Jalan Report a damp squib – II

The proposed rules regarding compensation to exchange executives are flawed, as are the rules for listing of exchanges and restricting their profits, and the powers to SEBI to regulate market infrastructure institutions

Compensation for executives: The Bimal Jalan Committee report on ownership and governance of market infrastructure envisages that the key executives will not have any variable component in their remuneration. The report states that the remuneration should be determined after giving due regard to industry standards. If we go by industry standards, most of the corporate world has a fixed as well as a variable component. In fact, all high-paid executives do have a large variable component so that the burden of the salary on the organisation is not very high and some minimum performance and accountability is assured.

The National Stock Exchange (NSE) has a fixed remuneration package, whereas the Bombay Stock Exchange (BSE) has a fixed-cum-variable remuneration package. The reasons are obvious. The BSE top management team was hired at a time when it was necessary to get high-class performance to increase the BSE market share. The top management on the NSE on the other hand has grown with the organisation and though there were challenges, the pressures to revive a sagging exchange were different.

There is no reason given by the committee on why the variable component should not be there. Favouring a particular model indicates a bias, more so when the reasons of such recommendation are contrary to its own views on market salaries.

Listing of exchanges: The Jalan Committee has raised the issue of the conflict arising out of self-listing of shares. Instead of thinking of a solution, such as monitoring by the Securities and Exchange Board of India (SEBI) or a separate cell within the exchange to monitor listing norms, it has recommended that listing is not advisable. In a bizarre comparison, the Jalan Committee states that the share price of the exchange would impact the credibility of the exchange. I am sure that the buyers of Colgate toothpaste are least bothered about share prices of Colgate. Everybody who is connected with the stock market understands that the price of the stock has no connection with the credibility of an organisation, but it has more to do with the demand supply of shares in the short term and financial performance and thereby its credibility in the long term.

The government is pushing very hard to promote financial inclusion and make available the prosperity in the share market to all Indian citizens. A statement of this kind is very saddening. This implies a general impression that most companies in the country are vehicles of speculative investments. The committee does not address the issue of current shareholders of the stock exchanges whose exit route would be sealed by its recommendations, if these proposals are accepted. It was always envisaged that stock exchange shares would be listed and the BSE delayed filing of the prospectus following the setting up of this committee. The modalities of listing are necessary, rather than question the very idea of listing. The question is how and where to list and not whether to list.

Market infrastructure institutions (MIIs) to generate only reasonable profit: The Jalan Committee recommends that there should be a cap on profitability of the exchanges and other MIIs. Any profit earned over and above the prescribed return on net worth shall be transferred to the Investor Protection Fund (IPF) or Settlement Guarantee Fund (SGF), as the case may be.

The profitability of exchanges and clearing corporations are essentially from three sources: transaction charge, penalty collected from members, and income earned on treasury operations of the funds deposited by brokers as margins. Hence, pragmatically speaking, the Committee should have recommended payment of interest on the broker's funds and reduction in transaction charges. Transferring funds to IPF or SGF fund serves nobody's purpose since there have been no broker defaults in recent times and investor claims are hardly made to the IPF. In the absence of default, again the SGF fund is hardly used. Hence, there will only be further interest accumulation to these funds.

It would be more advisable to reduce the cost of transaction, which is in the interest of every investor. Our markets are also over-margined and due to general ignorance of the risk associated with the stock markets, exchanges have got away with excessive margining. There is a strong case to rationalise the margin structures. Reduction in transaction charges, payment of interest on margins and rationalisation of margins, will automatically cap the exchange profits.

