Regulations
SEBI may announce new norms for angel investors
The new norms would help in encouraging entrepreneurship in the country by financing small start-ups at a stage where such start-up finds it difficult to obtain funds from traditional sources of funding
 
Market regulator Securities and Exchange Board of India (SEBI) plans to bring in new norms for angel investors, who provide funding to companies at their initial stages. The move is aimed at encouraging entrepreneurship in the country by financing small start-ups.
 
According to proposals being considered by SEBI, angel investors can be allowed to be registered as Alternative Investment Funds (AIFs)—a newly created class of pooled-in investment vehicles for real estate, private equity and hedge funds, a senior official said.
 
In order to ensure investment by angel funds is ‘genuine’, SEBI plans to restrict investment by such funds between Rs50 lakh and Rs5 crore.
 
Among other norms included, angel funds can make investments only in those companies which are incorporated in India. These funds needs to be invested in a firm for at least three years, can invest in companies not older than three years.
 
Further, investee company to be unlisted and with a maximum turnover of Rs25 crore and this firm may not be related to a group with a revenue of more than Rs300 crore.
 
The steps required to be taken on these matters may be considered at a SEBI board meeting scheduled for tomorrow.
 
The regulator also plans to stipulate that the fund must not have any family connection with the investee company and that no angel fund scheme may have more than 49 investors.
 
The new norms would help in encouraging entrepreneurship in the country by financing small start-ups at a stage where such start-up finds it difficult to obtain funds from traditional sources of funding such as banks, financial institutions among others.
 
Finance minister P Chidambaram in his Budget speech had announced that SEBI would frame guidelines for angel investor pools by which they can be registered under AIF venture capital funds (VCF).
 
Under SEBI guidelines, AIFs already have sub-categories such as Venture Capital Funds, Social Funds and SME Funds.
 
Angel fund is likely to be a separate sub-category.
 
Regarding raising of funds by an individual investor, the person should have an experience of 10 years and should possess assets of at least Rs2 crore.
 
In case an investor is a corporate entity, it should either have a net worth of Rs10 crore or registered as AIF/VCF with SEBI.
 

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Managing China funds: A lesson for legends like Anthony Bolton
Anthony Bolton, the legendary money manager failed in China, a country where the rules regarding fraud are hardly relevant since the government has a monopoly on information. Mr Bolton not only violated his own rules of investment but he failed to learn the Chinese ones
 
Anthony Bolton is a legendary money manager. He managed Fidelity International Special Situations Fund for 28 years. During that time the fund managed to deliver an incredible annualized return of 19%. Among Mr Bolton’s many accomplishments was to predict both the collapse of the market and the beginning of the bull market. In both cases he was a bit early. He warned that the bull market was overstretched in November of 2006, a year before it hit its top, and he predicted a turnaround in the markets in October of 2008, five months before it hit the bottom. Still if you had followed these recommendations you would have missed out on the top 15% and lost about 25%, but only for seven months. Over time you would done very, very well.
 
In 2010 Mr Bolton was tempted out of retirement to apply his legendary skills to the greatest growth market, China. What better place for a money manager of his calibre? China was the fastest growing economy on the planet. Mr Bolton hailed it as “investment opportunity of the next decade”. So in April 2010 he started his new fund, Fidelity China Special Situations PLC (FCSS.L), with about $700 million dollars and began to invest in China. But it didn’t work.
 
Initially the fund did well. By November 2011 it had increased from 100 British pound sterling  (GBP) to 124 GBP. Then things began to go wrong. It fell to a low of 71 GBP last September and is now trading at 83 GBP, off 17% over three years. In contrast the S&P 500 has increased 30% over the same period of time. What went wrong? Quite simple. The rules were different and no one told Mr Bolton.  
 
Western managers are used to dealing with developed market economies subject to enforced rules and regulations. Over many decades, financial analysts and economists have done countless studies into how these markets actually work. They use a variety of analytic financial tools to try to determine value. For example the most general tool is the earnings per share. The most common measure of how much money the company is earning for its shareholders. Money managers are always trying to determine if the company is consistent. Is it transparent? Do the managers have a good track record of creating value for their shareholders? Is it increasing market share? Can the company’s growth be translated into corporate profits?
 
