Business standard news update 15-10-2013

Now, book online for your railway food

ANUSHA SONI New Delhi, 14 October Each time Ajita Singh, aspiring to become a chartered accountant, travels from Delhi to her home town, Lucknow, she prefers to munch chips and biscuits rather than buy food on the train, being sceptical about the quality. This time, though, she tried something different — placed an order online and the food was delivered to her, at her berth, for less than ₹ 150. The ₹ 4,000- crore railway catering sector, a subject of debate on the quality of food served, is witnessing a change. Responding to the need are a couple of websites that have come up with a ‘ market place model for railway catering’. Travelkhana. com and Merafoodchoice. com are among the leading players in this space. Both have a tie- up with over 200 restaurants spread across 100 cities, where they can serve meals for individuals or groups. The cost could vary starting at around ₹ 130. All one has to do is provide the PNR number on the ticket or the originating and destination station, along with the date of travel. The websites will let you choose from multiple cuisines and prices. The delivery boy will have to buy a platform ticket to give you the food. Both these companies started with an investment of under ₹ 1 crore and expect venture capitalist funding in the coming months. “We are in a very advanced level of talks with the Railway Board for making us a recognised partner in rail catering,” says Pushpinder Singh who started travelkhana. com in August 2012. He plans to soon start a mobile application. “We serve about 500 meals in a day and reach 158 cities. People want quality food and affordable prices”, says Piyush Kasliwal, a software professional who started merafoodchoice.com in November 2012. The websites usually get a cut of 15- 30 per cent in the profits of the restaurant. Pushpinder expects large fast- food chains to tie- up with him soon. Currently, under the standard prices decided by the Railway Board, the caterers must serve a vegetarian meal at amaximum of ₹ 50 and a nonvegetarian at 55. But, usually, charges go up to ₹ 85 and above, according to railway officials. “Most of them overcharge as they say that in the current inflation, it’s very difficult to provide food at the rates decided by the railways,” says an official. In 2010, the catering of Indian Railways was taken away from Indian Railway Catering and Tourism Corporation. Currently, a little over 30,000 catering units take care of food in the trains and at stations. Dinesh Trivedi, who was railway minister in early 2012, had announced he’d start asimilar ‘ book a meal policy’, where people could book a meal of their choice before boarding. There have been success stories earlier, too. For instance, Comesum, a vendor for IRCTC, has about 20 outlets at railway stations and serves 70- 80 trains but its reach is limited. It’s here that the online model can perhaps fill the gaps. The railway catering sector has been a subject of debate on the quality of food served

Mumbai Police wing seeks powers to attach properties of Shah, others

SANJAY JOG Mumbai, 14 October The Economic Offences Wing (EOW) of the city police has sought recommendations of the Mumbai and Mumbai Suburban district collectors for invocation of the provisions under the Maharashtra Protection of Interest of Depositors Act, 1999, ( in financial establishment). The invocation, if it happens, will give EOW the powers to attach the properties of NSEL promoter Jignesh Shah, besides former directors, in connection with the ₹ 5,600crore payment fraud at the bourse. Balsing Rajput, deputy commissioner of police in the EOW, told Business Standard: “ We expect the two district collectors’ recommendations within a day or two. We have sought invocation of the Maharashtra Act, which mainly covers the functioning of financial establishments. The invocation of its provisions will enable EOW to attach properties of Shah and others who could have gained out of the crime.” On conviction for fraudulent default, according to the Act, imprisonment for up to six years and a fine of up to ₹ 1 lakh can be imposed on promoters, partners, directors or employees of a financial establishment. The Act gives the state the powers to attach properties of firms that fail to return deposits after maturity or on demand from depositors. Properties can also be attached if a financial establishment does not pay interest or other assured benefits, fails to provide the service promised against such deposit, or where the government has reasons to believe it is acting in a calculated manner against the interest of depositors with an intention to defraud them. Pending order from the designated court, the government can conduct the attachment through appointment of a competent authority. EOW’s action has come within days of the arrests of former NSEL vice- presidents Jai Bahukhandi and Amit Mukherjee over alleged fraud and bribery. These arrests were made on the basis of an FIR lodged against them, NSEL promoters, the board and other key employees. Meanwhile, EOW on Monday recorded the statements of former NSEL director B D Pawar and a director of Delhi- registered Namdhari Food International and Harayanabased Namdhari Rice and General Mills were also recorded. Asks for invocation of the Maharashtra Protection of Interest of Depositors Act, 1999 NSEL PAYMENT FRAUD FINANCE 7 > >Returns thatweren’t cost NSEl ~ 1,700 cr THE SMART INVESTOR 14 > >Compass: Petchem saves the day for RIL GK Pillai nominated on MCX- SX board MCX- SX, part of Financial Technologies group, on Monday said former home secretary, Gopal Krishna Pillai, had been nominated public interest director on its board. No question of govt taking over NSEL: FM Finance Minister P Chidambaram has said NSEL’s parent group, Financial Technologies, and related entity, MCX- SX, are underwatch and people responsible for the alleged irregularities will have to pay the price. “ There’s no question of the government taking over NSEL,” he said.

