SEBI allows stock exchanges to offer European style options

[The following post has been contributed by Vaibhav Kumar, who is an Associate at the law firm, Desai & Diwanji, Mumbai.]

In a significant development, SEBI by a circular dated 27th October has provided the Stock Exchanges with the flexibility of offering either European Style or American Style Stock Options. At present, it is only American style options which are allowed as per the SEBI circular of 20th June, 2001.

Simply stated, a stock option is a right but not an obligation to buy (call) or sell (put) a stock at a specified price on or before a given date in future. In an option contract, there are two parties- the buyer/holder/owner who takes a long position, and the seller/writer who takes a short position. The American Style options are those which can be exercised at any time during the subsistence of the contract, whereas, the European style options can be exercised only on the date of expiry of the option, i.e. on the agreed date.

As per the circular, after opting for a particular style, a stock exchange shall offer options contracts of the same style on all eligible stocks. It further directs the stock exchanges to put in place the systems, procedures, rules and regulations required for the introduction of European style options. Stock exchanges are to notify all the market participants, including general public at least one month in advance of implementing the switchover in the exercise style.

The interesting part of the circular is the leeway given to stock exchanges to change to another style of stock option after opting for a particular style, with the prior approval of SEBI. This is certainly helpful as it will not give rise to any kind of rigidity in the bourses.
This is seen as a progressive step taken by SEBI as it will boost the trading volume in options for the risk involved is more in American Options. In European-style options, the seller is aware about the timeline he has until the option is exercised. Further, on a separate note, as regards the European style options, there cannot be any option assignment unlike the American-style where there can be assignment prior to expiration of the option.

In furtherance of this circular, the NSE has already announced that it will offer European style stock options.

This circular is available here.

Investment limit for retail investors increased to 2 lakh, Rights issue framework for IDRs, Norms for public issues by insurance companies etc.

SEBI vide PR No.231/2010 dated October 25, 2010 has published the decisions taken by the SEBI Board in its meeting held on the same date. The highlights of the press release are as follows: -

Norms for public issues by insurance companies

SEBI has stated that SEBI (ICDR) Regulations, 2009 would be applicable to public issues by insurance companies. SEBI and IRDA have been working together for finalizing a framework for life insurance companies to raise funds from the market and list in the capital markets. The new framework stipulates more disclosures wherein insurance companies need to put in the risk factors specific to insurance industry in the offer document. Other changes include amendments to the ICDR regulations which allow monitoring agencies like one for banks in India where RBI is monitors banks, IRDA will be allowed to monitor life insurance companies who come into the capital markets.

Preferential issue of equity shares or convertible securities or warrants to promoters and promoter group

SEBI stated that in case of preferential issues, where any promoter or any promoter group entity has previously subscribed to the warrants of the company but failed to exercise the warrants, the promoters and promoter group would be ineligible for issue of equity shares or convertible securities or warrants for a period of one year from the date of expiry of the currency /cancellation of the such warrants. In case of any member of the promoters/ promoter group has sold shares in the previous six months, then the promoters/ promoter group would be ineligible for allotment on preferential basis.

The SEBI (ICDR) Regulations, 2009 allows preferential allotment of warrants subject fulfillment of certain specified conditions. These warrants give promoters an option to convert warrants into shares at a pre-determined price. The price of such conversion is decided based on the average price of the last six months or last two weeks, whichever is higher. Promoters have 18 months to convert the warrants into shares at that price. They generally convert the warrants in a rising market and book profits but tend to let them lapse when markets fall. Thus the allotment of warrants allowed promoters to enrich themselves in booming markets and getaway in crashing markets. SEBI, taking note of this issue, had earlier proposed to increase the upfront margin to be paid by allottees of equity warrants to 25% from the earlier 10%.

Rights issue framework for IDRs

SEBI stated that it will soon notify the framework for rights issue of IDRs. This would facilitate simultaneous rights offering by the foreign issuers (who have listed their Indian Depository Receipts (IDRs) in Indian Stock Exchanges) in their home jurisdiction and in India. Even though the Companies (Issue of Indian Depository Receipts) Rules, 2004 were issued in 2004, only one company has so far issued IDRs in India for raising capital.
 
Investment limit for retail investors increased to 2 lakh

SEBI has increased the maximum application size for retail individual investors to Rs.2 lakh across all issues.

Regulation 2 (1) (ze) of SEBI (ICDR) Regulations, 2009 currently defines "retail individual investor" to mean an investor who applies or bids for specified securities for a value of not more than one lakh rupees. Earlier in August 2009 SEBI had released a discussing paper which proposed to raise the investment limit for retail investors from the current Rs 1 lakh to Rs 2 lakh. SEBI felt that the retail individual investors who have the capacity and appetite to apply for securities worth above one lakh rupees were constrained from doing so because of the one lakh limit and they do not make application under the non institutional investor category because the allocation there is limited to 15% as against 35% for retail individual investor category. Another reason which prompted SEBI for such a move is the inconvenience faced by merchant bankers in big offerings to get enough number of retail investors because of the limit of one lakh rupees. It is also felt that the huge public offerings of PSUs which are in pipeline have prompted the Government for such a move to ensure that the offerings are fully subscribed in the retail segment.

Requirement of promoters' contribution not be applicable to FPOs

SEBI has stated that the requirement of promoters' contribution would not be applicable to FPOs where equity shares of the issuer are not infrequently traded in a recognised stock exchange for three years and the issuer has a track record of dividend payment for three years.

