Sebi slaps Rs 35 lakh penalty on 14 entities, persons for disclosure lapses

 Markets regulator Sebi on Tuesday imposed a total penalty of Rs 35 lakh on Sunrise Asian Ltd and 13 other entities, including individuals, for various disclosure lapses.

A probe by the watchdog found violations of Prohibition of Insider Trading norms, Substantial Acquisition of Shares and Takeovers Regulations, Securities Contracts (Regulation) Act and Listing Obligations and Disclosure Requirements norms.

The investigation was conducted in the scrip of Sunrise Asian Ltd (SAL) during the period October 16, 2012 to September 30, 2015.

In March 2013, a court sanctioned a scheme of amalgamation of Santoshima Tradelinks Ltd (STL) and Conart Trader's Ltd (CTL) with SAL. Pursuant to the amalgamation, over four crore shares were allotted to 1,697 entities.

Further, the number of promoters increased from 2 to 14 from quarter ended March 2013 to June 2013. On account of the change in shareholdings of the promoters, disclosures were to be made under the Prohibition of Insider Trading norms.

In its order, Sebi said that some of the noticees had made delayed disclosures and also that some entities had failed to disclose their shareholdings of 1,000 shares upon becoming a promoter.

The company and the 13 other entities are together called as noticees.

SAL, being the company, made several errors in making disclosures in the quarterly shareholding pattern, and also made delayed disclosures on several occasions, the order said.

For the violations, Rs 10 lakh fine has been imposed on Sunrise Asian Ltd. Besides, a penalty of Rs 5 lakh each has been slapped on three entities and Rs 1 lakh each on ten others.

(Only the headline and picture of this report may have been reworked by the Business Standard staff; the rest of the content is auto-generated from a syndicated feed.)

Sebi to prescribe stress tests, liquid holdings for debt mutual funds

 The Securities and Exchange Board of India (Sebi) on Tuesday said it would soon issue guidelines that mandate all debt mutual fund schemes to hold a certain percentage of liquid assets in their schemes, including government securities and treasury bills.

This is aimed at improving liquidity in all schemes and would help schemes to meet sudden redemption pressures, chairman Ajay Tyagi said addressing the mutual fund industry at the Association of Mutual Funds in India’s (Amfi’s) 25th annual general meeting. Liquid and overnight funds already have such provisions in place.

In June, a Reserve Bank of India paper had suggested that debt mutual funds should be asked to invest a certain amount in assets such as government bonds and treasury bills as a buffer against sudden redemption requests.

Tyagi said the regulator will set up an expert committee to frame a stress testing methodology for all open ended debt mutual fund schemes. In 2014, Amfi had come out with best practice guidelines on stress testing that was applicable to liquid funds and money market schemes.

“Recently, there were requests by mutual funds to allow them to include g-secs and t-bills in the core asset allocation of credit risk funds, corporate debt funds and banking & PSU debt funds to meet the heightened redemption request. While the same was allowed as a temporary measure, Sebi is setting up an expert committee to frame a stress testing methodology encompassing liquidity, credit, and market risks for all open ended debt mutual funds, and to design a framework to determine the minimum asset allocation required in liquid assets taking into account the type of investors, outcome of stress testing, and minimum redemption during gating,” said Tyagi.

The regulator is also mulling creating a backstop facility for corporate bonds, a mechanism which will allow entities to buy bonds that have no takers commercially and sell them later or find other ways to dispose of them. The entities may be required to have skin in the game, to ensure there is no moral hazard.

Tyagi also said that it had taken feedback from Amfi and would soon come up with a solution to deal with issues that had cropped up after its circular on multicap funds.

The regulator highlighted the fact that the industry’s penetration beyond top 30 cities had remained stagnant at 15-17 per cent over the last five years, and it needed to do more to address this.

Multicap funds with large AUM may face difficulty in re-shuffling portfolio

 Over the weekend, market regulator Securities and Exchange Board of India (Sebi) came out with two circulars. On September 11, 2020, it tweaked the asset allocation rules of multi-cap funds, which are now required to maintain minimum 25 per cent exposure in each of the market cap classification - large-cap (top 100 stocks in terms of market cap), midcap (101st to 250th stocks) and small-cap (251st stock and below). This has been done to diversify the underlying investments of multi-cap funds across large, mid-and small-cap companies so that they are true to its label, unlike the current allocation that is tilted towards large-cap stocks (around 75 per cent of total multi-cap AUM). Mutual Funds have time until January 31, 2021, to comply with these rules.

Multi-cap-rejig-1

Again on September 13, 2020, it clarified that “Mutual Funds have many options to meet with the requirements of the circular, based on the preference of their unitholders. Apart from rebalancing their portfolio in the Multi-Cap schemes, they could inter-alia facilitate the switch to other schemes by unitholders, merge their Multi-Cap scheme with their Large Cap scheme or convert their Multi-Cap scheme to another scheme category, for instance, Large cum Mid Cap scheme. …. It is reiterated that to achieve the desired objective of True to Label and Appropriate Benchmarking, SEBI will examine proposals of the industry, if any, received in this regard.” It has thus given a hint that it will consider the representations of fund houses about the difficulty in implementing the circular and may give some leeway/time for adherence.

These new rules can bring in a broader market rally, as compared to polarised moves seen over the past one-two years.

Multi-cap-rejig

Many expect several small-and midcap stocks could rally in the early part of this week in anticipation of likely increased exposure by AMCs in these segments. Investors should not blindly rush in and buy any and every stock in these two segments on the back of likely flows by domestic institutional players. Invest only if you are comfortable with the fundamentals and convinced about the growth prospects of the company, as it is the only driving factor in the long haul.

There is no need for existing multi-cap investors to panic or take any action, despite the likelihood of higher portfolio risk if the regulations are implemented in their present form. A better strategy would be to wait for clarity from the fund management. The market regulator might re-visit the circular later and provide some leeway or extra time to multi-cap funds.

