Capital Market Clippings

Prospects to have more clarity on directors’ details
The SEBI Board directed companies raising capital to make certain disclosures regarding their board of directors. The offer document of companies raising capital should contain disclosures from their directors on whether they were directors of any company whose shares were suspended from trading for more than three months during the last five years, SEBI said in a release issued after the board meeting. It is learnt that the market regulator is coming out with detailed amendments to its issue of capital and disclosure requirements prescribing the enclosures for such disclosures in the offer document.
The Hindu Business Line, May 20, 2010

SEBI eases listing rules for SMEs
The Securities and Exchange Board of India (SEBI) has relaxed share-listing norms for small and medium enterprises (SMEs) by allowing them to disclose their financial results every six months instead of three months, as is the norm for bigger companies. Companies listed on the SME exchange will not be required to send a full annual report to their shareholders and also need not publish their financial results as required in the main stock exchange. “Companies listed on the SME exchange may send to their shareholders a statement containing the salient features of all the documents,” the regualtor said in its circular. But these companies will have to maintain a public shareholding of at least 25% of the total number of issued shares at all times. A company listed on the SME exchange, having post-issue capital between Rs 10 crore and Rs 25 crore can migrate to the main exchange provided it meets the listing requirements of the stock exchange. For this purpose, the company must first make a proposal to list the specified securities and obtain the prior approval of its shareholders.
The Economic Times, May 19, 2010

SEBI asks brokers to submit report on rollout of new norms
Market regulator SEBI has asked stock brokers to provide the exchanges with a status report on the implementation of new client-broker agreement, which will become effective from June 30. The deadline has been extended a couple of times, as brokers sought time to prepare for the proposed changes, and also due to ambiguity over some of the rules. SEBI had announced the guidelines in December last year. The new rules require brokers to keep records of the people introducing new clients, and regulatory actions against them (clients), detail the systems for settling client funds and securities once a calendar quarter/month, among other things. For existing clients, the broker has to inform the exchanges if he has obtained a signed confirmation letter for the e-mail id to which transactions details will be sent, and the necessary consents for running accounts, annual renewal, among other things.
The Economic Times, May 19, 2010

SEBI panel recommends higher net worth for market intermediaries
A SEBI committee for review of eligibility norms (CORE) for various market intermediaries has recommended increased minimum net worth for market intermediaries, including asset management companies, brokers and merchant bankers. One sub-group of the core committee suggested a minimum net worth of Rs 50 crore for mutual fund asset management companies (AMCs) as against existing networth requirement of Rs 10 crore. “Although the operations of AMCs are in the nature of a pass through, a larger net worth is required to build up the minimum infrastructure that is sufficient to service investors,” said the study paper on the SEBI Webs ite requesting comments by June 14. The sub-group also recommended that existing AMCs be given an appropriate period by SEBI to build up their net worth to Rs 50 crore level.
The Hindu Business Line, May 15, 2010

SEBI proposes stronger disclosure norms for rating agencies
Concerned over the practice of certain companies influencing rating actions, market regulator SEBI proposed a stronger disclosure norms for credit rating agencies (CRA). “It is recommended that all registered agencies be required to disclose publicly on their websites their shareholding pattern and the names of the owners,” said a SEBI sub-group in its recommendation on which the regulator has invited comments from public. Rating agencies, the report added, “have to manage this conflict and prevent it from influencing rating decisions. Both regulations and internal procedures have to be designed towards this end.” On disclosure of rating performance, the sub group recommended that every CRA be required to publish, every six months, a list of its publicly outstanding ratings that have moved by more than one notch over the preceding six months.
The Economic Times, May 13, 2010