To unlock FDI, govt to ease lock- in period for realty NAYANIMA BASU New Delhi, 14 October Much to the cheer of foreign real estate developers, those investing in India’s construction sector might be allowed to exit before the mandatory three years stipulated at present. However, for that, they would have to complete the project and procure completion occupancy certificates from local authorities. Currently, they can exit before three years of putting in money only with permission from the Foreign Promotion and Investment Board ( FIPB). That’s not all. According to a Cabinet note, being prepared by the Department of Industrial Policy and Promotion ( DIPP), foreign developers will be allowed to take back the entire invested amount before three years, after obtaining the government’s approval. A senior official involved in the process confirmed this to Business Standard. According to the current FDI policy, the lock- in period of three years applies to every tranche of investment brought in by aforeign player from the date of receipt of investment or from the date of ‘ completion’ of minimum capitalisation, whichever is later. Developers had long been complaining that restrictions, such as the lockin norms, deterred them from investing in the Indian market. At present, at least $ 10 million of paid- up capital is required in whollyowned subsidiaries and $ 5 million in joint ventures. “There will be general easing of conditions in the lock- in norms. If they ( foreign developers) want to exit, they should not be scared to come to us for an approval,” the official said. DIPP, which has received approvals from most departments, is now in the process of firming up its proposal. It is expected to shortly finalise the final Cabinet note. With investors proposed to be allowed to exit earlier on receipt of completion occupancy certificate, there would be an incentive for players to complete the projects. India allows 100 per cent FDI through the automatic route in townships, housing, built- up infrastructure and construction- development projects, subject to certain conditions. Between 2000 and 2013, the construction development sector has received about $ 22 billion of FDI — about 11 per cent of the country’s total FDI inflow during the period. However, since 2012, FDI in the sector has slowed down significantly. In 201213, it was down to $ 1.33 billion, against $ 3.14 billion the previous year. In the first four months of the current financial year, only $ 0.36 billion foreign direct investment has flowed into this sector. But completion occupancy certificates to be mandatory BUILDING BRIDGES FDI inflows in the construction sector 2011- 12 $3.14 bn 2012- 13 $1.33 bn 2013- 14* $0.36 bn *April- July Source: Department of Industrial Policy &Promotion Returns thatweren’t cost NSEL ₹ 1,700 cr NSUNDARESHA SUBRAMANIAN New Delhi, 14 October Aforensic audit commissioned by the Forward Markets Commission (FMC) has found National Spot Exchange Ltd ( NSEL) gave away ₹ 1,700 crore as returns during its life span. According to regulatory officials, this sum, around 30 per cent of the ₹ 5,600 crore the exchange owes to 13,000 investors, was paid using the money brought in by new investors, as trades on the platform did not generate actual returns. “An unpermitted financing scheme was being run on the NSEL platform, wherein NSEL was allowing the defaulting buyers to get more money and fresh money was being brought in to ensure the earlier members were not exposed,” said a senior regulatory official. While some borrowers are prepared to pay the original amount they borrowed, they are not prepared to pay the extra amount the exchange has added to their dues as “ rollover costs”, leading to disputes. In negotiations with the aggrieved investors over the past few weeks, the exchange’s promoters, led by Jignesh Shah, have asked them to take ahair- cut. But investors have not agreed to this which has caused a deadlock. Now, the settlement of investors’ dues could not be completed, unless there was a decision on who would foot this ₹ 1,700- crore bill, the officials said. Asked by Business Standard if NSEL had taken any decision on how to generate this sum, a spokesperson of the exchange indicated NSEL was not responsible for the repayment. “ This is not correct. When an old investor exited, he exited with returns. His returns were funded by new investors, instead of defaulters. This way, the old investor got the returns; it’s not NSEL that got the money. In a way, old investors enjoyed the financing platform. Now, it is part of the defaulting members’ dues,” the spokesperson said in an emailed response. The sum grew over the years as NSEL went on filling in payout defaults by one party by using cash generated by others. The liability of members who had already defaulted also went on increasing. In his affidavit confessing his role in the scam, Anjani Sinha, former MD & CEO of NSEL, estimates “ rolling over costs” to be ₹ 1,200 crore. He also gives a member- wise break up of these costs. According to Sinha, “ It is a fact that these buyers have used part of these funds towards repayment of their interest component and other exchange charges. Besides, members have also used this fund for giving it back to the exchange as cash- margin deposit. Considering all these factors, the cost of funds comes to 21- 22 per cent a year. So, the total amount payable by the members as on date includes the principal amount utilised by them, plus the cost of funds paid by them through rolling over of their liability by way of compounding.” He goes on