That said, investors can look at gradually increasing their mid-and small-cap exposure via exchange-traded funds (ETF)/Index Funds or better still a small-cap or midcap fund.

Large-caps under pressure?

For direct investors into equities, this regulation provides an opportunity. Some large-cap stocks could come under some temporary selling pressure. Benchmark indices, too, are looking at global indices especially the US, foreign portfolio investor (FPI) inflows, and the emerging macro and micro situation in India. This could be a good time to reduce holdings in stocks that have run up too much, or which do not show much promise relative to their prices going by their recent fundamental performance.

Given the size of multi-cap funds and higher allocation, especially to small-cap stocks, some concerns have been raised about achieving the prescribed investment limits without creating a bubble in the small-and midcap stocks. Note that the AUM of small-cap stocks across equity categories (excluding sectoral) as on July 2020 is Rs 68,109 crore – compare this with around Rs 28,000 crore worth fresh buying required. These stocks have less free float availability, relatively lower volumes, corporate governance issues and higher impact cost (both at the time of getting in and getting out). Also, liquidity issues in small-cap stocks could get compounded in bear markets when these funds face redemption pressure and are required to sell small-cap stocks where impact costs could be large.

Portfolio churn

Most multi-cap funds are benchmarked to either Nifty 500 or S&P BSE 500. The allocation of Large-cap, Midcap and Small-cap stocks in Nifty 500 index is 77.2 per cent, 16.1 per cent and 6.7 per cent respectively, which is more or less in line with current market cap-wise exposure for most of the multi-cap funds.

Multi-cap-rejig-2

A new benchmark index would then be required to compare these schemes’ performance. One alternative is S&P BSE AllCap index, where again the split between large-cap, midcap and small-cap is 76.1:15.8:8.1, which is not very different from the split in Nifty 500. Comparing performance of schemes under new Multi-cap prescription of minimum 25 per cent each in midcap and small-cap with any of these indices will be totally misleading. Instead Sebi could have set the minimum exposure of 15 per cent to small-cap, and say 25 per cent to midcap segment, and left the rest to the fund managers’ discretion.

Multi-cap funds with large AUM may face difficulty in re-shuffling their portfolios. Merger of Multi-cap fund with their Large-cap funds or Large & Midcap category could be way out for some asset management companies (AMCs). Some AMCs could re-define the fund to a thematic fund – maybe an ESG fund – and at a later stage launch another Multi-cap fund.

Schemes requiring the least reshuffling include multi-cap funds from Invesco, IDFC, and Nippon, while schemes requiring the most reshuffling include Kotak Standard, HDFC Equity, Motilal Multi-cap 35, Axis, and Canara Robeco Eq diversified fund.

Deepak Jasani is head of retail research at HDFC Securities. Views are his own.

Sebi issues clarification on asset allocation framework for multi-cap MFs

 Regulator Sebi on Sunday said that mutual funds have many options to meet with the requirements of its circular pertaining to asset allocation framework for multi cap schemes based on the preference of their unit holders.

In a press release, the markets watchdog clarified that apart from rebalancing their portfolio in the Multi Cap schemes, mutual funds (MF) could inter-alia facilitate switch to other schemes by unit holders, merge their Multi Cap scheme with Large Cap scheme or convert their Multi Cap scheme to another scheme category, for instance, Large cum Mid Cap scheme.

The clarification came after the regulator tweaked asset allocation framework for multi cap mutual funds through a circular issued on Friday, requiring them to invest a minimum of 25 per cent each in Large, Mid and Small Cap stocks, and giving flexibility to the fund manager with the balance 25 per cent.

In its latest press release, Sebi noted that some sections of media have reported various views on the circular and various conclusions are being drawn.

"Sebi is conscious of market stability and therefore has given time to the Mutual Funds till January 31, 2021 to achieve compliance with the circular through its preferred route of which rebalancing of the portfolio is only one such route," the regulator said.

It is reiterated that to achieve the desired objective of True to Label and Appropriate Benchmarking, Sebi will examine proposals of the industry received in this regard, it added.

Multi Cap schemes had flexibility in terms of allocation to Large, Mid and Small Cap stocks but it was observed that some Multi Cap Schemes have skewed portfolios, with over 80 per cent of investment in large cap stocks akin to Large Cap schemes, and some Multi Cap schemes have near zero or insignificant asset allocation to small cap companies.

Therefore, in order to achieve the objectives of True to Label and Appropriate Benchmark, a need was felt to review the scheme characteristics of Multi Cap schemes and take necessary steps to clearly distinguish Multi Cap schemes from other category of schemes, Sebi noted.

"In order to diversify the underlying investments of multicap funds across the large, mid and smallcap companies and be true to label, it has been decided to partially modify the scheme characteristics of multicap fund," the Securities and Exchange Board of India (Sebi) had said in its circular on Friday.

Sebi tightens grip on board composition at market infra institutions

 The Securities and Exchange Board of India (Sebi) has tightened its grip on board composition at market infrastructure institutions (MIIs).

The regulator already has a strict framework in place dictating the appointments and tenures of board members at stock exchanges, clearing corporations and depositories –termed MIIs in market parlance. However, it appears the regulator opposed reappointment of certain ‘shareholder directors’ due to concerns over their lengthy association.

“In terms of Sebi letter dated February 17, 2020, NSE is advised not to forward the names of Abhay Havaldar and Prakash Parthasarthy for reappointment to the NSE board as and when appointment is due,” the exchange has mentioned in its annual report for 2019-20.

Both Havaldar and Parthasarthy have served on the NSE board for more than eight years. They were nominated on the board by General Atlantic and PremjiInvest respectively.

Another shareholder director nominated by Life Insurance Corporation (LIC), Sunita Sharma, however, has got the regulator’s nod for re-appointment.

She has been associated with NSE since October 2016.

Not just NSE but BSE too has seen its shareholder director exiting. According to BSE’s 2019-20 annual report, Usha Sangwan, nominated by LIC, whose tenure ended in June requested the exchange not to re-appoint her citing “personal and health reasons.” She was appointed to the BSE board in September 2016.

