Madras Stock Exchange, one of India's oldest exchanges, may close down because of low net worth and inability to have the right systems. A board meeting is scheduled for the 28th April to discuss its future
Madras Stock Exchange (MSE), the first stock exchange from South India, is likely to cease to exist following its failure to tie up with National Securities Clearing Corporation Ltd (NSCCL) and inability to raise a minimum net worth of Rs100 crore. The Exchange has called for suggestions and views from its stakeholders and would discuss ‘exit’ and other options in its board meeting on 28 April 2014.
Members of the governing board of MSE were categorically told by UK Sinha, chairman of Securities Exchange Board of India (SEBI) that regional stock exchanges (RSEs) would not be able to withstand the vagaries of new challenging environment and would only collapse. RSEs would be unable to match the demands like huge investments on IT, resources and product differentiation and liquidity, the SEBI chairman had said.
SEBI made its intentions clear through a communication on 12 March 2014. It states, “…the approval for the platform was not possible mainly on account of not having a proper agreement with the clearing corporation, not having a requisite standalone online surveillance system, which could monitor position prices and volumes on real and not having sufficient net-worth nor having concrete plan to enhance the net worth as required under Securities Contracts (Regulation) (Stock Exchanges and Clearing Corporations) Regulations, 2012 (SECC).”
As per the exit circular issued by SEBI on 30 May 2012, MSE was expected to set up a platform and generate an annual turnover of Rs1,000 crore before 30 May 2014. MSE was way behind the requirements and was told by Sinha to take a quick decision to opt for exit without losing further time.
Speaking about the issue of in-principal approval for MSE with the clearing corporation, the SEBI chairman told the representatives of the Exchange that the main exchange providing clearing support should also need to guarantee default water fall of a high order and hence the same might not come through in the near future.
The representatives of MSE, then had a meeting with Rajiv Agrawal, the whole time member of SEBI, regarding non-operational exchanges, which had not submitted their exit applications. During the meeting, MSE sought an extension for commencement of platform, simplified procedure for entering into tie up with a clearing corporation and a centralised surveillance mechanism for all the exchanges managed by independent government agency.
However, Agrawal reiterated the stand that regional exchanges, including MSE, should decide early to take the exit route to enjoy lenient charges lest SEBI could take measures, which might go against the interest of such exchanges.
The governing board of MSE had called for an interactive session with its stakeholders on 10th April. Majority of views and opinions during the interactions were...
1. SEBI's mandate of minimum net worth of Rs100 crore has been envisaged, so that, continuous up gradation of technology could be made possible, that not being the case for MSE, it would not be sustainable to meet with regulatory requirements.
2. Legal course would further antagonize the regulators and might affect the final contribution to SEBI besides hurting the relations with SEBI.
3. The merger proposals the fellow RSEs taken up aggressively with Bangalore and later on with Delhi and Pune exchanges did not yield any material results even after taking all steps necessary in that direction.
4. Formation of the new Government would take some time and even then the Conditions of RSEs might not garner any interest for the new Government in the immediate present unless there is a political push.
5. Even then, without a sound business model in a competitive environment there was no guarantee for improvement of business of Exchange, even after spending crores of rupees on technology and other things.
6. Hence, by applying before the due date, if MSE could garner some benefit of lesser regulatory fee etc., MSE should consider availing the same without further delay.
7. It would be a fitness of things that MSE take right steps to apply for the exit.
8. The management should take all steps to cut down cost and apply
While speaking with shareholders, Justice KP Sivasubramanian (retd.), the public interest director of MSE, ruled out the possibility of taking any legal course as he felt it would be a futile exercise with time lag and unwanted expenditure without any fruitful benefits whatsoever to the MSE and the courts would give its ruling purely based on the prevailing rules and regulations.
While sovereign wealth funds from Abu Dhabi, Qatar and Malaysia may pick up 74% interest in the hived-off entities for about Rs1,850 crore, Leelaventure will retain 26% stake
Hotel Leelaventure Ltd is in talks with sovereign wealth funds from Abu Dhabi, Qatar and Malaysia to sell its prime properties in Delhi and Chennai for around Rs1,850 crore to pare debt.
The company, which owns, operates and manages hotels, palaces and resorts, is likely to hive-off the two properties into separate entities.
While the foreign investor may pick up 74% interest in the hived-off entities, Leelaventure will retain 26% stake and continue to manage the five-star hotels. However, the deal is not yet finalised.
