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In a shocking move, the market regulator has jacked up arbitration fees multi-fold; enough to deter already harassed investors from seeking justice
The capital market regulator, the Securities and Exchange Board of India (SEBI), has done it again. As part of its attempts to 'streamline' the arbitration mechanism available at stock exchanges for disputes arising between a client and a member, SEBI has massively jacked up the fees for this compulsory arbitration procedure.
Investors point out that this is yet another insensitive move by the market watchdog in the name of providing justice to the harassed investors, who are now likely to be further deterred from approaching the exchanges for arbitration.In its circular dated 11 August 2010, SEBI has revised the fees charged for the compulsory arbitration mechanism at stock exchanges.
Earlier, no fees were charged on investor claims up to Rs10 lakh at the National Stock Exchange (NSE), while the Bombay Stock Exchange (BSE) charged Rs3,970. Now, SEBI has proposed a minimum charge of Rs11,130 and a maximum of Rs14,439 for claims filed within six months from the end of the quarter during which the disputed transaction was executed or settled. For an application filed after six months, the charges may shoot up to Rs43,117. For claim amounts greater than Rs25 lakh, the fees charged could touch Rs99,370, almost 11 times the current charge of Rs8,934 levied by the BSE.
Worse still, any application filed after six months would attract three times as much fees if the award is against the investor and he chooses to appeal. The total costs of arbitration for the investors (claim up to Rs10 lakh) in case the award is against him/her will be at least Rs66,380, up from Rs22,280 earlier. For claim amounts between Rs10 lakh-Rs25 lakh, the fees charged would be Rs76,308. For claim amounts greater than Rs25 lakh, the investor will have to shell out up to Rs1,32,560 for arbitration! Also, factor in the cost of hiring a lawyer, preparing the case, conveyance etc, the investor will be set back by an even bigger amount.
What exacerbates this move is the fact that the arbitration mechanism itself usually results in a drain of investors' money, time and resources. More often than not, the decisions taken are biased and heavily loaded in favour of the brokers. It is very well known that there is an immense conflict of interest between the exchanges and its trading members, the stock brokers, which tilts the scales unfavourably against the investors. Exchanges are also notorious for taking ages to respond to the complaints made by investors.
In their lackadaisical approach to attending to investor complaints, six months get over easily - which under the revised guidelines spells doom for investors. By imposing such hefty fees, SEBI has only sought to put another spanner in the works for investors, and added another revenue stream for the exchanges, least bothered about the wellbeing of the investor population.
Amit Bhargava, a regular investor, told Moneylife, "I am shocked to note how insensitive SEBI can be towards investors. The proposed fee is based on percentages of the claim amount as if asking for justice was like asking for a loan. Principles of lending money are being applied on fees for seeking justice!""This move suggests that SEBI is making sure that no complaints against stock brokers be made, and if made the costs be so prohibitive that they die a natural death even before justice is delivered. When it is compulsory for the investors to trade through a broker, it is only fair that this whole process of seeking justice through the exchanges is provided free of cost to investors," pointed out Mr Bhargava.
This move by SEBI marks yet another chapter in its recent chequered past, where a series of ill-timed and ill-conceived initiatives on its part have virtually put the brakes on the mutual fund industry. Retail investor participation in this segment has already taken a huge hit as a result. With such high arbitration fees, retail investors in equities will also find a reason to steer clear of the markets.
A number of brokerages have come out with strategy and review reports after the end of the earnings season. A few takeaways from some of these reports
Most analysts agree that the June quarter results were not exciting and there were more disappointments than positive surprises and consensus earnings for FY11 and FY12 have seen more downgrades than upgrades — while the magnitude was not high, this has almost all brokers worried.
Before we get into consensus conclusions, a few unique views stand out. Citi says a longer-term trend of foreign flows/market performance suggests that more and more foreign money is still moving the market, but by less and less.
It says there were no big positioning or sectoral shifts within the quarter. FIIs appear most bullish with financials, discretionary and industrials key over-weights, domestic MFs little less so but are hugely overweight on capital goods.
