Ashish Rukhaiyar & Reghu Balakrishnan
Mumbai, 13 July 2011
Both the main stock exchanges have set in motion a separate platform to generate more interest and more liquidity for the small and medium enterprises (SME) segment.
The Bombay Stock Exchange (BSE) and the National Stock Exchange (NSE) have both got a final go-ahead in this regard from the Securities and Exchange Board of India (Sebi), which has also relaxed some norms for the smaller companies. Both initiatives are at an advanced stage.
“The idea is to generate enough interest in the (SME) space, so that it attracts more and more good-quality companies," said a person privy to the developments. "The most common issue is lack of information and the exchanges are trying to plug that gap by acting as facilitators. The platform will be a one-stop source for SMEs, merchant bankers, private equity (PE) & venture capital (VC) funds and even law firms that would like to advise such companies.”
Essentially, the exchanges would help bring together investors and companies on the same table, along with merchant bankers, who have been assigned the task of market making for three years after managing the Initial Public Offer of those which list.
NSE, incidentally, sponsored an event recently which was attended by representatives of merchant banking entities, law firms, PE/VC players and Sebi officials, including chairman U K Sinha. A directory with listings of PE/VC firms, along with merchant bankers and law firms, was also issued.
BSE has already said it will go live with its SME segment in September. Lakshman Gugulothu, chief executive officer of the proposed exchange, has said the listing and other fees would be about half of what the main exchange charged. Potential investor groups are waiting with interest for the segment’s launch.
“Finding a better exit route will always be difficult for VC players who support SMEs, as most of them (SMEs) remain too immature to hit the market,” says Mahendra Swarup, president, Indian Venture Capital Association. “But through the newly proposed platform, VC firms can make an exit through listing. Also, it will bring valuation in line with market reality.”
K Srinivas, managing partner, BTS Investment Advisors, an SME-focused VC fund, has the same view. “The new initiative will help us to get out of investments quickly,” he says. However, he is not sure if such initiatives would bring more VC investments into the SME space. “We will have to wait for two-three years to find how successful the initiative could be,” he said.
Monday, 19 December 2011
New market idiom: Question mark is a full stop!
Ashish Rukhaiyar & Mehul Shah
Mumbai, 8 July 2011
Stock market analysts and dealers are experts in deciphering excel spreadsheets and predicting market movements. Of late, they have also been learning the complexity of English grammar to bypass a recent regulatory fiat.
And, most have discovered how a single punctuation mark, or the lack of it, can make all the difference.
In March, the Securities and Exchange Board of India (Sebi) issued a simple two-page circular, directing all market intermediaries to ensure their employees do not spread unverified information or rumours through emails, SMSes, blogs or chat messengers without checking their authenticity.
The circular has changed the way stock market participants interact with each other and also the media, based on some indigenously developed solutions.
“The tacit understanding between people now is that a question should be looked upon as a statement,” says an institutional dealer, who did not want to be named for obvious reasons. "Say, one has got some unverified information and needs to pass it on. He will forward the email or SMS and append it with a question mark, or may be the words “is it true?” The implied meaning is that “it is true”, he explains. One is just trying to check the veracity of the information and not spreading it, he quips.
According to the Sebi circular, intermediaries need to ensure that “employees/temporary staff/voluntary workers, etc employed/working in the offices of market intermediaries do not encourage or circulate rumours or unverified information obtained from clients, industry, any trade or other sources without verification.” Further, “access to blogs/chat forums/messenger sites, etc should either be restricted under supervision or access should not be allowed,” added the circular.
While grammar has come to the rescue of many, there are others who have just given in. Online groups and message boards of financial websites, once buzzing with market talk, have seen a drastic fall in the number of posts (read rumours). The media, interestingly, have found the going difficult after the change in norms, as many of the fund managers once famous for their “off the record” chats have become extremely circumspect.
“I won’t discuss stock-specific things over the phone. I am afraid my calls are getting recorded,” has become the standard statement of many fund managers, who are also reluctant to talk about their stance as minority shareholders in the Cairn-Vedanta deal.
Compliance officers, who have been assigned the onerous task of monitoring their employees for such acts, cite difficulties. “Sebi norms are impractical. We can monitor official email IDs. How can we track what our employees are doing through their personal email, blog or phone?” they ask.