Money managers employ vast armies of analysts, each vying with each other to discover some salient fact about the company to determine if in fact there is substance to its numbers. Although Mr Bolton did not speak or read Chinese he could rely on a very experienced team. Fidelity had an established research presence in China. Its flagship China Focus Fund managed stocks worth $4 billion. It is managed by Martha Wang, who was born, raised and educated in China. She has over 20 years of experience investing in China. In addition there were 30 regional analysts and 18 portfolio managers. So Mr Bolton had the brain power to analyze a market, a western market.
 
But the Chinese market and most emerging markets do not work with the same rules. China is a particular problem because of the level of government involvement in the economy. The vast preponderance, if not all, of listed companies are at least majority state owned. Senior management appointments are made by the Communist party.  Even fully private companies are not free from at least government influence over the management. For state-owned companies profit and shareholder value often takes second place to political considerations.
 
Even when the management does focus on business yardsticks for success are different than in Western countries. Western managers will focus on earnings growth and profit. Chinese are more interested in size, market share and increasing revenue than margins. 
 
The legal system in developed countries is taken for granted by investors. Since it has been around for so long and is generally enforced, its affects on the market and valuation are unseen. Not so in China. China has laws, but they are enforced selectively when they are enforced at all. Recently China’s theft of US intellectual property has been in the headlines. But there is little to keep the Chinese from stealing from each other. So a major competitive advantage could disappear overnight. 
 
Over ten years ago when I wrote Investing in China, I quoted a famous Chinese scholar who made the statement that the stock market was little more than a casino. Little has changed. Share value is driven often by speculation. The market is subject to manipulation, insider trading and government interference. While China’s economy has grown dramatically over the past five years, the Shanghai Composite index is actually lower than it was in June 2009.
 
Mr Bolton’s first mistake was not to translate his tool kit to adapt to socialism with the Chinese characteristic. His second was much greater. He also ignored the most important factor for any investor—the need for complete, timely and accurate information. Western investors just assume that people are telling them the truth. They have not bothered to do a simple economic analysis. Information has value. It is accurate only if the economic incentives are less than the legal disincentives. If you can commit fraud without punishment, then there is no reason to tell the truth. In China the rules regarding fraud are hardly relevant in a country where the government has a monopoly on information.
 
So Mr Bolton trusted management to his loss. For example he invested in China Integrated Companies which lost 90% of its value after it was accused of fraud and its auditor KPMG resigned. He also lost money by investing in a small-cap fund whose main asset was China Integrated Energy (CBEH). It had falsely reported the level of sales of its bio-diesel product. Mr Bolton thought that his best bet was to beef up his staff for better due diligence and remained optimistic about China. But more staff is not going to help if managers are deliberately trying to distort their numbers. It is a fundamental principal of law and economics that managers as agents will always act in their own best interests unless there is a sufficient legal disincentive.
 
Finally Mr Bolton failed because he disregarded his own rules. In an interview in 2009 Mr Bolton said he looked at three factors. These were the scale of the rise and fall of the markets relative to their historical averages. Second he uses several measures like put/call ratios, sentiment of advisors, and mutual funds cash positions to judge investor sentiment. Finally he looked at long-term (30 to 40 year) market valuation to see how far valuations had deviated from their norm. None of this information, which Mr Bolton deems so essential, is available in China. So Mr Bolton not only violated his own rules he failed to learn the Chinese ones.
 
(William Gamble is president of Emerging Market Strategies. An international lawyer and economist, he developed his theories beginning with his first hand experience and business dealings in the Russia starting in 1993. Mr Gamble holds two graduate law degrees. He was educated at Institute D'Etudes Politique, Trinity College, University of Miami School of Law, and University of Virginia Darden Graduate School of Business Administration. He was a member of the bar in three states, over four different federal courts and has spoken four languages.)
 

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RTI Judgement Series: PIO and FAA failed to discharge their duties
The CIC said this was a blatant case where without any reasonable cause, both the PIO and FAA denied information to an elderly person about an affidavit claimed to have been filed by him. This is the 119th in a series of important judgements given by former Central Information Commissioner Shailesh Gandhi that can be used or quoted in an RTI application
 
The Central Information Commission (CIC), while allowing an appeal, issued a show-cause notice to the Public Information Officer (PIO) in the Department of Trade and Taxes (DTT) at the Government of the National Capital Territory of Delhi (GNCTD) for not furnishing information within the prescribed time limit under the Right to Information (RTI) Act.
 