Powers to SEBI in matters relating to MIIs: The Committee is of the view that SEBI should have the discretion to limit the number of MIIs operating in the market, in the interest of the market and in public interest. Instead of limiting the MIIs, it would be desirable to set up countrywide investor participation benchmarks and permit exchanges once the benchmarks are reached. For example, another depository can come up when the combined beneficial owners of the current depositories are say 5 crore. This would link the infrastructure to the demand in the economy. To sum up, instead of putting discretion with SEBI, it is desirable to have performance benchmarks so that basic principles of equity and democracy are prevailed upon. There should also be a provision to close MIIs by SEBI if they fail to reach minimum benchmarks in terms of membership, turnover, etc. This would ensure that price wars indulged in by new exchanges are not just entry strategies but a long-term strategy for survival is in place. Such a condition will in fact accentuate the price wars as there is a time limit to achieve the benchmarks! There is an opinion that every entity interested in setting up an exchange should be allowed to do so. Let the market forces decide whether the exchange should continue operations. Unfortunately, our markets lack depth in terms of the number of participants who use exchange services. Competing on price only leads to attracting speculators who are extremely cost conscious. Wastages in terms of computer systems, networks, office buildings, and so on, are evident in the regional exchanges. Interconnected Stock Exchange (ISE) was promoted by all regional exchanges to trade on the BSE and the NSE and then they directly became members of the BSE and the NSE through their subsidiaries. The infrastructure was wasted. Now ISE is trying to survive like any other broking house.

To conclude, all issues arising from demutualisation and regulation of MIIs should have been addressed before allowing stock exchanges to demutualise. Unfortunately, the Jalan Committee report is a non-starter and in fact, regressive in its ideas. It appears biased in favour of a particular exchange and does not address the problems. It is not bold in taking a stand that exchanges are utilities. Half-hearted attempts at restricting top management remuneration, a cap on income and not listing the shares is an attempt to give a colour of socialism to the stock exchanges. Socialism per se is not bad.

A bold stand is required to call the exchanges as public utilities and bring down the cost of transaction and spend money on the development and penetration of the capital market throughout the country.

(This is the second and concluding part of a critique by Deena Mehta on the Bimal Jalan Committee Report. In the first part, 'Jalan Report a damp squib - I', published on Monday, Mrs Mehta wrote that the shareholding proposals of the Committee for market infrastructure institutions are biased and not justified and that the report sidetracks corporate governance issues and the developmental role of stock exchanges. Deena Mehta is managing director of Asit C Mehta Investment Intermediates Ltd. She is one of the three trading member directors on the board of the Bombay Stock Exchange. To read the first part click




6 years ago

What is existing law on listing by Exchanges?

(1) The Corporatisation and demutualisation (C&D) scheme of BSE as notified by SEBI states regarding listing as under:

"6. Listing of Shares of Bombay Stock Exchange Limited
Bombay Stock Exchange Limited may at any time list its securities on any recognized stock exchange."

(2) AS we all know, C&D scheme is a statutory order. See Section 4B of the SCR Act.
"4B (4) Where the scheme is approved under sub-section (2), the scheme so approved shall be published

(b) .............and upon such publication, notwithstanding anything to the contrary contained in this Act or any other law for the time being in force or any agreement, award, judgment, decree or other instrument for the time being in force, the scheme shall have effect and be binding on all persons and authorities including all members, creditors, depositors and employees of the recognised stock exchange and on all persons having any contract, right, power, obligation or liability with, against, over, to, or in connection with, the recognised stock exchange or its members."

(3) Section 4B (8) makes it mandatory for the exchanges to go public. See the language:

"(8) Every recognised stock exchange, in respect of which the scheme for corporatization or demutualisation has been approved under sub-section (2), shall, either by fresh issue of equity shares to the public or in any other manner as may be specified by the regulations made by the Securities and Exchange Board of India, ensure that at least fifty-one per cent of its equity share capital is held, within twelve months from the date of publication of the order under sub-section (7), by the public other than shareholders having trading rights:"

The phrase " shall, fresh issue of equity shares to the public" does not give any other meaning but mandatory listing of its securities by an exchange.

(4) Regulation 4 of the most debated SECURITIES CONTRACTS (REGULATION) (MANNER OF INCREASING AND MAINTAINING PUBLIC SHAREHOLDING IN RECOGNISED STOCK EXCHANGES) REGULATIONS, 2006 ( MIMPS Regulations) also provide for listing. See the following extract of the regulation.

