Govt clarifies on investment in tax-free bonds by companies

Ambiguity over a clause in the Companies Act that disallows corporates from investing in tax-free bonds at a rate of interest lower than the prevailing bank rate was seen as hurting investments into tax-free bonds

The ministry of corporate affairs (MCA) on Thursday said companies can invest in tax-free bonds where the effective rates are higher than the prevailing bank rates, a move that would help in attracting more investments into such instruments.

 

Ambiguity over a clause in the Companies Act that disallows corporates from investing in tax-free bonds at a rate of interest lower than the prevailing bank rate was seen as hurting investments into tax-free bonds.

 

Making the clarification, the ministry has said corporate investments in tax-free bonds having higher interest rates (effective rate of returns) than prevailing rates would not violate the Companies Act.

 

“...where the effective yield (effective rate of return) on tax free bonds is greater than the yield on prevailing bank rate, there is no violation of Section 372(A) of Companies Act, 1956," the ministry said in a circular dated 14th March.

 

The circular is effective from 14th March.

 

A clarification on the issue was sought by the finance ministry in order to effectively implement the Budget proposals.

 

In the Union Budget for 2013-14, the government authorised raising of up to Rs50,000 crore through issue of tax-free bonds.

 

As per the Companies Act, “no loan to anybody corporates shall be made at a rate of interest lower than the prevailing bank rate, being standard rate made public under Section 49 of the Reserve Bank of India Act...”

 

Such bonds carry a lower rate of interest—at present in the range of 6.75% to 7.50%. These instruments are also allowed in the current financial year but the response has been relatively poor.

 

According to the circular, the poor response was mainly on account of the restriction in terms of Companies Act—where tax free bonds cannot have rates higher than the prevailing interest rate.

User

Does AMFI’s advertisement on mutual funds pass the test of ethics?

Investors cannot start with an assumption that every mutual fund scheme that they intend to invest in can beat inflation. Portraying mutual fund as a product capable of beating inflation to gullible investors is unfair



Have you seen the advertisment campaign that Association of Mutual Funds of India (AMFI) is running these days to promote mutual funds? If not, it is time to watch it now. AMFI is promoting mutual funds as, “Savings ka naya tareeka” and “Inflation ka injection”.  The idea behind the advertisement is to pitch mutual funds as a savings product to first time investors. The main protagonist in the advertisement says that, “Mutual fund ko injection bhee kah sakte hain, inflation ka injection. Zara sa chubhega, lekin salo tak mahgaee ki bimari se ladgea” (“Mutual fund can also be termed as injection against inflation. It will fight inflation for years”). It is important to note that this advertisement is being promoted by an association which claims that it is meant to serve some of the objectives which are as follows:
 

  • To define and maintain high professional and ethical standards in all areas of operation of mutual fund industry 
     
  • To recommend and promote best business practices and code of conduct to be followed by members, and others engaged in the activities of mutual fund and asset management including agencies connected to, or involved in, the field of capital markets and financial services.
     
  • To disseminate information on the mutual fund industry and to undertake studies and research directly and/ or in association with other bodies
     

Now let us analyse to what extent AMFI has been able to achieve these objectives. The AMFI website states that one of the objectives with which it is functioning is to disseminate information on the mutual fund industry. If that is the objective of AMFI, is it right in promoting mutual fund as a product for savings rather than a product meant for investments? It is expected that a so-called professional body like AMFI must be having understanding of the difference between savings and investments, which is available on a simple google search. One of the simplest segregation between savings and investments can be described as follows, “Saving represents money that is supposed to be immediately liquid and safe.
Investing is for money that is supposed to be generating more money”.  It is obvious that a mutual fund is not a savings product and hence promoting it as, “savings ka naya tareeka” is misleading. It is important to note that one of the key objectives of a mutual fund is to convert savings into investments.
 

For mutual fund industry updates and analysis, please click here.
 

AMFI talks about setting high professional and ethical standards in the mutual fund industry but is AMFI, itself, following those standards? AMFI acting on the behalf of mutual funds should not promote the product which is taking care of the interest of mutual fund houses and seems to be misleading retail investors. The advertisement by AMFI promotes mutual funds as an injection to protect against inflation. Mutual fund is a great investment product, no doubt, but whether it can beat inflation is really debatable. Aren’t there several mutual fund schemes which have given negative returns consistently over the years? Only well managed funds are capable of beating mutual funds. Investors cannot start with an assumption that every mutual fund scheme that they intend to invest in can beat inflation. Portraying mutual fund as a product capable of beating inflation to gullible investors is unfair. If mutual funds can act as an injection against inflation, what is the need to introduce an inflation index bond which is being introduced as a product to fight inflation? AMFI should impress upon the RBI (Reserve Bank of India) and the ministry of finance to drop the idea of introducing inflation index bonds, as we have an effective tool to fight inflation.
 

