Petition filed against SEBI in NSDL row

No matter how hard Securities Exchange Board of India (SEBI) chairman C B Bhave tries to dust the ashes of the 2005 IPO scam under the carpet, it comes right back to haunt him. An aggrieved investor, V Narayan Reddy, has filed a writ petition in the Andhra Pradesh High Court, questioning the market regulator’s action of withholding a final order passed by its two-member committee with respect to the role of National Securities Depository Ltd (NSDL) in the IPO scam. He alleges that SEBI is not inclined to publish the order to prevent adverse consequences for Mr Bhave, as he was the chairman and managing director of NSDL when the scam occurred.
 
The final order was passed on 4 December 2008 by a two-member committee comprising independent directors of SEBI Board, Dr Mohan Gopal and V Leeladhar. The committee was specifically tasked with disposing the ongoing quasi-judicial proceedings against NSDL. The PIL came up before a bench comprising Chief Justice Anil Dave and C V Nagarjuna Reddy. The court has issued a notice to the regulator and posted the matter for hearing on 13 October 2009.
 
The petitioner also submitted that in addition to the failure of NSDL, there was also a failure of SEBI to protect the interest of the investors and regulate the depository system. He claims that SEBI has ulterior motives in not publishing the final order. It is his belief that apart from indicting NSDL, the order also indicts SEBI for its failure to regulate depositories and that it has also given directions to SEBI to conduct an investigation of individuals at NSDL who were responsible for this scam. He opines that SEBI’s reluctance to release the order also stems from its efforts to protect then NSDL chairman CB Bhave. To avoid conflict of interest, Mr Bhave has since recused himself from the ongoing proceedings with regard to role of NSDL in the IPO scam.

Instead of complying with the order, the SEBI Board by a resolution dated 13 April2009, decided to withhold publication of the order on the ground that it was examining whether SEBI has the power to review the said order. Even after ten months of passing of the final order, SEBI is yet to release the order or take any steps to comply with the directions given in the said order.
 
Subsequent to the scam coming to light in 2005, SEBI had conducted an investigation into the role of NSDL in the said scam. Pursuant to the investigation, SEBI issued an interim order that found several failures on the part of NSDL to detect and prevent the scam. It was found that numerous benami accounts had been opened with NSDL and CSDL between 2003 and 2005, with the aim of cornering shares reserved for retail investors. Both these depositories were aware that dummy accounts were being opened, but failed to prevent the scam. In view of these grave lapses, the interim order had directed a revamping of NSDL management. NSDL, however, challenged the validity of this order before the Special Appellate Tribunal (SAT), but did not press the appeal because of a statement from SEBI’s counsel that the observations made in the interim order are “prima facie observations” and are subject to a final order passed by SEBI. The two-member committee of SEBI, after hearing the arguments of NSDL and SEBI, passed a series of final orders on 4.12.2008 with respect to the role of NSDL in the IPO scam.
 
The petitioner has requested the bench to consider the action of SEBI in not publishing the final order as arbitrary, illegal, unconstitutional and ultra-vires of the provisions of the SEBI Act and Depositories Act. He has also requested the court to direct SEBI to publish the suppressed committee report and take appropriate action as per the direction given by the two-member committee to prevent the fraud and abuse of the depository system.
 

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PMS in troubled waters
Frequent churning of portfolio, high management fees followed by dismal returns and dwindling profitability is leading to several Asset Management Companies (AMCs) exiting the portfolio management service (PMS) business. Such exits would have not been normally noticed because PMS is a privately sold service. But one of them, from Franklin Templeton, has turned controversial after the fund house abruptly exited from the PMS business, leaving the investors and distributors high and dry. According to distributors, Franklin Templeton has failed to offer enough reasons to them and investors for impetuously pulling out two equity products—FT Select and FT Opportunities.

The distributors are now angry with the fund house for putting them in an awkward situation in front of the clients, to whom they were once encouraged to sell PMS. “During the bull run, AMCs tried to convert PMS from a large value item into a retail item. But as the market crashed, they realised that it was not the right place for them to be,” said T Srikanth Bhagavat, managing director, Hexagon Capital Advisors Pvt. Ltd. Zankhana Shah, co-founder, Moneycare Financial Planning Ltd, said, “I was surprised with Templeton’s move. I had to incur 50% loss because of this.”

In an attempt to underplay the crisis, Harshendu Bindal, president, Franklin Templeton Investments India said, “We haven't closed down our PMS business but pulled out only two equity products—FT Select and FT Opportunities.”

Before 2005, if an investor wanted to enter the PMS business, the entry level charge used to be anywhere between Rs50 lakh and Rs1 crore. During 2005- 2006 when the stock market was bullish, AMCs had slashed the PMS entry level charge between Rs5 to Rs10 lakh in a bid to attract more retail customers.

Besides Templeton, DSP BlackRock Investment Managers has also shut down its PMS business.

The profit-sharing fee charged by most PMS houses is also on the higher side. Most PMS houses charge 20% more than the hurdle rate profit-sharing ratio. Even if the scheme shows poor performance, the PMS house charges a fixed fee which is very high. Again there is no control on the cost in terms of churning and the brokerages paid to distributors. There is no transparency in the process.

Some distributors don’t even like PMS. “I do not like PMS schemes and I do not sell these schemes. It’s my personal choice as I am not convinced with what fund houses like Templeton have done,” said Kolkata-based Brijesh Dalmia, founder, Dalmia Advisory Services.
 
When asked whether PMS is a dubious product because of high costs and poor returns, Dalmia said,”PMS is a good product but the paradox is that customers do not understand it. PMS is sold as a customised product, but in reality, it is not. This is because the cost is very high compared to other investment options available in the market. The taxation is not suitable for customers. Besides, there is no control on the churning part by the fund house or the fund manager.”
 
“I find there is no logic to differentiate PMS from a mutual fund. The PMS schemes are operated in a manner where there is no fixed fee structure and capping on expenses on churning. This is obviously not in the interest of the client. In the last couple of years, I have not seen any PMS which has beaten the benchmark index of any diversified equity fund. Of course, PMS will be promoted by the distributors and financial advisors because of high commission offered by the fund houses which range anywhere between 2%-4%,” said Dalmia.
Vidyut Kumar Ta & Pallabika Ganguly [email protected]
 
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