Other MIIs, including National Securities Depository (NSDL) and the Central Depository Services India (CDSL) have got new shareholder directors this year. The trend suggests regulator has been in favour of shorter tenures for independent directors that serve on the boards of MIIs.

There are two kinds of independent directors that serve on the board of MIIs—public interest directors (PIDs) and shareholder directors.

A shareholder director is nominated by dominant shareholders. PIDs are appointed by the exchanges and Sebi. Their objective is to safeguard the larger interest of the securities market.

PIDs are appointed for a period of three years and can have a maximum of two tenures with a single MII and one more tenure with another MII with a one-year cooling off period.

Meanwhile, appointment of shareholder directors is governed by the Companies Act, which allows tenure of up to five years and reappointment by way of special resolution.

Experts say while Companies Act allows lengthier association, Sebi believes in shorter tenures to avoid conflict of interest.

Sebi eases 90-day curing period norm for defaulting firms post-downgrade

The Securities and Exchange Board of India (Sebi) has relaxed the 90-day requirement for curing period following a default rating, as such cases are likely to rise in the wake of Covid-19 pandemic.
Under the existing framework, after a default is cured and the payments regularised, a rating agency shall generally upgrade the rating from default to non-investment grade (speculative grade) after a period of 90 days, based on the satisfactory performance by the company during this period.
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In its circular, Sebi said rating agencies may deviate from the period of 90 days on a case to case basis, subject to rating agencies framing a detailed policy in this regard.
Sebi said these policies can be used to factor in scenarios such as technical defaults, change in management, acquisition by another firm, sizeable inflow of long-term funds or benefits arising out of a regulatory action, etc. which fundamentally alter the credit risk profile of the defaulting firm.
The policy shall also be placed on rating agency’s website. Cases of deviations from stipulated 90 days shall be placed before the ratings sub-committee of the board on a half yearly basis, along with the rationale for such deviation.

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However, Sebi didn’t specify any relaxation on the 365 day curing period required to move the company back to investment grade following a default.

Chinese investors likely to face Sebi heat after change in FDI rules

The Securities and Exchange Board of India (Sebi) is likely to make investment rules more stringent for China and other neighbouring nations.
This follows the recent modification in the Union government’s foreign direct investment (FDI) norms, with China at the centre of the tweak.
Besides stepping up scrutiny, Sebi could put a cap on the purchase limit, beyond which additional approvals would be required, said a person privy to the initial discussion. Sebi may also ask custodians not settle any trade without proper identification of end-beneficiaries.
Last week, the government removed all neighbouring countries from the automatic FDI route. What was applicable only to Pakistan and Bangladesh — the two countries that were barred from automatic FDI — has now been extended to all neighbouring countries.
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Chinese investment, forming a large chunk in the Indian start-up world, is believed to have triggered the change in the FDI rulebook. The move is seen as a wedge to prevent Chinese investment firms from acquiring domestic companies at bargain valuations caused by the Covid-19 outbreak.
Earlier, Sebi had sought extensive details from custodians with respect to investments from nations with whom India shares its borders. Beneficial ownership, control and board composition of funds and total investment corpus are some of the details asked by Sebi.
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The increase in vigilance comes after Chinese firms picked up stake in several domestic companies during the selloff in March.
“The regulator is in touch with custodians that empanel foreign portfolio investors (FPIs). It wants to ensure verification of all accounts, not just those with new purchases but also the existing ones,” said a person cited above.
Sebi wants investments routed through Hong Kong and other financial hubs to be vetted as well. With Chinese companies now required to take government approval for any FDI, no China-domiciled FPI can buy beyond 10 per cent in a listed company without prior permission from the Indian authorities.
chartExperts say there are adequate provisions to monitor portfolio investments. The regulator and the government may soon clarify their stance on the issue as the FDI circular has resulted in some ambiguity.
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“There are checks and balances embedded in the current FPI regulation to avoid risk of a hostile takeover. Single or even a group of foreign investors with related entities can take ownership only up to 10 per cent. Hence, the cause of worry in portfolio investment is comparatively lower than the automatic route of foreign direct investment,” said Bhavin Shah, partner, PwC India.
It would be interesting to see the factors considered by the regulator while processing such applications, said Devraj Singh, Associate Tax Partner, EY India.
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“The Centre should also ensure proposals are considered in a time-bound manner as firms are in dire need of funds in such challenging times. It should also be ensured that any bona-fide investments that are aligned with our national interest, should not be adversely affected,” Singh said.
India is scrutinising China and other neighbouring nations as high-risk jurisdiction. Higher scrutiny includes bi-annual scrutiny of accounts and ultimate beneficial owner (UBO) reporting once every three months.
While accounts of investors from low-risk countries are scrutinised every three to five years, UBO reporting happens annually. So far, the US, UK, Singapore and Hong Kong are in the low-risk bracket.
China calls India’s move to scrutinise FDI discriminatory
The Chinese government slammed India's latest changes to the foreign direct investment (FDI) policy that mandates government approval for all investments by neighbouring countries, including China.Two days ago, New Delhi effectively closed the ‘automatic route’ of investment for Chinese firms and individuals. An increasing amount of funds had recently started to flow into the start-up, e-commerce and digital sectors in recent years through this route. But on Monday, China retorted that this will make investments difficult. “Chinese investment has driven the development of India’s industries,” said spokesperson of the Chinese Embassy.

Sebi defers deadline by 2 years to separate roles of chairman & MD

Markets regulator Sebihas deferred by two years to April 2022 its directive for listed companies to split the roles of chairman and managing director in view of demand from corporates and to keep compliance burden lower in the wake of the current economic scenario.
Under the Sebi norms, the top 500 listed entities by market capitalisation were mandated to comply with the requirement of separation of the roles of chairperson and managing director (MD) or chief executive officer (CEO) with effect from April 1, 2020.

