Regulations
National Spot Exchange in a fix over violations
In a probe, FMC, the commodities regulator found that National Spot Exchange allowed trading on its platform without verifying whether the seller had stocks, thus allowing short sales by members
 
Food and consumer affairs minister KV Thomas on Tuesday said that the government would soon take action against Financial Technologies India Ltd (FT) promoted National Spot Exchange Ltd (NSEL) for violating certain rules while offering commodity contracts. 
 
“NSEL should strictly follow the law. Wherever it has violated, we will take action soon. The orders to this effect will be issued shortly,” the minister said.
 
The decision in this regard was taken at a meeting held last week with the commodity regulator Forward Markets Commission (FMC).
 
Last year in October, the ministry had issued a show-cause notice to NSEL after it found violation of some conditions set by the government for operating the exchange.
 
Spot exchanges, including NSEL, were allowed to offer one-day forward contracts provided that members would not resort to short sales and that outstanding positions at the end of the trading day would result in delivery.
 
However, the FMC found that the exchange allowed trading on its platform without verifying whether the seller had stocks, in effect allowing short sales by members.
 
Short selling is the sale of commodities that one does not own at the time of a contract with the hope of buying them at a lower price before the delivery time. If the delivery period exceeds 11 days, it is called a futures trade.
 
The FMC also found that the contracts traded on the exchange for which the settlement period exceeded 11 days were non-transferable specific delivery contracts, which was in violation of provisions of Forward Contract Regulation Act.
 

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Sensex, Nifty in a mildy bullish trend: Tuesday closing report

The Nifty has to close above 5,870 for the upmove to gain strength
 

On Monday the US market closed in the green after Alcoa, posted sales and profit yesterday that exceeded analysts’ forecasts. Taking cues from it almost all the Asian indices were up today. Back home the Sensex and Nifty opened in the positive. Sensex opened at 19,399 while the Nifty opened at 5,835. Yesterday, we had mentioned a close above 5,850 on the Nifty may bring some gains while a close below 5,760 may lead to a sharp decline. Nifty is still in a no man’s land. From here the Nifty has to close above 5,870 for the upmove to gain strength. The NSE saw a much lower volume of 52.20 crore shares today, showing indecisiveness among market players.
 
Through out the trading session both the benchmark traded in the green but in a narrow range. The intra day range on the Sensex was the lowest after 11 May 2013 while for Nifty was the lowest after 5 February 2013. Both the Sensex and the Nifty hit a higher high of 19486 and 5,865 respectively. Similarly the indices hit a higher low of 19,380 and 5,835. Both the benchmark covered most of the yesterday’s loss. Sensex closed at 19,439 (115 points up, 0.59%) while the Nifty closed at 5,859 (47 points up, 0.82%).
 
Among the broader indices, the BSE Mid-cap index rose 0.73% and the BSE Small-cap index rose 0.74%.
 
All the sectoral indices ended in the green. The top five gainers were BSE Consumer Durables (up 1.93%); BSE Power (up 1.86%); BSE Realty (up 1.65%); BSE Capital Goods (up 1.47%) and BSE Healthcare (up 1.44%).
 
Out of the 30 stocks on the Sensex, 22 stocks settled higher. The gainers were Sun Pharma (up 3.57%); BHEL (up 2.22%); Bajaj Auto (up 2.09%); Sterlite Industries (up 1.88%) and L&T (up 1.70%). The main losers were Jindal Steel (down 1.90%); Mahindra & Mahindra (down 1.18%); ONGC (down 0.79%); Hindustan Unilever (down 0.76%) and Maruti Suzuki (down 0.54%).
 
The top two A Group gainers on the BSE were—TTK Prestige (up 6.50%) and Karnataka Bank (up 6.24%).
 
The top two A Group losers on the BSE were— Strides Arcolab (down 5.80%) and Gitanjali Gems (down 4.97%).
 
The top two B Group gainers on the BSE were—Sancia Global (up 20%) and Everonn Education (up 19.97%).
 
The top two B Group losers on the BSE were—Satra Properties (down 19.84%) and Nimbus Inds (down 19.02%).
 
Of the 50 stocks on the Nifty, 39 ended in the in the green. The major gainers were Power Grid (up 4.37%); Kotak Bank (up 3.86%); Sun Pharma (up 3.30%); Reliance Infrastructure (up 2.92%) and IndusInd Bank (up 2.40%). The key losers were Jindal Steel (down 2.37%); Bharti Airtel (down 0.85%); Hindustan Unilever (down 0.83%); Mahindra & Mahindra (down 0.81%) and ONGC (down 0.61%).
 
European indices were trading in green after euro-zone finance ministers agreed on an aid disbursement for Greece. In Europe, Greece secured a lifeline from the euro zone and the International Monetary Fund (IMF) on Monday but was told it must keep its promises on cutting public sector jobs and selling state assets to get all the cash. The 6.8 billion euro deal, which spares Greece defaulting on debt in August, will see Athens drip-fed support under close watch from the euro zone and the IMF to ensure implementation of unpopular reforms.
 
