The domestic market is likely to witness a green opening today, tracking firm global cues. Markets in the US closed at their two-year highs on positive earnings forecasts and news of corporate deals. The Asian pack was trading with marginal gains in early trade this morning on signs that recoveries in the regional economies were on track. The SGX Nifty was 6.50 points higher at 6,020.50 against its previous close of 6,014.
The market opened with modest gains on Tuesday on support from the global arena. The Bombay Stock Exchange’s bellwether index—Sensex—regained the 20,000-mark in early trade on across-the-board buying. The market touched the day’s high in late morning trade, but pared some early gains and was seen range-bound in subsequent trade. The market continued to trade sideways in the post-noon session in the absence of any major triggers, but ended with gains of close to 1%.
The Sensex closed above the 20,000-mark at 20,060.32, up 171.44 points (0.86%). The Nifty ended a tad above the 6,000 levels at 6000.65, a gain of 53.60 points (0.90%).
The US markets ended in the green overnight with the Dow and the S&P 500 closing at their two-year highs on growth optimism for 2011 and on earnings forecasts. Banking stocks rallied on news that Canada-based Toronto-Dominion Bank agreed to acquire Chrysler Financial, the auto lender owned by Cerberus Capital Management, for $6.3 billion. Adobe Systems Inc surged 6% to $30.93 after it gave a positive earnings forecast for the fourth quarter.
The Dow gained 55.03 points (0.48%) to 11,533.16. The S&P 500 added 7.52 points (0.60%) to 1,254.60. The Nasdaq rose 18.05 points (0.68%) to 2,667.61.
Markets in Asia were trading with marginal gains in early trade on Wednesday. Japan’s export growth in November accelerated for the first time in nine months. Overseas shipments rose 9.1% in November from a year earlier, from October’s 7.8% gain, the finance ministry said in Tokyo today. However, the euro-zone debt crisis continued to dampen investor sentiment.
The Hang Seng gained 0.39%, the Jakarta Composite was up 0.19%, the KLSE Composite rose 0.37%, the Nikkei 225 added 0.06%, the Straits Times surged 0.45%, the Seoul Composite was up 0.18% and the Taiwan Weighted gained 0.26%. On the other hand, the Shanghai Composite was down 0.10% in early trade. The SGX Nifty was 6.50 points higher at 6,020.50 against its previous close of 6,014.
Buoyed by 8.9% growth in the first half, global consultancy Fitch on Tuesday revised upwards its growth forecast for India to 8.7% this fiscal, from its earlier estimate of 8.5%.
This is almost similar to the growth projection of 8.75%, plus or minus 0.35% made by the government in its mid-year Economic Review earlier this month. For 2011-12 and 2012-13, however, Fitch said that economic growth is likely to fall further to 8.5% and 8%, respectively.
Gautam Shah, chartered accountant and expert working with charitable institutions, asks non-government organisations to be scrupulous about the rules, if they want to avoid harassment at the hands of the authorities
Click here for more pictures of the workshop
Civil society organisations have come to play an increasingly important role in our lives. While the government struggles to implement laws and schemes, non-government organisations (NGOs) have, in many cases, effectively filled in the gaps. From reviving neighbourhoods to educating slum children, providing relief during calamities or even taking care of stray dogs, they are visibly active in several areas. This increasing responsibility is putting pressure on the management of their activities. Unfortunately, there have been allegations of poor management against quite a few of these organisations.
The zeal for charity is not enough. Institutions should be equally diligent with their financial accounts and they must comply with the laws if they are to be more effective and inspire trust in the public. This was the advice of Gautam Shah, managing partner of Gautam Shah & Associates, Chartered Accountants, to NGO workers at a workshop hosted by Moneylife Foundation on Saturday, 18 December 2010.
"We feel very good when we donate something for a noble cause, but is it enough," Mr Shah asked the participants attending the programme. "We have to see that the money is utilised properly, and to ensure that the support continues even when the donor is no more. Moreover, not some family member, but the public at large should be the beneficiary. That defines the purpose of a charitable institution. And for a good NGO to continue you have to stick to every norm, notify the authorities of every single development and most importantly, maintain detailed verifiable financial records. "
At the outset, Mr Shah described the process of setting up a charitable institution. While elaborating the mechanism for formation and registration, he explained why a Section 25 company was an ideal format over a charitable trust and society. He said, "People think that setting up an NGO is an easy thing. It is not. Several clauses are to be included in the constitution and many documents and certificates are required. If these are not in place at the registration, the institution will be unable to make any amendments in the future and could face many problems."
He gave an example of a charitable trust which had two persons as trustees. It did not mention what was to happen if one of the two quit or died. As a result, the trust suffered much difficulty. Many institutions face similar difficulties because of a lack of technical knowledge.