to add: “ The situation was such that if we did not allow rollovers, buyers would have defaulted on huge amounts. On the other hand, if we continue to allow a member to roll over his position position, his exposure keeps on increasing every year by 2025 per cent due to the impact of rollover cost and exchange fees.” Exchange used new investors’ money to pay returns to old ones, finds FMC’s forensic audit How it unfolded |Exchange paid regular returns to investors |Returns were paid despite defaults by borrowers |The payments were made using money brought in by new investors |The return payments added as rolling- over costs to borrowers’ dues |These rolling- over costs run into hundreds of crores of rupees NKProteins ₹ 388 crore PD Agro Processors ₹ 215 crore ARKImports ₹ 165 crore LOILgroup ( 3 firms) ₹ 117 crore Mohan India/ Tavishi ₹ 70 crore Yathuri ₹ 55 crore Top rolling- over cost of funds Source: Anjani Sinha’s affidavit Madras HC bars ARCIL from taking possession of SPIC land BS REPORTER Chennai, 14 October The Madras high court has set aside earlier orders allowing Asset Reconstruction Company ( India) Ltd ( ARCIL) to take possession and sell the 168.35 acres in Tamil Nadu it had acquired as part of the restructuring of SPIC Petrochemicals Ltd, a subsidiary of Southern Petrochemical Industries Corporation ( SPIC). The order was related to a petition by Chennai Petroleum Corporation Ltd ( CPCL), which had formed a joint venture with SPIC to float a project on 1,655.92 acres, including the disputed land. Judge V Ramasubramanian said the issue involved public interest, as despite the acquisition of more than 1,655 acres by the government, invoking the emergency clause, the industry for which the acquisition was made hadn’t come up. Allowing CPCL’s application, the court recalled the earlier order passed in December 20, 2010, which allowed ARCIL to take possession of the 168.35 acres. In January 1985, CPCL had signed a memorandum of understanding with SPIC for a joint venture to float a public limited company— National Aromatics and Petrochemicals Corporation— after the former received an industrial licence to manufacture o- xylene, benzene and purified teraphthalic acid. The project was named Arochem. In September 1989, the Tamil Nadu government accorded administration sanction for the acquisition of 1,655.92 acres of patta and poramboke lands in various villages. NSEL probe gets wider RAJESH BHAYANI Mumbai, 14 October The probe in the National Spot Exchange Ltd ( NSEL) payment crisis is being widened, with more agencies joining the investigations. Also, the Forward Markets Commission ( FMC) is considering aspecial audit of the Multi Commodity Exchange (MCX), NSEL’s sister concern. The Department of Company Affairs has already begun an inspection of NSEL under Section 209- A of the Companies Act, 1956. The probe would include inspection of the exchange’s books, with a specific reference to “ all sums of money received and expended by the company and the matters in respect of which the receipt and expenditure take place”. The Enforcement Directorate is probing the exchange’s operations under the Prevention of Money Laundering Act ( PMLA), after securing information in this regard from the economic offences wing of the Mumbai Police. When contacted, an NSEL spokesperson said, “ Since investigations are on, we cannot comment on this.” After issuing a show- cause notice to the promoters and directors of the crisis- ridden exchange, the FMC is now focusing on MCX, India’s leading commodity futures exchange. It is considering a special audit of MCX operations since the inception of the exchange in 2003, focusing on related party transactions and on probing whether any special treatments were given to these, in terms of margins. In response to a query, an MCX spokesperson said, “ MCX has not yet received any communication from FMC with regard to a special audit. MCX is open to any scrutiny from FMC or any other authority.” MCX has already admitted the Indian Bullion Merchants’ Association ( IBMA) was found to be trading on MCX, despite the fact that it was a subsidiary of NSEL and, therefore, a related party. Trading by related parties isn’t allowed by regulations governing commodity futures. The MCX spokesperson clarified, “MCX has an automated trading system, with virtually no human interference. Calls for margin money are automated, with adequate provisions for informing members about their margin requirements and settlement dues. Moreover, the system does not waive or lower margin money for members’ leveraged trades. Members are not allowed to take new positions without the requisite margin requirements, and the system automatically squares off all such outstanding positions.” Sources privy to the development said a special audit would cover issues related to trading by IBMA — whether any related party traded on it or not, whether favourable margins were given to related parties and whether proper procedures were followed in case of NSEL defaults. In its show- cause notice to NSEL promoters, FMC had said there were 2,000 defaults. A source said FMC would soon finalise who would conduct the special audit. The audit is aimed at ascertaining whether corporate governance norms were adhered to. “ If nothing serious comes out, that will inspire confidence among other stakeholders and if some discrepancies are found, prompt action will be taken to restore the confidence,” said a government official. Inspection under Companies Act launched; ED starts money- laundering probe; FMC mulls special audit of MCX

