SEBI clears IPOs of Shree Pushkar Chemicals, ACB India

Shree Pushkar Chemicals and Fertilisers plan to raise Rs75 crore while coal washing company ACB India would sell shares held by Pineridge Investment, Ashok Mrig and Ganesh Chandra Mrig


Market regulator Securities and Exchange Board of India (SEBI) has given its approval for initial public offering (IPO) of ACB (India) Ltd and Shree Pushkar Chemicals & Fertilizers Ltd.
These companies had filed their draft red herring prospectus (DRHP) with the market regulator in September 2014 for the proposed public offers.
SEBI had issued its final ‘observations’ on the draft offer documents of Shree Pushkar Chemicals and Fertilizers and ACB India on 2nd February and 6th February, respectively, according to the latest update by the market watchdog.
Issuance of ‘observations’ on offer documents by SEBI is considered a clearance to the issuer to go ahead with the share issues through routes such as IPOs, FPOs and rights issue.
Going by the details in the DRHP, Shree Pushkar Chemicals and Fertilisers plan to raise Rs75 crore by issuing fresh shares as well as an offer for sale of 20.26 lakh shares.
Coal washing company ACB (India) would sell shares held by Pineridge Investment, Ashok Mrig and Ganesh Chandra Mrig the existing shareholders, as it proposes to offload 3.09 crore shares.
With regard to Shree Pushkar Chemicals and Fertilisers IPO, the proceeds from the fresh issue are to be utilised for expansion plans, general corporate purposes and to meet the preliminary and pre-operative and issue expenses. Besides, the funds from the offer for sale would be received by the selling shareholders.
ACB (India) said it “will not receive any proceeds of the offer and all the proceeds of the offer will go to the selling shareholders.”


Truth in lending: Is the RBI bending?
RBI’s latest guidelines direct banks to share more information on lending rates, fees and charges to borrowers. But then, these are just guidelines. Will the RBI ask government to enact the stringent Truth in Lending law, which has provisions for penalty on creditors?
Last month, the Reserve Bank of India (RBI) asked banks to disclose to borrowers, more information on lending rates and fees on their websites. With these guidelines to be implemented from 1 April 2015, the central bank hopes to promote transparency in banking operations, especially in lending activities.
By having a uniform standard for presenting the terms of consumer credit, individuals have a much easier time of comparing and thus, choosing the best credit option.  Instead of things being shielded and hidden from the consumer, this gives power back to borrowers as they need to make informed choices about credit. Before the concept of truth-in-lending came into picture, consumers were not able to compare the interest rates and loan costs, properly. Frauds and scams were therefore, rampant because the lenders used to take advantage of the fact that the consumers were not able to make comparison between the credit options. Hence, taking cue from the global scenario, India definitely needs stringent norms and laws with respect to truth-in-lending. The recent RBI notification covered here, is definitely a major step to imbibe transparency and authenticity in the transactions of banks with the individual borrowers.
Truth-in-lending laws, found in many countries world-over, ensure that lenders make a truthful disclosure of their rates of interest, and do not try to attract borrowers with misleading rates of interest. Truthful disclosure of rates of interest is as important as fair disclosures made by a vendor selling goods. There was a time when there was no truth in lending in India at all. A lender could get away with disclosure of what was called "flat rate of interest", which was almost like half of the actual interest rates. Leading housing finance lenders would show what was called "annually declining rate of interest", which was also was deceptively lower than the actual interest rates.

Steps taken by RBI to ensure transparency

The Reserve Bank of India (RBI) vide its Circular dated 22 January 2015 has instructed banks to adhere to the following instructions, which shall come into effect from 1 April 2015.
Banks are required to disclose on their websites the range of interest rates of the loans contracted with the individual borrowers, in the previous quarter.

The average interest rate of the abovementioned loans is also required to be displayed on the website.

At the time of processing of loans, the entire fees and all related charges, including the processing fees should be disclosed to the borrowers, as well as displayed on the website of the banks.
Banks should disclose the Annual Percentage Rate (APR), to show the total cost of credit on loans to individual borrowers.
Banks are required to give an explicit and lucid statement/ fact sheet to all the individual borrowers, at each stage of loan processing and when the terms and conditions of the loans undergo change.

