A year of regulatory tweaks

The year 2011 was not the best of times for Indian investors. They could do little as they watched stock prices plumb newer depths. But the equity markets functioned quite smoothly in this period without any glitches.

The year will be remembered mainly for the National Stock Exchange being taken to task, perhaps the first time in its history. Though the year didn't see the fast and furious pace of change that one saw in 2010, many big-ticket regulations were initiated by way of concept papers this year that may be implemented in 2012.

NSE on the back-foot

The Competition Commission of India (CCI) surprised everyone by hauling the NSE up for misusing its dominant position. Much to the detriment of the other two players, MCX-SX and the United Stock Exchange, the exchange had not been levying transaction charges in the currency derivative segment. The CCI also charged a penalty of Rs 55.5 crore that is 5 per cent of NSE's average annual turnover. NSE is contesting the penalty, though it has now started charging fee for currency derivative trades.

Patching up

After years of bitter rivalry, the Bombay Stock Exchange (BSE) and the NSE called a truce this year. Their alliance has turned out to be a bonanza for market participants. Traders can now access data feeds from both the BSE and the NSE on a single platform. This means that brokers need just one terminal to access both BSE and NSE prices.

Availability of BSE's online platform on NSE's Neat-on-Web (NOW) system has made it possible for the NSE registered brokers to dabble in the micro-cap companies that were the exclusive prerogative of the BSE earlier. 2011 has also saw BSE make inroads into equity derivatives. From a negligible turnover, it is now recording between Rs 1,000 and 1,500 crore worth of transactions every day. This has come about largely because SEBI gave permission to exchanges early in the year to introduce Liquidity Enhancement Schemes, wherein intermediaries can be incentivised for creating volume in any security. Traders have been homing in on Sensex futures, with these contracts dominating BSE derivative trading.

Higher open offer limits

Corporate India heaved a sigh of relief as the Takeover Code was implemented in a diluted form. While the open offer trigger was raised from 15 to 26 per cent, the size of the open offer was only marginally raised from 20 to 25 per cent. It may be recalled that companies were vociferous in protesting against Achuthan Committee's recommendation that open offers be made for all shares of the company so that minority shareholders are taken care of.

Simplified account opening

Investors wishing to open a trading account have so far had to fill a bulky account opening form requiring signatures on multiple sheets.

This account opening form has now been simplified with the investor needing to sign in just one place — the first sheet of the form.

This part of the form also contains all the details pertaining to an investor. This KYC (know your client) form has been made uniform so that it can be used by all SEBI registered intermediaries whether for stocks, mutual funds, portfolio management schemes, venture funds, and so on.

The intermediaries are required to submit the KYC details to a KYC Registration Agency (KRA). When the same investor approaches another intermediary, his details can be easily downloaded through the KRA. The KRA regulations are set to come in to force from the beginning of next calendar.

Go international

The weakness in stock market and investor apathy had kept new product launches to the minimum. NSE, however, launched trading in futures on the Dow Jones Industrial Average and the S&P 500 and options on S&P 500 this August. These instruments provide an easy route through which domestic traders can gain exposure to US equities. These contracts are denominated in rupees and, hence, remove the foreign exchange risk.

In a bid to placate mutual fund distributors, SEBI proposed that distributors be paid Rs 100 as transaction charge for subscription of Rs 10,000 and above. This amount was set at Rs 150 for first-time investors.

This move has, however, left most distributors cold as it was viewed as an inadequate compensation for the time and cost involved in selling mutual fund products. Higher incentives offered by other products such as ULIPs, small saving schemes and bonds have already resulted in distributors moving away from mutual funds.

Concept papers galore

Distributors of financial products have another fight on their hands with SEBI coming out with a concept paper on regulation of financial advisors.

This paper states that distributors cannot assume the dual role of an agent and a financial advisor and receive payment from both the manufacturer of the product as well as the investor.

Agents are to receive commission only from the mutual fund, insurance company, and so on, and will be regulated by the authority that is responsible for these products.

The regulator also wants financial advisers to be professionally qualified or have 10 years experience in selling these products. A self-regulatory organisation is proposed for monitoring these advisers. Distributors have not been too happy with these proposals and are hoping that it will be implemented in a more benign form. Another concept paper that created a furore was SEBI's paper on proposed Alternative Investment Fund (AIF) regulations. This paper suggested compartmentalising private equity and venture funds according to their target investment.

It meant that PE funds could invest only in unlisted companies; PIPE funds in small listed companies that are not part of any stock market index; debt funds in debt of unlisted companies; venture capital funds only in early stage ventures, and so on.

The alternative investment fraternity felt that it was losing the advantage it could enjoy through diversification by such strict rules.

Sahara and ADAG case

In a move that can have major implications, the Securities Appellate Tribunal (SAT) ruled that the optionally fully convertible debentures (OFCDs) issued to more than 22.1 million investors by the Sahara companies were securities and it was a public issue. SEBI had earlier ordered that the Sahara companies refund the entire proceeds of its OFCDs.

The consent order that SEBI signed with the ADAG group on the allegation that Reliance Infrastructure and Reliance Natural Resources along with Mr Anil Ambani and four group executives, had used funds raised through ECB and FCCB to invest in shares of Reliance Communications also deserves a mention.

The consent order issued a fine of Rs 25 crore each against the two companies and prohibited the accused from investing in the stock market for a certain period.

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