Capital Market Clippings

Market making must for SME bourse: SEBI
SEBI has made market making mandatory for the proposed small and medium enterprise (SME) exchange. Under the guidelines issued by SEBI , any member of the exchange would be eligible to act as a market maker provided the criteria laid down by the exchange are met. Market making has been made mandatory for stocks listed and traded on the SME exchange. There would not be more than five market makers for a scrip. These would be selected on the basis of objective criteria to be evolved by the exchange which would include capital adequacy, net worth, infrastructure and minimum volume of business, among others. The market maker will have to provide a two-way quote for 75 per cent of the time in a day. The quote will be monitored by the stock exchange. Further, the market maker has to inform the exchange in advance of blackout periods when the quotes are not being offered.
The Hindu Business Line, April 28, 2010

SEBI permits volatility index trading in F&O
Securities and Exchange Board of India gave a go-ahead to the stock exchanges to introduce derivative contracts on Volatility Index (VI). Volatility Index is a measure of the market’s expectation of volatility over the near term. At present, only the National Stock Exchange of India has a volatility index called India VIX. The introduction of the derivative contract based on Volatility Index would be subject to the condition that the said Volatility Index has a track record of at least one year and the relevant bourse has in place the appropriate risk management framework for such derivative contracts. The exchanges before introducing such contracts have been directed to submit contract specifications, the economic purpose it is intended to serve, details of settlement procedures and systems along with other related details. Exchanges have to also submit details of back testing of the margin calculation for a period of one year considering a call and a put option on the underlying with a delta of 0.25 and -0.25 respectively and actual value of the underlying, a SEBI circular said.
The Hindu Business Line, April 28, 2010

New PE valuation norms for unlisted cos
Foreign private equity firms will face stiff valuations when they decide to buy stakes in unlisted companies following a change in valuation norms by the RBI. The shares in unlisted companies will now have to be valued using a discounted cash flow model. This will remove any discretion in price-fixing and also reduce the chances of lower valuation under the earlier guidelines that fixed the price at average of two different valuations. The central bank has amended the provisions under the Foreign Exchange Management Act and a circular is expected shortly, an RBI official said. Experts think the change is significant as it would ensure that the value of Indian business that gets transferred outside of India will not be less than the consideration received. “A financial investor would typically invest at lower-than-market value depending on the risk profile of the asset. Imposition of discounted cash flow method for investments completely rules out commercial negotiations between a financial investor and the company,” said an industry official.
The Economic Times, April 26, 2010

Do away with power of attorney from clients: SEBI to brokers
Market regulator SEBI asked brokers not to refuse services to investors in case they fail to furnish power of attorney in favour of them. Power of attorney (PoA) is a legal arrangement that allows brokers to access bank and demat accounts of their clients. “No stock broker or depository participants shall deny services to a client if the client refuses to execute a PoA in their favour”, SEBI said in its new PoA guidelines. The guidelines, issued after consultation with various stakeholders, further said brokers will be prohibited from using clients account for off-market trade. SEBI came out with the guidelines in view of complaints of misuse of PoA by brokers. “In some cases, the PoA even allows a broker to open and close accounts on behalf of client and to trade on client’s accounts without the consent of clients”, it said.
The Economic Times, April 23, 2010

BSE reduces membership deposit to Rs 10-lakh
The Bombay Stock Exchange (BSE) has reduced membership deposit and fee requirements for new members in its cash and equity derivatives segments with immediate effect. The Exchange membership can be obtained by paying a deposit of Rs 10-lakh in place of the existing Rs 1-crore, the Exchange said in a press release. “By offering this exciting pricing scheme, we intend to make it affordable to all those aspiring for BSE membership,” the Exchange’s Managing Director & CEO, Madhu Kannan, said. The Exchange hoped that this new scheme would generate a good response from market participants thereby building and expanding its existing membership base to promote financial inclusion, Kannan said. In addition to the Rs 10-lakh (interest-free deposit), the member has to pay a base minimum capital of Rs 10-lakh, trade guarantee fund of Rs 10-lakh, annual subscription of Rs 25,000 plus service tax as applicable and initial contribution towards trade guarantee fund of Rs 10,000.
The Economic Times, April 22, 2010

