Business standard updates

MCA starts framing rules for new Companies Act

NSUNDARESHASUBRAMANIAN Mumbai, 18 October With the Cabinet clearing the modified Companies Bill, activity has gathered pace in the Ministry of Corporate Affairs (MCA). The ministry has appointed an advisory group to verify and oversee the rule-making process of the new Companies Act. “An expert group comprising seven to eight people has been formed. This group will verify the various rules under the Act and give suggestions,” said an official familiar with the development. Representatives of professional bodies such as the Institute of Company Secretaries of India (ICSI) and Institute of Chartered Accountants of India (ICAI), top securities lawyers and other company law experts are part of this group. The rule-making process is significant, as they will determine the manner in which the law is implemented, say experts. The Companies Bill, 2011, aimed to give a modern legislation for growth and regulation of corporate sector was approved by the Union cabinet earlier this month with certain modifications. The Bill which is expected to be tabled in the Parliament during the Winter session, redefines the role of auditor, makes companies answerable towards corporate social responsibility. It also contains new provisions governing inter-corporate loans and responsibility of directors and private placements. The Bill, which will become law after Parliament approval, provides the broader policy direction on these issues. The rules will determine the course through which these objectives are achieved. After verification by experts, the draft rules are also expected to be put up on the MCA website for public comments.

TCI converts legal case with Coal India akin to class action suit

SHINE JACOB & NSUNDERESHASUBRAMANIAN Kolkata/Mumbai, 18 October About 650,000 shareholders of state-owned miner Coal India will now have a stake in The Childrens Investment Fund’s legal battle against the central government, Coal India’s largest shareholder, and directors of the company. The Calcutta High Court has approved a request by the British hedge fund to make the case representative of all shareholders. The court has also directed The Childrens Investment Fund (TCI) to issue newspaper advertisements "explaining the nature and details of the lawsuit" to the shareholders. Institutional investors, including TCI, hold some 7.3 per cent in Coal India (CIL), while companies and retail investors hold 2.7 per cent. The Centre holds the 90 per cent. TCI has claimed ~2,12,250 crore from the government of India on behalf of CIL shareholders, as compensation for losses caused by its policy to price coal substantially below market prices. According to TCI, this is the cumulative loss to pre-tax profits since the IPO in November 2010. The loss is estimated for a period starting November 2010 to March 2013, for 861 million tonnes of coal sales under fuelsupply agreements, at a price differential of ~2,500 a tonne. TCI is also seeking interest on this sum at prevailing commercial rates of 18 per cent an annum. "The court has approved our request to make the case representative. It may eventually become a class action suit. The outcome of the case will benefit all shareholders," said a partner at Luthra and Luthra, the lawyers for TCI. The case names 26 defendants, including Coal India, government of India, all the firm’s subsidiaries, except CMPDI and the directors. According to court documents reviewed by Business Standard ,the case filed by TCI Cyprus Holding at Calcutta High Court is asking the compensation, citing that there is abreach of duty by the government of India and the board members of CIL which resulted in the loss. “The plaintiff is entitled to and claims such decree on behalf of defendant no.1 (CIL) at the rate of 18 per cent interest per annum,” it said. TCI has also argued that the loss in revenue resulted in loss on its portfolio at different price earnings ratio (PE). If the coal was sold at ~2,500 a tonne, post-tax profits for FY13 would be ~65,625 crore. At a PE ratio of 13.3 times, Coal India would have been valued at ~8,72,813 crore. TCIs investment would have been worth ~8,815 crore. If the PE was 15 times, the market cap would be ~9.84 lakh crore and TCIs holding would be worth ~9,942 crore. Current market prices of Coal India are roughly a fourth of this. Coal India shares gained 1.65 per cent to close at ~359.35. At this price CILs market cap stood at ~2.26 lakh crore. A top CIL official confirmed the development and said, “Since this is a representative suit on behalf of CIL shareholders, the court has directed them to publish the details in newspapers to let the public know about this. They have reached this inflated loss of revenue by citing reason of price differential per tonne compared to market prices and also the coal sale based on fuel supply agreement during this period.” While the date of hearing at the Calcutta High Court will be on December 12, the pending case at Delhi High Court will be heard on December 7. According to CIL, "the logic that TCI is giving is that as the CIL management cannot go against the government for losses suffered, TCI is doing it on behalf of all the shareholders." Though TCI owns only 1.01 per cent of the shares in CIL, it is the largest foreign investor in the Kolkata-based coal major. According to CIL, while TCI had first filed a complaint to the board of arbitrators based on bilateral investment treaty (BIT) between India and Cyprus in May 2012, even before the gestation period of six months it approached the court. In August, TCI had filed a writ petition in the Delhi High Court over the interference of the Centre in the functioning of CIL, instructing the firm to revise the price hike based on gross calorific value made in December 2011. The major difference that the fresh case filed at Calcutta High Court last on October 12 was the compensation factor. TCI had also raised the scrapping of the system of fuel supply agreements claiming that it will hurt the coal major’s profit. The British hedge fund has claimed ~2,12,250 crore from the government of India on behalf of Coal India shareholders Coal India

