SEBI on fast track Apr 09, 2010

SEBI and IRDA cross swords once again

April 09, 2010

Weekly Facts
	Close	Change	%Change
BSE Sensex	17,714.40	21.8	0.12%
Re/US$	44.17	0.8	1.67%
Gold Rs/10g	16,660.00	280.0	1.71%
Crude ($/barrel)	84.95	3.7	4.49%
FD Rates (1-Yr)	5.00%-6.50%

Weekly change as on April 8, 2010

SEBI on fast track

Impact

In an endeavour to make the Initial Public Offer (IPO) more efficient, the Securities and Exchange Board of India (SEBI) issued a circular which called for, from May 2010, a reduction in the time gap between the closure of the IPO and listing to 12 days. Hence, from the effective date all companies making an Initial Public Offer (IPO) will have to list their shares within 12 days from the date of subscription closure. Currently companies have 22 days to list their shares after the issue closes.

Earlier on several occasions, SEBI Chairman Mr. C.B. Bhave has indicated that the regulator wants the overall time for a public issue to be cut to 7 days. This is a step in that direction.

According to investment bankers, such a move will make the listing process tough, especially if there are holidays in between. They also expressed that the circular is silent on whether it is "12 days" or "12 working days". A senior banker also commented saying "unless more retail investors use the ASBA (Application Supported by Blocked Amount) route, it will not be possible to shorten the time period between the issue (IPO) closure and listing".

We believe that it’s a good move overall since:

A shorter timeline will mean reduction in market risk

It will curtail the speculation emanating from the grey market for IPOs

Investors will be able to "unlock" their funds faster

It will benefit companies since they will receive the IPO funds in their account sooner

However, we also feel that market infrastructure will have to be upgraded so that the system can cope with the pressures resulting from the new move.

Debt shadow on real estate

Impact

Base: 10,000
(Source: ACE MF)

For quite some time real estate companies were resorting to debt as a source of capital, which eventually resulted in debt escalation in their balance sheets. And now the same debt overhang is pinching them.

The central bank has estimated that real estate firms have built a total debt of almost Rs 75,000 crore and must pay at least Rs 25,000 crore in 2010-11 on the principal and interest accrued, once the grace period on repayment ends in June 2010.

Real estate players have not been able to mobilise funds through the equity route, since the private equity route was inactive and the IPO route was unsuccessful. This is unlike the situation three years ago (in 2007), where real estate companies took advantage of the days of easy money to embark on an unprecedented expansion spree. But the following slowdown of 2008 hammered real estate sales, as buyers kept away and banks became averse to lending. This was also reflected through the extreme volatility experienced in the BSE Realty Index.

Today, in order to tide over the crisis, real estate companies are trying to woo customers by slashing prices in the "affordable housing" category by giving them inferior quality of housing. Rates in the real estate market too have again scaled up. In the premium market, prices have firmed up and a one off deal in Mumbai was allegedly struck at Rs 100,000 per sq ft. Also now that the Indian equity markets are showing an upbeat sentiment, some real estate companies are also looking at the equity markets to repay their debt obligations. As many as 10 companies, including Emaar MGF Land, Lodha Developers, Sahara Prime City and Ambience, have SEBI's permission to raise, in aggregate, Rs 15,000 crore through IPOs.

We therefore advise investors to beware and not get lured by realty company IPOs. Invest your money in a company that has solid expansion plans and not where the company has significant debt obligations.

SEBI ensuring transparency

Impact

SEBI has amended the listing agreement that companies sign with the stock exchanges, thus stating that listed companies will have to disclose their financial statements i.e. statements of assets and liabilities and solvency position, within 45 days from the end of a half year. Presently, shareholders have access to these statements only on an annual basis.

The more frequent disclosure of asset-liability position of companies is aimed at enabling investors to know the financial health of the company without having to wait for the full year. "In the wake of the recent global financial crisis, the issue of solvency has come to the forefront from the shareholders’ perspective", the SEBI circular states.

SEBI has also reduced the timeline for submission of financial results by listed companies by making it more uniform. "It has been decided that listed entities shall disclose, on a standalone or a consolidated basis, their quarterly (audited or un-audited with limited review) financial results within 45 days of the end of every quarter", the circular states. The regulator has also decided to provide an option for listed companies having subsidiaries to submit their consolidated financial results either in accordance with the accounting standards specified under the Companies Act or in accordance with International Financial Reporting Standards (IFRS).

The income tax benefit on such loans is also extended to parents who legally adopt a child. This will thus encourage individuals to adopt a child with less to worry about the expenses of the child's education.