While rumours related to many companies have decreased, the recent past saw the tide turning and a brokerage finding itself the target of rumour-mongers. India Infoline, through a stock exchange announcement, denied rumours that a US-based financial conglomerate is picking up a stake in the brokerage. Everyone wondered... is it true?
Mumbai, 8 July 2011
Stock market analysts and dealers are experts in deciphering excel spreadsheets and predicting market movements. Of late, they have also been learning the complexity of English grammar to bypass a recent regulatory fiat.
And, most have discovered how a single punctuation mark, or the lack of it, can make all the difference.
In March, the Securities and Exchange Board of India (Sebi) issued a simple two-page circular, directing all market intermediaries to ensure their employees do not spread unverified information or rumours through emails, SMSes, blogs or chat messengers without checking their authenticity.
The circular has changed the way stock market participants interact with each other and also the media, based on some indigenously developed solutions.
“The tacit understanding between people now is that a question should be looked upon as a statement,” says an institutional dealer, who did not want to be named for obvious reasons. "Say, one has got some unverified information and needs to pass it on. He will forward the email or SMS and append it with a question mark, or may be the words “is it true?” The implied meaning is that “it is true”, he explains. One is just trying to check the veracity of the information and not spreading it, he quips.
According to the Sebi circular, intermediaries need to ensure that “employees/temporary staff/voluntary workers, etc employed/working in the offices of market intermediaries do not encourage or circulate rumours or unverified information obtained from clients, industry, any trade or other sources without verification.” Further, “access to blogs/chat forums/messenger sites, etc should either be restricted under supervision or access should not be allowed,” added the circular.
While grammar has come to the rescue of many, there are others who have just given in. Online groups and message boards of financial websites, once buzzing with market talk, have seen a drastic fall in the number of posts (read rumours). The media, interestingly, have found the going difficult after the change in norms, as many of the fund managers once famous for their “off the record” chats have become extremely circumspect.
“I won’t discuss stock-specific things over the phone. I am afraid my calls are getting recorded,” has become the standard statement of many fund managers, who are also reluctant to talk about their stance as minority shareholders in the Cairn-Vedanta deal.
Compliance officers, who have been assigned the onerous task of monitoring their employees for such acts, cite difficulties. “Sebi norms are impractical. We can monitor official email IDs. How can we track what our employees are doing through their personal email, blog or phone?” they ask.
While rumours related to many companies have decreased, the recent past saw the tide turning and a brokerage finding itself the target of rumour-mongers. India Infoline, through a stock exchange announcement, denied rumours that a US-based financial conglomerate is picking up a stake in the brokerage. Everyone wondered... is it true?
Vaswani listing to go ahead amid probe
Ashish Rukhaiyar & Palak Shah
Mumbai, 7 July 2011
This would come as good news to investors who put money in the initial public offer (IPO) of Vaswani Industries. The capital markets regulator is expected to give its go-ahead for the listing of shares during this month.
The IPO got stuck after a large number of investors withdrew their applications and the regulator launched a probe.
According to sources, while the listing will be allowed, the investigation into the matter by the Securities and Exchange Board of India (Sebi) will continue.
The listing is being allowed so that genuine investors are not made to suffer due to the regulatory probe that is in its final stages. Also, the Ahmedabad-based All Gujarat Investors Protection Trust (AGIPT), which had approached Sebi alleging irregularities in the Vaswani Industries IPO, has gone back on its stand, for unknown reasons.
However, sources say the investigation will go on, as dummy subscriptions were suspected in the IPO. Around 3,000 retail applicants withdrew their applications and several others were disqualified due to stop-payment of cheques after subscription closed for the Vaswani Industries IPO.
Sources say Sebi’s concerns emerge from fears that a majority of the applicants could be acting on behalf of a few big operators. In the recent past, the market regulator had initiated probes in the dealings of several IPOs as all the new listings of the current financial year and 70 per cent of those in 2010-11 are trading below their issue price. Experts believe the situation of dummy investors is similar to the IPO scam involving Rupalben Panchal, who operated multiple demat accounts and put in several applications.
“Allowing listing is fine. But the matter needs to be investigated and results declared to the public. Operators in the IPO market are running a racket with impunity, which has been proved by the recent sharp fluctuations in share prices post-listing,” said the head of a Mumbai-based stock broking firm.
