Regulations
SC notice to Centre on PIL challenging FM's role in SEBI appointments

The apex court issued notice to union government on a PIL challenging Finance Minister's power to nominate two members in the search and selection board for appointment of SEBI chairman and full time members

New Delhi: The Supreme Court on Friday issued notice to the Centre on a public interest litigation (PIL) challenging the Finance Minister's power to nominate two members in the search and selection board for appointment of Securities and Exchange Board of India (SEBI) chairman and full time members.

 

A bench headed by Justice SS Nijjar, however, refused to stay Rule 3 (5)(e) of SEBI (Terms and Conditions of Service of Chairman and Members) Rules, 1992, which empower the Finance Minister to nominate two members.

 

The court passed the order on a petition filed by former IPS officer Julio Ribeiro and other members of civil society alleging that the rules framed by the government were contrary to the SEBI Act.

 

Ribeiro had earlier also approached the apex court challenging appointment of UK Sinha as SEBI chairman on the same ground, but the court had refused to entertain his plea on the ground that the allegations levelled in the petition were of personal nature.

 

The petitioner later filed a fresh PIL dropping all those allegations and challenging only the rules framed by the government.

 

The apex court on 21st November declined to entertain a plea questioning the appointment of Sinha as SEBI Chairman, saying it is aimed against an individual under the garb of raising legal and constitutional issues.

 

Ribeiro, in his earlier petition, had submitted that the new procedure, stipulating a five-member panel for selection of the SEBI chief in place of the existing three members, was wrong and there was an ulterior motive behind it.

 

The petition had alleged that rules were changed for appointment of the SEBI chairman and members under corporate pressure.

 

The government had refuted the allegations and had submitted an affidavit, which had said Sinha was the unanimous choice of the search and selection panel and no undue favour was shown to him by his appointment at the post.

User

COMMENTS

Rajkumar Singh

5 years ago

It appears to be a futile attempt.

Please update me about this case, if possible. I am curious to know about the fate of this case.

Rajkumar Singh

5 years ago

It appears to be a futile attempt.

Please update me about this case, if possible. I am curious to know about the fate of this case.

Rajkumar Singh

5 years ago

It appears to be a futile attempt.

Please update me about this case, if possible. I am curious to know about the fate of this case.

SEBI slams down on F&O manipulation-II: NSE and BSE as the first line of regulation stand exposed

Some operator-driven stocks in the F&O segment have crashed in response to SEBI’s decision to change the norms. Why had NSE added a bunch of dubious stocks to the F&O list that was open to manipulation and why is BSE silent about manipulation in hundreds of obscure companies? The answer is simple: Bourses are out and out profit-making entities and cannot be relied upon to act as the first line of regulators

 
The day after the market regulator Securities and Exchange Board of India (SEBI) changed the criteria for choosing stocks that would be eligible for the Futures & Options (F&O) segment, some of the obviously shady companies fell sharply. If this was not enough of a severe indictment of the quality stocks that trades in the NSE’s F&O segment, today some the other dubious F&O stocks crashed. Apparently, large positions in these shady scrips belong to the promoters of these companies themselves and brokers close to them and were pledged with financiers to raise money. SEBI’s moves and recent the market weakness ensured that there were pressures on the financiers who had funded these positions. They have resorted to firesale of pledged shares to recover their cash. Situations like these were inevitable ever since NSE expanded its F&O portfolio with a long list of companies whose business is puffed up and the stocks are run and down by operators and promoters.
 
It has all been an open secret. Indeed, more than two years ago, one of our Chennai-based readers, Shaym Shekhar, went to the extent of writing a detailed letter to the National Stock Exchange (NSE) which Moneylife forwarded to the Exchange, SEBI chairman and the finance ministry's capital market division. The points raised by him and the flimsy responses of NSE and its joint venture with CRISIL, India Index Services & Products (IISL) were as follows:
 
1. The Nifty includes a holding company (Reliance Industries) and a subsidiary company (Reliance Petroleum) in which it has controlling interest. What is the logic behind this duplicative representation? The same question holds for Reliance Infrastructure and Reliance Power.
 
NSE’s response: The top 50 companies listed on the NSE that satisfy the criteria related to market capitalisation, liquidity (impact cost), floating stock and minimum listing criteria are considered for inclusion in the index.
 
2. When an analyst computes the PEs of an index, earnings of an index’s constituent companies are material to its EPS. Why include Reliance Power and Reliance Petroleum in the Nifty long before they have started commercial production? What is the rationale for giving a company index representation when it has no earnings history?
 
IISL’s response: Currently, companies are reviewed based on market capitalisation, liquidity (impact cost), floating stock and minimum listing criteria. Profitability is not a current criterion. In case, one was to introduce profitability as a criterion, all companies with long gestation periods (infrastructure, telecom, etc) would not be eligible for inclusion in the index. In such a case, the resultant index would not be truly representative of the underlying market.
 