News reports appearing after filing of draft offer document to be consistent with disclosures in the offer document

SEBI has stated that the merchant bankers may submit a compliance certificate as to whether the contents of the news reports that appear after filing of draft offer document are supported by disclosures in the offer document or not. This would apply in respect of news reports appearing in newspapers stipulated in ICDR for issue advertisements, major business magazines and also in the print and electronic media controlled by any media group where the media group has a private treaty/shareholders' agreement with the issuer company/promoters of the issuer company. Earlier in August, 2010 SEBI had asked media companies to disclose the details of the stake held by such media companies in various companies.

A copy of the press release is available here.

SEBI amends ICDR Regulations: Draft offer documents of public issues upto 100 crore to be filed with regional offices

SEBI vide circular CIR/CFD/DIL/9/2010 dated October 13, 2010 has mandated that draft offer documents in respect of public issues of size upto 100 crore should be filed with the concerned regional office of the SEBI under the jurisdiction of which the registered office of the issuer company falls. Earlier offer documents of issues upto 50 crore were filed with the concerned regional offices of SEBI. SEBI has now increased this limit from 50 crore to 100 crore. This circular comes into force with immediate effect.

A copy of the circular is available here.

ASBA forms can be collected by syndicate/ sub-syndicate members

SEBI vide circular CIR/CFD/DIL/8/2010 dated October 12, 2010 has allowed syndicate/ sub-syndicate members to collect ASBA forms from the investors and to submit it to Self Certified Syndicate Banks ("SCSBs"). Earlier only SCSBs were allowed to collect ASBA forms, while the syndicate/ sub-syndicate members collected the non-ASBA forms. Under the new scheme syndicate/ sub-syndicate members would be required to upload the bid and other relevant details of such ASBA forms in the bidding platform provided by the stock exchanges and forward the same to the respective SCSBs. SCSBs should carry out further action for such ASBA forms such as signature verification, blocking of funds etc. and forward these forms to the registrar to the issue.

A copy of the circular is available here.

More on ASBA process (previous posts):

SEBI extends ASBA facility to QIBs

ASBA Phase II – Facility extended to HNIs and corporate investors

SEBI amends rights issue norms: ASBA introduced

SEBI modifies the rule of dividend transfer under SLB

SEBI vide circular CIR/MRD/DP/ 33 /2010 dated October 07, 2010 has modified the Securities Lending and Borrowing ("SLB") framework. As per the modified framework, the lenders of shares under SLB scheme will now get dividend on the record date. Currently the borrower who is in the possession of share gets the dividend on the record date and he transfers the dividend to the lender at the time of repayment of the shares borrowed.

A copy of the circular is available here.

Draft listing agreement for securitized debt instruments

SEBI has placed on its website, the draft listing agreement for securitized debt instruments, for public comments/ suggestions. The highlights of the draft listing agreement are the following:

• Performance related information to be disseminated on a monthly basis.
  
• The burden of disclosures is placed on the Special Purpose Distinct Entity (SPDE)/ SPV which is the issuer of securitized debt. In order to facilitate flow of information, the draft requires the SPDE/ SPV to enter into back to back arrangements with the originator, servicer and the trustee.
  

A copy of the draft listing agreement is available here.

New norms for PMS fees

SEBI vide its circular dated October 5, 2010 has streamlined the fees and charges levied by portfolio mangers. This move by SEBI is pursuant to the consultative paper issued by SEBI on the regulation of fees and charges levied by the portfolio managers in July 2010. Through this circular, SEBI has effected the proposed changes in the consultative paper. A brief background and the highlights of the circular are posted below:

Background

Usually in Portfolio Management Services ("PMS") the portfolio manager, pursuant to a contract with the client, advises or directs or undertakes on behalf of the client the management/ administration of a portfolio of securities or the funds of the client. There are two kinds of PMS, namely (i) discretionary PMS and (ii) non-discretionary PMS. A discretionary portfolio manager individually and independently manages the funds of each client in accordance with the needs of the client. A non-discretionary portfolio manager manages the funds in accordance with the directions of the client.

The relationship between the portfolio manager and client including their mutual rights, liabilities and obligations are specified in the agreement between the portfolio manager and the client. Recently SEBI had received complaints from clients relating to fees and charges levied by portfolio managers and upon scrutiny SEBI noticed that the clauses relating to fees and charges in the portfolio manager-client agreement do not always clearly reflect the fees and charges payable by the client. Thus in order to bring about greater uniformity, clarity and transparency with regard to fees and charges, SEBI has come out this circular.

Highlights of the circular

1. Fees charged by portfolio managers to be based on high water mark principle: High water mark is the highest value that the portfolio account has reached. The portfolio manager should charge performance based fee only on increase in portfolio value in excess of the previously achieved high water mark. High water mark principle would be applicable only for discretionary and non-discretionary services and not for advisory services. In case of interim contributions/ withdrawals by clients, performance fees would be charged after appropriately adjusting the high water mark on proportionate basis.

2. Maximum liability of a client towards the portfolio manager limited to his investment with the portfolio manager.

3. Agreement with the client to contain an annexure containing all fees and charges payable to the portfolio manager: This annexure should contain details of levy of all applicable charges on a sample portfolio of Rs.10 lacs over a period of one year. The fees and charges shall be shown for 3 scenarios viz. when the portfolio value increases by 20%, decreases by 20% or remains unchanged.

4. Disputes between the portfolio manager and the client in relation to the fees and charges to be settled through arbitration under the Arbitration and Conciliation Act, 1996.

A copy of the circular is available here.