It has been well over a month since the IPO of Vaswani Industries closed for subscription. The company planned to raise Rs 50 crore through its IPO by offering 10 million shares in a price band of Rs 45-49.
On the day the issue closed, the stock exchange website showed the institutional portion was subscribed 0.16 times, while that reserved for high net worth individuals and retail investors was subscribed 11.29 times and 6.82 times, respectively. While the issue price was fixed at the upper end of the band at Rs 49, shares were allotted to investors on May 10.
Meanwhile, Sebi received complaints alleging large-scale withdrawals by investors. Sebi investigations showed that the issue, which was earlier subscribed a total of 4.16 times, was subscribed only 1.28 times after the withdrawals. The subscription in the HNI category dropped to 0.84 times from the earlier 11.29 times. In all, 3,813 applications were withdrawn while two terminals contributed to around 60 per cent of the total withdrawals.
Mumbai, 7 July 2011
This would come as good news to investors who put money in the initial public offer (IPO) of Vaswani Industries. The capital markets regulator is expected to give its go-ahead for the listing of shares during this month.
The IPO got stuck after a large number of investors withdrew their applications and the regulator launched a probe.
According to sources, while the listing will be allowed, the investigation into the matter by the Securities and Exchange Board of India (Sebi) will continue.
The listing is being allowed so that genuine investors are not made to suffer due to the regulatory probe that is in its final stages. Also, the Ahmedabad-based All Gujarat Investors Protection Trust (AGIPT), which had approached Sebi alleging irregularities in the Vaswani Industries IPO, has gone back on its stand, for unknown reasons.
However, sources say the investigation will go on, as dummy subscriptions were suspected in the IPO. Around 3,000 retail applicants withdrew their applications and several others were disqualified due to stop-payment of cheques after subscription closed for the Vaswani Industries IPO.
Sources say Sebi’s concerns emerge from fears that a majority of the applicants could be acting on behalf of a few big operators. In the recent past, the market regulator had initiated probes in the dealings of several IPOs as all the new listings of the current financial year and 70 per cent of those in 2010-11 are trading below their issue price. Experts believe the situation of dummy investors is similar to the IPO scam involving Rupalben Panchal, who operated multiple demat accounts and put in several applications.
“Allowing listing is fine. But the matter needs to be investigated and results declared to the public. Operators in the IPO market are running a racket with impunity, which has been proved by the recent sharp fluctuations in share prices post-listing,” said the head of a Mumbai-based stock broking firm.
It has been well over a month since the IPO of Vaswani Industries closed for subscription. The company planned to raise Rs 50 crore through its IPO by offering 10 million shares in a price band of Rs 45-49.
On the day the issue closed, the stock exchange website showed the institutional portion was subscribed 0.16 times, while that reserved for high net worth individuals and retail investors was subscribed 11.29 times and 6.82 times, respectively. While the issue price was fixed at the upper end of the band at Rs 49, shares were allotted to investors on May 10.
Meanwhile, Sebi received complaints alleging large-scale withdrawals by investors. Sebi investigations showed that the issue, which was earlier subscribed a total of 4.16 times, was subscribed only 1.28 times after the withdrawals. The subscription in the HNI category dropped to 0.84 times from the earlier 11.29 times. In all, 3,813 applications were withdrawn while two terminals contributed to around 60 per cent of the total withdrawals.
NSE in talks to launch Dow Jones options now
Ashish Rukhaiyar
Mumbai, 5 July 2011
The National Stock Exchange (NSE) is set to enhance its current tie-up with the CME Group that owns the Dow Jones Industrial Average (DJIA) Index. The two entities are in talks for launching option contracts based on the US index at the Indian exchange.
According to persons familiar with the development, the discussions are currently on and a decision on the option contracts can be expected soon. Thereafter, NSE would be free to launch futures and options on both S&P500 and DJIA. Incidentally, the current tie-up between NSE and CME Group allow the former to launch only futures contracts on DJIA.
“The partnership between NSE and CME (Group) is relatively new and hence the discussions (for options) are taking time,” said a person familiar with the development. “On the other hand, NSE has a long association with S&P and so the approvals for both futures and options based on S&P500 were received at the same time,” he explained.