NGOs should not only get registered under Section 12(a) and get an 80G certificate, but they should also know how to channelise funds properly. NGOs, who accept contributions from abroad, should source the money from an NRE account (non-resident external) and get registered under the Foreign Contribution Regulation Act 1976 (FCRA). "Just think", said Mr Shah, "if the Tirupati temple does not have an FCRA registration, it cannot do anything with the huge amount of donations it gets from NRIs and foreigners. Then, the only other way is to convert this money to 'white money', which is definitely not preferable."
Also, it is very important to have proper accounting in a fixed format. Mr Shah recommended that accounting should be intensive and done by professionals. He said that it is a must to have at least four meetings annually, as well as maintain a minute book recording the proceedings, to present to the supervisors.
Mr Shah warned that the proposed Direct Tax Code (DTC) "is going to be very bad for NGOs". Earlier, NGOs could accumulate 15% of their funds for some future big project, for five years. But that feature is to be changed considerably under the DTC. The new rule will only allow for 15% of surplus or 10% of gross earnings (whichever is greater) to be accumulated for five years. Also, exemptions will be more basic in nature, like that of individual tax exemptions.
While sticking to the rules is good in itself, it also helps to avoid many legal hassles and interferences from the authorities. In Maharashtra, NGOs are set up under the Bombay Public Trust Act, 1950, and are under the scrutiny of the charity commissioner. "The charity commissioner is the Supreme Court," Mr Shah said. He mentioned the elaborate red-tape process and an astonishing amount of paperwork that an NGO has to undertake before, during and after the registration. Every financial and administrative detail is to be notified, otherwise, the NGO could be threatened with de-registration and may even be closed down.
Mr Shah gave the example of an exclusive high-end association which had to undergo a lot of trouble because it had not notified the charity commissioner of some changes. To their horror, they were told that they had conducted "illegal activities" for a decade, and their work was suspended. They were unable to get relief even after many phone calls to higher-ups. After meek submission and several apologies (and some payments), the association was allowed to operate again.
Mr Shah described how some of these officials abused their position for personal gain. The law, while making many procedures mandatory towards ensuring accountability, is giving NGOs nightmares. "We do good for society, and then we are harassed. The process should be such that the authorities should be accountable and NGOs should be allowed to function freely," Mr Shah said.
Mr Shah had some specific advice: "Do not start an NGO in Maharashtra. Get it done somewhere else. That way, even if your operations and property are in Maharashtra, the charity commissioner cannot interfere with the operations." This brought up the question on the ideal place to start an NGO. "New Delhi," Mr Shah answered promptly. "In union territories, central laws are applicable, which are more simplified and the process is hassle-free. Delhi, being the capital, will provide the best infrastructure and ensure better access to resources."
Questions from NGO representatives attending the workshop ranged from tax exemptions to legal issues and validation certificates. Mr Shah answered most of the questions and promised to answer more on email.
For Mr Shah, social duty comes before private gain. He holds a PhD in business finance for which he submitted a thesis on "Management of Charitable Institutions-a Financial Perspective". His association utilises 80% of the funds to help NGOs with their finances. "For me, charity is not a hobby. I am where I am because of somebody's contribution. And so, I think it is very important to help other people."
The turning point for him came many years ago, when he decided to sponsor the education of his maid's daughter. He decided to establish his association about a decade back, when a school with more than 600 students approached him for help with their accounts. The charity commissioner had threatened to close it down because the accounts showed discrepancies. Mr Shah helped the institution out, and decided to start an association which would help charitable institutions with financial management and legal advice.
This workshop was second such programme for NGOs held by Moneylife Foundation. The first was held in July.Click here for details and registration.
The proposed rules regarding compensation to exchange executives are flawed, as are the rules for listing of exchanges and restricting their profits, and the powers to SEBI to regulate market infrastructure institutions
Compensation for executives: The Bimal Jalan Committee report on ownership and governance of market infrastructure envisages that the key executives will not have any variable component in their remuneration. The report states that the remuneration should be determined after giving due regard to industry standards. If we go by industry standards, most of the corporate world has a fixed as well as a variable component. In fact, all high-paid executives do have a large variable component so that the burden of the salary on the organisation is not very high and some minimum performance and accountability is assured.
The National Stock Exchange (NSE) has a fixed remuneration package, whereas the Bombay Stock Exchange (BSE) has a fixed-cum-variable remuneration package. The reasons are obvious. The BSE top management team was hired at a time when it was necessary to get high-class performance to increase the BSE market share. The top management on the NSE on the other hand has grown with the organisation and though there were challenges, the pressures to revive a sagging exchange were different.
There is no reason given by the committee on why the variable component should not be there. Favouring a particular model indicates a bias, more so when the reasons of such recommendation are contrary to its own views on market salaries.