I wrote on this to AMFI which has remained unanswered till date. However HN Sinor, chief executive at AMFI, told Business Standard, “This is a decision taken at the board level of AMFI, where it has representation from its members. The board’s decision represents the consensus among members. There could be individuals who do not agree but I cannot take 100% consensus of the members. Some people like something and others may have a separate opinion on the same.”  The question of like and dislike does not arise in the case of a product, which is being wrongly pitched. It important to note that mutual fund as a product has not taken off as an investment product in spite of repeated efforts. Any misrepresentation of facts with respect to mutual funds can prove to be fatal for the product.
 

Other stories by Vivek Sharma
 

(Vivek Sharma has worked for 17 years in the stock market, debt market and banking. He is a post graduate in Economics and MBA in Finance. He writes on personal finance and economics and is invited as an expert on personal finance shows.)

User

COMMENTS

hasmukh

4 years ago

The Advertisement of "inflation ke liye injection" is a cruel joke on MF investors, who have got negative returns (as against positive returns, which they expect always). Returns, which compensate inflation remain a far-cry. SEBI should allow MF houses to promise certain returns and if such promises are not met, their AMC s should be made responsible to bear the shortfall.

Vinay Joshi

4 years ago

Dear Mr.Vivek Sharma,

I would have appreciated you putting up 'Mutual Fund' figures & analyses, Sucheta has done it periodically, including scrips.

Further justifying 'the necessity of [proposed] inflation bonds', it was pertinent for you to floor AMFI.

If you have done your 'homework' CALL AMFI for one-to-one dialogue at ML. Don't only write letters & be dependent on Sucheta & ML. You're an activist!? Self admitted!

You talked about SBI ad, the issue is buried by me.

As a finance functionary - 'you are working' in the 'finance' sector & if you have an authoritative view[s], ML is the first to enhance such a dialogue.

Your only contention is 'Ads'. You don't go beyond that! No exemplification.

Are you aware that more than 1.5-2 trillion of rupees are lost by investors in insurance sector, in last five years? "MIS-SELLING"! Ads contribute?

Are you aware that in last five years the big ten insurance co's have lost premia [persistency ratio] in five years?

Starting in 07, 70-85%, [92% ICICI Pru]. In '12 it has come down to 30-45%, certain even higher at 50%. [AVIVA]

Further the co's use reducing balance method - stating 'industry guidelines'.
BUT, what about regulator giving 'persistency' as measured in premia?

Is it not serious an issue.

Have you ever analysed PAT / Lapsed Profit? Atleast last two fiscals?

Who gained?

I was the first to put in the forum about RGESS misselling.

No person, with any sense of financial acumen will undertake to lock his funds for three years in sensex/cnx scrips.

There steps in 'mutual funds', offering commission 7.5%! TO WHOM?

THE GULLIBLE'S - YOU CAN CATCH THEM BY FISHING NET,- are netted by, mutual fund houses, including investors willing to invest 100-500K. THIS IS A SCAM!

Well Mr.Vivek,i appreciate your concerns, follow the 'right path' for redressal of grievances, if any.

Well as of now, i'm not getting you on 'fund' analyses or Philip Kotlers' fifth 'P'.

Regards,





Vinay Joshi

4 years ago

Mr. Vivek Sharma,

It seems you have no answer to my post. If any you've would had posted it?

I understand that you're not an 'armchair' an activists, 'LIKE ME' [as professed by you, you only]- so WHAT about SBI ad v/s ASCI?

As an activist please let the forum know in which manner you'll get justice to the affected victims of SBI ad.

I had stopped short of telling you that 'nothing in the ad can be misleading'.

C'mon now what? Do justice to the task you undertake & as you 'PROFESS TO BE AS AN ACTIVIST' see 'compensation of the said victims'!? If you can, JUST ANSWER THIS POST? You never can?

I had advised you the path for justice!

By depending, rather thinking, Sucheta is tackling, you were one up!Sad!

YOU WRITE TO AMFI, state 'UNANSWERED'- WHAT ABOUT MY POST TO YOU? 'Unanswered'!

Mr. Vivek Sharma, with due respect to you, please let me know about SBI ad.

Further, with your financial wizardry & acumen, KINDLY LET US KNOW, 'the savings instruments for cumulative growth', to harness 'inflationary' trend AND IT GIVES A BETTER RETURN'. Unaffected by inflation!

C'mon Mr.Vivek Sharma & i'll be pleased 'IF YOU' invite me to your next schedule lecture - where 'Q&A', is the norm. [not ML!?]