The norms were aimed at improving corporate governance structure of listed companies.
Now, the date of implementation of the regulatory provision has been deferred to April 1, 2022, according to a gazette notification dated January 10.
While the notice did not specify any reason for the move, sources said that the decision to defer the implementation has been taken in view of demand from corporates and also to ease the compliance burden amid a slowing economic growth rate.
The Securities and Exchange Board of India (Sebi) has been receiving various representations with respect to the regulatory requirements including from industry bodies like FICCI and CII. The representations highlighted the present levels of unpreparedness of listed entities to comply with the directive.
Data from stock exchanges reveal that presently, only around 50 per cent of the top 500 listed entities are in compliance with the regulatory provision.
Currently, many companies have merged the two posts as CMD (chairman-cum-managing director), leading to some overlapping of the board and management, which could lead to conflict of interest and consequently the regulator in May 2018 came out with its norms to split the post.
The norms were part of the series of recommendations given by the Sebi-appointed Kotak committee on corporate governance.
A large number of big companies including Reliance Industries, BPCL, ONGC, Coal India, Wipro and HeroMotoCorp have a single person holding the twin post of chairman and managing director.

As REITs, InvITs catch investors' fancy, MFs pour in Rs 12,000 cr in 2019

Emerging investment instruments REITs and InvITs seem to be finally catching investors' fancy, with mutual funds investing a whopping Rs 12,000 crore in such units in 2019.
Fund managers infused Rs 670 crore in real estate investment trusts (REITs) and Rs 11,347 crore in infrastructure investment trusts (InvITs) last year, according to the Securities and Exchange Board of India (Sebi).

Mutual funds have increased their exposure in these investment avenues over the past one year. Investment by fund houses in REITs jumped to Rs 72.5 crore in December 2019 from a mere Rs 7 crore in January 2019, while the same in InvITs rose to Rs 948 crore from Rs 611 crore during the period under review.
Market experts believe that REITs could be a potential investment option giving good returns as interest of investors in the residential segment is declining due to inability to monetise assets and limited appreciation in property prices.
They further said that investment in InvITs may pick up in the coming months following Reserve Bank of India's decision to allow banks to lend to InvITs.
Sebi Chairman Ajay Tyagi, who had met scores of foreign investors in the US in October, said he saw keen interest from them in emerging areas such as REITs and InvITs.
During the meeting, the participants were enthusiastic about emerging areas such as REITs and InvITs, which have more than $10 billion asset size as on date.
Sebi first issued the guidelines for REITs and InvITs in 2014, and revised them in 2016 and 2017.
However, mutual funds, which are investment vehicles made up of a pool of funds collected from a large number of investors and invest in stocks, bonds, money market instruments and similar assets, were allowed to invest in REITs and InvITs in February 2017.
The move was part of the markets watchdog Sebi's effort to get more number of investors into such instruments.
Under the norms, a mutual fund has been permitted to invest only up to 5 per cent of its net asset value in units of a single issuer of alternative securities. The maximum allowed investment in alternative instruments by a single fund has been capped at 10 per cent.
Ever since Sebi introduced InvITs, markets witnessed the listing of two public InvITs -- IRB InvIT Fund and India Grid Trust. Three InvITs -- IndInfravit Trust, India Infrastructure Trust, Oriental InfraTrust --- were privately placed. On the other hand, Embassy Office Parks REIT is the only listed real estate investment trust.

RBI blasts credit rating agencies for allowing 'rating shopping'

After getting it badly from markets watchdog Sebi, credit rating agencies (CRAs) whose role in the bad loan implosion has been under scrutiny for years now, the Reserve Bank has blasted them for allowing low-rated companies to do "rating shopping".
It can be noted that rating agencies have been largely blamed for their lax policies and oversight for the 2008 global financial crisis, which primarily spawned from junk-type mortgage bonds and their derivatives worth trillion of dollars that the Wall Street bankers invented and hawked across the globe to get AAA ratings and finally imploded.

Back home, a fortnight before IL&FS went belly up in September 2018, rating agencies India Ratings, Icra and Care had given its debt papers AAA/AA+ ratings.
This finally had the Sebi last Friday penalising Icra, Care and India Ratings Rs 25 lakh each for their "lapses in their duty to investors by not taking timely action" when they rated NCDs of IL&FS which owes close to Rs 1 lakh crore to the system. Sebi also found the agencies guilty of excessively relying on assertions of the IL&FS management.
These CRAs had given IL&FS the highest rating of AAA, even when its subsidiary, IL&FS Transport Networks, defaulted in June. There was also an abrupt downgrade in the ratings of bonds sold by IL&FS and related entities, after they defaulted in September. Soon after they downgraded the bonds from AA+ to default or junk.
In the 25th edition of the Financial Stability Report released on Friday, the RBI has warned of 'rating shopping' by companies for long-term bank loans based on indicative ratings given by CRAs which are not available to the banks or investors.
Rating shopping refers to how, a company or a debt paper manages to get same or better rating from another agency within three months of it getting a poor rating.
The report notes that "most rating shopping happened around 'BBB' or lower graded instruments and has called for closer scrutiny of instances of rating shopping".
The FSR also notes that recent Sebi findings noting instances where rating agencies have provided 'indicative ratings' to issuers without entering into written agreements with such issuers and "since such 'indicative ratings' are not disclosed by CRAs on their websites, it becomes difficult to identify instances of possible rating shopping", says the RBI.
"Some instances of possible 'rating shopping' can still, however, be ascertained by looking at the dynamics around rating withdrawals where outstanding rating issued by a CRA was withdrawn and a new rating was provided by a different CRA within three months of each other; and in more than two-thirds of the cases new ratings were provided before the withdrawal of the old ones since April 2016," according to the FSR.
It can be noted that since 2016, Sebi had changed the regulations governing raters at least six times.
The central bank has also pointed out that there are clear indications of investors in debt instruments using additional credit-screening mechanisms, along with ratings given by raters.
"Similarly, given the inherent incentive on the part of the banks to boost capital adequacy through optimistic external ratings, while at the same time adopting additional mechanisms to control aggregate credit risks, the issue of movement in external ratings requires additional scrutiny," the FSR said.
The share of 100 large borrowers in banks' total loan portfolios and their share in GNPAs accounted for a whopping 16.3 per cent and 16.4 per cent of their gross advances, as per the report.
Long-term loan rating is a primary device for credit screening for banks. It also has regulatory implications as the capital adequacy of banks is directly linked to external long-term ratings that they are exposed to.
This implies that these investors must be adopting additional credit screening mechanisms apart from borrower rating during credit selection.
Similarly, given the inherent incentive on the part of the banks to boost capital adequacy through optimistic external ratings while at the same time adopting additional mechanisms to control aggregate credit risks, the issue of movement in external ratings requires additional scrutiny, the FSR noted.
Clearly, for ratings that are withdrawn, the new ratings assigned are either the same or an improvement over the earlier ratings. Although replacement of withdrawn ratings by better or similar ratings by a different CRA is visible across all rating grades, such instances are particularly pronounced at BBB and below possibly because the rated universe has a big concentration around these rating grades.
There are only nominal cases where withdrawn ratings were better than the assigned ratings.
The issue of possible rating shopping behaviour on the part of obligors clearly requires serious attention. This is particularly relevant as some of the rating agencies have a much greater share in ratings assigned compared to their share in ratings withdrawn. Yet, given the fact that the universe of rated obligors is around 40,000, the sample where such distortionary movements are seen represents only a small fraction of the rated universe and may not make the external ratings based capital adequacy framework infructuous, the RBI concludes.