While NSE has already got all the regulatory approvals for launching futures based on S&P500 and DJIA, it has sought the capital market regulator’s approval for options only on S&P500.
The Securities and Exchange Board of India (Sebi), in January this year, came out with guidelines based on which derivatives on foreign indices could be introduced by the Indian exchanges.
According to the market regulator, derivatives contracts can be launched only on those global indices that have a minimum market capitalisation of $100 billion and are broad-based.
According to Bloomberg data, the market capitalisation of S&P 500 is a more than $11 trillion while that of DJIA is over $3 trillion. The DJIA index includes the 30 most liquid large companies in the US. According to recent estimates, it represents nearly 30 per cent of the free float market capitalisation of the whole US market. Meanwhile, this will be the first time that futures based on the S&P500 will be introduced on an exchange outside the US.
Once futures and options based on S&P500 and DJIA are launched, NSE will also look at launching derivative contracts based on FTSE100. The Indian exchange has already signed a letter of intent with the London Stock Exchange (LSE) for getting the index on its platform.
“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.
Mumbai, 5 July 2011
The National Stock Exchange (NSE) is set to enhance its current tie-up with the CME Group that owns the Dow Jones Industrial Average (DJIA) Index. The two entities are in talks for launching option contracts based on the US index at the Indian exchange.
According to persons familiar with the development, the discussions are currently on and a decision on the option contracts can be expected soon. Thereafter, NSE would be free to launch futures and options on both S&P500 and DJIA. Incidentally, the current tie-up between NSE and CME Group allow the former to launch only futures contracts on DJIA.
“The partnership between NSE and CME (Group) is relatively new and hence the discussions (for options) are taking time,” said a person familiar with the development. “On the other hand, NSE has a long association with S&P and so the approvals for both futures and options based on S&P500 were received at the same time,” he explained.
While NSE has already got all the regulatory approvals for launching futures based on S&P500 and DJIA, it has sought the capital market regulator’s approval for options only on S&P500.
The Securities and Exchange Board of India (Sebi), in January this year, came out with guidelines based on which derivatives on foreign indices could be introduced by the Indian exchanges.
According to the market regulator, derivatives contracts can be launched only on those global indices that have a minimum market capitalisation of $100 billion and are broad-based.
According to Bloomberg data, the market capitalisation of S&P 500 is a more than $11 trillion while that of DJIA is over $3 trillion. The DJIA index includes the 30 most liquid large companies in the US. According to recent estimates, it represents nearly 30 per cent of the free float market capitalisation of the whole US market. Meanwhile, this will be the first time that futures based on the S&P500 will be introduced on an exchange outside the US.
Once futures and options based on S&P500 and DJIA are launched, NSE will also look at launching derivative contracts based on FTSE100. The Indian exchange has already signed a letter of intent with the London Stock Exchange (LSE) for getting the index on its platform.
“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.
Boost for interest rate futures, with 91-day contracts
Ashish Rukhaiyar
Mumbai, 4 July 2011
The interest rate futures (IRFs) segment, operational for nearly two years, could finally see some volume pouring in. Futures on the 91-day treasury bill (t-bill) are to be launched tomorrow and, more importantly, would be settled in cash. Industry players feel banks, mutual funds and even corporate houses could develop a liking for the product, to hedge against interest rate fluctuations.
Interest rate futures, as the name suggests, are derivative contracts, with government bonds the underlying product. Depending on one’s view on interest rate movements, an entity can go short or long to hedge against volatility in these. The instrument will be available for trading on the National Stock Exchange (NSE).
Market players say the 91-day t-bill contracts would offer a lot of advantages, with a high probability of gaining wide acceptance. The biggest advantage is that the contract will be settled in cash, an industry demand for the whole IRF segment, said a dealer in debt instruments.
The other advantages are an absence of Securities Transaction Tax and lower margins compared to other asset classes. And, since the contracts are cash-settled, there are no concerns among market participants related to dumping of illiquid bonds, he explained.
Corporate houses dealing in floating rate bonds are expected to use this instrument to hedge against interest rate volatility. So could the mutual fund industry, which has a lot of debt funds. Banks, though, are expected to be the biggest user, since they invest significantly in t-bills as part of their treasury operations. Banks can go short on the contracts if they feel rates would move northwards.