In Asia, China's inflation accelerated more than estimated in June as food prices climbed, while the decline in factory-gate prices extended its longest streak in a decade amid slowing economic growth and lower commodity costs. The consumer price index rose 2.7% from a year earlier, the National Bureau of Statistics said today in Beijing. Most of the Asian indices closed in the green. Nikkei 225 was the top most gainer (up 2.58%) while Jakarta Composite, only loser, lost the most (fell 0.67%). US Futures were trading higher, indicating a positive opening. 
 
With reference to the news item appearing in a news channel regarding the Clariant Chemicals being in process to sell its land property in Thane for around Rs. 1500-1600 crore, the company has clarified that it has neither initiated any process nor taken any decision to sell its land in Thane. The stock rose 19.66% to close at Rs466 on the NSE.
 

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Perverse incentive structures in banks under RBI scanner

RBI has warned banks that it is taking a closer look at the ‘perverse incentive structures’ that are leading to ‘widespread mis-selling’ of third party products such as insurance to account holders

Intense competition and perverse incentive structures have frequently led to widespread mis-selling of products and misdirection of clients to inappropriate and risky investments by financial service providers, says the Reserve Bank of India’s (RBI) financial stability report released on 27 June 2013.
 

Para 3.50 of the Financial stability report states that “There seems to be an urgent need to revisit the marketing and sales strategies used by the banks in pushing insurance products, especially since insurance is among the more complex of financial products for the common man to fully comprehend”.
 

Regarding insurance as a third party product para 3.52 states that “Banks have been advised to disclose to the customers, details of all the commissions / other fees (in any form) received, if any, from the various companies for marketing / referring their products, even in cases where the bank is marketing/ distributing/ referring products of only one company”

 

Regarding mis-selling in wealth management and other related activities para 3.55 states that “The recently notified SEBI (Investment Advisers) Regulations, 2013, contain detailed norms for risk profiling and suitability, creation of a Separately Identifiable Department or Division (SIDD) for IAS, detailed disclosure to the clients including any conflicts of interest, redressal of investor grievances, etc. Such norms are expected to address mis-selling risks to a certain extent”. Read RBI reviewing guidelines on mis-selling by banks in wealth management services
 

Earlier, the focus of the Open House session organised by Moneylife Foundation with the RBI deputy governor Dr KC Chakrabarty was on various aspects of banking services, including mis-selling of third party products, grievance redressal system and technology glitches in banks.
 

While accepting that mis-selling should not happen in banks, Dr Chakrabarty had said, “Mis-selling is same across banks and brokers and we need to first identify what is mis-selling. For example, insurance penetration in our country is just 5-6%. However, even the highly educated people fall for ‘higher returns’, rather than the insurance cover and sign papers blankly”.
 

Moneylife Foundation placed before the deputy governor, a few submissions regarding third party products.
 

Selling process: If they continue to sell these products, a specific sign off by the customer on all clauses denoting risk factors and disclosure is a must. The BCSBI along with consumer bodies can be asked to work on these in a time bound manner but not more than three months.
 

Onus on banks: The onus of selling products appropriate to customers must be on the banks. Otherwise, they will keep selling a five-year locked in mutual fund to a 79-year old man. Or sell ULIP to a 60+ retiree, which requires hefty premium payments to be made for five years before it starts making any returns at all.
 

Paper trail: Banks must be made responsible to create proof and trail mail/hard copy when relationship managers/tellers accost customers at home or at the banks. A clear email spelling out specific terms and pros and cons must be sent to the consumer.
 

Compensation: RBI must codify compensation to victims of mis-selling. Since the onus of proving appropriateness of products must be on the bankers, there must be detailed specified penalties when mis-selling is established.
 

Moneylife had even written a memorandum to the RBI in context to mis-selling, it can be found here.
 

Regarding Technology issues para 3.60 of the report states that “While leveraging on technology has resulted in many benefits, especially, in extending the reach of the financial services, these developments pose challenges in the form of regulatory, legal and operational risks”. Moneylife has come up with certain suggestions for the same: There must be an annual IT audit to verify the robustness of banks systems and their calculation of tax deductions, interest and equated monthly instalments. Mistakes, such as SBI’s 40% deduction, must be reported to RBI along with corrective action.
 

Regarding KYC para 3.56 of the report mentions that “All financial sector entities need to comply with the extant KYC, which are meant for safeguarding the financial system against the possibility of its use for money laundering” which Moneylife has been advocating since a long time.
 

RBI has clearly listened to what we have said with some seriousness. However, flagging these issues in the financial stability report is only the first step; consumers may have to wait for a real change in rules that ensures an end to mis-selling.
 

You may also want to read
 

Mis-selling Is Inherent to Life Insurance, Cartelisation, not competition, decides banking service charges, Customer service in banking is not negotiable, asserts Dr Chakrabarty.
 

You can watch the
 

Open House session with the Deputy Governor Dr KC Chakrabarty here.

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