business standard news updates

Walmart keeps the door open for India retail play

NAYANIMA BASU New Delhi, 10 October American retail major Walmart has snapped ties with Indian partner Bharti but its plans to enter the country’s multi- brand retail space appears intact. The company has urged the Department of Industrial Policy and Promotion (DIPP) to allow entry of private label suppliers as part of 30 per cent mandatory sourcing norms. It has asked DIPP to amend the mandatory sourcing clause to introduce the concept of private- labelling. This, if allowed, would help the US retail behemoth bring in some of its international private labels that are keen to enter the fast- paced Indian retail market. Walmart, which announced its break- up with Bharti on Wednesday, has sent to DIPP a detailed plan on the way it wants its private label suppliers to operate in India. “They ( Walmart) have suggested private labelling to be inducted in the sourcing clause. We are examining it and trying to understand the concept,” asenior DIPP official told Business Standard. He said DIPP was trying to comprehend whether sourcing would be done from foreign markets or from India before taking a call on the issue. Through its partnership with Bharti Retail, Walmart had brought in seven private labels — Great Value, Equate, Hometrends, George, Astitva, Mainstays and Simply Basic — offering adiverse mix of products in India at Easyday supermarket chain. Private labels, popularly known as store brands, are owned by the retailers and sold at lower prices within their own outlets. Big retailers are able to sell these at lower prices, unaffected by margin worries, as the cost of marketing and advertising of these private labels is nominal. Indian retail biggies, such as Future Group and Reliance Retail, also rely on private labels to push their sales. Even as the government has relaxed entry norms for foreign multibrand retailers, Walmart has expressed its discontent over some of the conditions the policy lays out. Under pressure from international players, the government further eased the norms on some of the riders, especially the one related to the mandatory sourcing clause. “They still have problems with the sourcing norm. We are trying to analyse what they are seeking,” the official said. According to the extant policy, foreign retailers can open outlets in the country on the condition that 30 per cent of their sourced sales would come from small to medium- sized domestic producers in India. However, the definition of small sector has been expanded to include units with total investments of up to $2 million in plant and machinery (instead of $ 1 million earlier). Walmart now wants to get this norm amended to fit in its private label suppliers. Seeks entry of private- label suppliers as part of 30% sourcing norms STICKING POINT The mandatory MSME sourcing norm >Up to 51% FDI allowed in multi- brand retail on the condition that at least 30% of requirements will be sourced from Indian micro, small and medium enterprises >To attract FDI, the norm was eased by redefining the MSME sector to include units with total investments of up to $ 2 million in plant and machinery ( instead of $ 1 million earlier) >Still wary of the sourcing norm, Walmart has been seeking further relaxation