3. A company’s price discovery starts when it makes an IPO. The price discovery process would be effective only after a reasonable period. Why did we include a company like DLF within months of listing? DLF’s dominant revenues were from inter se transactions with its own subsidiary or related parties. Had NSE assessed corporate governance at DLF before DLF was brought into its index? How do you justify including DLF in the Nifty with not even a few quarterly results to judge performance or corporate governance? The serious litigation that DLF had with its minority shareholders just months before the IPO and the covertly managed earlier de-listing process reflected abject lack of corporate governance. DLF made hurried out-of-court settlements with the litigant shareholders to raise capital and get re-listed. Were these factors duly considered before giving DLF a presence in the index?
 
IISL’s response: A company which comes out with an IPO will be eligible for inclusion in the index if it fulfils the normal eligibility criteria like impact cost, market capitalisation and floating stock for a three-month period. This three-month period is reckoned from a cut-off date which is at the end of every quarter. So, typically, an IPO stock will become eligible for inclusion, if it meets all other criteria invariably for a period exceeding three months. Factors related to litigation, etc, are subjective in nature and are not considered while reviewing the index constituents.
 
4. Reliance Power crashed within minutes on the listing day. Institutional shareholders dumped the stock that day implying that they had been duped on valuation. Yet, NSE included it in the Nifty within months of listing. Implicitly, you made every Nifty index fund buy the stock, which they had chosen to dump months ago. Were you not interfering with the price discovery and forcing investors to buy an out-of-favour stock by giving it index representation?
 
IISL’s response: The stock from the replacement pool with the highest market capitalisation that satisfies other criteria (mentioned above) are considered or inclusion. Factors related to valuation (correlation between issue price and market price post-listing) are not considered for inclusion in the index. Market capitalisation (and not issue price-related data) is internationally considered as one of the eligibility criteria for inclusion of constituents in the index.
 
5. NSE included several scrips in the F&O segment like Educomp Systems, Lanco Infra, HDIL, Sobha Developers, AIA and Rajesh Exports, to name a few. These scrips were thinly traded even in the cash segment before they were brought into the F&O. The valuations went up several-fold after that. What is your method of evaluating a company before you include it in F&O? What is your response to my accusation that the futures segment was used to rig the stock prices in several mid-cap companies in 2007-08?
 
NSE’s response: SEBI prescribes the following criteria for selection of securities for derivatives contracts:
A. The stock should be out of the top 500 in terms of market capitalisation and average daily traded value in the previous six months on a rolling basis.
B. The stock’s median quarter sigma order size over the last six months shall be at least Rs1 lakh. The MWPL (market-wide position limits) of the stock should be at least Rs50 crore. For the above purpose, the MWPL shall be equal to 20% of the non-promoter holding in the stock.
 
However, as required by SEBI, an application is made for introduction of derivatives contracts using the following more stringent criteria. The stock should be out of the top 500 in terms of market capitalisation and average daily traded value in the previous six months on a rolling basis; the stock’s median quarter sigma order size over the last six months shall be at least Rs5 lakh; the MWPL of the stock should be at least Rs100 crore. Securities, which do not meet the following criteria for consecutive three months, are excluded from derivative list: The stock's median quarter sigma order size is at least Rs1 lakh, while the MWPL of the stock is at least Rs45 crore.
 
A few years ago, NSE decided to dump as many as 50 scrips from the F&O list. We wrote at that time, “NSE does not say whether it was a mistake to have included them.” It also decided to modify the criteria for selecting the stocks for F&O. The NSE formula was a mumbo-jumbo which allowed it to include poor-quality stocks and those with minimal volumes in F&O for creating higher trading turnover.
 
As is clear, in practice, all this while, it was NSE which has been deciding which stocks to include in the list. What was the idea? More and more scrips in F&O and that too the scrips that market operators want, meant higher traded volumes which in turn meant higher revenues for the NSE. NSE, remember is a for-profit entity, where a large number of top institutional investors have invested their money. Since cash market volumes are flagging, the NSE management had to create volumes in the speculative segment to create revenue and profit growth like any other business. Everyone except the regulator could see it.
 
This was NSE’s game but don’t think that BSE is blameless. Thousands of poor quality stocks are listed in the BSE. They are often targets of massive manipulation as we have been writing for the past few years in Moneylife magazine. Stocks of companies with revenues or profits which have gone up multi-fold but BSE and SEBI pretend not to notice it. We intend to put out a longish research piece on this in the magazine soon.
 
It is intriguing that SEBI has stepped in to cut the F&O list by bringing in stricter criteria. What investors (the few who are left in the market) would like to know is, what will SEBI do about the fundamental issue here? The bourses are for-profit entities where top managers are paid globally competitive compensation. If they are left alone, they can stoop to any level to push their key sources of revenues—traded volumes and listing fees. SEBI’s regulatory action on F&O is laudable but skirts this fundamental rot within the system. 
 

User

COMMENTS

Sudhir Rao

5 years ago

Replies from NSE sound quite logical; why are they called Flimsy ? It is job of SEBI to monitor, let it do its job well.