DIPP seeks views of corporate affairs ministry on Sony Pictures deal

SOUNAKMITRA New Delhi, 18 October The department of industrial policy and promotion (DIPP) has asked the Foreign Investment Promotion Board to seek the views of the Ministry of Corporate Affairs on the deal between Sony Pictures and Multi-Screen Media (MSM) as to whether its sealing undervalued the shares and rights of the minority shareholders. In June, MSM had sought approval from FIPB for transfer of 21.11 per cent holding of Atlas Equifin Pvt Ltd in MSM India to SPE Mauritius Investments Ltd, Mauritius. It also asked permission for transfer of 20.28 per cent stake of MSM India, held by Grandway Global Holdings Ltd, Mauritius to SPE Mauritius Investments Ltd, Mauritius. After the sale and transfer of shares to SPE Mauritius Entities, SPE Mauritius will hold 94.39 per cent in MSM India, increased from 62 per cent. Foreign holding in MSM India would increase from 87.99 per cent to 100 per cent. DIPP has also mentioned that an examination of fund flows revealed that funds were routed through Mauritiusbased Conduit Company through a multi-layered structure to avail the IndiaMauritius DTAA. “This is a clear case of treaty shopping,” according to DIPP documents, available with Business Standard . FIPB is likely to discuss the issue at its meeting on October 19, according to an FIPB document. MSM did not comment on the issue saying the concerned spokespersons were travelling. The ministry of corporate affairs declined comments on the issue. There were seven promoters, including Singapore-based investment banker Rakesh Agarwal, Shemaroo Films Managing Director Raman Maroo, World Media Group’s Sudesh Iyer, actor Jackie Shroff and businessman Sadanand Sule, together owned 32 per cent in the broadcaster via their consortium company Atlas Equifin (12.11 per cent) and Grandway Global Holdings (20.28 per cent), as widely reported earlier. Atlas Equifin was shown as the only resident shareholder, while Grandway was shown as the non-resident shareholder. Shares held by Grandway Global Holdings, Mauritius were transfer to SPE Mauritius Investments Ltd, Mauritius. DIPP also said that the “approval should be given once the company pays the due taxes on the transaction based on the facts and valuation of shares arrived at after examination.” The Department of Revenue (DoR) has also said that the taxation of dividend and future capital gains on alienation of shares by the investor shall be governed by India-Mauritius DTAA, on the principle of ‘resident based taxation’. During FY11, MSM’s revenue stood at $395.1 million, while its revenue stood at $592.5 million during FY12. The company’s Ebidta has also increased from 67 in FY11 to 139.9 in FY12, according to the company’s balance sheet. MSM runs eight channels —Sony TV, SET Max, SAB TV, Sony Pix, AXN, Animax and the recently launched music channel Mix and sports channel Six. In 2009, MSM failed to sell 32 per cent stake to the BK Modi Group due to differences over management rights and a lack of clarity on exit options. The deal was then valued at around $300 million. In 2010, a battle erupted among various stakeholders, with the minority shareholders filing a petition before the Company Law Board. The board had issued an interim order restraining MSM from raising the paid-up capital of the company. The shareholders had charged Sony Pictures Entertainment with mismanagement and oppression of minority shareholders. Shareholders Holding (in %) SPEMauritius Holdings 50.7 GrandwayGlobal Holdings 20.3 SPEMauritius Investments 20.0 Atlas Equifin 12.1 Emerging Markets Growth 3.1 Fund, Inc American Funds Insurance 0.9 Series, International Fund The NewEconomyFund 0.9 Capital International 0.6 Emerging Markets Fund American Dunds Insurance 0.2 Series, Global Growth Fund Source: FIPB/DIPP documents MSM SHAREHOLDING