Listing of exchanges: The Jalan Committee has raised the issue of the conflict arising out of self-listing of shares. Instead of thinking of a solution, such as monitoring by the Securities and Exchange Board of India (SEBI) or a separate cell within the exchange to monitor listing norms, it has recommended that listing is not advisable. In a bizarre comparison, the Jalan Committee states that the share price of the exchange would impact the credibility of the exchange. I am sure that the buyers of Colgate toothpaste are least bothered about share prices of Colgate. Everybody who is connected with the stock market understands that the price of the stock has no connection with the credibility of an organisation, but it has more to do with the demand supply of shares in the short term and financial performance and thereby its credibility in the long term.
The government is pushing very hard to promote financial inclusion and make available the prosperity in the share market to all Indian citizens. A statement of this kind is very saddening. This implies a general impression that most companies in the country are vehicles of speculative investments. The committee does not address the issue of current shareholders of the stock exchanges whose exit route would be sealed by its recommendations, if these proposals are accepted. It was always envisaged that stock exchange shares would be listed and the BSE delayed filing of the prospectus following the setting up of this committee. The modalities of listing are necessary, rather than question the very idea of listing. The question is how and where to list and not whether to list.
Market infrastructure institutions (MIIs) to generate only reasonable profit: The Jalan Committee recommends that there should be a cap on profitability of the exchanges and other MIIs. Any profit earned over and above the prescribed return on net worth shall be transferred to the Investor Protection Fund (IPF) or Settlement Guarantee Fund (SGF), as the case may be.
The profitability of exchanges and clearing corporations are essentially from three sources: transaction charge, penalty collected from members, and income earned on treasury operations of the funds deposited by brokers as margins. Hence, pragmatically speaking, the Committee should have recommended payment of interest on the broker's funds and reduction in transaction charges. Transferring funds to IPF or SGF fund serves nobody's purpose since there have been no broker defaults in recent times and investor claims are hardly made to the IPF. In the absence of default, again the SGF fund is hardly used. Hence, there will only be further interest accumulation to these funds.
It would be more advisable to reduce the cost of transaction, which is in the interest of every investor. Our markets are also over-margined and due to general ignorance of the risk associated with the stock markets, exchanges have got away with excessive margining. There is a strong case to rationalise the margin structures. Reduction in transaction charges, payment of interest on margins and rationalisation of margins, will automatically cap the exchange profits.
Powers to SEBI in matters relating to MIIs: The Committee is of the view that SEBI should have the discretion to limit the number of MIIs operating in the market, in the interest of the market and in public interest. Instead of limiting the MIIs, it would be desirable to set up countrywide investor participation benchmarks and permit exchanges once the benchmarks are reached. For example, another depository can come up when the combined beneficial owners of the current depositories are say 5 crore. This would link the infrastructure to the demand in the economy. To sum up, instead of putting discretion with SEBI, it is desirable to have performance benchmarks so that basic principles of equity and democracy are prevailed upon. There should also be a provision to close MIIs by SEBI if they fail to reach minimum benchmarks in terms of membership, turnover, etc. This would ensure that price wars indulged in by new exchanges are not just entry strategies but a long-term strategy for survival is in place. Such a condition will in fact accentuate the price wars as there is a time limit to achieve the benchmarks! There is an opinion that every entity interested in setting up an exchange should be allowed to do so. Let the market forces decide whether the exchange should continue operations. Unfortunately, our markets lack depth in terms of the number of participants who use exchange services. Competing on price only leads to attracting speculators who are extremely cost conscious. Wastages in terms of computer systems, networks, office buildings, and so on, are evident in the regional exchanges. Interconnected Stock Exchange (ISE) was promoted by all regional exchanges to trade on the BSE and the NSE and then they directly became members of the BSE and the NSE through their subsidiaries. The infrastructure was wasted. Now ISE is trying to survive like any other broking house.
To conclude, all issues arising from demutualisation and regulation of MIIs should have been addressed before allowing stock exchanges to demutualise. Unfortunately, the Jalan Committee report is a non-starter and in fact, regressive in its ideas. It appears biased in favour of a particular exchange and does not address the problems. It is not bold in taking a stand that exchanges are utilities. Half-hearted attempts at restricting top management remuneration, a cap on income and not listing the shares is an attempt to give a colour of socialism to the stock exchanges. Socialism per se is not bad.
A bold stand is required to call the exchanges as public utilities and bring down the cost of transaction and spend money on the development and penetration of the capital market throughout the country.
(This is the second and concluding part of a critique by Deena Mehta on the Bimal Jalan Committee Report. In the first part, 'Jalan Report a damp squib - I', published on Monday, Mrs Mehta wrote that the shareholding proposals of the Committee for market infrastructure institutions are biased and not justified and that the report sidetracks corporate governance issues and the developmental role of stock exchanges. Deena Mehta is managing director of Asit C Mehta Investment Intermediates Ltd. She is one of the three trading member directors on the board of the Bombay Stock Exchange. To read the first part click http://www.moneylife.in/article/72/12497.html)