http://www.newyorker.com/humor/2008/09/29/080929sh_shouts_borowitz
27 September 2008
Pardon the humour - financial crisis
This is hardly the time for humour on the financial crisis and bailouts, but this one is good from the New Yorker on a personal bailout.
http://www.newyorker.com/humor/2008/09/29/080929sh_shouts_borowitz
http://www.newyorker.com/humor/2008/09/29/080929sh_shouts_borowitz
17 September 2008
AIG and Lehman - some dark unintended humour
Check out this AIG commercial on youtube and don't miss the 'liabilities as nightmare' bit. (Thanks to Paul Kedrosky for pointing this out).
There's another on 'never outlive your money' commercial of AIG.
Also don't miss the CFO of Lehman being all optimistic ('sometimes perceptions are stronger than reality') about raising $3 billion earlier in the year and this investment advisor's take on it (jump to the 6th minute of the video).
There's another on 'never outlive your money' commercial of AIG.
Also don't miss the CFO of Lehman being all optimistic ('sometimes perceptions are stronger than reality') about raising $3 billion earlier in the year and this investment advisor's take on it (jump to the 6th minute of the video).
15 September 2008
Financial maelstrom
People on wall street aren't really looking forward to how this week unfolds as details of 158 year old Lehman's bankruptcy filings come out, Bank of America's (BoFA) acquisition of Merrill Lynch as the latter totters and the near precipice situation of AIG - while it is liquidating assets to stay float.
Appears like the most significant week in the financial history of the USA in a very long time - possibly a once in a hundred year event - as Alan Greenspan states about these and other events of the recent weeks. How will this effect the Indian financial sector? - over to you.
Appears like the most significant week in the financial history of the USA in a very long time - possibly a once in a hundred year event - as Alan Greenspan states about these and other events of the recent weeks. How will this effect the Indian financial sector? - over to you.
11 September 2008
Forfeiture of demat shares
Yesterday's Economic Times has a piece on 'Thawed frozen demats to yield 20k crores'. It seems the finance ministry has sought the opinion of the law ministry whether demat accounts which have been unclaimed can be forfeited. While many of the shares frozen may be benami in nature (owned by someone other than the shareholder), and the requirement of providing the income tax identity card PAN card may have caused several such illegally held shares to be abandoned, it is important to move with caution. Any law which goes below 7 years (a la Companies Act 'Investor Education and Protection Fund') and which does not give a right to claim securities even after that period would be unfair and possibly amount to expropriation.
Under common law, forfeiture or bona vacantia would typically require upwards of 10/15 years of unclaimed status and even after that period, it would be possible to claim the property. Also, at least some of the non-claimed status is the negligence of the brokers. Take my example, though I haven't held equity shares for the past 3 years, but have a demat account with ICICI Direct. Around three years back I got a series of threatening mails (instead of aplogetic ones) from ICICI that they had lost my KYC papers in the Bombay floods and that I must immediately provide PAN and other details. After providing it once, they apparently could not trace it and kept sending rude reminders - no word of apology for losing it twice in the first place because of their negligence. After providing the same documents thrice (the last of which over a year back), I received an email from ICICI on 9th Sept 08 that my account did not have PAN details! Well, so much for illegal accounts. Luckily there is nothing to freeze there :)
Is the price of petrol subsidised in India?
I am amazed at how well the government has portrayed a generous subsidy for petrol, diesel etc. This is far from the correct position. I did some back of the envelope calculations on the price of petrol and here are my numbers. I started with the price of petrol in the
Present price of Petrol in the
Taxes in US (per gallon): 0.47
Net price of petrol excluding taxes $/gallon: 3.198
Net price of petrol excl taxes in $/liter: 0.845
Net price of petrol excl taxes in Rs/liter: 38.47
(Note: 1 gallon [US, liquid] = 3.785 liters
1 USD = 45.54 Rupees)
Can we all stop pretending that petrol is subsidised? Of course many European countries have an even more obnoxious tax treatment of petroleum products, and for a country which badly needs to correct its fiscal deficit position, this quantum of tax may even be justifiable, inflation be damned. But it's not clear to me why we have this convoluted system of high taxes and then 'subsidies' in the form of oil bonds given to public sector petro companies, bleeding those companies. Makes me wonder how Fitch (a rating agency) thinks that the 'subsidy' is bleeding the Indian government.