While giving this judgement on 15 October 2009, Shailesh Gandhi, the then Central Information Commissioner, said, “The PIO and First Appellate Authority (FAA) have both failed to discharge their duties under the RTI Act. This is blatantly a case where without any reasonable cause information has been denied to an elderly person about the affidavit claim to have been given by him.”
 
Delhi resident Radhey Shyam Aggarwal, on 15 June 2009, sought information regarding copy of a no objection certificate and affidavit filed by him from the PIO of DTT at the GNCTD. Here is the information he sought from the PIO...
 
Copy of NOC/Affidavit of Radhey Shayam Aggarwal from the file of M/s Aggarwal Traders, TIN No.  in TIN/VAT no.07090325518 applied by Arun Kumar Gupta from Ward No19.
 
The PIO denied the information. He stated, “It is to inform you that as per Section 98 of Delhi Value Added Tax (DVAT) Act such information is prohibited, the same cannot be provided under RTI Act.”
 
Aggarwal, not satisfied with the reply, filed his first appeal. While upholding the PIO’s reply, the FAA in his order said, “I have gone through the reply given by the PIO, and do not find any infirmity in the same.  It is true that the PIO is prohibited under Section 98 of the DVAT Act to divulge the information to a third party.  Rather I would like to add M/s Aggarwal Traders has a fiduciary relationship with the Department of Trade & Taxes.  And as per Section 8 of the RTI Act, 2005, the PIO is not obliged to give any information relating to the said dealer to a third party (in this case the appellant).”
 
Not satisfied with the PIO’s reply and FAA’s order, Aggarwal, then approached the CIC. In his second appeal, he stated, “The PIO’s reply is illegal. The FAA has wrongly upheld the response of the PIO by holding that the PIO is prohibited under Section 98 of the DVAT Act to divulge the information to a third party and that M/s Aggarwal Traders has a fiduciary relationship with the Department of Trade & Taxes.”
 
During the hearing, Mr Gandhi, the then CIC, noted that the PIO without any application of mind has refused to give the information claiming that the VAT action does not permit to give the information. 
 
“In the instant case the appellant, an 80 year old senior citizen, had asked for a copy of an affidavit which he alleges was falsely given in his name to the Department. The PIO refused to give him the information purportedly given by him,” the CIC said.
 
Mr Gandhi said, “The FAA, in what appears to be collusion to deny and harass the citizen, suddenly claimed that the department gets the information in a fiduciary relationship. The department obtains the information in fulfilment of regulatory requirements but the FAA apparently would like to claim other relationships with people who prevent false affidavits.”
 
While allowing the appeal, the CIC directed the PIO to provide the information to Aggarwal before 30 October 2009.
 
Further finding the PIO guilty of not furnishing information within the time specified under sub-section (1) of Section 7 by not replying within 30 days, as per the requirement of the RTI Act, the Commission issued a show-cause notice to him.
 
 
CENTRAL INFORMATION COMMISSION
 
Decision No. CIC/SG/A/2009/002075/5158
Appeal No. CIC/SG/A/2009/002075
 
Appellant                                             : Radhey Shyam Aggarwal
                                                                  Delhi-110006
 
Respondent                                         : NS Bhoria
                                                                  Public Information Officer & VATO
                                                                  Govt. of NCT of Delhi
                                                                  Zone-III Office of Deputy Commissioner
                                                                  Deptt. of Trade and Taxes, Room No. 1201,
                                                                  12th Floor, Vyapar Bhawan,
                                                                  New Delhi-11002. 
 

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COMMENTS

Shanmugam

3 years ago

Sir,
I have filed F A to Office of CIC, and then Second Appeal to CIC of Chennai Tamil Nadu.More than 6 months were passed no responses from them who are the controlling / implementing of RTI Act in Tamil Nadu. So, Kindly confirm for the issue of final orders and the copy of Judgement if released in Appeal No. CIC/SG/A/2009/002075.
My e mail Id: [email protected]

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