REPLY

Debashis Basu

In Reply to Sudhir Rao 5 years ago

Replies are academic. Hope you are aware what happened to the stocks NSE was putting in F&O. If not, read the two parts again :)

Dayananda Kamath k

5 years ago

there are various other issues also in cpaital market.earlier the price limit was .50rupees for shares below rs.10 today the circuit is 2% for shares quoting at rs.0.20 and surprising ly volume in these shares is in millions daily the brokerage will be more than share value and even if you hold it for whole year and it hits upper circuit everyday after you purchase will not cover the brokerage. the circuit filter norms have to be verified. delay in listing of demerged companies. there are companies which are not listed even after 3 to 4 years of demerger.eg nathseeds.when you have given in principle approval for demrger why there should be so much delay.

sohan modak

5 years ago

congratulation to moneylife team for this incisive analysis and asking the fundamental question which SEBI should answer.

Adi Daruwalla

5 years ago

The bourses were never meant to be the first line of regulators, as you have rightly pointed out that they are business entities solely to make profit.(organisation) Also before the apperance of SEBI on the scene of Capital Markets, the bourses were forced to be regulators but could not as there was conflict of interest, profit or regulate. That time there were DEA (Dept Of Economic Affairs), DCA (Dept of Company Affairs) and now SEBI and for monetary polict RBI. So the original onus was with DCA and DEA to regulate and now all three including SEBI and RBI for monetary policies.

REPLY

Sucheta Dalal

In Reply to Adi Daruwalla 5 years ago

Actually, the bourses were indeed meant to be first line regulators. In fact, they are still called first line regulators. But since we ape the american corporate model that is focussed on profits coupled with higher and higher CEO salaries and perks - we have the messy situation we see today.

Ramesh Poapt

5 years ago

Excellent article!pl continue the same for the sake of millions of small investors!They will be slaughtered by this merciless casino people and by foreign investors' killing arbitrage strategies and F&O scams!Due to national fiscal/monetary situation and global headwinds, market is gradually moving to a very lower level!Hence kindly alert the investors by such researched eye opening articles!

polyvin

5 years ago

You have stated many faults, but still not enough. These institutions are FRAUDS, including SEBI. As Dr Bimal Jalan had correctly recommended, the stock exchanges should not be listed and should not be for profit.

Insurers should disclose risks in IPO offer, says SEBI panel

The panel recommended that general insurance companies proposing to come out with IPOs should disclose the “claims arising out of catastrophic losses, which could impact the profitability or cash flow of the insurance companies.”

Mumbai: Clearing the decks for the Insurance Regulatory and Development Authority (IRDA) to come out with initial public offer (IPO) guidelines for general insurers, a Securities and Exchange Board of India (SEBI) appointed panel has suggested outlining risk factors in the offer document, including return from their investments, reports PTI.

“The insurance industry is different from other industries and has risks which are unique to it,” the panel said, adding that specific risk areas need to be disclosed in the offer document.

The SEBI Committee on Disclosures and Accounting Standards (SCODA) recommended that general insurance companies proposing to come out with public offer should disclose in offer document the “claims arising out of catastrophic losses, which could materially and adversely impact the profitability or cash flow of the insurance companies.”

The report of the panel, having representatives of both SEBI and IRDA, will now be used by insurance regulator IRDA to finalise the guidelines for general insurance companies to come out with IPO.

The offer document, it suggested, would outline industry specific risk factors like interest rate risk, liquidity risk, catastrophic risk, re-insurance risk, regulatory risk and market growth risk.

IRDA had last year issued IPO norms for life insurance companies.

Also they need to inform regulatory restrictions on investments and the impact of any possible default any re-insurers which could materially affect the financial condition and results of their operations.

The meeting of the panel held in January this year has suggested that the insurer should come out with overview of the entire industry and a specific format as prescribed by the IRDA.

“...considering the fact that no insurance company in India has come out with an issue so far, it is felt necessary that the investors get a broad overview of the insurance industry,” it said.

Broad parameters under which such disclosure would be made by insurance industry has been suggested, it added.

Insurance companies have to disclose financial information at regular interval to IRDA.

The panel has also given its suggestions with regard to advertisements, objects of issue, definition of Promoters and disclosure with regard to uniform financial denomination.

The sub-group recommends that report of an independent actuary on the Economic Capital of the insurance company should be made a part of the offer document.

The contents and format of the reports and criteria for actuaries who are authorised to prepare such report may be prescribed by IRDA, it said.

These suggestions are based on the study of existing practices in other global markets..

User

COMMENTS

R Balakrishnan

5 years ago

The discussion of risk factors etc is a mindless exercise. I would rather that the offer document with the price is available at least a couple of weeks before the hurried placement with fixed FIIs/DFIs. That would give time for analysts to give a view. Today, in the three day window, no one can take a view. It becomes a sheer momentum play.

REPLY

Rajkumar Singh

In Reply to R Balakrishnan 5 years ago

Sorry, not understood, seems to be a mind exercise in fine print!

Rajkumar Singh

5 years ago

Thanks for the informative news.

It appears to be a good check rule for the insurers and against the offerings of the insurance companies.

Am I correct in following it up?

Rajkumar Singh

5 years ago

Thanks for the informative news.

It appears to be a good check rule for the insurers and against the offerings of the insurance companies.

Am I correct in following it up?

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