Regards,

Madhusudan Thakkar

4 years ago

Mr Vivek Sharma,Please tell me which is the better investment option for common man to beat Inflation.....This is one of the best campaign on creating awareness of mutual funds in recent times.......Full marks to AMFI...for a change

Vinay Joshi

4 years ago

Mr.Vivek Sharma,

First let me know about what you've done about ASCI on SBI tax saving?

Regards,

REPLY

Vinay Joshi

In Reply to Vinay Joshi 4 years ago

Mr. Vivek Sharma,

It seems you have no answer to my post. If any you've would had posted it?

I understand that you're not an 'armchair' an activists, 'LIKE ME' [as professed by you, you only]- so WHAT about SBI ad v/s ASCI?

As an activist please let the forum know in which manner you'll get justice to the affected victims of SBI ad.

I had stopped short of telling you that 'nothing in the ad can be misleading'.

C'mon now what? Do justice to the task you undertake & as you 'PROFESS TO BE AS AN ACTIVIST' see 'compensation of the said victims'!? If you can, JUST ANSWER THIS POST? You never can?

I had advised you the path for justice!

By depending, rather thinking, Sucheta is tackling, you were one up!Sad!

YOU WRITE TO AMFI, state 'UNANSWERED'- WHAT ABOUT MY POST TO YOU? 'Unanswered'!

Mr. Vivek Sharma, with due respect to you, please let me know about SBI ad.

Further, with your financial wizardry & acumen, KINDLY LET US KNOW, 'the savings instruments for cumulative growth', to harness 'inflationary' trend AND IT GIVES A BETTER RETURN'. Unaffected by inflation!

C'mon Mr.Vivek Sharma & i'll be pleased 'IF YOU' invite me to your next schedule lecture - where 'Q&A', is the norm. [not ML!?]

Regards,

Vaibhav Dhoka

4 years ago

Many mutual funds scheme has given negative returns some have nearly wiped off PRINCIPAL amount.Actually AMFI only speaks from AMC's point and not investors,For Example SBIMF Infrastructure is quoted around Rs 8 NAV at present.The NFO opened in 2007. AMFI should direct all AMC to give details with positive and negative returns.

Suiketu Shah

4 years ago

Excellent,excellent article Mr Sharma on Mutual Fund industry which is rightly rapidly dying(due to mass mis-selling) and just about trying to survive with an oxygen mask by false ads.

Suketu

Nilesh KAMERKAR

4 years ago

You seem to be confused Mr. Sharma.

Investing is all about foregoing consumption now so that you have the ability to consume more at a later date.

By your own admission, you say "mutual fund is a great investment product". – Given your superior understanding & 17 years of experience, will you call an investment ‘Great’ if it is incapable of beating inflation?

Thus there is nothing misleading about Mutual Funds being Inflation ka Injection.

Raghav Bahl of CNBC, Sameer Manchanda, Den Networks & others pay up Rs4.93 crore as settlement fee

The cable distributor along with 24 other entities including its CMD Sameer Manchanda and Network18 founder Raghav Bahl paid Rs4.93 crore to SEBI for settling various alleged violations committed by Den Networks during its IPO

 
Den Networks, along with 24 other entities, including its chairman and managing director (CMD), Sameer Manchanda and Raghav Bahl, founder and managing director of Network18, has paid Rs4.93 crore to settle a case of alleged violations with market regulator Securities and Exchange Board of India (SEBI). Thus, it appears that these entities have taken advantage of SEBI’s consent order mechanism by collectively paying a huge fine in order to escape possible punishment, public shame and possible debarment from the securities market.

Typically, SEBI has helped hide the true nature of the offences by these persons and entities by using vague and obfuscatory terms in its consent order. The SEBI consent order hence suggests that the company, its promoters, board of directors and several other entities were charged with violating various regulations, including prohibition of certain dealings in securities, prohibition of manipulative, fraudulent and unfair trade practices. The company is also alleged to have flouted the code of internal procedures and conduct for listed companies and other entities. In fact, the order ought to have explained in detail the specific nature of the charges, even if they entities were allowed to get away without confirming or denying guilt. The massive size of the settlement however indicates that the charges were pretty serious. 
 
Den Network’s CMD Sameer Manchanda played an important role in launching CNN-IBN, a 24-hour English language news and current affairs channel, and has been integral to the Network18 Group, an Indian media house. Incidentally, Bahl, one of the founders of the Network18 group and the TV18 Group, found mention in the consent order. He paid Rs2 lakh as fine. Bahl, a prominent media personality, quit directorship of Den Networks in October 2010.
 
Den Networks’ board of directors includes Robindra Sharma, Atul Sharma, Shahzaad Siraj Dalal, Raghav Bahl, Ajaya Chand and Krishna Kumar PT. Incidentally, Shahzaad Siraj Dalal used to be a director of TV18 until he quit last year. He too paid Rs2 lakh as fine.
 