Business standard news updates 10-10-2013

NSEL admitted members without KYC documents

NSUNDARESHA SUBRAMANIAN Mumbai, 9 October National Spot Exchange Ltd (NSEL), in the middle of a ₹ 5,600- crore payment crisis, admitted several of its 24 borrowing members without proper compliance with know your customer ( KYC) norms and failed in due diligence, a forensic auditor has found. The refusal by these 24 members to pay their dues triggered the payment crisis in August. During a forensic audit commissioned by the Forward Markets Commission ( FMC), it emerged “ 25 buyers were introduced on the NSEL platform over the last four years. No due diligence of these buyers was done and buyers with very poor credentials had been introduced into the NSEL system.” NSEL admitted several of its borrowing members such as N K Proteins, Mohan India, Sankhya Investments, Yathuri, Namdhari Food International, Tavishi Enterprises, Shree Radhey Trading, Metkore Alloys & Industries and Topworth Steel and Powers, when one or more of their KYC documents such as identity proof, address proof, details of promoter group, etc, were not available. These members account for about ₹ 2,700 crore or nearly half of the total dues. Some of these such as Tavishi and Yathuri have gone hostile. Tavishi has even initiated legal proceedings, saying it never received the goods against ₹ 346 crore dues shown by the exchange. In some cases, even the security deposit was not fully received. In the case of Chandigarh- based LOIL group entities and Andhra- based Sankhya Investments, the security deposit was only partially received. Further, the audit also found LOIL group firms LOIL Overseas, LOIL continental foods and LOIL Health Foods had a common director in Balbir Singh. This was in contravention of Rule 33 of the NSEL rules. Yet, exceptional approval was given for them to trade by the then managing director & chief executive officer, Anjani Sinha, and his juniors, but the grounds of this exceptional approval were not documented, the auditor found. The report also found no evaluation was conducted on the annual compliance documents collected from members. In the absence of effective monitoring, no penal actions have been initiated. No member was ever barred or deactivated on such grounds. FMC has issued a showcause notice based on the findings of the forensic auditor. An NSEL spokesperson said he could not offer any comments, since the report was confidential. Forensic audit finds some members did not put in enough security deposit NOT ENOUGH KNOWN Members with incomplete KYC documentation ( Amount due in ₹ cr) NK Proteins 929 Mohan India 605 Yathuri Associates 460 Tavishi Enterprises 346 Topworth Steels 182 Metkore Alloys 114 Namdhari Food Intl 53 Shree Radhey Trading 36 Sankhya Investments 7

