Standardising PoAs: Long overdue development
It has taken at least five years for the Securities and Exchange Board of India (SEBI) to finally wake up to the harassment of retail investors through the instrument of the Power of Attorney (PoA). Ever since SEBI decided that secondary market trading would be compulsorily in dematerialised account (demat) form, it is almost impossible for a secondary market trader to even open a brokerage account or a demat account without a PoA which authorises the sale and purchase of shares or transfer of funds and securities, in or out of these accounts. Since 2005, we have been drawing the regulator's attention to the rampant misuse of such PoAs. We have also pointed out to the regulator, with specific examples how leading brokerage firms were including various clauses in the PoA that curtail investor's access to his/her own depository or bank account. Former SEBI Chairman M Damodaran told us in 2006 that he does not want a standard PoA that seemed to be prescribed by the regulator. Five years later, a SEBI discussion paper based on the recommendations of its secondary market advisory committee is suggesting some standard clauses as well as dos and don’ts in the structure and format of PoAs. It also wants to make it mandatory for the broker to ensure that the original and attested true copy is made available to the client—here too, we had repeatedly pointed out that retail investors are often unaware of having signed a PoA which is quietly slipped into bulky account opening forms of brokerage firms and depository participants (DPs).

The committee's prescriptions reveal the extent of abuse of the PoA system and probably explain why stock exchanges have recently launched massive media campaigns to educated investors on the danger attached to PoAs. SEBI's secondary market committee starts with basic prescriptions such as asking for the execution of a "specific PoA to facilitate transfer of shares for stock exchange related margin/delivery obligations for trades: on the stock exchange through the same broker".The discussion paper asks that the bank accounts and beneficial owner accounts that the broker is entitled to operate need to be clearly identified and transfer of securities will restricted to the clearing member-pool account or client-margin account of the stock broker only. An important recommendation, which again serves to highlight gross abuse of PoAs is this: the PoA can’t be executed in the name of any employee or representative of the stock broker/depository participant, but only in the name of the entity concerned. The rules plan to provide for SMS alerts when transactions are executed in investors' accounts. This is a good move and will immediately alert investors to unauthorised trades or activity in their bank and DP accounts. Another interesting feature is the mandatory inclusion of a clause specifying the "settlement of disputes arising out of the operations of the PoA" and also insisting that broker disputes will have to be settled under the bye-laws of the stock exchange or depository under which they have been executed. Finally, the guidelines prescribed also clarify that in case of a merger/demerger of the DP or the brokerage firm, the rights under a client's PoA cannot devolve automatically to the assignees, nominees or transferees without specific confirmation by the investor. These are all important first steps in protecting investors and it is shocking that it took five years of bitter complaints and litigation to get the regulator to recognise the harassment. The regulator must now ensure quick implementation and strict enforcement of these guidelines and review them from time to time to make the market safe for investors.
[email protected]

 

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A few MFs hit hard by choppy markets
Weakness in the global markets and fears of monetary tightening by the Reserve Bank of India have brought down the Indian stock market sharply since 17 October 2009. The Sensex and the Nifty have lost over 1,900 points and 550 points respectively, till 3 November 2009. Telecom stocks suffered badly during this period on fears that the ongoing price war would slice profitability. Realty and banking stocks too were among the major losers during the period.
 
Among the equity diversified funds that performed the worst during this period was JM Hi Fi Fund, which crashed by 18% between 17 October 2009 and 3 November 2009 against its benchmark Nifty which was down 11%. This fund is a tiny fund with Rs13.87 crore in assets with exposure to Indiabulls Financial Services, Escorts, Idea Cellular, India Infoline, Aban Offshore, Nitin Fire Protections, Lanco Infratech and Nagarjuna Construction.  These stocks were battered heavily during this period. The NAV of SBI Magnum Midcap Fund, which has Rs345 crore in assets, declined 14% while its benchmark index CNX Midcap fell 10%. The portfolio of this midcap fund consists of stocks like Suzlon Energy, Balaji Telefilms, Elecon Engineering, NIIT, Sobha Developers, Ibn18 Broadcast, Great Eastern Shipping and Areva T & D India. Suzlon Energy plunged 35% while Balaji Telefilms and Elecon Engineering declined 27% and 26% respectively. NIIT and Sobha Developers were down 24% each.
DBS Chola Global Advantage Fund was the third worst underperformer. It is a tiny fund of Rs6.06 crore having exposure in Reliance Industries, Dishman Pharmaceuticals, Sterlite Industries, Punj Lloyd, Tata Steel, Everest Kanto Cylinder, Reliance Communication, 3i Infotech, Suzlon Energy and Arvind Mills. While many of these stocks fell sharply in the recent crash, the fund’s performance was particularly hampered by Everest Kanto and Punj Lloyd, both of which plunged a massive 35%.
 

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Reliance & Hardy hit a dry well in KG Basin
 
One well of Reliance Industries in the KG basin has turned out to be dry which has meant a loss of just Rs100 crore for the company but this has led to a loss of Rs17,420 crore of market capitalisation in a few minutes. The news of the dry well has sent shock waves across the market, with investors fearing that success ratio is not high enough in KG basin. Investors sold off Reliance shares (down by 5% to Rs2,041) fearing that more wells could turn out to be dry in the money-making oil and gas basin. In D6 block in the same area, Reliance is producing 40 million cubic metres of gas per day.
 
Reliance had 90% interest in D9 block and that was shared by Hardy Oil and Gas for the remaining 10%. Hardy Oil and Gas, the exploration and production group, has kicked off a four-well drilling campaign in the D9 block. It drilled 4,875 metres in the first well in the sub-sea area and could not find substantial traces of oil and gas. Industry analysts say that the approximate cost for deep drilling of 4,875 metres is in the range of Rs 80 crore to Rs 100 crore per well. Krishna Godavari basin on the east coast of India covers an area of approximately 11,605 square km. The well has now been plugged and abandoned.

Hardy Oil and Gas is a UK-based company and its share prices crashed by 40% during the day. The company also has exploration blocks in D3 blocks in KrishnaGodavariBasin in India. Hardy Oil and Gas is an upstream international oil and gas company whose assets are principally in India and Nigeria. Its portfolio includes a blend of exploration, appraisal, development, and production assets Recently, Reliance has returned 14 blocks to the government saying that it could not find oil in these blocks. The company has spent over Rs 1,400 crore in these blocks which cannot be recovered. The news of a dry well comes at a bad time for Reliance Industries which is in a lawsuit with Anil Ambani in the Supreme Court. Anil Ambani has claimed gas worth 28 million cubic metre per day from D6 block at the price of $2.34 per mmbtu as against government settled price of $4.2 per mmbtu.
Dhruv Rathi  [email protected]
 

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