Govt, Sebi spar over transfer of surplus funds as Budget 2020 nears

The stand-off between the Securities and Exchange Board of India (Sebi) and the Central government over transferring the former’s surplus funds to the exchequer is likely to linger.
Ahead of the Budget, the Centre, which is eyeing these resources to reduce its fiscal deficit, recently sought a status report from Sebi, the market regulator. The government wants to decide on the plan of the surplus transfer in line with the new rule.
“The departments concerned in the finance ministry recently sought details from the market regulator about the reserves to systemise its income and expenses and accordingly make the revenue estimates for the current financial year and also the Budget estimates for FY21,” said a source privy to the development.
Sebi, on the other hand, has yet to comply with the provisions of the Finance Act, 2019, which mandates a 75 per cent cash transfer from its general fund to the government’s books, after creating a “reserve fund” of the annual surplus.
The transfer is proposed to take place after Sebi incurs all expenses mandated under the law establishing it.
Though the amount may not be big enough to help the government bridge its fiscal deficit to any great extent, it is important for Sebi to maintain its autonomy, sources said.
According to the amended law, Sebi can keep 25 per cent of its annual surplus, which should not exceed its annual expenditure in the preceding two financial years. The balance will be transferred to the Consolidated Fund of India. According to officials, Sebi’s surplus was Rs 3,606 crore as of March 31 last year.
Budget 2020: Centre, Sebi spar over transfer of surplus funds to exchequerGoing by these provisions, Sebi might have to transfer around Rs 2,800 crore to the central government in the current financial year.
The norms in the Finance Act have automatically amended the Sebi Act after the Bill was passed in Parliament. However, Sebi has opposed the move after the amendment in the Act, seeking a review.
The regulator is learnt to have sent at least two letters to the Department of Economic Affairs after the decision was made.
In both, the regulator said the proposal was made in haste without consultation and any such decision should be taken by the Financial Stability and Development Council (FSDC).
The FSDC is chaired by the Union finance minister and the heads of all financial sector regulators including Sebi are its members.
Sebi is of the view that its reserve fund is important in protecting the interests of investors. The government move has also been opposed by the Sebi Employees Association (SEA), a brokers’ forum, and many other market participants, who are saying it amounts to an infringement of the independence of the regulator.
An e-mail sent to Sebi did not elicit a response.
Another argument from Sebi’s side is that the new provision is like an additional tax because the regulator levies fees on intermediaries for rendering services but the move to transfer funds would become an additional tax on market participants.
However, the government wants to address the accumulation of huge surplus funds lying with Sebi and other financial regulators.

IL&FS case: Sebi fines ICRA, CARE Rs 25 lakh each for poor due diligence

Markets regulator Sebion Thursday imposed a penalty of Rs 25 lakh each on rating agencies ICRA and CARE for failing to exercise "due diligence" while assigning credit rating to the non-convertible debentures of IL&FS.
Sebi also said the default by IL&FS occurred due to "lethargic indifference and needless procrastination and laxity" of these rating agencies.

The case relates to the default committed by IL&FS and its subsidiary IL&FS Financial Services on their obligations in respect of the commercial paper, inter-corporate deposits (ICDs), as well as on interest payments related to the non-convertible debentures (NCDs).
The regulator undertook an examination with respect to the role of the credit rating agencies (CRAs), including CARE Ratings Ltd and ICRA Ltd, in assigning rating to various NCDs of Infrastructure Leasing and Financial Services (IL&FS).
According to Sebi, IL&FS and its group companies' financial parameters, especially short-term borrowings, debt-equity ratio, current maturities of long-term debt, operating profit, and monetisation of assets, among others, were not as conducive or healthy as assumed by these rating agencies in their rating report or rating rationale.
They failed in conducting independent professional assessment while rating the NCDs of IL&FS and placed undue weightage on institutional parentage.
While assigning credit rating to the NCD of IL&FS, the two entities "failed to exercise proper skill, care and due diligence while discharging its responsibilities as a credit rating agency and violated the provisions of... code of conduct of the CRAs," the regulator said in two separate but similarly worded orders.
Further, they also "failed in exercising independent professional judgment in order to achieve and maintain objectivity and independence while 'rating' IL&FS and its instruments and in closely monitoring all relevant factors that might affect the creditworthiness of the issuers".
The regulator said it is important to mention that IL&FS is a systematically important non-deposit-accepting core investment company. It is in the business of raising and holding public funds.
The exposure of IL&FS, at the relevant times, was critical to the financial stability as its share in total exposure of banks to the non-banking financial company sector was fairly high. There was substantial public interest involved in the affairs of IL&FS considering its importance for financial stability.
Though there is no allegation of any mala fide on the part of these rating agencies, Sebi said the failure by them is blameworthy and serious considering the degree of responsibility bestowed upon it by the statute.
"Further, in the peculiar facts and circumstances of this case, the default has occurred due to lethargic indifference and needless procrastination and laxity of the noticee," the regulator said.
Accordingly, the Securities and Exchange Board of India (Sebi) has slapped a fine of Rs 25 lakh each on CARE and ICRA.

