Standard Chartered PLC files draft prospectus for the first ever IDR issue

Standard Chartered PLC has on March 30, 2010 filed a draft prospectus with SEBI to raise up to USD 750 million (around Rs 3,375 crore) through Indian Depository Receipts (“IDR”). If successful, this would be the first time that an MNC is raising capital from India through IDR route.

Even though the Companies (Issue of Indian Depository Receipts) Rules, 2004 were issued in 2004, no foreign company had so far issued IDRs in India for raising capital. Later these rules were relaxed in 2007 in order to make IDR route attractive to the foreign companies. Apart from these rules, chapter X of the SEBI (ICDR) Regulations, 2009 contains the regulations in relation to the issue of IDRs in India.

A copy of the draft prospectus is available here.

Master circular on oversight of members

SEBI vide circular SEBI/MIRSD/Master Cir-04/2010 dated March 17, 2010 has issued a master circular on oversight of members (stock brokers/trading members/clearing members of any segment of stock exchanges and clearing corporations). This master circular consolidates and updates the requirements/obligations with regard to oversight of members (inspection by stock exchanges/clearing corporations, internal audit etc.)

SEBI had issued in December, 2008 a consolidated master circular on Anti Money Laundering (AML) and Combating Financing of Terrorism (CFT) and in January, 2010 a consolidated master circular for Mutual Funds.

A copy of the master circular on oversight of members is available here.

SEBI circular for Mutual Funds

SEBI vide its circular SEBI/IMD/CIR No 18 / 198647 /2010 dated March 15, 2010 has made amendments to the mutual funds regulations. They are summarized below:

1. A new format has been prescribed for AMC’s to disclose details of payment of brokerage or commission, if any, made to the sponsor or any of its associates, employees or their relatives.

2. ASBA facility has been extended to the investors subscribing to New Fund Offers (NFOs) of mutual fund schemes. This rule will be applicable for all NFOs launched on or after July 01, 2010.

3. In order to make NFO process efficient, the NFO period has been reduced to 15 days. This rule will also be applicable for all NFOs launched on or after July 01, 2010.

4. AMCs should disclose their general policies and procedures for exercising the voting rights in respect of shares held by them on the website of the respective AMC as well as in the annual report distributed to the unit holders from the financial year 2010-11.

5. AMCs are also required to disclose the actual exercise of their proxy votes in the AGMs/EGMs of the investee companies in respect of the certain specified matters on the website of the respective AMC as well as in the annual report distributed to the unit holders from the financial year 2010-11.

6. AMC should not collect any additional management fees for schemes launched on a no load basis in view of the SEBI’s ban on entry load.

7. AMCs should not enter into any revenue sharing arrangement with the underlying funds in any manner and should not receive any revenue by whatever means / head from the underlying fund. Any commission or brokerage received from the underlying fund should be credited into concerned scheme’s account.

A copy of the circular is available here.

Revised format for reports submitted by portfolio managers

SEBI vide its circular IMD/DOF-1/PMS/Cir-1/2010 dated March 15, 2010 has revised the formats of the half yearly reports submitted by portfolio managers to SEBI. The new format contains an additional disclosure which requires portfolio managers to disclose the details of the performance of portfolio manager in comparison to any benchmark indices during the period. It should be disclosed individual client wise as well as corporate client wise.

Earlier in January, 2010 SEBI had revised the format of the ‘quarterly report on venture capital activity’ submitted by the venture capital funds (covered in this blog here).

A copy of the circular is available here.

Provisions of Section 11-B of SEBI Act, 1992 can be applied retrospectively

The Supreme Court of India (“the SC”) in the case of SEBI v. Ajay Agarwal has ruled that the provisions of section 11 B of the Securities and Exchange Board of India Act, 1992 (“the Act”) can be applied retrospectively by SEBI. The SC has also stated that an order by SEBI restraining a person from associating with any corporate body in accessing the securities market and prohibiting a person from buying, selling or dealing in securities would not amount to a ‘penalty’ or ‘punishment’ for the purposes of the protection against ex post facto laws.