No probe ordered into Walmart, say government officials

REUTERS New Delhi/Mumbai, 18 October The government has not ordered a probe into Walmart Stores over accusations the US retailer violated foreign ownership rules, officials said on Thursday in response to a media report. Walmart, which is expected to open its first Indian store after a change to ownership rules, said it had not been contacted on the subject by Indian authorities. The Financial Times said the commerce ministry last week asked the Reserve Bank of India (RBI) to investigate allegations that the worlds largest retailer had "clandestinely and illegally" invested in supermarkets in the country. The accusations were made by a Communist Party member of parliament in a letter to the prime minister. An ministry of commerce and industry official, who declined to be identified, said the ministry had forwarded the complaint on October 10 to the RBI for examination, but said the ministry had not asked for a formal probe into the matter. Pankaj Pachauri, spokesman for the office of Prime Minister Manmohan Singh, told Reuters :"Every letter that comes from an MP is routinely forwarded to the department concerned for examination. We did not order a probe. We got a letter from an MP and in due course we forwarded it to the department concerned." A Walmart spokeswoman in India, who declined to be named, said the company had not been contacted by the ministry or the central bank and was in full compliance with Indias foreign direct investment laws. "All procedures and processes have been duly followed and details filed with relevant Indian government authorities, including the Reserve Bank of India," the US-based retailer said in a statement. India recently allowed foreign retailers to own up to 51 percent in supermarkets, a decision made in the face of fierce political opposition. Previously, Walmart and other foreign players were only allowed to own wholesale operations. Walmart was the most vocal advocate for the rule change and is expected to open its first retail store within 18 months. First step to universal pension BS REPORTER New Delhi, 18 October The government is set to take the first step towards the universalisation of pension for the aged, widows and the physically challenged, as it mulls removing the distinction between those above and below the poverty line for selection of beneficiaries in the 12th Five-Year Plan. The proposal, with big financial implications, has been pushed by activists Aruna Roy and Baba Adhav, besides many organisations. Rural Development Minister Jairam Ramesh today said pensions would be given on the basis of some exclusion criteria on the socio-economic census that is on. Activist Nikhil Dey welcomed the news and said this was a great step forward. The schemes under the rural development ministry now provide apension of just ~200 a month, while states complement this with more. The 12th Plan would also for the first time give states some say in spending the funds of centrally-sponsored rural development programmes, according to their own priorities and needs. The Plan has allowed a small window of ~40,000 crore for such flexibility to the ministry, which overall is getting an allocation of ~490,000 crore. The window, called a rural flexi fund, would have a central share of 70 per cent (~28,000 crore), while the rest would be from the state’s share. Ramesh and Montek Singh Ahluwalia, deputy chairman of the Planning Commission, announced the fund today. MCX-SXmantra: Less speculation PALAKSHAH Mumbai, 18 October The soothing rooftop garden outside his corner office might have played a role in this, but Jignesh Shah, the 45-year-old founder of FT Group, is now in a mood to “collaborate”, even with rival stock exchanges with which he has fought many a battle in the past. In fact, Shah, who has built an empire of nine exchanges and related ventures in warehousing, information management and electronic payments with combined revenues of ~834 crore and estimated profits of ~264 crore, and is planning to do a soft launch of equities and debt trading on MCX-SX this Diwali, has set his sights higher: "My competition is not domestic. We want to benchmark ourselves to Chinese exchanges where retail participation is nearly two-thirds,” Shah says, in his first interview to media after getting clearance to start a stock exchange. The licence for MCX-SX came after nearly four years of fighting the Securities and Exchange Board of India. Shah says the FT Group is known to create new markets, which is what it will do through MCX-SX. Fortunately, he says, regulatory policies are conducive for this. Shah says he wants to “change the trading structure” to avoid the huge concentration of volume in the derivative segment that is keeping retail investors away from capital markets in India. The derivative market has a 92 per cent market share and the