In the case of 91-day t-bills, there would be three serial monthly contracts, followed by three quarterly contracts. Each contract will have a face value of Rs 2 lakh. It will be cash-settled, based on the weighted average discount price, obtained from the Reserve Bank’s weekly auction of the 91-day t-bill.
The IRF segment was launched in 2009 with futures on 10-year government bonds. The contracts were allowed to be settled with delivery of government securities, the 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.
The segment, however, failed to enthuse market participants with the biggest fear being that of dumping of illiquid bonds.
Data available on the NSE website clearly shows the segment has not been registering any volumes in the recent past. Market players want the entire segment to be moved to a cash-settlement basis, a demand the Securities and Exchange Board of India is looking into.
Mumbai, 4 July 2011
The interest rate futures (IRFs) segment, operational for nearly two years, could finally see some volume pouring in. Futures on the 91-day treasury bill (t-bill) are to be launched tomorrow and, more importantly, would be settled in cash. Industry players feel banks, mutual funds and even corporate houses could develop a liking for the product, to hedge against interest rate fluctuations.
Interest rate futures, as the name suggests, are derivative contracts, with government bonds the underlying product. Depending on one’s view on interest rate movements, an entity can go short or long to hedge against volatility in these. The instrument will be available for trading on the National Stock Exchange (NSE).
Market players say the 91-day t-bill contracts would offer a lot of advantages, with a high probability of gaining wide acceptance. The biggest advantage is that the contract will be settled in cash, an industry demand for the whole IRF segment, said a dealer in debt instruments.
The other advantages are an absence of Securities Transaction Tax and lower margins compared to other asset classes. And, since the contracts are cash-settled, there are no concerns among market participants related to dumping of illiquid bonds, he explained.
Corporate houses dealing in floating rate bonds are expected to use this instrument to hedge against interest rate volatility. So could the mutual fund industry, which has a lot of debt funds. Banks, though, are expected to be the biggest user, since they invest significantly in t-bills as part of their treasury operations. Banks can go short on the contracts if they feel rates would move northwards.
In the case of 91-day t-bills, there would be three serial monthly contracts, followed by three quarterly contracts. Each contract will have a face value of Rs 2 lakh. It will be cash-settled, based on the weighted average discount price, obtained from the Reserve Bank’s weekly auction of the 91-day t-bill.
The IRF segment was launched in 2009 with futures on 10-year government bonds. The contracts were allowed to be settled with delivery of government securities, the 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.
The segment, however, failed to enthuse market participants with the biggest fear being that of dumping of illiquid bonds.
Data available on the NSE website clearly shows the segment has not been registering any volumes in the recent past. Market players want the entire segment to be moved to a cash-settlement basis, a demand the Securities and Exchange Board of India is looking into.
Sebi scans companies' share buyback record
Ashish Rukhaiyar
Mumbai, 30 June 2011
Regulator against repeated buyback offers, given the potential for misuse
The Securities and Exchange Board of India (Sebi) is taking a serious note of companies that have made buyback offers a habit. It has indicated that companies that had made such offers and not bought back a significant amount of shares won’t get approval for a fresh buyback.
According to persons familiar with the development, the capital markets’ regulator is perturbed by the trend of companies making buyback announcements to push the stock price. They then close the offer without buying back a significant number, even when the shares trade at a price lower than the buyback offer. Sebi made its views clear in a recent order, too.
"Repeated buyback offers is not something that Sebi, as a regulator, would like to encourage, given that it could be misused by entities to consolidate their holding at the expense of the company," it said in the matter of Deccan Chronicle Holdings. In a buyback, funds from the company reserve are used, to buy and extinguish the shares, thereby reducing the entity’s equity base.
Companies use buyback as an attractive tool to manage the stock price, as any such announcement sends a positive signal to investors. Even short sellers stay away from such counters, since any fall beyond a certain level can be stopped by buying back shares. Such announcements have been a favourite resort during a bearish phase.
According to data on the website of the Bombay Stock Exchange, buyback offers of Allied Digital, Balrampur Chini, FDC, Infinite Computer Solutions, SRF and FDC are currently on. In the past, Balrampur Chini, Reliance Industries, Prime Securities, Reliance Infrastructure, Hindustan Unilever and SRF have come out with more than one buyback offer. “Many companies make buyback announcements just to create a positive sentiment around its counter,” said an investment banker who has managed these.
