SEBI fines Ajay Shah, 7 others 110 mln rupees in NSE governance case

30 Jun 2022

The Securities and Exchange Board of India today fined eight entities 110 mln rupees in a case that alleged misgovernance at the National Stock Exchange of India with regard to exclusive use of confidential and sensitive data for the period from 2009 to 2016.

Ajay Shah, an academician who was closely associated with NSE since 1994, was levied a penalty of 30 mln rupees, while Infotech Financial Services was fined 20 mln rupees and Suprabhat Lala, Sunita Thomas and Krishna Dagli were fined 10 mln rupees each.

SEBI also levied a penalty of 10 mln rupees each on the NSE and two former managing directors, Chitra Ramakrishna and Ravi Narain.

In its order, SEBI held that its investigations had provided a clear picture of irrefutable preponderance of probability of a nexus amongst Shah, Infotech, Thomas, and Dagli to use NSE’s liquidity index project as a conduit to achieve their commercial goals.

SEBI held that Shah had exerted his influence over NSE to get the contract for computing of liquidity index awarded to Infotech in which Thomas and Dagli were directors.

SEBI fined Lala on the ground that he was a senior official in NSE during the period in question, was the spouse of Thomas and was found to have had a close nexus with Infotech, Thomas and Shah in the entire scheme.

The NSE and its former heads Ramakrishna and Narain were held by SEBI to have committed “glaring negligence and irregularities as well as procedural lapses” while executing data use agreements with Shah.

SEBI said that they had “failed to ensure proper due diligence with respect to execution of agreements and to ensure fair dealing while executing these agreements and thereby have compromised on the integrity of the securities market.”  End

FOCUS: New capex plans by cement companies raise supply glut concerns

30 Jun 2022

The capacity expansion plans announced recently by major cement companies such as UltraTech Cement Ltd and Shree Cement Ltd, have tempered expectations of high earnings growth. This is because the capacity additions will lead to a supply glut over the next five years which will not be commensurate with demand growth.

There is also a view that speculation over whether Adani Group will aim to double the joint capacities of ACC Ltd and Ambuja Cements Ltd after legally completing its acquisition of the two companies has spurred existing major cement players to announce new capacity expansion plans.

The fact that these could be preemptive in nature is also indicated by the fact that much of the announced capex additions will get implemented after 2022-23 (Apr-Mar) is over and up to end of 2024-25 or even beyond.

UltraTech set the ball rolling early this month by announcing a 22.6-ml-tn annual capacity expansion till end of 2024-25, taking its total cement capacity to around 160 mln tn by end of 2025-25.

But the company hinted in an investor conference in mid-June that much of the new planned capacity additions, will take place after 2023-24 and not before it.

The company had earlier announced a capacity expansion of 20-mln-tn over 2021-22 and 2022-23 which is currently underway and which will likely expand its total capacity to 137 mln tn at the end of 2022-23.

According to brokerage Emkay Global, UltraTech is looking to add 16 mln tn of annual cement capacity in 2022-23, and expects delays in the commissioning of new capacities announced this month.

Unlike most other players in the cement industry, UltraTech does not shy away from using the greenfield route in any new phase of expansion and that will take time to commission.

In terms of cement capacity, UltraTech accounts for a little over one-fifth of the industry.

Following UltraTech’s footsteps, Shree Cement also announced a 3-mln-tn annual cement capacity expansion which will raise its total capacity to 49.4 mln tn by the end of December 2024. The company’s managing director, HM Bangur, told Business Today recently that the company will increase total capacity to 80 mln tn in five years from now.

According to estimates made by Jefferies India in May, the aggregate annual cement capacity in the industry will rise to 620 mln tn by the end of 2023-24 from the current level of around 560 mln tn.

After the new capacity hike plans announced by UltraTech and Shree Cement this month, the cement industry’s total capacity will likely rise further to 650 mln by the end of 2024-25.

“In the past, cement manufacturers have added capacities despite lower utilization rates and fall in return ratios,” Jefferies India said in a recent report. It attributed the rush to expand cement capacity by companies to multiple factors like fancy for dominant market share and time-to-time improvement in free cash flow with limited opportunities to invest elsewhere.

Further, state incentives for setting up manufacturing units goad cement companies to deploy incremental capex without considering the unit economics of the plant or region, the brokerage said.

The market has already factored in the capacity expansions that are already in play since the last one or two years. But it is worried about the supply glut that will take place from 2024-25 onwards assuming that UltraTech and Shree Cement would start executing their latest capacity expansion plans in a big way from that year.

The new capex plans took analysts by surprise. In a recent report, brokerage Nirmal Bang Equities listed “aggressive capacity expansion plans by multiple players” as the most significant headwind “which will inhibit earnings growth” of companies in the cement sector.

The brokerage said the new capacity addition by Ultratech was “aimed at pre-empting the capex that Adani may announce after completing the ACC and Ambuja acquisition process to establish a strong foothold” in the cement industry.