“Manner of increasing the public shareholding

4. Subject to the provisions of sub-section (8) of section 4B of the Act and the scheme, the recognised stock exchange shall ensure that at least fifty-one percent of its equity share capital is held by the public, either by fresh issue of equity shares to the public through issue of prospectus or in the following manner: -

(a) offer for sale, by issue of prospectus, of shares held by shareholders having trading rights therein;”

The above regulation makes it a vested right for the shareholders of the Exchanges to go public.

It is strange why Bimal jalan tried to reinvent the wheel and why SEBI supported it publicly.

Entire intelligentsia in India has already debunked the report. Thanks to the untiring efforts of likes of Sucheta.

Hero Honda split, little short-term impact, more long-term negatives

A look at the pros and cons of the Hero Honda split reveals more long-term negatives if at all; in the short term nothing much has changed. Surprisingly, the split does not seem to do much for Bajaj either

Hero Honda clarified yesterday that royalty payments to Honda will be about 3-5% of sales for new models and at the existing level of 2.5-3% for current products. The company believes that these payments (as a percentage of sales) will decrease as volumes increase, so they assume volumes will rise fast over the next three years or so.

A few days ago, the stock price crashed on talk that the royalty outgo would be 8%! The bad news is that Hero Honda (or do we say Hero?) will now have to pay ‘new model fees’ to Honda in addition to royalty. After it buys out Honda’s stake the Munjal family will own 52%, that is double from the current 26%. It seems clear from the nature of the split that while in the near term (2-3 years) it will have no impact on Hero Honda, longer term it is a slight negative. The split does not seem to work in favour of competitor Bajaj Auto either.

Market players are mostly underweight on the stock and they believe that the stupendous 18% rise in the stock price yesterday is a good opportunity to exit the stock.

The positives

• Not much change in the near term for Hero Honda since it continues to get technical support from Honda and gets to use the brand name till 2014.

• Zero royalty payments after 2014.

• Royalty payment will start falling sooner than expected (the management says as early as next month) if the company will develop more models itself.

• Higher exports, as the company can now export to locations where Honda has a presence

• Hero Honda has three years to develop its R&D capabilities—not a very long time, but enough to come up with decent models at least in the entry-level segment from where it gets 70% of its sales.

• Even if Honda reserves its good models for Honda Motorcycle & Scooter India (HMSI), its wholly-owned subsidiary, Hero’s old ‘Splendour’ and ‘Passion’ models constitute 70% of its sales; all new bikes in the last few years add up to only 8% of its sales—so this should not be a huge problem.

Some negatives

• Although Honda needs to provide new models to Hero Honda under the new agreement, there is a possibility it will reserve all the good ones for HMSI.

• Hero will have to pay new model fees, which could be hefty.

• R&D spend for Hero Honda will rise—Bajaj spends about 1.5% of sales and TVS about 2% on this. Although it is not impossible that HH may come up with good models, since it is getting three years to develop them, historical evidence shows it has not been easy. Bajaj had many failures after its split with Kawasaki—like Wind, Caliber, Discover 125CC, XCD 125CC. HH has indicated that it will pay about 1.5%.

• Exports may not rise as fast as expected because it takes time to understand local markets and to build supply chains. Additionally, they cannot use the Honda name for exports. Branding will be a challenge.

• Advertising and selling expenses are likely to shoot up after the split.
Implication for Bajaj Auto

• HMSI is likely to turn more aggressive in its plans—its models and network expansion. Its models compete more with Bajaj Auto’s products and this could erode Bajaj’s market share.

• Hero Honda, too, might turn a bit more aggressive in the next 2-3 years to assure its dealers, vendors, and employees and this again could be a negative for Bajaj Auto.

• Hero Honda will turn more aggressive in the exports market, again a business area that was Bajaj Auto’s domain so far.