“Till a few years earlier, there were even instances of companies allocating a certain amount of money for buyback and hardly using any of it,” he said, wishing not to be named.
This is not the first time the regulator is tightening these norms. A couple of years before, it had come down heavily against companies making ‘hollow’ buyback offers. In an informal warning to investment bankers, it directed them to disclose the minimum number of shares a company intended to buy. A buyback offer was not allowed to be closed till this was done.
Sebi rules say a company can buy back its shares without a shareholders’ resolution if the total amount allocated for doing so is less than 10 per cent of its paid-up equity capital and reserves. Buyback can only be up to 25 per cent of the paid-up capital and reserves and anything in between has to be approved by shareholders.
SEEKING FULL DISCLOSURE
* Sebi against companies making repeated buyback offers
* Such buyback offers can be misused at the company’s expense, says Sebi
* Companies use buyback as a tool to create positive newsflow
* Companies announce buyback, but few shares are actually bought back
* Sebi has tightened buyback norms in the past, too
* Companies directed to disclose the minimum number of shares to be bought back
Mumbai, 30 June 2011
Regulator against repeated buyback offers, given the potential for misuse
The Securities and Exchange Board of India (Sebi) is taking a serious note of companies that have made buyback offers a habit. It has indicated that companies that had made such offers and not bought back a significant amount of shares won’t get approval for a fresh buyback.
According to persons familiar with the development, the capital markets’ regulator is perturbed by the trend of companies making buyback announcements to push the stock price. They then close the offer without buying back a significant number, even when the shares trade at a price lower than the buyback offer. Sebi made its views clear in a recent order, too.
"Repeated buyback offers is not something that Sebi, as a regulator, would like to encourage, given that it could be misused by entities to consolidate their holding at the expense of the company," it said in the matter of Deccan Chronicle Holdings. In a buyback, funds from the company reserve are used, to buy and extinguish the shares, thereby reducing the entity’s equity base.
Companies use buyback as an attractive tool to manage the stock price, as any such announcement sends a positive signal to investors. Even short sellers stay away from such counters, since any fall beyond a certain level can be stopped by buying back shares. Such announcements have been a favourite resort during a bearish phase.
According to data on the website of the Bombay Stock Exchange, buyback offers of Allied Digital, Balrampur Chini, FDC, Infinite Computer Solutions, SRF and FDC are currently on. In the past, Balrampur Chini, Reliance Industries, Prime Securities, Reliance Infrastructure, Hindustan Unilever and SRF have come out with more than one buyback offer. “Many companies make buyback announcements just to create a positive sentiment around its counter,” said an investment banker who has managed these.
“Till a few years earlier, there were even instances of companies allocating a certain amount of money for buyback and hardly using any of it,” he said, wishing not to be named.
This is not the first time the regulator is tightening these norms. A couple of years before, it had come down heavily against companies making ‘hollow’ buyback offers. In an informal warning to investment bankers, it directed them to disclose the minimum number of shares a company intended to buy. A buyback offer was not allowed to be closed till this was done.
Sebi rules say a company can buy back its shares without a shareholders’ resolution if the total amount allocated for doing so is less than 10 per cent of its paid-up equity capital and reserves. Buyback can only be up to 25 per cent of the paid-up capital and reserves and anything in between has to be approved by shareholders.
SEEKING FULL DISCLOSURE
* Sebi against companies making repeated buyback offers
* Such buyback offers can be misused at the company’s expense, says Sebi
* Companies use buyback as a tool to create positive newsflow
* Companies announce buyback, but few shares are actually bought back
* Sebi has tightened buyback norms in the past, too
* Companies directed to disclose the minimum number of shares to be bought back
Bankers' fee strategy under Sebi scanner
Ashish Rukhaiyar
Mumbai, 22 June 2011
At a time when fee income from managing primary market issuances is down to a trickle, it is not surprising that investment bankers are coming up with innovative marketing and pitching strategies. One such strategy, however, has attracted the attention of the capital markets regulator.
Persons privy to the strategy, on condition of anonymity, say domestic and foreign bankers have been convincing promoters to raise more than the intended amount of money by charging ‘slab-based fee’, which has not gone down well with the Securities and Exchange Board of India (Sebi). It is, however, not clear if the regulator has formally initiated any enquiry in this issue.