Sebi comes out with new mechanism to reward whistleblowers, informants

Markets watchdog Sebion Tuesday came out with a new mechanism to reward whistleblowers and other informants for sharing information about insider trading cases.
Under the new framework, it would be mandatory to disclose the source of information, besides, confidentiality regarding the identity of the informant would be protected, the regulator said in a statement.

Insider trading refers to trading of securities while in possession of Unpublished Price Sensitive Information (UPSI) about the particular securities.
The Securities and Exchange Board of India (Sebi) said,"reward would be given in case the information provided leads to a disgorgement of at least Rs 1 crore in accordance with the PIT (Prohibition of Insider Trading) Regulations".
The regulator said that Office of Informant Protection (OIP) has been established by it as an independent office for receiving and processing Voluntarily Information Disclosure Form (VID form).
The OIP would serve as a medium of exchange between the informant or legal representative and the regulator.
According to Sebi, an informant would have to voluntarily submit original information pertaining to any violation of insider trading laws to the OIP, through a VID form. The information would have to be submitted by the informant directly in which case his identity would be required to be revealed at the time of submission of the VID form.
In case, the information is submitted through a legal representative, the identity of the informant is not required to be revealed at the time of submission of VID form. However, the identity of the informant would be required to be revealed prior to payment of reward, if any, it added.
"Every person required to have a code of conduct under PIT regulations shall ensure that such a code of conduct provides for suitable protection against any discharge, termination, demotion, suspension, threats, harassment, directly or indirectly or discrimination against any employee who files a VID Form," Sebi noted.
The PIT (Prohibition of Insider Trading) Regulations were amended in September by inserting a new chapter dealing with informant policy in relation to insider trading laws. The new amendments will come into force with effect from December 26, 2019.
Sebi said that VID Forms will be available on its website from December 26.
Earlier in June, the regulator came out with this proposal in order to curb insider trading and had sought comments from public on the same.

Sebi plans to rope in agency to implement data analytics project

Betting big on technology, Sebi is looking to hire an agency to implement a "data analytics project", through which the watchdog also wants to track possible market manipulations such as insider trading and front running.
The move is part of Sebi's effort to address and handle challenges arising out of technological advancements in the markets.

In a notice, the regulator has invited expression of interest (EoI) from "reputed and reliable solution providers for implementation of data analytics project and building of data models at Sebi".
The analytics/model development would include developing new models, implementing analytics project, establishing linkages between various entities in the market, automated extraction of details from documents filed with Sebi and prediction of market manipulations such as insider trading and front running.
Spelling out the eligibility criteria, the markets regulator said that the bidding company should have been in operation for at least 3 years and should have successfully implemented similar projects of analytical model development, preferably for a regulatory body or a banking and financial institution.
Among others qualification, the interested party should be 'fit and proper' as it should not be a blacklisted firm due to unsatisfactory performance, breach of instructions, corrupt or fraudulent or any other unethical business practices, Sebi said.
Also, it should have adequate manpower with experience in the technical skills and engaged in analytical model development since last three years.
The interested bidders need to submit their applications by December 20, the Securities and Exchange Board of India (Sebi) said.
Recently, Sebi Chairman Ajay Tyagi announced that the regulator plans to spend Rs 500 crore on information technology in the next five years as well as have a "data lake project".
The project is aimed at augmenting analytical capability at Sebi with advance analytical tools such as artificial intelligence and machine learning, deep learning, big data analytics, pattern recognition, processing of structured and unstructured data, text mining and natural language processing, among others.
Besides, the regulator, in its annual report for 2018-19, said that it intends to deploy data analytics and new generation technologies to deal with various challenges in the market.
As per the report, the regulator would continue to strengthen market supervision through steps such as technology solutions being built to achieve the objective of identifying non-compliance and assisting in investigations.

Sebi bans Karvy Stock Broking for Rs 2,000 crore client defaults

After a major scandal hit the stock markets with the brazen modus operandi of misusing clients' funds, the Securities and Exchange Board of India (Sebi) has banned Karvy Stock Broking (KSBL) from taking new clients and executing trades.
IANS had first reported the payment defaults occurring in Karvy Stock Broking and its clients filing complaints with the Prime Minister's Office (PMO), the Finance Ministry and Sebi.