RBI barred suppliers’ subvention financing

Earlier, RBI vide its circular, dated 17 September 2013, took the high moral ground in directing commercial banks to desist from certain “pernicious practices,” which, in its view, “deter consumer protection and accounting integrity.” At the core of its directives, was the fairly widespread practice of certain banks, which offer retail loans at “zero percent” interest to purchase high value consumer durables such as LED TV sets, high-end refrigerators, and the like. Arguing that there is no such thing as an interest free loan, the RBI laid down guidelines to make a large swathe of retail lending by banks more transparent. Subvention, as well as moratorium on payment is fairly common practices to boost sales. There has been a disquieting tendency among banks of not giving their customers information on the full extent of such concessions. Even more unacceptable has been the practice of part-loading these to the interest rate charged to make the latter appear lower. Through this notification, banks were asked to pass on the benefits to their consumers “fully and indiscriminately”, without camouflaging them in the form of lower interest rates. Thus, a discount on the price would mean a lower quantum of loan. It also stated that repayment of the loan would commence only after the moratorium period.
Credit card issuing banks quite often promise an interest-free EMI loan if a particular card is used for a particular purpose- saying, booking of a travel. There are no free lunches in life; neither is there any interest free credit in the world of banking. Here, zero interest is a misnomer because the borrowers are charged a high processing fee.  It is just that the bankers are getting merchant commissions from the respective merchants offering the services - in this, the airline or the travel company, from which the interest is being made up.
Canons of transparency require all such fees to be uniform across all products and segments. It was also stated that no fees would be charged on debit card transactions by merchants. Considering the overall scenario, consumer protection is far more vital than a short-term dip in sales of consumer durables, which will rebound over time anyway. By seeking to make expensive products affordable to even those who cannot really afford it, the “zero-interest” schemes, which were not really doing that, were ultimately drawing consumers into a debt-trap. Hence, this notification came into picture at an appropriate time.
Supplier subventions were a common phenomenon all over the world of asset-backed financing - manufacturers of automobiles, commercial vehicles, construction equipment, even IT sector - all actively try to promote the sales of their products through subventions. This notification put a curb on subvention-based financing in India.

The truth about The Truth in Lending Act

The Truth in Lending Act (TILA) of 1968 is US Federal law that requires lenders to provide standardized information so that borrowers can compare the loan terms and take their call accordingly. It has been implemented by Regulation Z (12 CFR Part 226). Regulation Z has been considered as one of the most complex and broad regulations in the consumer lending space. Compliance with this regulation has become increasingly more challenging over the last few years. Contrary to popular belief, the Truth in Lending Act does not regulate the charges that may be assessed against consumer credit.  Instead, it requires a standardised disclosure of the charges and costs that consumers can then compare with other creditors.  It is intended to ensure that credit terms are disclosed in a meaningful way so that the consumers can compare credit terms more readily and knowledgeably. This is done to stabilize the economy and encourage competition amongst financial institutions by keeping their consumers informed about the terms and conditions of the credit for which they are applying. 
Before its enactment, consumers were faced with a bewildering array of credit terms and rates. It was difficult to compare loans because they were seldom presented in the same format. Now, all creditors must use the same credit terminology and expressions of rates. At the application stage, disclosure of terms and conditions allows the consumer to compare credit offers from different financial institutions. At the acceptance stage, full disclosure of terms and conditions allows him, to adequately predict how much the credit arrangement will cost him and whether it is an appropriate financial move.
Two of the most important terms regulated by this Act are finance charges and the annual percentage rate. Both of these terms may be difficult for a lay person to understand, may vary from lender to lender, and may greatly impact a consumer’s personal finances. The Act explains that the amounts of both the finance charges and the annual percentage rates need to be disclosed and may not vary significantly from the disclosed values. This is essential for the consumer’s understanding of the credit terms and ultimate repayment amount.
There are both civil and criminal penalties if the Act is violated. Creditors can be liable for violating the disclosure terms of the Act even if the consumer was not hurt by the violation unless the creditor fixes the error within 60 days of notification or proves that the error was made unintentionally. If a creditor does not comply with the requirements of the Act, the consumer can file a lawsuit within one year of the alleged violation. Wilful violations of the Act could result in criminal charges being brought and sentences of fines and prison time being imposed.