“Bankers know that a particular company needs Rs 200 crore but will tempt the promoters by saying they can help raise Rs 250 crore,” a senior official of a mid-sized investment banking firm said. “But the catch is, for the extra Rs 50 crore, the fee will be higher than what is being charged for the first tranche of Rs 200 crore,” he added. In simple words, if the banker is charging two per cent for helping raise Rs 200 crore, the ‘top-up’ of Rs 50 crore will cost the company three per cent (of Rs 50 crore).
The fee quotient will further go up if the promoters agree for Rs 300 crore. While there is no compulsion on the part of the promoters to agree, many of them fall prey to the offer. It is no secret that capital raising has been a challenge in the recent past and an extra amount of money is more often than not welcome in such market conditions.
“Most of the leading banking entities have their loyal set of investors who would chip in even if the pricing can be termed ‘aggressive’,” said a person involved in the initial public offer (IPO) distribution process. “This gives the banker the much-needed flexibility in pricing the issue. He knows there are takers,” he added.
This, according to industry sources, has made Sebi uncomfortable. The regulator, incidentally, had pulled up investment bankers in the past for ‘maximising’ profits for promoters and ignoring investor interest. Industry sources say that while such practices were prevalent even during the bull period, it has gained significance now given the paucity of companies looking to launch a public issue.
“If you look at maximising the price for promoters then obviously you are not looking at the interest of the investors,” former Sebi Chairman C B Bhave had said at an event organised last year by the Association of Merchant Bankers of India.
In a similar context, Sebi Executive Director Usha Narayanan, who handles the corporate finance portfolio, had questioned the role of the investment bankers. “What the investment banker is there for? He needs to advise promoters to leave something on the table. Some thoughts need to come out from within (the industry). This is more like self-regulation,” she had said at the same event.
Mumbai, 22 June 2011
At a time when fee income from managing primary market issuances is down to a trickle, it is not surprising that investment bankers are coming up with innovative marketing and pitching strategies. One such strategy, however, has attracted the attention of the capital markets regulator.
Persons privy to the strategy, on condition of anonymity, say domestic and foreign bankers have been convincing promoters to raise more than the intended amount of money by charging ‘slab-based fee’, which has not gone down well with the Securities and Exchange Board of India (Sebi). It is, however, not clear if the regulator has formally initiated any enquiry in this issue.
“Bankers know that a particular company needs Rs 200 crore but will tempt the promoters by saying they can help raise Rs 250 crore,” a senior official of a mid-sized investment banking firm said. “But the catch is, for the extra Rs 50 crore, the fee will be higher than what is being charged for the first tranche of Rs 200 crore,” he added. In simple words, if the banker is charging two per cent for helping raise Rs 200 crore, the ‘top-up’ of Rs 50 crore will cost the company three per cent (of Rs 50 crore).
The fee quotient will further go up if the promoters agree for Rs 300 crore. While there is no compulsion on the part of the promoters to agree, many of them fall prey to the offer. It is no secret that capital raising has been a challenge in the recent past and an extra amount of money is more often than not welcome in such market conditions.
“Most of the leading banking entities have their loyal set of investors who would chip in even if the pricing can be termed ‘aggressive’,” said a person involved in the initial public offer (IPO) distribution process. “This gives the banker the much-needed flexibility in pricing the issue. He knows there are takers,” he added.
This, according to industry sources, has made Sebi uncomfortable. The regulator, incidentally, had pulled up investment bankers in the past for ‘maximising’ profits for promoters and ignoring investor interest. Industry sources say that while such practices were prevalent even during the bull period, it has gained significance now given the paucity of companies looking to launch a public issue.
“If you look at maximising the price for promoters then obviously you are not looking at the interest of the investors,” former Sebi Chairman C B Bhave had said at an event organised last year by the Association of Merchant Bankers of India.
In a similar context, Sebi Executive Director Usha Narayanan, who handles the corporate finance portfolio, had questioned the role of the investment bankers. “What the investment banker is there for? He needs to advise promoters to leave something on the table. Some thoughts need to come out from within (the industry). This is more like self-regulation,” she had said at the same event.
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