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