Insurance Clippings

IRDA’s new norms to provide strong cover for Ulip holders
Holders of unit-linked policies will in future get more of their money back if for any reason they are forced to surrender their policy within a couple of years. New norms by the Insurance Regulatory & Development Authority (IRDA) now provide very strong incentive to insurers to ensure that policies do not lapse. The regulator unveiled new regulations on unit-linked insurance plans, capping the surrender charge on policies that are returned after a year at 15%. This is a huge benefit for the customer as today there are several plans where the customer gets nothing if s/he surrenders her/his long-term policy after paying the first year premium. For example. If the policyholder paid Rs 100 in the first year, a big chunk of around 40% is deducted by way of various charges. The remaining 60% is allocated to the Ulip fund. If for any reason the policyholder fails to pay the renewal premium, the insured would get back 85% of Rs 60 thereafter, i.e., Rs 51 after the lock-in period.
The Economic Times, May 19, 2010

IRDA seeks financial condition reports from non-life insurers
The non-life insurance companies need to submit financial condition reports on an annual basis from March 2010, the Insurance Regulatory and Development Authority (IRDA) said. In a circular,  Dr R. Kannan, Member (Actuary), IRDA, said the insurers should submit the report for the year ending March on or before September 30. The report should be sent in a prescribed format with details including business projections, analysis of business growth, adequacy of premium/capital, risk management, investment and asset liability management and current and future financial condition. “Based on the experience gathered, the format (of the report) will be reviewed by the end of January 2011, if required,” Dr Kannan said.
The Hindu Business Line, May 17, 2010

Ulip investors face changes in DTC
Holders of unit-linked policies (Ulips) are a troubled bunch these days. The insurance grapevine has it that there may be changes in the tax treatment of Ulips. For instance, if the sum assured for a Ulip is less than 20-times the premium paid for such policies, chances are one may end up paying taxes on the returns from April 2011 onwards. It is exempt now but that could change once the revised direct tax guidelines come. Ulip holders will need to modify their plans accordingly to ease the tax burden. But in case the sum assured isn’t 20 times the premium a Ulip holder pays, returns on Ulips may decline if one has to adjust it to make it tax exempt by increasing the sum assured value. More sum assured means an increased portion of premium going into paying mortality charges which will leave less money to be invested into units — the portion of the money that goes into either equity or debt to earn returns. The draft Direct Tax Code submitted last August proposed a tax on returns for insurance policies where the premium paid is less than 20 times the sum assured. A final version is expected in the next couple of months which will lay down the fineprint on the issue.
The Economic Times, May 18, 2010

Ulips formed half of all life insurance biz!
Private life insurers in the country are lucky that the recent Sebi ban on unit-linked insurance plans (ULIPs) was cancelled. They would have lost almost half their businesses if the market regulator’s ban on 14 insurers from raising funds through the investment-cum-insurance product. That is because Ulips constitute 46% of the total business in the life insurance space. “Ulip has taken a prominent place in the global insurance market and India is not far behind. It has become the growth engine over the years in the Indian insurance market,” said an industry expert. Of Rs 2,00,000 crore-plus life insurance premium collected in the first 11 months of 2009-10, a little over Rs 91,000 crore came from Ulips, according to the Life Insurance Council of India, an industry body representing 23 life insurers. Premium collection from renewal of Ulips registered a 33% year-on-year jump in the April-February period to Rs 46,927 crore, showing that majority of the consumers are banking on Ulips for better long-term return.
The Economic Times, May 14, 2010

No quarterly financial statements for insurers: IRDA
The Insurance Regulatory and Development Authority (IRDA) has directed non-life and reinsurance companies to submit complete details about solvency margins from 2010-11. The date of submission of quarterly solvency reporting would be same as prescribed for public disclosures, Mr R.K. Nair, Member (F&I), IRDA, said in a circular. In a separate circular, the authority had also said all insurance companies need not submit quarterly financial statements as prescribed by a circular issued in November 2007. “As a new system of comprehensive public disclosures was introduced in January, the authority feels that there is no need for separate filing of quarterly financial statements,” it said.
The Hindu Business Line, May 11, 2010