MCX’s board to get govt flavour

NSEL PAYMENT CRISIS FALLOUT NSUNDARESHA SUBRAMANIAN Mumbai, 9 October Nudged by the Forward Markets Commission (FMC), Multi Commodity Exchange ( MCX) has written to five institutional shareholders to nominate their representatives on the exchange’s board. Requests have been sent to IFCI, Bank of India, Union Bank of India, Corporation Bank and HDFC Bank. Once the proposal is implemented, Financial Technologies, which has been controlling the exchange, is likely to have just one board seat. Officials in the know said the move was independent of the regulator’s show- cause notice to the three Financial Technologies Group directors—Jignesh Shah, Joseph Massey and Shrikant Javaglekar. “Once these directors are appointed, MCX would have six institutional nominees, as one director representing Nabard is already there. Eventually, Financial Technologies will have only a single director in the board,” said a senior regulatory official familiar with the development. The exchange’s board would have 14 directors, seven of whom would be independent ones. FMC wants institutional representatives be nominated for non- independent executive roles. Executive directors would be involved in the day- to- day running of the exchange. The restructuring is likely to give the Centre indirect control over the exchange’s affairs, with five of the six institutional investors--- Nabard, IFCI, Bank of India, Union Bank of India and Corporation Bank —under the administrative control of the finance ministry. Also, three of the seven independent directors would be nominated by FMC. Traditionally under the control of the consumer affairs ministry, FMC affairs have recently been brought under the finance ministry’s ambit. In response to an email seeking comment, an MCX spokesperson said, “ FMC has given revised guidelines to reconstitute commex boards. In order to meet its guidelines, we are in the process of reconstituting the MCX board and have asked institutional shareholders to nominate board representatives.” The regulator’s move is aimed at insulating the regulated MCX from the troubles of National Spot Exchange Ltd (NSEL), which has run into a ₹ 5,600- crore payment crisis. “The restructured board is likely to bring in a new management and take corrective steps wherever there are issues,” said the official quoted earlier. According to the latest shareholding pattern, Financial Technologies, the promoter of NSEL, holds 26 per cent in MCX. A few industry officials said this holding would give Financial Technologies a quarter of the non- independent board seats — two directors out of seven. But Financial Technologies would still be a minority on the board. With 26 per cent stake, however, the group would be able to block special resolutions, as company law provisions require a threefourths majority for a special resolution to be passed. IFCI holds 4.79 per cent stake in MCX. With 3.06 per cent stake, Nabard is the second largest shareholder among state- owned institutions. While Corporation Bank owns 2.95 per cent, Bank of India, Union Bank and HDFC Bank hold about one per cent each. Bourse has asked IFCI, three public sector banks to nominate directors; HDFC Bank to get a board seat IN THE WORKS |After the restructuring, Financial Technologies is likely to have just one board seat |Once these directors are appointed, MCX would have six institutional nominees |FMC wants institutional representatives be nominated for nonindependent executive roles |The restructuring is likely to give the Centre indirect control over the exchange’s affairs