When it was first reported in February that Leelaventure is selling the two hotels, the company informed the stock exchanges: "In terms of corporate debt restructuring (CDR) package being implemented, the company has to reduce its debts through sale of assets."
It had stated that the company was "in discussion with various investors" and it continues to "evaluate proposals".
As part of discussions with the cash-rich sovereign wealth funds of Abu Dhabi, Qatar and Malaysia, Hotel Leelaventure will still run and manage the Delhi and Chennai properties for 33 years for a fixed fee.
The Leela chain, in which ITC Hotels holds 12% stake, has been in the red for the past several quarters, hit by business slump, competition and demand-supply mismatch.
Part of The Leela Group, The Leela Ventures is looking to divest stakes in its bouquet, full of luxury hotels, resort properties, IT and business parks, as well as real estate development.
In 2011, it sold the luxury Kovalam beach hotel to industrialist Ravi Pillai for Rs500 crore and followed it up by selling the Chennai IT park building for Rs170.17 crore to Reliance Industries in 2012.
The company is now in talks to offload stakes in The Leela Palace, Delhi and The Leela Palace, Chennai to pare debt after moving the CDR cell.
CDR is a mechanism where borrowers seek extension of loan period and adjustment of interest rate. Hotel Leelaventure's debt as on 30 September 2013 was Rs4,295.15 crore.
Leela Delhi is a 260-room property in the heart of the capital for which the group had paid nearly Rs600 crore for buying land. Located in the diplomatic enclave at Chanakyapuri, it is the capital's first freehold property.
Leela Chennai is a 326-key property on the sea face in Chennai's MRC Nagar.
According to Prof Vaidyanathan, soon we would have to strengthen and facilitate our small business that contributes a huge 45% to the Indian economy and this would help in better employment and society
R Vaidyanathan, the professor of Finance at Indian Institute of Management, Bangalore (IIM-B), in one-of-its-kind and in-depth well researched study, delves into India Unincorporated by presenting a persuasive case on this sector’s single largest contribution of 45%. This contribution comes from national income, savings, investments and taxes that are ignored even though it exceeds three times the corporate sector’s contribution of a mere 15%. The official guestimates of its contributions in manufacturing and services sector are inaccurate, flawed and outdated, making the India Story incomplete when this real engine of growth story is thus wrongly disregarded.
“The growth of the economy in the nineties should be attributed to the partnership and proprietorship (P&P) firms in service activities and not due to the reforms carried out by the government or the miniscule contribution of the corporate sector... ironically this remarkable contribution of the P&P sector has not been documented and appreciated.” The wealth of information presented is adequately backed by facts and figures of P&P firms or “the unincorporated economy” that comprises small entrepreneurs in India’s growth and development of over the years…governments control and regulate an economic activity that it does not understand it and tax it if it is growing fast...this gargantuan appetite of the government goes against the grain of our civilization ethos and negates the entrepreneurship of the non-corporate sector designated mini, small and medium enterprises. Its contribution to national savings hasn’t received the recognition because the aberration is due to it being wrongly labeled “household sector, though many of them notch turnovers running into hundreds of crores… Nirma was once a group of partnership firms…. Incremental capacity created is based on its ingenuity like many passengers travelling by bus are outside the bus (by hanging on to the widows or door rails taxis in Bihar, UP and Bengal carry a couple of passengers more and a barber needs two more hands to shave an extra person rather than four more chairs… The concept of capacity is cosmic and unlimited unlike western notions of limited capacity and possibility of increasing output only by increasing capital.”
The best part of this book is Prof Vaidyanathan’s masterly analysis that discusses at length the “FDI in Retail Trade - Fact and Fiction”. The learned Professor dispassionately analyzes that “Retail trade (in India) is currently dominated by P&P firms… the retail revolution that is applauded by planners, encouraged the government and eagerly talked by experts… but not many seem to be worrying about the millions of retail traders, who will get marginalized. There is not much debate [let alone informed debate] among academics and other policy-makers about the far reaching implications that the entry of global retailers has on our economy, where the level playing field argument is meaningful and significant too. Next only to agriculture’s 17.5%, wholesale and retail trade contributes 16.6% and manufacture 14% of the GDP, their growth rates have been 3.6%, 9.2% and 8.4% respectively in the national DP of 8.3%... Livelihood of 30 million, including children and others, is involved in retail trade; 120 million will be directly impacted by the so-called retail revolution, when real estate sharks will corner prime land to construct large malls by evicting retailers.