Sebi said the unauthorised use of clients' funds creates a serious doubt over the conduct and integrity of KSBL.
This is one of the biggest cases of broker defaults in the equity segment and despite numerous regulations, the fact remains that clients' money and securities were brazenly misused for its own purposes by Karvy Stock Broking.
The defaults are to the tune of Rs 2,000 crore and in an ex-parte order, Sebi has directed that pending forensic audit, KSBL is prohibited from taking new clients with respect to its stock broking activities.
The depositories, i.e. NSDL and CDSL, in order to prevent further misuse of clients' securities by KSBL, are hereby directed not to act upon any instruction given by KSBL in pursuance of power of attorney given to KSBL by its clients with immediate effect, Sebi said.
The depositories shall monitor the movement of securities into and from the DP account of clients of KSBL as DP to ensure that clients' operations are not affected.
"Therefore, there is need for urgent regulatory intervention to prevent further misuse of clients' securities," said Ananta Barua, wholetime member, Sebi, in the order.
Detecting the fraud, the order noted that the securities lying in the aforesaid DP account actually belong to the clients who are the legitimate owners of the securities. Therefore, KSBL did not have any legal right to create any kind of pledge on these securities, the order said.
Even if clients' securities were pledged, it should have only been for meeting the obligation of the respective clients which was not observed in this case.
"Considering the issue of misuse of clients' securities by KSBL in an unauthorised manner, for its own use and purposely not disclosing the DP account no. 11458979, named KARVY STOCK BROKING LTD (BSE) to the Exchanges in their reporting create a serious doubt on the conduct and integrity of KSBL," Sebi said in the strongly worded order.
The NSE on Friday forwarded a preliminary report to Sebi on the non-compliances observed with respect to the pledging/misuse of client securities by KSBL. NSE has also stated that a detailed report in the matter will be submitted shortly.
KSBL has sold excess securities (securities not available in DP account) to the tune of Rs 485 crore through nine related clients till May 31, 2019. Further, KSBL has also transferred excess securities to six out of these nine related clients to the tune of Rs 162 crore till May 31, 2019.
On subsequent verification, it was observed that securities worth Rs 257.08 crore, pledged on behalf of four clients out of the aforesaid nine clients, were unpledged between June 1, 2019 and August 22, 2019 and securities worth of Rs 217.85 crore was recovered by KSBL from four out of the nine client accounts.
KSBL has also purchased securities in five out of the nine client accounts amounting to Rs 228.07 crore during the period from June 1, 2019 to September 8, 2019. KSBL had undertaken the recovery/purchase of securities to recoup the securities shortfall.
Prima facie, a net amount of Rs 1,096 crore has been transferred by KSBL to its group company, i.e. Karvy Realty Private Limited, between from April 1, 2016 and October 19, 2019.
Further, KSBL has sold excess securities (securities not available in DP account) to the tune of Rs 485 crore through nine related clients till May 31, 2019.
Further, Karvy had also transferred excess securities to six out of these nine related clients to the tune of Rs 162 crore till May 31, 2019. On subsequent verification, it was observed that securities worth Rs 257.08 crore pledged on behalf of four clients out of the aforesaid nine clients were unpledged between June 1, 2019 and August 22, 2019 and securities worth of Rs 217.85 crore was recovered by KSBL from four out of the nine client accounts.
KSBL has also purchased securities in five out of the nine client accounts amounting to Rs 228.07 crore between June 1, 2019 and September 8, 2019.

Sebi makes it mandatory for listed firms to disclose each loan default

The Securities and Exchange Board of India (Sebi) has made it mandatory for all listed companies to make public disclosures on loans defaults. The move will help stakeholders stay better informed on the financial health of a company.
The move comes two years after the market regulator had abruptly withdrawn a circular ahead of its implementation, directing companies to disclose all defaults within 24 hours of missing the payment date, after concerns were raised by banks, companies and other stakeholders.

Sebi has now said any default of payments of interest or principal on loans taken from financial institutions, including banks, will have to be disclosed if it continues beyond 30 days.
While the new norms are less stringent compared to the earlier circular, Ajay Tyagi, chairman, Sebi, said it is better than the current scenario where no such disclosures are required.
“Our philosophy is that more and more information should be in the public domain as it guides investors and all the stakeholders. Right now, there now there is no disclosure requirement at all. So, in that case, it is a betterment,” he said.
While bond defaults are immediately made public, failure to repay banks don’t get recorded, leading to information disparity.
Market players said the move will help banks, as companies will now be more careful in extending payment deadline beyond 30 days, fearing backlash from investors. It will also help credit rating agencies.
Sebi makes it mandatory for listed firms to disclose each loan default“A regulatory stipulation to mandatorily disclose instance of delays on even loans etc, at least for listed entities, indeed would be useful, notwithstanding a 30-day lag,” said Jitin Makkar, head credit policy, ICRA.
Sebi said it would soon issue a uniform format for making such disclosures. The Sebi also entirely revamped the framework for portfolio management services (PMS) and shortened the time period taken for completion of rights issues.
The minimum net worth for portfolio managers will be Rs 5 crore, up from Rs 2 crore. Players, however, will be given three years to comply. Also, the minimum investment size has been increased from Rs 25 lakh to Rs 50 lakh. Sebi has also directed to PMS providers to offer direct plans; streamlined performance disclosures and fee structure; and capped operating expenses.
The rights issue timeline has been reduced from 55 days to 31 days and there is scope to bring it down further. For the first time, Sebi has allowed trading in rights entitlement. In other words, a shareholder entitled to get shares under the rights programme can transfer the entitlement to another investor at a price.
The Sebi board also extended the business responsibility reporting to top 1,000 companies. At present, only the top 500 companies have to make such disclosures.

Sebi approves stricter loan default disclosure norms for listed companies

Markets regulator Sebi on Wednesday approved stricter disclosure norms for listed companies on loan defaults and revised its regulations for portfolio managers as well as for rights issue of shares.
Sebi also extended the Business Responsibility Report (BRR) requirement to top 1,000 companies, from 500 currently.

In case of default in repayment of principle or interest on loans beyond 30 days, listed companies will have to disclose "fact of such a default" within 24 hours, the regulator said after its board meeting.
In another decision taken at the meeting, Sebi would revise the norms for issuance of shares on right basis to existing shareholders. The timeline would be reduced from 55 days currently to 31 days.
Besides, the watchdog would amend the norms for portfolio managers wherein net worth and minimum investment requirements would be raised for such entities.
About the new disclosure requirements on loan defaults, Sebi Chairman Ajay Tyagi said the objective is to "get more openness to help investors".

Sebi tightens asset quality disclosure norms for all listed banks

The Securities and Exchange Board of India (Sebi) on Thursday tightened the asset quality disclosure norms for banks. The market regulator has directed all listed lenders to make disclosures pertaining to divergences and provisioning within a day of receipt of the Reserve Bank of India’s (RBI’s) final risk assessment report (RAR).
Earlier, banks used to make these disclosures as part of their annual financial statements. Also, in the past, the regulators had frowned upon certain banks for making selective disclosures from the RAR, an annual exercise conducted by the central bank.