Insurance Clippings

Life insurers must reveal commission on policies
Life insurance firms will now have to spell out to customers the commission they pay to agents on each policy. The insurance regulator has told insurers to disclose explicitly the commission in the `benefit illustration’, a document that contains the benefits due to a policyholder upon maturity of an insurance policy. A signed copy of the illustration along with the proposal form is mandatory for issuing a policy. In a circular to all life companies, the Insurance Regulatory and Development Authority (Irda) said companies will have to disclose the commission paid to agents with effect from July 1, 2010. The regulator said this will bring about enhanced transparency by providing prospective policyholders the exact amount of commission/brokerage paid by insurers.
The Economic Times, April 28, 2010

New business for life insurance industry grew 25 pc in FY2010
Led by state-owned LIC, new business for the life insurance industry recorded a growth of 25 per cent during 2009-10, overcoming the decline witnessed a year ago on account of the global financial meltdown. According to industry sources, the 23 life insurers mopped up a first year premium of Rs 1.09 lakh crore in 2009-10 compared to Rs 87,108 crore in the previous year. In 2008-09, the insurers registered a degrowth of 6 per cent.
The Economic Times, April 22, 2010

Govt examining lock-in period of 5 years for insurance cos
The government said it is examining to allow insurance companies to list after five years of operation, instead of the current 10-year norm, Parliament was informed. “The issue of reducing the lock-in period of insurance companies for initial public offer (IPO) is under examination in consultation with the Insurance Regulatory and Development Authority (IRDA) and other stake holders,” Minister of State for Finance Namo Narain Meena said in a written reply to the Rajya Sabha. He, however, said that a final decision on this matter has not been taken yet. Last month, IRDA had said that the initial public offer guidelines for the insurance sector is likely to come out in April. “The IPO guidelines could take a month-time and SEBI will take the final call,” IRDA chairman J Hari Narayan had said.
The Economic Times, April 20, 2010

ULIPs: Finance Ministry told to resolve spat
In a thinly veiled criticism of the Finance Ministry, a Parliamentary Panel has asked it to “immediately intervene” in the deadlock between SEBI-IRDA on the ULIPs regulation matter. The Finance Ministry cannot remain a “mute spectator” to posturings of “one-upmanship” by its regulatory bodies, the Standing Committee on Finance said in a report tabled in the Lok Sabha. This comes a week after the Securities and Exchange Board of India and the Insurance Regulatory and Development Authority, at the behest of the Finance Ministry, agreed to seek a binding legal mandate from an appropriate court to resolve the jurisdictional dispute. The Panel also expressed surprise that the regulatory jurisdiction over the Unit-Linked Insurance Policies, despite being an old product, was still hazy and not clearly defined. The Standing Committee, headed by Dr Murli Manohar Joshi, has asked the Finance Ministry to put in place comprehensive regulations for ULIPs, incorporating the concerns of both SEBI and IRDA.
The Hindu Business Line, April 20, 2010

SEBI order may not affect life insurers in near term
The ongoing SEBI-IRDA turf war is unlikely to impact life insurance companies’ business, at least for the time being. This is because April is a lean period for the companies after the busy January-March quarter. Almost 40-45 per cent of sales of insurance policies happen in the Jan-March quarter due to the tax-saving season. In contrast, the April-June quarter is comparatively lean, with around 10 per cent of the industry sales coming from this quarter. Even though SEBI issued show cause notices to the life insurance companies in January, the order barring 14 insurance companies from selling ULIPs was issued only on April 9. This ensured that there was not much impact on sales, said officials of insurance companies and distributors.More than 80 per cent of the new business premium collected by the insurance companies comes from the sale of unit-linked plans.
The Hindu Business Line, April 16, 2010