Many householders will then create small retail shops inside their homes with the help of surplus self-employed in-house labour with mini refrigerators to store just-in-time stock of cola and bundles of toilet paper rather than a major retail revolution with the razzle-dazzle of shopping in comfortable surroundings, computer generated unreadable printouts as a panacea for all problems. The arguments that the new outlets will remain open for longer hours unlike those in the West where they close early and on Sundays falls flat as the local next door mom-n-pop kirana shops manned by the efficient owner knowing and his family the customers’ tastes, requirements, price considerations offers free home deliveries and also extends credit. He opens at 7am and closes at 10pm every day for 365 days, but labeled ‘unorganized’ by our experts and the national income data to diminish his contribution. The customers don’t need to blow up fuel to drive miles away to go to the malls. The footfalls in these shops cannot be measured using western models [since there is no place to keep anybody’s foot inside his shop!] and so he is derided and abused. It is like clubbing housewives with prostitutes in our Census data to showing them that they are involved in ‘unproductive’ activities. This is indeed a great tongue-in-the mouth apt simile. He considers these economic constraints imposed by the west to be terminological terrorism mouthed ad-nauseam by economists and policy planners without understanding their implications, they want to open it up to global sharks in the name of liberalization and kill the fast growing, productive, efficient and effective retail trade.
In this trade, the weak are marginalized due to the denial of adequate lines of institutionalized credit at reasonable rates. The other is the difficulties faced by them in opening Core Banking Solutions bank accounts – KYC [Lord Megnad Desai terms it “KILL Your Customer”!] requirement on insistence of proof of residence more particularly the migrants with no fixed residences. The just-retired governor of the Reserve Bank of India (RBI) was unable to open a bank account at Hyderabad because he couldn’t provide proof of residence in that city! While large corporates obtain large lines of credit with highly suspect credit appraisals, at prime lending rate (PLR) or base rates, soft loans and exotic facilities, a poor flower vending girl cannot open a No-frills account. This too at times she may be borrowing from a usurious money lender at 180%, or getting Rs45,000 up front for a loan amount of Rs50,000. More than 70% of the retail working capital requirements come from such non-bank sources.
The phenomenal bribes extorted by police, municipal babus and their minions are ‘organized dacoity’ as much high as Rs20 on a daily income of Rs200. That is 10% of gross income.
The arguments that the multi-national companies (MNCs) bring in ‘funds, efficiency and cost effective solutions is totally mirage, and failed models, they only access funds in our domestic financial institutions by brandishing their parent company’s ‘letters of comfort’, which fetch them funds even below prime rates because they are ‘global’. Enron promised to bring in Rs10,000 crore, but our institutions now hold more than Rs6,000 crore of worthless paper now turned into non-performing assets (NPAs). Enron CEO Rebecca Mark claimed that they’ve “spent millions to educate Indians a part of the project.” The so-called ‘technology and knowledge base’ sought to be brought with them is “just “to dumb down India” as was done by Wal-Mart in the US. The French have their Loi Royer Regulations to protect ‘Centres of French towns and villages and living of small shopkeepers’ and Germany with similar legislative constraints on outlets exceeding 1200sq.m. Other Asian countries, like Korea and Japan have the well-developed regulations and local competition to protect community based local establishments by excluding overseas companies in any ‘distributional aspects in petroleum products, rice, tobacco, salt, alcoholic beverages, fresh foods, milk and fertilizers.
Indian laws are being amended a thousand times to facilitate the grand entry of global malls and hypermarkets, some to permit the retail giants to procure directly from farmers at the agricultural market yards and not to trade in commodities, the transparency doubtful. Indian brands like Reliance have encountered opposition in states like UP. In India, with mounting pressure presently 100% FDI is permitted in single brand and up to 50% in multi-brand. Wal-mart faces US Congressional investigations into allegations of bribery and corruption in India. Today it is a hot election issue with the principal opposition parties Bharatiya Janata Party (BJP) and Aam Admi Party (AAP) stoutly opposing the entry.
Prof Vaidyanathan sums up the chapter by saying – “The sooner we strengthen and facilitate our small business, the better for employment and society.”
This must-read-by-all has a lot to say on a variety of tropical matters like Taxation and Bribery, Social Security for the Self-Employed and the role of gold, role of the stock markets, Caste and musings on other matters like the NGO sector, Art of giving – Warren Buffet to be told, Sports and Bollywood as UnInc that I commend the readers to pick up from the book itself.
Author R Vaidyanathan
Publisher: Westland Books 2014