09 September 2008
SEBI's flawed order on takeover regulations in buy back situations
SEBI has passed an order on the 5th Sept 08 where it exempts promoters of DLF (a listed Indian company) from complying with the SEBI (Substantial Acquisition of Shares and Takeovers) Regulations 1997 (takeover regulations). The facts in brief are that the listed company proposes a buy-back of its equity shares, and pursuant to the scheme shareholders would tender their shares to the full limit on offer (assuming all persons except the promoters tender their shares). On the buy-back, the voting rights of the acquirers would increase from the existing 88.16% to 89.32% of the outstanding equity share capital of the target company and the same would attract the provisions of Regulation 11(2) of the takeover regulations. In other words, the promoters' ownership in terms of number of shares would remain constant, while the proportion of their shareholding in the company's capital would increase (as the other shareholders' equity has been bought back) - thus triggering a compulsory tender offer requirement.
The promoters had sought exemption from complying with the provisions of the takeover regulations which prescribes that the acquisition of any voting rights (once the acquirers already own 55% shareholding) would cause a tender offer of 20% to be triggered (in this case the quantum would be lower as the public float is only around 11%). Such applications go to an independent takeover panel, which in this case has recommended an exemption. Based on the recommendation, the whole time member of SEBI has allowed the exemption.
The order gives the exemption by concluding "The acquirers are also in control of the target company. I note that, even after the proposed buy back, the shareholding of the acquirers in terms of numbers would remain the same and that the increase in the shareholding (in terms of percentage) is only incidental to the proposed buy back plan of the target company. The acquirers have undertaken that they would not participate in the buy back offer of the target company. I further note that, pursuant to the proposed buy back, there would not be any change in control over the target company, as the acquirers (part of the promoter group) are already in control over the target company."
This is a non sequitur. The increase in shareholding is not incidental to the buy back program. The increase is occurring because the promoters are choosing not to tender their shares into the buyback program - had they chosen to tender, their shareholding would have fallen. That's not a typo - it would actually have fallen as the promoter would have tendered the number of shares announced while many non-promoters would not have tendered, ensuring the promoter shareholding was guaranteed to fall. Only because of the exercise of the volition of the promoters is the acquisition occurring rather than as an incidental occurrence.
The last sentence quoted above 'there would not be any change in control over the target company, as the acquirers (part of the promoter group) are already in control' is a challenge to the very spirit of the takeover regulations. Regulations 11(2) mandates that acquisition of even one share beyond 55% would attract the compulsory tender offer requirement. Then following this order, shouldn't all acquisitions over say 50% or 67% not require a compulsory tender offer - as the person is already in control? Unfortunately, this flawed order will remain, for many to exploit as a precedent, as neither the persons granted the exemption nor SEBI will appeal against it.
PS: While, SEBI had in the past allowed exemptions where the promoters held below 55% and their buy back induced acquisition would not exceed 5% as the exemption was in the nature of creeping acquisition which was allowed under Reg. 11(1) and was in a way equitable. That fact pattern is however a gray area and open to debate - but contrast it with the present one.
The promoters had sought exemption from complying with the provisions of the takeover regulations which prescribes that the acquisition of any voting rights (once the acquirers already own 55% shareholding) would cause a tender offer of 20% to be triggered (in this case the quantum would be lower as the public float is only around 11%). Such applications go to an independent takeover panel, which in this case has recommended an exemption. Based on the recommendation, the whole time member of SEBI has allowed the exemption.