In a conference call on 20th December, HH said it will have to create new capacities to meet the growing demand, and in addition to de-bottlenecking it may look at setting up a fourth plant which would entail capital expenditure.

The news of the split drove the stock price down to Rs1,560 on 15th December from a high of Rs2,062 on 30th November—a 24% fall in a fortnight. However, yesterday, the stock rose 18% in a single day and is back to around Rs 2,000.
According to CLSA’s valuations, Hero Honda trades at 13.6 times FY12 price-to-earnings, while Bajaj Auto trades at 14 times. 

(This article is based on secondary research. The report is for information only. None of the stock information, data and company information presented herein constitutes a recommendation or solicitation of any offer to buy or sell any securities. Investors must do their own research and due diligence before acting on any security. Some of the opinions expressed in this article are the author’s own and may not necessarily represent those of Moneylife.) 


The Year That Was: What went around in the car show

Everybody and their aunties from public relations companies have jumped onto the bandwagon of loud songs and dances by famous and not-so-famous singers, cricketers and actors, extolling the virtues of cars they actually do not drive

Everybody already knows that all new and not-so-new cars and bikes and trucks and and of course, buses, and leather seat covers, launched this year have all been awarded a slew of prizes and awards. Amid this, Toyota Etios may well have been awarded the top prize for maximum money spent on squiring the motoring media around on jaunts to check out anything related to Nagoya. (I had visited the lovely Japanese port as a seafarer in 1975 and won a lot in a casino there.)

Everybody also knows that the Tata Nano is bombing. That is a pity. Tata Motors could try to rebuild it, with a removable front like in the BMW Isseta, so that potential buyers could get some more cargo space. As of now, one of the biggest reasons for its misfortunes is the rather small cargo space. The fact remains that if the Nano was supposed to give two-wheeler users an option, it should have been capable of carrying an LPG cylinder. Or running on one maybe - though that's illegal.

In addition, everybody and their aunties from public relations companies have jumped onto the bandwagon of loud songs and dances by famous and not-so-famous singers, cricketers and actors, extolling the virtues of cars they actually do not drive. Suniel Shetty's declamation on his Hummer, at the re-launch of the new improved Ford Endeavour in the summer, was the high point of the year as far as I am concerned. It was even funnier than the one where the lady from the PR agency for one automobile company started asking many of the motoring media present some questions about the other automobile company account they also held.

So when the editors at Moneylife - who are very strict but nice people and let me write what I want to and also have a wonderful sense of humour all the same-asked me to run a '2010 in Indian motoring' kind of article, I said to myself, 'This is your chance!' No word limit either. So here's my 2010, from the word go...and predictions for 2011 too!

# The pricing of fuel has reached a point where nobody knows what it really is anymore. Least of all the people who are paying. It is all about "check the zero" please, and after that never mind, they can charge us whatever they want per litre. The year 2010, as far as fuel prices are concerned, was when some more de-regulation was brought into an already badly-run oil retailing sector. Badly-run because there is still no control on quality, and no proper explanation on what these "branded" premium fuels are all about actually.

Prediction: In 2011, we may reach a point where fuel prices are provided to us in rupees per millilitres, and the sellers won't know the price, either.

# At least a dozen "costliest cars in the world" were released in India in 2010. The reality is that there is still no clear winner on which is the costliest car in the world. But it doesn't matter to the buying plebeians. They have to buy the costliest car in the world, every two months, even if all they use it is for their drivers to cruise for street-side ladies of easy repute late at night. In addition, nobody is really sure if the cars are actually new or not-as was discovered in one case by a person who bought an expensive new toy. Though that was, in all fairness, one of those "costliest motorcycles in the world". Names have been withheld in the national interest and it may impact the mango trade to the US.

Prediction: In 2011, special bank vaults may yet be built for costliest cars, and used as F1 tracks.

