah, principal and head (fund formation), Nishith Desai Associates.
“Many others converted their sub-accounts into registered FIIs, thereby surrendering their original sub-accounts, whereas some entities surrendering their registration would opt for the PN route. The Sebi move has led to a clean-up, encouraging dormant players to surrender,” he added.
In April 2010, Sebi asked FIIs to stop using the complex structures of protected cell companies and segregated portfolio companies. In addition, it said the investor base be broadbased in case of multi-class share vehicles (MCVs). The deadline was September 30.
Protected cell companies are entities with several cells within the same vehicle. A cell has its own assets, liabilities, capital, dividends and accounts. Each cell functions as an independent unit within the overall set-up and the debtors and creditors of each cell have no claims against the assets or liabilities of another cell.
An MCV is a structured entity where investors in each class have different contractual agreements with sub-accounts with regards to investment strategies, liabilities and fund manager.
Incidentally, after Sebi’s restrictions on PNs in 2008, MCVs had become popular with hedge funds and a large number of individual investors. The notional value of investments in equities through PNs was as high as 35 per cent in January 2008. This fell to below 15 per cent in December 2008. At present, the number is below 14 per cent.
Subscribe to:
Comments (Atom)