Hemant Narang, who is linked to Lucid Systems Pvt Ltd (one of the entities accused and co-promoters of Den Networks at time of violation) was asked to pay Rs5.86 lakh as consent fine to SEBI.
 
Earlier on 18 May 2012, the market regulator issued a show-cause notice to Den Networks and 24 entities for alleged violation of SEBI regulations. It was alleged that Den Networks had directly or indirectly provided funds to certain entities for buying the company’s shares in its initial public offering (IPO), without making any disclosures.  
 
While adjudication proceedings were on, Den Networks and other entities moved a consent application to SEBI to settle the adjudication proceedings and the proposed prosecution proceedings on payment of Rs 4.93 crore as settlement charges.
 
SEBI in its press release said, “A panel consisting of whole-time members, SEBI, Rajeev Kumar Agarwal and Prashant Saran has passed a consent order on 11 March 2013 on the application submitted by Den Networks on behalf of itself and 24 other entities, in accordance with SEBI Circular dated 20 April 2007 read with the circular dated 25 May 2012. The applicants have remitted a sum of Rs4.93 crore towards consent terms in the matter without admitting or denying the guilt on their part.”
 
Robindra Sharma, Atul Sharma, Shahzaad Siraj Dalal, Raghav Bahl, Ajaya Chand and Krishna Kumar PT paid a fine of Rs2 lakh each. Meerut Cable Network Pvt Ltd, Den Entertainment Network Pvt Ltd, Den Satellite Networks Pvt Ltd, Convergence Consultants Pvt Ltd, Puja Arora, Gagan Arora, Romi Shiv, MD Cable Network, Rashmeet Kaur, Piyush Goyal, Amit Grover, Vikas Bali, Summit Grover and Harvinder Singh together paid Rs47.60 lakh or Rs3.40 lakh each. 
 
Sameer Manchanda and Lucid Systems Pvt Ltd, both promoters of Den Networks at the time of alleged violations paid Rs4 lakh together, while Hemant Narang and Anuj Gandhi paid Rs5.86 lakh each.
 
SEBI’s consent order mechanism allows indicted companies, who have supposedly flouted regulations, to pay up a big fine to the market regulator and get away virtually scot-free, without admitting guilt. The so called High Powered Advisory Committee examined the application submitted by Den Networks and agreed that the case was ripe for settlement. The consent  order said, “The High-Powered Advisory Committee constituted by SEBI, in its meeting held on 21 December 2012, after considering the consent terms proposed by the applicants and all the relevant factors, recommended the case for settlement on payment”.
 
According to the SEBI website, the High-Powered Advisory Committee on consent orders and compounding of offences includes: Justice (Rtd) SM Jhunjhunwala—former judge of the Bombay High Court, Dr B Samal—former member of Securities Appellate Tribunal, V Leeladhar—former deputy governor of Reserve Bank of India and Dolphy D’Souza—Partner, E&Y. The High Powered Advisory Committee’s recommendations were accepted by SEBI. 
 
Den Networks is one of India's leading cable TV distribution companies reaching an estimated 11 million households. According to the website, Den Networks has a 50-50 joint venture with News Corp’s Star TV Group called Star DEN which was formed in 2008. In May 2011, Star DEN formed a 50-50 joint venture with Zee Turner combining the distribution assets of the Star, Zee and Turner groups in India.
 

User

COMMENTS

Emerging Voice

3 years ago

DEN NWs service is poor. It serves itc customer through a Network of cable oprators. In Powai, Mumbai, Den's Cable franchise is Jai AMbe. Jai ambe cable NW is very old & gives very poor quality of signal. Post digitization, channels are very noisy and frequent blackouts are norm. Jai Ambe helpdesk at Hiranandani Powai doesn't take any remedial action but directs subscriber to call the field engr on a mobile. Needless to say, the guy- Sudhakar's phone is always switched off. Numerous complaints to DEN NW about poor quality of service failed to evoke a response.
About DEN - Try calling DEN Toll free on weekends or post 9pm. You will never get to speak to an operator. You can hold endlessly. DEN only has a web based complaint system which doesn't work. Post lodging a complaint, you NEVER get a Complaint no which is reqd for tracking. The website says, Tracking number will only be given when you call Toll free no. So You call Toll free which no one picks & webbased compliant doesn't give Tracking no.
Also Web system ask for DEN VC/MAC id. But STB has DEN SN, MDS SN & Smart Card SN. No VC/MAC ID. SO how does a subscriber complaints.
TRAI should be appraised of this & a notice should be issued to DEN to get all these customer facing issues sorted out.

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