Sebi allows SME listing sans IPOs BS REPORTER Mumbai, 9 October The Securities and Exchange Board of India ( Sebi) has allowed listing of small and medium enterprises ( SMEs) without raising any money from the public, a move expected to help provide an exit avenue to existing investors. The companies would be listed on a platform which is open only to institutional investors and which would have a minimum trading lot of ₹ 10 lakh, according to a regulatory notification dated October 8. Pavan Kumar Vijay, managing director at financial consultancy firm Corporate Professionals, said the move would aid price discovery and liquidity for the shares of such companies. “Listing will afford companies better valuations and also help make it easier for investors to sell their stake,” he said. Sebi has said promoters need to have at least 20 per cent stake in the company. “Not less than 20 per cent of the post listing capital shall be held by the promoters at the time of listing of specified securities of the small and medium enterprises, which shall be lockedin for a period of three years from the date of listing,” the notification said. Sebit has also put in place conditions to keep away wilful defaulters and those who have had a run- in with regulators, according to the notification released on Wednesday. It bars listing by companies whose name appears in the wilful defaulters list of the Reserve Bank of India. Sebi is also looking to keep out companies whose promoter, group company or directors appear in the list. Also, there should be no winding up petition against the company or regulatory action against it for five years, said the notification. Other criteria include not completing more than 10 years after incorporation and revenues, which have not exceeded ₹ 100 crore. The companies that list on the platform would also require to have received funding or investment from at least one from a list of eligible entities, which include angel investors, alternative investment funds, scheduled banks or specialised international multilateral agencies. The list also extends to merchant bankers and qualified institutional investors whose stake in the company would be locked in for at least three years from the time of listing. The exit from such an institutional trading platform will be subject to a nod from a majority of non- promoter shareholders and the stock exchange where it is listed. The exit would also happen if the company has been listed for 10 years or fulfils criteria such as revenues of more than ₹ 300 crore or market capitalisation, which is greater than ₹ 500 crore. The exchange can de- list the company if it fails to file periodic filings or comply with corporate governance norms for more than a year. The promoters and nonindependent directors of a company, which is de- listed for non- compliance, will not be allowed to list another company on the platform for five years. Companies cannot come out with an IPO while listed on the platform but can raise capital through private placement or rights issue. SMALL GOES BIG Features of the new SME platform |SME allowed to list without raising of funds |Institutional platform to help price discovery, liquidity |Minimum trading lot of ₹ 10 lakh |Promoter lock- in for three years |Sebi bars entities that are apart of wilful defaulters’ list or have faced regulatory scrutiny Sebi mulls trade cancellation to prevent ‘ freakouts’ BS REPORTER Mumbai, 9 October Market regulator Securities and Exchange Board of India (Sebi) on Wednesday proposed aframework for cancellation or annulment of trades to deal with the growing instances of freak trades. A freak or erroneous trade is a transaction executed either by a punching error by amarket dealer or through malfunction of a trading system. Currently, exchanges are empowered to annul trades and have their own bye- laws in the absence of a regulatory framework. To have uniformity and transparency, the market regulator, in a discussion paper, proposed a regulatory framework for the annulment of trades. Sebi has said that trades that are executed shall not be annulled under normal circumstances. “Trade annulment should only be considered under exceptional circumstances ( fraud, market manipulation, regulatory action or error that impacts the sanctity of price discovery, etc). In such cases, the exchange may also suo moto undertake examination of trades for cancellation,” Sebi has said in a discussion paper. The regulator has said as the decision to cancel trades impacts a large set of market users, it should only be invoked in the interest of the market at large. “Such traders/ investors may find themselves at the losing end for no fault of theirs in the event such ‘ erroneous’ trades are cancelled or modified,” the paper added. The exchanges will have to be clearly define circumstances under which a trade annulment request shall be accepted. The regulator has said annulment shall be accepted if all the parties involved are in agreement to do so. Under the proposed regulatory framework for trade annulment, Sebi has proposed to apply deterrent penalties in the form of fines or suspension of trading rights of the stock broker. It has also prescribed a time limit for accepting a request for annulment. Typically, trades executed on exchanges are considered final. However, in some exceptional cases, including the volume surge during Muhurat day trading on BSE triggered by faulty algorithm, exchanges have annulled trades. Refusal of trade annulment also can be a contentious issue between an exchange and a broker as seen in case of the infamous Emkay flash crash. RAGE AGAINST THE MACHINE Recent freak trade incidents observed in the Indian securities market Exchange Date Incident BSE Oct 26, ‘ 11 A trading algorithm malfunctioned resulting in a large movement in the Sensex futures in less than three minutes NSE Apr 20,’ 12 An error by a trading algorithm resulted in a fall in the prices of Infosys futures by 19% NSE Oct 05, ‘ 12 On account of erroneous orders of a stock broker resulting in multiple trades for an aggregate value of over ₹ 650 crore, the Nifty circuit breakers got triggered and trading in the NSE’s cash market segmentwas halted NSE Feb 01, ‘ 13 Malfunction of a trading software of a stock broker resulted in erroneous orders in the scrips of Tata Motors and UltraTech Cement Source: Sebi discussion paper