After consultation, Sebi and RBI have set the threshold for making such disclosures. These include additional provisioning for non-performing assets (NPAs) assessed by the RBI exceeding 10 per cent of the reported profit before provisions and contingencies for the reference period. Also, additional gross NPAs identified by the RBI exceeding 15 per cent of the published incremental gross NPAs for the reference period.
Sebi has said the disclosures have to be made in either or both cases.
The move is aimed at improving transparency and to help investors assess the risk better.
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“These disclosures in respect of divergence and provisioning are in the nature of material events or information and hence, necessitate immediate disclosure. Further, this information is also price-sensitive, requiring prompt disclosure,” Sebi said in a circular.
Analysts said in the absence of specific guidelines, banks used their own discretion in making disclosures from the RAR.
“The latest Sebi circular is a welcome step. The rules are now clear for making disclosures from the risk report. This will help avoid a YES Bank-like episode in future,” said a banking analyst.
Earlier this year, YES Bank had made a disclosure to the stock exchanges stating the RBI’s RAR had not found any divergence in asset classification and provisioning done by the lender for 2017-18. Following the disclosure, shares of YES Bank had skyrocketed 30 per cent. However, later the RBI had pulled up YES Bank for making the disclosure over breach of confidentiality and selective revelations. The stock had later tanked.
Later Sebi launched a probe into the same matter, charging the lender for making selective disclosure and not disclosing other issues mentioned in the RAR, such as lapses and regulatory breaches in various areas in its functioning.
In September, YES Bank had settled the case with Sebi under the consent route by paying a penalty of Rs 14.5 lakh.

Sebi tightens norms to deal with abrupt resignations of auditors

The Securities and Exchange Board of India (Sebi) on Friday tightened the rules around resignations of auditors from listed companies.
The market regulator has said that an auditor will have to provide review — limited or complete audit report — for the quarter during which it resigns. For instance, if the auditor decides to resign in August 2019, it will have to issue the review for the quarter ended September 30, 2019.

Similarly, if the auditor signs the audit report for all the quarters of a financial year, except the last quarter, then it will have to finalise the audit report for the entire financial year. Sebi has said if the listed company or its material subsidiary does not provide the required information, the auditor shall provide an appropriate disclaimer in the audit report.
Further, the regulator has said if the management of a listed or its material subsidiary hampers the audit process, the auditor should approach the chairman of the audit committee of the company.
The audit committee then has to discuss the matter and communicate its views to the management and the auditor. The regulator has also prescribed a format for obtaining information from auditor upon resignation. This includes detailed reasons for resignation and information requested but wasn’t provided.
Sebi’s latest circular on resignation of statutory auditors comes following a spike in auditors at listed firms in recent years. According to data provided by NSE Infobase, the year 2018 saw mid-term cessations of 48 auditors and another 16 so far this year. In the past, Sebi has fumed over the growing instances of abrupt resignation, particularly the when the auditor cites “pre-occupation” as the reason.
“Resignation of an auditor of a listed entity / its material subsidiary before completion of the audit of the financial results for the year due to reasons such as pre-occupation may seriously hamper investor confidence and deny them access to reliable information for taking timely investment decisions,” said Sebi in a circular. Most of the guidelines issued by Sebi are from a discussion paper it had floated in July.
New guidelines
All listed entities and material subsidiaries told to ensure that an auditor issues the audit report, if he or she is tendering resignation, within 45 days from the end of a quarter
Those resigning after 45 days from the end of a quarter have to issue audit reports for the quarter concerned as well as the successive quarter
Auditors who have signed the limited review or audit report for the first three quarters will need to issue the audit report for the last quarter as well as for the complete financial year before resignation
Those rendered disqualified as per the provisions of the Companies Act will not be required to comply with the directions

Sebi tightens norms to deal with abrupt resignations of auditors

The Securities and Exchange Board of India (Sebi) on Friday tightened the rules around resignations of auditors from listed companies.
The market regulator has said that an auditor will have to provide review — limited or complete audit report — for the quarter during which it resigns. For instance, if the auditor decides to resign in August 2019, it will have to issue the review for the quarter ended September 30, 2019.

Similarly, if the auditor signs the audit report for all the quarters of a financial year, except the last quarter, then it will have to finalise the audit report for the entire financial year. Sebi has said if the listed company or its material subsidiary does not provide the required information, the auditor shall provide an appropriate disclaimer in the audit report.
Further, the regulator has said if the management of a listed or its material subsidiary hampers the audit process, the auditor should approach the chairman of the audit committee of the company.
The audit committee then has to discuss the matter and communicate its views to the management and the auditor. The regulator has also prescribed a format for obtaining information from auditor upon resignation. This includes detailed reasons for resignation and information requested but wasn’t provided.
Sebi’s latest circular on resignation of statutory auditors comes following a spike in auditors at listed firms in recent years. According to data provided by NSE Infobase, the year 2018 saw mid-term cessations of 48 auditors and another 16 so far this year. In the past, Sebi has fumed over the growing instances of abrupt resignation, particularly the when the auditor cites “pre-occupation” as the reason.
“Resignation of an auditor of a listed entity / its material subsidiary before completion of the audit of the financial results for the year due to reasons such as pre-occupation may seriously hamper investor confidence and deny them access to reliable information for taking timely investment decisions,” said Sebi in a circular. Most of the guidelines issued by Sebi are from a discussion paper it had floated in July.
New guidelines
All listed entities and material subsidiaries told to ensure that an auditor issues the audit report, if he or she is tendering resignation, within 45 days from the end of a quarter
Those resigning after 45 days from the end of a quarter have to issue audit reports for the quarter concerned as well as the successive quarter
Auditors who have signed the limited review or audit report for the first three quarters will need to issue the audit report for the last quarter as well as for the complete financial year before resignation
Those rendered disqualified as per the provisions of the Companies Act will not be required to comply with the directions