We believe that this measure taken by SEBI will infuse transparency into the disclosure norms, which in turn will help the investors to know the correct financial health of the company over shorter "waiting periods".

SBI turns biggest mutual fund marketing machine

Impact

State Bank of India (SBI), India’s largest private sector bank has trained a veritable army to sell mutual funds to its customers, in a year-long programme that could change the face of the country's mutual fund distribution business.

According to an official from SBI, under a programme named ACE (AMFI Certified Employee) around 18,000 employees of SBI have passed the mandatory AMFI's distributors module, which makes them eligible to sell all mutual funds. However, the sales force is expected to focus on products of the bank’s subsidiary - SBI Fund Management Pvt. Ltd. Presently SBI serves its investors through a network of 260 centres of sales and service. The parent bank also has 12,207 branches, 8,500 automated teller machines and electronic channels such as internet banking.

According to the SBI official, the bank has motivated its employees to appear for the test by giving them a one- time cash award of Rs 5,000 - 10,000, depending on their position in the hierarchy and performance in the test. Interestingly, the Reserve Bank of India's (RBI's) rules do not allow banks to give cash incentives to staff for selling mutual funds.

We think that SBI's aggressive move in mutual fund distribution is an indication of the growing importance of captive distribution channels which will turn mutual funds into "money gatherers" rather than "investment managers". We also feel that mis-selling may get multiplied, if impulsive methods of sales are followed.

INTERVIEW

In an interview with the Economic Times, Ms.Jyothy Vaswani, the Chief Investment Officer (CIO) and Director of Fund Management at Aviva India, expressed her views on insurance regulator’s move to cap fund management fees, interest rates, and equity market outlook.

On the insurance regulator's move to cap fund management fees at 1.35%, she believes that it hasn't impacted her company in a significant way. She said "earlier, our charges were in the range of 0.75-1.75%. Hence, on an average, we don't see a significant change." She also mentioned that Aviva believes in the principle of long-term investing and managing risk is the key to delivering sustainable returns.

On interest rates she has said that high inflation will be a cause of concern. She believes that while food inflation is likely to be under control, manufacturing inflation would be a threat going forward. Thus according to her, given this (inflation) and a large government borrowing programme, interest rates are expected to remain firm.

On the equity markets she said that the market is trading close to its fair value. According to her the pace and the magnitude of the rally since 2009 were built around abundant liquidity globally. She believes that share prices will remain range-bound and consolidate around these levels for sometime. However, she is of the opinion that fundamental long-term story of India remains intact, with key drivers being infrastructure, demographics and consumption boost. Sectorally she is bullish on construction, engineering, capital goods, power utilities, oil & gas, banking, auto and retail sectors.

AND OTHER NEWS...

Bankers are likely to urge the Reserve Bank of India (RBI) not to hike its key rates and mandatory cash requirements in its April 2010, annual policy review meeting, as they fear that this would affect their liquidity, thereby resulting in sharp rise in their lending rates.

Finance Minister, Mr. Pranab Mukherjee said economy would return to a 9% growth trajectory, helped by various measures announced in the Union Budget 2010-11. He said the economy would post 8.25% - 8.75% growth in the current fiscal after recording 7.2% growth in 2009-10, which is impressive by global standards.

The search for cheaper capital amid firming interest rates is prompting companies and financial institutions to consider raising money through Non-Convertible Debentures (NCDs). About a dozen companies and financial institutions plan to raise roughly Rs 4,000-6,000 crore through NCD issues. Shiram Transport, IIFCL, REC, SBI, Dishman Pharma, L&T Finance, Sundaram Finance, Srei Finance and Tata Group, among others, are planning to raise money through issue of NCDs.

Shriram Capital Ltd. (SCL), which has a decade-old experience and expertise in financial services sector, will move the Reserve Bank of India (RBI), seeking a license to enter into the banking sector.

RBI said that commercial and urban co-operative banks with a net worth of over Rs 3 billion will have to comply with new accounting standards from April 1, 2013. The new accounting standards are a mix of Indian Accounting Standards (IAS) and International Financial Reporting Standards (IFRS).

India is poised for economic growth of 8.2% in 2010, but the rising inflation will be a concern, the Asian Development Bank (ADB) said in a report. The report has also estimated the expansion in the Indian economy by 8.7% in 2011.

Improving domestic demand and strong signs of economic recovery have helped to push up investor sentiments in India, an ING survey said. The India Investor Sentiment Index rose to 174 in the first quarter of 2010 from 169 in the fourth quarter of 2009.

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