Energy, IT and utilities were key consensus under-weights. Religare analysed cash levels with S&P 500 companies (ex-fin) and found them to be at an unprecedented $637 billion. The brokerage believes that with the US economy likely to remain subdued for a while, one of the likely avenues for this cash could be high-growth emerging markets like India and China, which would be positive for merger & acquisition candidates.
Kotak was worried about the EV (Embedded Value) syndrome, which is the market’s tendency to assign exaggerated value to future assets and the PG (Perpetual Growth) syndrome, which is the market’s tendency to extrapolate a benign environment and resultant earnings for a long period while ignoring potential negative changes to the macro-environment. Nomura believes that the recent system-wide squeeze in liquidity and emerging signs of an easing in economic activity — evident from lower growth in IIP, the six core infra industries, imports, railway freight and import traffic at ports — suggest we might be heading into a period of market consolidation.
Morgan Stanley said in its global strategy note, “China and India stand at inflection points, and India’s growth rate could exceed China’s during 2013-15. To take advantage of this projected transition, a long-term investment portfolio would seek to overweight China consumer and overweight India industrials and overweight China industrial upgrade sectors (enterprise resource planning, automation, construction machinery to replace labour) and overweight India urbanisation plays (retail, financial services, media).” It expects the pace of reforms to pick up in the next 12-24 months, with the government initiating further steady reduction in subsidies, introducing a goods and services tax system, implementing direct tax reforms, and accelerating infrastructure spending — particularly for roads and power.
Coming to consensus opinions, most brokerages found the results tepid — earnings revisions breadth has turned negative for the first time since May 2009 (source: Morgan Stanley). Broad market earnings slowed down and interest costs were higher. However, there were hardly any changes to FY11 Sensex expectations — most still expect 18%-25% growth over FY10.
Most broadly agree that banks were the star performers of the quarter gone by with strong core performances. Loan growth was strong partly due to lower base and 3G auctions. Deposit growth was under pressure but for the quarter CASA remained strong. Deposit rate hikes are inevitable in the future. Fee income was also disappointing for most banks. The going should be smooth for banks since they are upping lending rates (offsetting higher deposit costs) and their asset quality looks set for improvement — loan growth is expected to continue its pace.
Auto companies saw volume-led growth but raw material costs were higher than expected. Tata Motors saw EPS upgrades (with better-than-expected JLR performance) while Maruti saw some downgrades. Volume growth was highest for Bajaj Auto at almost 70% y-o-y and lowest for Hero Honda at 10%. Going forward there are not too many visible headwinds for the industry except hardening interest rates and possibly higher prices due to raw material cost escalations (two-wheeler demand is more sensitive to price hikes). Very few brokers expect demand to slow down significantly.
In cement, while realisations were higher than expected, volumes were not. Costs also came in higher than expected. Excess capacities should keep prices under pressure (see our latest article on the recent surge in cement stocks: http://www.moneylife.in/article/4/8395.html). India Cements probably saw the worst downgrades this quarter.
In engineering, while order intake improved a little, execution was a problem. Construction companies’ order intake was good, margins held, and they saw some reduction in interest costs. Going forward, it is very important for engineering companies (especially L&T and BHEL) to step up on execution, or their stock prices could slide significantly.
Crompton has been a clear outperformer in the last two months while ABB has been an underperformer. For orders, a lot hinges on the government’s emphasis on infrastructure development.
FMGC volumes and margins were better than expected. Optimism prevails with the good monsoon. ITC’s cigarette volume fall remains a concern. With IT, wage inflation led to a decline in margins, but this was expected. Going forward, stocks are expected to track economic developments in the US and Europe, not to mention the movements in currencies.
In oil & gas, OMCs received no compensation from the government (effectively bearing 2/3rd of under-recoveries) and GRMs declined. RIL’s halt in its KG-DG ramp-up was a major disappointment. In telecom, traffic remained strong — but telecom could face headwinds in Q2 in terms of seasonal weakness and in Q3 in mobile number portability.
Utilities saw lower incentives and decline in merchant realisations. However, this situation could improve since there were some planned maintenance shutdowns this quarter.
Real-estate companies surprised positively, on better-than-expected realisations. The commercial segment also showed some signs of picking up. While real estate should face hurdles in terms of higher interest rates, some believe falling inflation should help.