Mutual Fund Clippings

Mid-cap funds post returns of 101% over a year
Funds that focussed on mid-cap stocks have clocked impressive returns over a one-year period. The average return for the mid-cap funds category was 101 per cent (as on April 19) against the 76 per cent generated by the diversified peers. The mid-cap stocks barometer – the CNX Mid Cap – generated 104 per cent, while the BSE Midcap index has delivered generated 102 per cent against 56 per cent and 60 per cent generated by bellwether indices CNX Nifty and BSE Sensex . Despite such a stellar performance both the mid-cap indices were some way away from their all-time highs achieved in the early part of 2008. The segment bore the burnt of the market meltdown. The return divergence between mid-cap funds was however wide. The gap between the best in the category and the worst was quite wide at 42 percentage points.
The Hindu Business Line, April 28, 2010

Agent freebies: MFs under lens
Mutual fund houses have come under the scanner of market regulator Sebi for allegedly lavishing their agents and distributors with incentives like cash payouts and foreign junkets in return for higher sales. Instances of distributors of various fund houses being showered with cash incentives as also trips to locations in India and abroad have come to light, especially since the scrapping of entry-load charges from investors putting their money in mutual funds, a top Sebi official said. Besides finding such practices as unethical, Sebi is also examining whether these incentives are being funded by investors’ money in the name of fund expenses, the official noted. Strong remedial actions are said to be being contemplated for such practices and the market regulator might come out soon with appropriate guidelines in consultation with the industry body Association of Mutual Funds in India (AMFI) to tackle these issues, an industry official said.
The Economic Times, April 26, 2010

Sebi may cap PMS fees on realty fund
The Securities and Exchange Board of India (Sebi) is considering a cap on the fees charged by portfolio management service (PMS) providers for their real estate fund, sources said. Investors have complained to Sebi that most PMS providers are charging the full management fee upfront , rather than in proportion to the net invested amount. The capital market regulator recently met some of the top fund houses to understand their fee structure, and recommend changes to make it more investor-friendly. Most real estate funds collect money from their clients in phases. Assuming , a client wants to invest Rs 100 in four instalments of Rs 25, and the annual management fee is 2%. Ideally, the money manager should charge a fee of 50 paise on every instalment of Rs 25. Instead, he charges the client Rs 2 at the time of the first instalment itself.
The Economic Times, April 23, 2010

SEBI for check on mis-selling of mutual fund products
Market-regulator Securities and Exchange Board of India (SEBI), said that it is looking at the need to put a check on mis-selling of mutual fund products by the distributors through a compliance certification examination. “There is a need to put a check on distributors, who mis-sell mutual fund products in the market. By May or June, we will come out with an online test for distributors,” SEBI’s executive director, KN Vaidyanathan, told reporters. Currently, AMFI is conducting the test and accepts the registration formalities. From May onwards, the programme will be carried out by the National Institute of Securities Markets (NISM), a division of SEBI. Sebi wants to bring all financial products certification programmes under NISM. Presently, NISM conducts certification programmes for intermediaries in currency derivatives, registrar and transfer agents for stocks and registrar and share transfer agents for mutual funds.
The Economic Times, April 20, 2010

Pension schemes may be next on SEBI radar, say fund managers
Pension fund managers fear that pension schemes regulated by the Pension Fund Regulatory and Development Authority (PFRDA) could be a potential target for SEBI to assert its jurisdiction. While asserting its regulatory authority over unit-linked plans, SEBI had highlighted the investment component in them to justify its stance. Pension fund officials say that SEBI could use the same logic to assert authority over the pension schemes as well. Pension scheme for the unorganised sector provides the option to investors of investing most of the funds in equity markets. In the other schemes also, funds are invested in the equity markets. Industry experts feel that SEBI’s proactive stance in the case of ULIPs had more to do with regulating the exorbitant distributor commissions than the product. Due to this, SEBI may not look to encroach upon the jurisdiction of PFRDA as pension products do not have commission structures. Instead, they are fee-based. Also, the PFRDA Act has not been passed as yet. PFRDA has only signed investment management agreements with the pension fund managers.
The Hindu Business Line, April 15, 2010