The facts which lead to the case are as follows. Mr. Ajay Agarwal (“the Respondent”) was the joint managing director of Trident Steel Limited (“the Company”). SEBI initiated certain preliminary investigations into the affairs relating to the public issue done by the Company on the basis of a complaint received from a member of BSE. The complaint alleged misstatement of facts by the Company in the prospectus issued in furtherance of the proposed public issue. In the course of investigations it appeared that the Directors of the Company had pledged their personal holdings of 7,50,000 shares with the Bank of Baroda and the same was not disclosed in the prospectus of the Company. On 22.12.99 SEBI issued a show cause notice to the Respondent asking him to show cause why directions under Section 11−B of the Act restraining the Company and its directors from accessing the capital market for a suitable period should not be issued. The Respondent filed his reply and was also given an opportunity of personal hearing. On March 31, 2004 the Chairman of the SEBI passed an order, under Section 4(3) read with Section 11 and Section 11B of the Act, restraining the Respondent from associating with any corporate body in accessing the securities market and prohibiting him from buying, selling or dealing in securities for a period of five years. The said order was challenged before the Securities Appellate Tribunal (“SAT”). It was contended by the Respondent that section 11−B of the Act came by way of amendment with effect from January 25, 1995 whereas the public issue of the Company in respect of which the impugned order was passed was of November 1993 and the prospectus was of October 1993. Both the public issue and the prospectus were prior to 1995. Respondent argued that the alleged misconduct if any was for a period of time when Section 11−B was not on the statute book. Thus, the question which arose before SAT was whether any direction can be issued under Section 11−B for the alleged misconduct said to have been committed prior to introduction of Section 11−B. SAT was of the view that the provision of Section 11−B could not be invoked in respect of the alleged misconduct which took place at a point of time when Section 11−B was not on the statute book. The said order of the SAT was challenged by SEBI before the SC wherein it argued SAT was erroneous in holding that powers under Section 11−B could only be used prospectively and not retrospectively.

The SC in the judgment said that the right of a person of not being convicted of any offence except for violation of a law in force at the time of the commission of the act charged as an offence and not to be subjected to a penalty greater than that which might have been inflicted under the law in force at the time of the commission of the offence, is a fundamental right guaranteed under our Constitution only in a case where a person is charged of having committed an ‘offence’; and is subjected to a ‘penalty’. The SC stated that:

“The respondent has not been held guilty of committing any offence nor has he been subjected to any penalty. He has merely been restrained by an order for a period of five years from associating with any corporate body in accessing the securities market and also has been prohibited from buying, selling or dealing in securities for a period of five years.
The word ‘offence’ under Article 20 sub−clause (1) of the Constitution has not been defined under the Constitution. But Article 367 of the Constitution states that unless the context otherwise requires, the General Clauses Act, 1897 shall apply for the interpretation of the Constitution as it does for the interpretation of an Act.
If we look at the definition of ‘offence’ under General Clauses Act, 1897 it shall mean any act or an omission made punishable by any law for the time being in force. Therefore, the order of restrain for a specified period cannot be equated with punishment for an offence as has been defined under the General Clauses Act.”

As regards the retrospective application of the Section 11 – B of the Act, the SC stated that Section 11−B came up by way of amendment in 1995 to empower SEBI to issue certain directions. The statements of objects and reasons of amendment show that one of the objects is to empower the Board to issue regulations without the approval of the Central Government. The SC stated that:

“Section 11−B of the Act thus empowers the Board to give directions in the interest of the investors and for orderly development of securities market, which, as noted above, is one of the twin purposes to be achieved by the said Act. Therefore, by the 1995 amendment by way of Section 11−B Board has been empowered to carry out the purposes of the said Act.”

The SC concluded that the provisions of Section 11−B being procedural in nature can be applied retrospectively (relying on a plethora of established caselaws). The SC quashed the order of SAT and upheld the order of Chairman of SEBI restraining the Respondent from associating with any corporate body in accessing the securities market and prohibiting him from buying, selling or dealing in securities for a period of five years.

Capital markets reforms by SEBI

SEBI vide its press release PR No.59/2010 dated March 6, 2010 has announced the decisions of the board meeting of SEBI held on the same day. The following is an analysis of the abovesaid decisions.

Margin requirements for Qualified Institutional Buyers (QIBs) bidding in a book built public issue revised so as to ensure level playing field among all categories of investors.

SEBI has decided that all types of investors should bring in 100% of the application money as margin along with the application for securities in public issues.