The order gives the exemption by concluding "The acquirers are also in control of the target company. I note that, even after the proposed buy back, the shareholding of the acquirers in terms of numbers would remain the same and that the increase in the shareholding (in terms of percentage) is only incidental to the proposed buy back plan of the target company. The acquirers have undertaken that they would not participate in the buy back offer of the target company. I further note that, pursuant to the proposed buy back, there would not be any change in control over the target company, as the acquirers (part of the promoter group) are already in control over the target company."
This is a non sequitur. The increase in shareholding is not incidental to the buy back program. The increase is occurring because the promoters are choosing not to tender their shares into the buyback program - had they chosen to tender, their shareholding would have fallen. That's not a typo - it would actually have fallen as the promoter would have tendered the number of shares announced while many non-promoters would not have tendered, ensuring the promoter shareholding was guaranteed to fall. Only because of the exercise of the volition of the promoters is the acquisition occurring rather than as an incidental occurrence.
The last sentence quoted above 'there would not be any change in control over the target company, as the acquirers (part of the promoter group) are already in control' is a challenge to the very spirit of the takeover regulations. Regulations 11(2) mandates that acquisition of even one share beyond 55% would attract the compulsory tender offer requirement. Then following this order, shouldn't all acquisitions over say 50% or 67% not require a compulsory tender offer - as the person is already in control? Unfortunately, this flawed order will remain, for many to exploit as a precedent, as neither the persons granted the exemption nor SEBI will appeal against it.
PS: While, SEBI had in the past allowed exemptions where the promoters held below 55% and their buy back induced acquisition would not exceed 5% as the exemption was in the nature of creeping acquisition which was allowed under Reg. 11(1) and was in a way equitable. That fact pattern is however a gray area and open to debate - but contrast it with the present one.
06 September 2008
Regional stock exchanges - time to let them go
The Supreme Court has sent notice to SEBI and the government on a petition by Saurashtra and Kutch exchange, see newsreport. SEBI had withdrawn its recognition of the exchange under the Securities Contracts (Regulation) Act 1956 last year and SAT had upheld the SEBI decision. While the specifics of the case are not too important, the bigger picture is important.
India now has some 18 stock exchanges which remain recognised as exchanges by the regulator even though only 2 (NSE and BSE) have operational activity, of which the BSE has been in a steady state of decline for the past decade. With 16 defunct exchanges, someone should have answered the question why do they still exist as legally recognised entities? The answer is broadly political and partly economic.
Many of the exchanges have subsidiaries which act as brokers on the main exchange (BSE/NSE), with its brokers acting as sub-brokers of the main exchange. These are in fact doing very well - last known statistics, if I recall right, 17% of the total national turnover came from these sub-brokers. With such success it will of course be wrong headed to close these centres of commerce down - however, one must recognize that these are functioning as brokers and not as exchanges. While the right to create broking subsidiaries, was a special regulatory dispensation, there have also been some regulatory bottlemecks to closing down the main exchange while allowing the subsidiaries to continue, as the existence of the parent was a condition precedent to operating these subsidiaries. Thus SEBI needs to tweak its regulations to allow closure of the parent without affecting the business of the subsidiary.
The political problem is more serious and is connected to the right of the government to extract revenue from the exchanges. Here there are two issues, one relating to properties (specially land and building) of the exchanges, many of which are worth astronomical amounts at today's prices, and the other relating to tax ememption status of several of the exchanges. A few of these properties were given at subsidised prices by the government, though a vast majority were acquired at market price. The resolution of the issue is simple in the latter case, where properties were acquired at market prices by the exchanges, the members should be given the right to sell the property or use it in the manner they choose, after the exchange is de-recognised (it continues as a limited company). Where the property is given at subsidised rates, the market price minus purchase price should be divided equally between the exchange and the government - it is a small price to pay for derecognition. Particularly, the mischief which occurs on several of the exchanges because of the benefits of capital gains exemption to name but one. Also tens of millions of rupees were lost on corporatisation and demutualisation of these defunct exchanges.
Any tax breaks and exemptions need to be ignored and the members of the present exchanges should be permitted to keep the properties and run the business as a limited company (derecognised as an exchange) so long as they don't misrepresent their former exchange status for their benefit. This will clearly have to be a decisive governmental decision and is the only right thing to do.