# The Formula One circus is coming to India. After all, it's not every day that we can see cars doing the rounds on our roads, going round and round, like what goes round and round and vanishes with a woosh every morning. One Commonwealth Games scam was not bad enough, now we will end up paying for another circus, and see the roads barricaded for days. In addition, is it not true that much of the costs will be defrayed by simply making the "volunteer" officials pay for the privilege? And remember, you heard that here first.

Prediction: In 2011, Formula One will slowly be withdrawn from some other countries, that's why they are called "developed".

# The big thing for 2010 was the soft launch of a six-year warranty for select customers of a certain brand of car, at select locations. In any case, four- and five-year warranties are almost becoming the norm, even the Tata Nano made it to the cut-off here. However, copywriters figured out new ways to add even finer print to the terms and conditions of these warranties-so like menus in Chinese restaurants with red lanterns, we may now need special glasses to figure out what to do if, for example, the engine falls out of the car and we discover that this is not covered.

Prediction: In 2011, automobile manufacturers will still not be able to agree on and provide us with one standard on warranties, as well as indicator and wiper stalks-some will be right-hand drive and others will be left-hand drive.

# Early in 2010, slightly earlier actually, the big thing was LED running lights, fore and aft. People were willing to pay mega bucks to buy cars which had them (read Audi). As the year wore on, like a tired lady of the night flashing a Gucci bag in Paris, LED running lights started making an appearance as after-market fitments on all sorts of cars. Now you can see them on cycle-rickshaws too, the LED lights, that is.
Prediction: In 2011, owners of expensive luxury cars will need some more bling, and they may achieve this by ensuring that their cars have NRI or American drivers, thanks to the recession there.

# Automobile moment of 2010 (international) had to be the display of enthusiasm and reverence for the monarchy by certain segments of the British population, obstructing the progress of the long-standing Crown Prince (of whatever is left of the British Empire), in a Rolls Royce on a street that is otherwise packed with visiting tourists from India. Their security escorts were driving, what else, Jaguar cars made by Tata Motors. And riding Japanese motorcycles.

Prediction: In 2011, the Britishers will probably not be averse to the idea of picking up a few bullet-proof Hindustan Motors Ambassadors from India, even the initials fit. And ride Bullets, too.

# Automobile moment of 2010 (domestic) was likely the sight of thousands of cars from India being exported on pure car carriers headed for all parts of the world. Unfortunately, this does not get much media publicity. The reason for this is that most of the manufacturers still shy away from letting customers abroad know that their car was made in India. Like with India and infotech in the early years.

Prediction: In 2011 this will be reversed, and the badge of honour as far as car manufacturing is concerned will shift towards India, just as it did in the case of infotech.

Other than a whole lot of old technology, internal combustion engine-powered machines, nothing of much new importance actually happened in the motoring world in India. But then, as always, I guess we in India are waiting for the early costs to come down, and once they do, we shall make non-conventional cars better and cheaper than the rest of the world.

Reva NxT, here we come.

As far as the worst of motoring in 2010 is concerned, it had to be about the trend to place instrument clusters in the middle of the dashboard. Not only does it look odd, but it was and is positively unsafe, especially in typical Indian driving conditions
where the centre of the dashboard is used more as a location to place a religious symbol designed to bring good luck and not tell us about engine temperature and speed.

So, the final prediction for 2011, we may just see a "head up" display of the instrument cluster on the front windscreen itself, as is now not uncommon on aircraft. After that, we could really fly on our crowded roads, at low speeds. Because the way things are going, opulence and gadgets will be more important on Indian roads, and not speed and power.


We are listening!

Solve the equation and enter in the Captcha field.

To continue

Sign Up or Sign In


To continue

Sign Up or Sign In



The Scam
24 Year Of The Scam: The Perennial Bestseller, reads like a Thriller!
Moneylife Magazine
Fiercely independent and pro-consumer information on personal finance
Stockletters in 3 Flavours
Outstanding research that beats mutual funds year after year
MAS: Complete Online Financial Advisory
(Includes Moneylife Magazine and Lion Stockletter)