rest of the trading takes place in the cash equities segment. “There were more retail investors in the Indian stock market before derivative trading became big. Investors had clarity of downside risk, as they knew they can hold on and sell Though Shah doesn’t say this, the So, MCX-SX will follow deliverybased settlement system in equities. Under the system, a seller of stock futures or options will have to deliver shares to the counter-party when the contract expires. The pattern is followed by all leading derivative exchanges around the world and also BSE, but the latter has not been able to capitilise on it due to lack of marketing strategy. Market experts say physical settlement, as it is known, will double delivery-based volumes. In the commodities segment, MCX follows T+1 settlement and it plans to implement the same in the equity segment as well where settlement is done on a T+2 basis currently. Stress would also be on developing an active bond, interest rate futures and SME markets, which Shah says, will result in a 360 degree development of the capital market. In the US and Europe, the market share of equity market is around 30 per cent, whereas currency, bond and interest rate futures markets dominate the scenario. Both the NSE and the BSE have failed to develop the debt market in the past. In bonds, Shah says there should not be a market only for AAA-rated securities for which everyone wants to lend. The key will be to develop a market for other lower-rated bonds. Turn to TSI, Page 2 >Jignesh Shah says retail investors get unnerved by complicated derivative products MCX-SX: KEYSTRATEGY |Delivery-based settlement system for equity derivatives to reduce market volatility |Bring in T+1 settlement system in equities |Launch indices based on growth sectors than just market-cap to attract ETFs |Encourage investment culture by products based on fixed income and increase understanding of give and take delivery |Develop bond, interest rate futures and SME along with equities and currency segments Initial challenges |NSE has indicated to brokers that it is willing to do more to bring down cost |In such a scenario, attract higher membership. |Catch-up on providing a high speed trading platform Click: Article continued from…MCX-SXmantra: Less speculation MCX-SX mantra... On the SME segment, MCX-SX will not have an anonymous order matching system and will bank on a hub-and-spoke model. NSE, on the other hand, is looking to leverage partner London Stock Exchange’s expertise. LSE operates one of the largest platforms for the SME segment, known as AIM. Technology, of course, will play a key role. The FT group, which has five operational exchanges globally, says its servers run a minimum of 16 hours a day without interruption compared to equity exchanges in India where trading is conducted for six-and-ahalf hours. Shah says the world should wait for more such surprises from MCX-SX. “Before we came into the picture in the stock exchange space, sun-outage was an excepted norm. When we launched operations in currency derivatives, our technology ran smoothly during sun outage. Both the other exchanges caught up later,” he says, adding as a new entrant, MCX-SX will bring in the latest technology with less legacy costs, the benefit of which will be passed on to market participants. Though some observers say much of what Shah says is only playing to the gallery, the fact is he has walked the talk in the past. MCX has over 80 per cent share in commodities trading volumes, which are more than ~65,000 crore on an average daily basis. FT’s brokerage solutions software ODIN, the major revenue earner for the company, also has 80 per cent market share. Also, take spot power trading, where the Indian Energy Exchange (IEX), promoted by FT, enjoys 90 per cent market share. NSE- and NCDEX-promoted Power Exchange of India is a distant second. For example, IEXs initiatives had led to revival of many SME units in Punjab, which were shut down due to high power tariffs. But the launch of power trading on an exchange platform resulted in availability of cheap merchant power. Shah, however, knows it can’t be roses all the way for his dream of creating a market for the masses, which is why some of his experiments faltered. For example, the Safal National Exchange, a joint venture between the FT-MCX and National Dairy Development Board. The exchange was supposed to offer an online platfiorm for fruit and vegetables, but failed as traders and farmers just could not agree on the quality and price. Similarly, the Singapore exchange couldn’t live up to its potential in the initial years, necessitating a management shake-up, but has recovered since then. But Shah says he has never shied away from risk when it come to expanding the business and is willing to learn from some of his past mistakes. The baby in the equity market clearly can bank on his mentor.