See a copy of the SEBI Report of the Committee to Study The Future of Regional Stock Exchanges (RSEs) – Post Demutualisation of which I was a part.
03 September 2008
First major ARS action in the US - powers of SEBI
The US securities regulator today filed perhaps its first major complaint relating to auction rate securities (ARS) in the district court of New York against Credit Suisse brokers who made unauthorized purchases of these securities for corporate customers by making false and misleading statements and mischaracterisations. What is interesting is that most of the investors who were duped were foreign corporate investors rather than American investors and so is at least one of the brokers who has fled to his native Bulgaria.
The SEC has sought the following:
- Permanently restraining and enjoining the brokers from violating the anti-fraud provisions of the securities statutes.
- Disgorgement and prejudgment interest.
- Civil monetary penalties
Separately, the Department of Justice announced its criminal action against the brokers.
Unlike the US SEC, the Indian regulator has no power to approach a civil court seeking injunctions or other useful remedies. As it seems to have no locus to file a civil suit, it is hobbled in its enforcement to only administrative remedies rather than a combination of administrative and civil remedies. There is clearly a need to amend the SEBI Act 1992 and provide this additional remedy to the regulator.
01 September 2008
SAT costs on SEBI stayed by Supreme Court
CNBC just reports that the Supreme Court stayed the imposition of cost by SAT on SEBI in the Goldman Sachs case.
SAT has imposed costs in nearly half a dozen cases on SEBI - usually against the adjudicating officer or whole time member's quasi judicial order. Ironically, the costs are imposed in cases where SAT's poor understanding of law and finance is betrayed e.g. the Mathew Easow case or where the facts are gross and the persons involved are routine violators of securities laws e.g. Top Telemedia.
Be that as it may, the key legal question is whether a statutory tribunal has powers to impose costs on another statutorily created body (or its officers acting in good faith) even though no such powers are given. The settled position is that a tribunal may use incidental powers while using their main powers e.g. stay an action in the interim - even though no power to stay has been granted. To me it seems like a clear excess of authority, particularly where the orders are bona fide. Even assuming such powers did implicitly exist in the tribunal, this appears a perverse exercise of the powers - by analogy High Courts and the Supreme Court would also begin to impost costs on the benches of the lower court they disagree with so that reputational compensation may make the party aggrieved whole.
This problem is exhibited in an order where the tribunal itself overruled its previous order on such costs and admitted that two views were possible in the interpretation and therefore the view taken by the adjudicating officer was a fair and possible view.
All the cases where the tribunal itself has not itself overruled itself in review, have been stayed by the Supreme Court - which will eventually take a final view on the subject both from a power perspective and its exercise in specific cases.
SAT has imposed costs in nearly half a dozen cases on SEBI - usually against the adjudicating officer or whole time member's quasi judicial order. Ironically, the costs are imposed in cases where SAT's poor understanding of law and finance is betrayed e.g. the Mathew Easow case or where the facts are gross and the persons involved are routine violators of securities laws e.g. Top Telemedia.
Be that as it may, the key legal question is whether a statutory tribunal has powers to impose costs on another statutorily created body (or its officers acting in good faith) even though no such powers are given. The settled position is that a tribunal may use incidental powers while using their main powers e.g. stay an action in the interim - even though no power to stay has been granted. To me it seems like a clear excess of authority, particularly where the orders are bona fide. Even assuming such powers did implicitly exist in the tribunal, this appears a perverse exercise of the powers - by analogy High Courts and the Supreme Court would also begin to impost costs on the benches of the lower court they disagree with so that reputational compensation may make the party aggrieved whole.
This problem is exhibited in an order where the tribunal itself overruled its previous order on such costs and admitted that two views were possible in the interpretation and therefore the view taken by the adjudicating officer was a fair and possible view.
All the cases where the tribunal itself has not itself overruled itself in review, have been stayed by the Supreme Court - which will eventually take a final view on the subject both from a power perspective and its exercise in specific cases.
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