Truth-in-lending legislation in case of NBFC- MFIs

Non-Banking Financial Companies- Micro Finance Institutions (NBFC-MFIs) are required to give a copy to the borrower of a standard loan agreement form, along with the terms and conditions of the loan, which include the annualized interest rate and method of application. The borrowers must be provided a summary loan card, which shall include the following information:
Effective rate of interest charged
Terms and conditions of the loan
Information that are sufficient for identification of borrowers
Acknowledgements by the NBFC-MFIs, with regard to the repayments
Non-compliance of these directions would tantamount to imposition of the penal provisions under The Reserve Bank of India Act, 1934. The NBFC-MFIs and the banks that lend money to them, both have to play the monitoring role as well.
(Neha Somani works with Vinod Kothari and Company)


Will RBI’s new regulations be effective for bond market?
RBI's new regulations on bond market prescribe settlement through clearing houses, allows inclusion of instruments issued by several agencies to bring more liquidity and the 'haircut' to help corporates to leverage more
The Reserve Bank of India (RBI) on 3 February 2015 came out with a new set of regulations on the ready forward contracts on Corporate Debt Securities replacing the old one of 2010. The new regulations are certainly looking better than the old one, but not sure of how effective will it be.
There are three things that work for the new regulation. Firstly, unlike the earlier regulations, this one prescribes for settlement through the clearing houses of the three stock exchanges, BSE, NSE and MCX-Stock Exchange (MCX-SE). This would reduce risk of malpractices adopted by the intermediaries, which is what happened in the Harshad Mehta scam. 
Secondly, the inclusion of the money market instruments and instruments issued by the multilateral agencies in the list of the eligible collaterals will bring in more liquidity in the corporate bond market. 
Lastly, the minimum haircut has been kept quite low by the RBI, which would help the corporates to leverage to a greater extent as compared to the earlier regulations. Let us discuss this by way of numerical.
Say a bank holds investments in AAA securities worth Rs100. In order to enter into a ready forward contract, the minimum haircut that it will have to bear is 7.5%. Therefore, in order to utilise Rs100, it will have to spend Rs7.5 and thus will be able to leverage up to 12 times [i.e. Rs (100 - 7.5)/ 7.5]. Thus, this would help to the corporates to leverage more than it could normally do.
What is a ready forward transaction or a repo transaction?
To describe in commoners’ language, a ready forward transaction, which is commonly known as a repo transaction, is where a repo seller sells a security to and investor with an agreement to repurchase the transaction at a pre-determined date at a pre-determined rate. In India, these have tenure of less than one year and are therefore money market instruments and the participants to these transactions are financial institutions as listed down by RBI from time to time. The concept of repo is very common in the US as well is managed by the Federal Reserve.
What is new in the new regulations?
1. The 2010 regulations allowed repo transactions against only listed corporate debt securities with an ‘AA’ or above rating held in demat form, however, the Commercial Papers (CPs), Certificates of Deposit (CDs) and other instruments including Non-Convertible Debentures (NCDs) of less than one year of original maturity, were not considered as eligible collateral. 
The new regulations have something more in store – in addition to what we had earlier, the list of eligible collateral now includes all the money market instruments which were earlier prohibited and bonds with ‘AA’ or above ratings issued by multilateral agencies like World Bank Group (e.g., IBRD, IFC), the Asian Development Bank (ADB) or the African Development Bank and other such entities as may be notified by the Reserve Bank of India from time to time. This is surely a welcome move of RBI. However, the security receipts and the securitised debt instruments still stays excluded from the definition of corporate debts securities.
2. The old regulations prescribed for OTC settlement whereas the new regulations provide that these instruments are to be settled only through the clearing house of NSE, BSE and MCX-Stock Exchange (MCX-SE).
3. The minimum rates for the haircut have also undergone change and in the new regulations, different rates have been provided for securities with different ratings. Higher the rating, lower the haircut. (Haircut means the percentage, which is subtracted from the market value of an asset that is being used as collateral.) 
For AAA/A1 securities – 7.5%
For AA+/A2+ securities – 8.5%
For AA/A2 securities – 10%
Earlier the minimum rate for the haircut was prescribed at 25%.
4. The CRR and SLR requirements for these securities will be in line with those applicable to the government securities.
The concept was in limelight in the early nineties, thanks to the Harshad Mehta scam. Mehta was engaged in stock manipulation scheme financed by undervalued bank receipts, which his firm brokered in ready forward transactions between the banks. The amount involved in this scandal was about Rs5,000 crore rupees! There were several loopholes in the then regulatory framework, which was later on corrected but the concept was discouraged by several bodies in the country.
(Abhirup Ghosh works as researcher at Vinod Kothari & Company)


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