Earlier SEBI had not mandated margin requirements for any of the categories of investors applying in public issues. However it was noted that in practice, retail investors and non institutional investors were required to pay 100% of the application money at the time of placing bids while QIBs were permitted to bid without paying any upfront amount. This led to huge oversubscription. Subsequently in September 2005, SEBI (DIP) Guidelines were amended requiring collection of at least 10% of application money from QIBs at the time of placing bids. The above margin requirement continues to exist in the present SEBI (ICDR) Regulations 2009. Schedule XI Part A (11)(b) of SEBI (ICDR) Regulations states “An amount of not less than ten percent of the application money in respect of bids placed by qualified institutional buyers and not less than twenty five percent of the application money from the Anchor investors shall be taken as margin money.” While SEBI regulations does not prescribe any margin requirements for other categories of investors, as per current market practice 100% of application money is collected from all other investor categories.

Numerous IPOs in recent times have shown a high appetite from various investors with such issues being over subscribed from a few times over to more than 60 times. Irrespective of the reasons for such huge demand, which could be on account of the fundamentals of the issuer or mere speculative interest, it is felt that the lower margin enjoyed by QIBs coupled with proportionate allotment leads them to put in larger bids than they intend to acquire, thus reflecting a demand which is much higher than what actually is. Retail and other investors often look at QIB bidding levels as an indicator of the interest in the scrip/ issue and hence overbidding by QIBs may falsely encourage other investors to put in their bids. As a result, the total demand in a book built public issue could be overstated significantly. Since the listing price is often driven by unsatiated demand during issue process, overbidding could also affect post listing price discovery. Following an earlier recommendation of SEBI Board, Primary Market Advisory Committee of SEBI (PMAC) examined the entire IPO process afresh to bring about more efficiency in terms of time involved, cost, transparency etc and constituted the Group on Review of Issue Process (GRIP). GRIP had inter-alia suggested that 100% margin may be collected from QIBs. These suggestions were accepted in principle and recommended by PMAC for implementation at appropriate time. SEBI Board has now decided to implement these suggestions from 1 May 2010.

Reservation for Employees in Public/Rights Issues

SEBI has decided that the reservation for employees in public/rights issues would also be available to employees of subsidiaries and material associates of the issuer whose financial statements are consolidated with the issuer’s financial statements.

SEBI regulations currently permit SEBI permit reservation for employees of the issuer. The rationale behind allowing such a dispensation is to enable the issuer to reward its employees for their contribution to the operations of the issuer. However as per the current regulations the employees of the holding company/ subsidiaries of the issuer are not entitled for such rewards, though their contribution to the business of the issuer may be at par with the employees of the issuer. In the present day business environment there are several companies who may be having a number of subsidiary companies apart from having a holding company who contribute to the profitability of the issuer company. There could be several instances where a major part of the business operations of the group may be done through holding/ subsidiary companies. The provision for employee reservation provided in the current regulations enables an issuer to reward employees who are on its payroll. SEBI has now decided that this reward should also be made available to employees of subsidiaries and material associates of the issuer. However corresponding amendment in SEBI (ICDR) Regulations, 2009 is still awaited.

Reforms in Derivatives Market

(1) Equity derivatives contracts with tenures upto 5 years: Earlier in January, 2008 SEBI had introduced long term options on Sensex and Nifty with tenures of upto 3 years. Now SEBI has in principle permitted stock exchnages to introduce equity derivatives contracts with tenures upto 5 years.

(2) Derivative contracts on volatility indexes which have suitable track record: Earlier in January 2008, SEBI has permitted stock exchanges to adopt any of the volatility index computation models available globally or develop their own model for computation of Volatility Index. SEBI has now in principle permitted the introduction of derivative contracts on volatility indexes like the Volatility Index (VIX India) of NSE.

(3) Physical settlement of equity derivatives: SEBI also has decided to allow physical settlement of equity derivatives.

A copy of the press release is available here.

For more information log on to www.sebi.gov.in

[Ed: A few typos appeared in the original article have been corrected. Thanks to my readers for pointing this out.]

Stock exchanges to provide QIP details online

SEBI vide its circular SEBI/CFD/DIL/LA/1/2010/05/03 dated March 5, 2010 has directed stock exchanges to provide all details related to shares allotted to institutional investors through QIP route on their websites. As per the circular stock exchanges should make available on their website the details of those allottes in QIP who have been allotted more than 5% of the securities offered in the QIP, viz names of the allottees and number of securities allotted to each of them, pre and post issue shareholding pattern of the issuer in the format specified in clause 35 of the Equity Listing Agreement. This circular comes into force with immediate effect.

A copy of the circular is available here.