Damage control

When the Wall Street was breached, the Indian bourses had to battle a tsunami. Succumbing to panic, institutional and retail investors frantically pulled out money from the stock market and mutual fund schemes.

Print Edition: January 8, 2009

When the Wall Street was breached, the Indian bourses had to battle a tsunami. Succumbing to panic, institutional and retail investors frantically pulled out money from the stock market and mutual fund schemes. The result was an unparalleled liquidity crisis in the equity market. Cynics might say it’s a case of too little too late, but market regulator Sebi is now considering ways to minimise the impact on institutions and companies, thereby helping investors. Here is a look at the measures that will affect your investments in the stock markets.

MUTUAL FUNDS: In a bid to cap the huge redemption pressure that mutual funds have been facing since October, Sebi has curbed early exits from closed-ended schemes. Mutual funds will have to list all their closed-ended funds, including fixed maturity plans, on the stock exchanges. Now, the only way that investors can exit prematurely from these schemes is by selling the units on the bourses. Earlier, they could scoop their money out of a scheme after paying an exit fee.

Sebi has also mandated that the underlying assets for such schemes will not have a maturity beyond the date on which the scheme expires. Says Sukumar Rajah, CIO, equity, Franklin Templeton Investments: “This will help the fund contain the interest rate risk on the debt portfolio by matching the maturity of its debt securities with that of the fund. It will also help the fund remain fully invested through its tenure, reducing a cash drag on returns.”

The decision will also benefit investors as mutual funds will no longer have to dip into their reserves or sell assets—often at depressed prices in a falling market—to pay off investors who wish to opt out of a scheme.

IPOs AND RIGHTS ISSUES: Sebi has decided to extend the validity of the approval letter it hands out for public and rights issues. The validity has gone up from three months at present to a year. This means a company can wait for a year before a flotation if it finds the market isn’t receptive to IPOs. The move will immediately benefit 18 companies, which were collectively planning to raise around Rs 9,000 crore. In the past year, about 40 companies, which were planning to raise Rs 29,000 crore, had to let Sebi’s permission lapse due to poor investor response.

The board has also cleared a proposal, allowing electronic trading of ‘rights entitlement’ in stock exchanges. Now, shareholders with demat accounts can receive their rights shares in an electronic form. The issuer will gain access to issue proceeds only after the allotment is finalised.

In addition, Sebi is debating the collection of disbursement amount from entities that have committed irregularities in the market as also ways to compensate the investors. The other issues discussed by the board include the segregation of schemes for corporates and individuals. Sebi has asked the Association of Mutual Funds in India (Amfi) to prepare an industry paper on the subject. Says A.P. Kurian, chairman, Amfi: “This crisis has thrown up certain issues, which are, in a way, welcome. The paper aims at promoting mutual funds for retail investors.”

Steps taken by Sebi
• No early exit in any closed-ended mutual fund schemes.
• All closed-ended schemes to be compulsorily listed on stock exchanges.
• Underlying assets of such schemes not to have maturity beyond their expiry date.
• Validity period of IPOs and rights issues extended from three months to a year.
• Firms to access rights issue proceeds only after the finalisation of allotment.
• Rights entitlement to be available in demat form.

— Rakesh Rai

Gulliver Yields to Lilliputians

Here’s one for corporate governance. A shareholder revolt has forced software giant, Satyam Computer Services, to cancel its plan for a $1.6 billion acquisition of two companies linked to the company’s founder, Ramalinga Raju. The deal had to be called off within 48 hours of the board approving the buy-out because its stock was hammered. The proposal triggered a record 55% decline in the firm’s US shares, while back home, the share price tumbled 31%. Both analysts and shareholders criticised the move, terming it a disregard for shareholders’ interests, and institutional investors threatened to block the move. According to analysts, the deal was structured in such a way that the company would not have required shareholder approval and the payment would have gone to the promoters, instead of the company.

This is the second highprofile case of investor activism in recent times, after DLF was forced to offer shares to minority shareholders in 2006. Experts say the backlash was swifter in this case as institutions hold more than 60% share in the firm. It has also put a question mark on the role of independent directors on the board, who are supposed to protect the interests of non-promoter shareholders. “We will see investors becoming more active in India if firms don’t adhere to corporate governance,” says S. Dalal, MD, IL&FS Investment Managers.


Praful Patel
“The aviation turbine fuel prices have come down, so should the fares. It is now imperative for the airlines to respond to the situation.”
—Praful Patel, Aviation Minister

“Interest rates on deposit and lending are expected to come down by 150 basis points by March 2009.”
—T.S. Narayanasami, Chairman, Indian Banks’ Association

“About 4,000 ancillary units are on the verge of closure and about 2 lakh people will be affected by this crisis.”
—Anil Bhardwaj, Secretary General, FISME

“The markets are seeing a momentum upswing, but only when the global and domestic macro-economic environment stabilises will we see a sustained rally.”
—V.V.L.N. Sastry, Country Head, Firstcall India Equity Advisors

Source: The Hindu, The Business Standard and Reuters

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