Mutual Fund Clippings

Rally in G-secs has positive impact on MF income schemes
The rally in the Government securities market over the last one month has had a positive impact on the income schemes of mutual funds. These schemes have given investors attractive annualised returns of 15-20 per cent the one-month period. A host of factors including global economic uncertainty, receding probability of the Reserve Bank of India going in for rapid increase in interest rates when major central banks were persisting with an easy monetary policy, a thaw in global commodity and oil prices, and volatility in stock markets have triggered a rally in the bond market, which in turn has boosted the net asset values of income schemes, say market players. Income schemes of mutual funds typically invest 80-100 per cent of their corpus in debt instruments including the Central Government securities, State Government securities, and debt securities issued by public and private sector companies and up to 20 per cent in money instruments such as treasury bills, certificate of deposits, commercial papers, etc.
The Hindu Business Line, May 24, 2010

Sebi may close equity options route for MFs
The Securities and Exchange Board of India (Sebi) may shortly ban mutual funds from selling equity options. Option sellers potentially face unlimited losses if their bets go wrong, because they are obliged to honour the contract if the buyer chooses to exercise it. Conversely, buyers of option contracts lose only the upfront premium should their bets go awry. The logic behind Sebi’s plan to bar mutual funds from selling equity options could be that the market regulator feels some fund houses are taking ‘excessive exposure’ to options, a person familiar with the development told. In a circular sent only to mutual funds late-March, the market regulator sought feedback from asset management companies (AMCs) on proposals such as barring them from selling equity options, reducing their exposure to equity derivatives and disclosing more about their bets in this segment.
The Economic Times, May 14, 2010

SEBI asks MFs to disclose investor complaints
Market regulator SEBI asked mutual fund houses to disclose the details of investor complaints on websites, as well as in annual reports, to enable clients to make more informed decisions. “Mutual Funds shall henceforth disclose on their websites, on the AMFI website as well as in their Annual reports, details of investor complaints received by them from all sources,” the Securities and Exchanges Board of India said in a circular. Following the circular, all Asset Management Companies (AMCs) will have to put up the data for the bygone fiscal by June 30, 2010, and for each new fiscal within two month of the close of the year. SEBI expects the disclosure norms would improve transparency in functioning of the AMCs and would enable investors to take informed decisions.
The Economic Times, May 13, 2010

MF agents flout SEBI rule on sub-brokers
Self-styled distributors, lacking basic qualifications to sell mutual fund units are advising investors as to where they should put their hard-earned money. Distributors need to pass the Amfi Advisors’ Module if they want to sell mutual fund schemes to investors. If industry officials are to be believed, top national distributors, who sell investment products across asset classes, are not insisting on Amfi certification while appointing sub-brokers (sub-advisors or franchisees). This is more prevalent in franchisees or sub-broker offices in tier-II and tier-III cities, according to sources. “Top distributors simply ask for a small membership fee at the time of empanelling as a sub-broker. They are not really concerned about Amfi registration or any certification. The sole criterion is how many investors you can bring into the branch,” said a fund industry source. These distributors are allowed to sell products across asset classes, from equity mutual funds to ULIPs, corporate deposits and even Nabard bonds on certain occasion. For mutual funds, market regulator Sebi has made it mandatory for distributors to pass certification test (advisors module) and obtain registration number from Amfi.
The Economic Times, May 10, 2010

New guidelines to make ultra short-term funds more volatile
Even as ultra short-term funds were the most sought-after investment avenues in 2009-10, the current fiscal could prove challenging for these funds as the returns are likely to get more volatile once the new money market and debt security valuation guidelines are introduced from July 1. For investors, this would result in a trade-off between liquid schemes that provide low returns and stable net asset values (NAV) and ultra short-term funds that provide slightly higher returns with marginally higher volatility in NAV. Ultra short-term funds are popular with investors for the management of short-term surpluses. The increase in assets under management in 2009-10 was due to banks and corporate entities parking their surplus in mutual funds as part of their cash management and treasury operations. In the last quarter of 2009-10, however, the AUM of the industry declined sharply, largely on account of year-end redemptions by institutional investors.
The Hindu Business Line, May 06, 2010