Some analysts say the impact of recent announcements will depend upon the type of expansion. According to Sumit Agrawal, equity fund manager at IDFC Mutual Fund, a brownfield capacity generally takes 2-3 years to come up post announcement and a greenfield takes 4-6 years.

Capacity expansion through the greenfield route involve setting up of new plants are set up or expanding existing ones, whereas brownfield capacity is through acquisitions of existing facilities of another company.

“FY23 (2022-23) supply may not be impacted at all by the new announcements. FY24 capacity will also have very little impact from new announcements. It is very difficult for any of the newly announced capacity to come up before FY 25,” said Agrawal.

WHERE IS DEMAND?
There was a strong revival in cement demand after the lockdowns were eased in 2020 which caught the street and the cement companies themselves off guard. Jefferies India said this an initial phase of pent-up demand from incomplete projects and houses which saw rural demand suddenly shoot up. Demand from cities followed significantly.

But recent inflationary pressures on consumers have muddied the waters for the cement companies. In post-March quarter conference calls with analysts in May, some cement companies have confirmed sluggishness in demand in the current quarter (Apr-Jun).

Inflation impact on government expenditure and current rural weakness may also belie market “anticipation of a surge in construction demand in the run-up to the general election (in 2024),” Jefferies India said. The brokerage pointed to the fact the recent slag in demand was partly on account of “a lack of infrastructure construction push due to government’s inaction”.

Further, input cost pressures have stayed high in the last three quarters and prevented companies from stroking demand through lower cement prices. Analysts are, however, more worried that the sustained rise in coal and other input costs will rein in companies from hiking cement prices and thereby hit the operating margins.

The cement sector is “passing through bumpy roads”, ICICI direct said in its report recently. A key factor, according to the brokerage, “will be the glut of new supplies over next three to four years.”

This view seems to be the market consensus. Time will tell, and particularly Adani Group’s action after completing acquisition of ACC and Ambuja Cements, whether the sector will manage to ride its way on the bumpy roads.

SEBI fines NSE, former MD, 16 others 438 mln rupee in dark fibre case

29 Jun 2022

The Securities and Exchange Board of India, on Tuesday, imposed penalties aggregating to 438 mln rupees on 18 entities including National Stock Exchange of India and its former Managing Director and Chief Executive Officer, Chitra Ramakrishna, in the dark fibre and leased line connectivity case.

The case involved alleged preferential treatment given to Way2Wealth Broker and GKN Securities by NSE and its officials by allowing them to utilise the services of unlicensed technology vendor Sampark Infotainment to lay optical fibres to colocation data centres of NSE and BSE.

Colocation refers to the practice of renting space at data centers for placing one’s own equipment such as servers, usually for quicker network connectivity.

The arrangement was found to have breached the exchange’s norms requiring equal, unrestricted, transparent and fair access to all brokers.

SEBI held NSE accountable for not disseminating to all members changes in empaneled service providers for providing point-to-point connectivity at NSE’s colocation facility. Point-to-point connectivity, in this context, refers to the link between a stock broker's server at NSE colocation and that stock broker’s server at BSE colocation. The exchange was also held responsible for the consequent preferential treatment given to the two brokers.

Former NSE officials Ramakrishna and Subramanian were held accountable for failing to prevent the breaches from happening given the fact that they had total control over the affairs of the exchange.

SEBI imposed a fine of 70 mln rupees on the exchange and 50 mln rupees each on Ramakrishna, former Chief Operating Officer Anand Subramanian, and Ravi Varanasi, who was in charge of the colocation business.

Way2Wealth Brokers was fined 60 mln rupees while GKN Securities received a penalty levy of 50 mln rupees. The technology vendor, Sampark Infotainment, was fined 30 mln rupees.

Further, three partners in GKN Securities — Om Prakash Gupta, Rahul Gupta and Sonali Gupta — have been handed out penalties of 11 mln rupees each.

The violations took place during the period of 2014 to 2016.

Tata Steel 10-mln-tn capacity add to be domestic, says Chandrasekaran

28 Jun 2022

Tata Steel Ltd’s targeted expansion of annual steel capacity by 10 mln tn will take place over a long period and it will all be within the country, its chairman, N Chandrasekaran, told shareholders in the company’s annual general meeting today.

The expansion will raise the domestic annual steel capacity to around 30 mln tn from 20 mln tn, he said.

The company was currently focused on increasing annual capacity in Kalinganagar to 8 mln tn from 3 mln tn, according to its annual report for 2021-22 (Apr-Mar).

Its capital expenditure in last financial year was 62.9 bln rupees primarily on account of the expansion project in Kalinganagar.

Tata Steel had recently acquired Neelachal Ispat Nigam whose site was in proximity to the company’s Kalinganagar site. Chandrasekaran told shareholders that the company “will endeavour to ramp up the operations of NINL (Neelachal Ispat Nigam) to its rated capacity of 1.1 million ton per annum within the next 1 year, subject to obtaining statutory clearances.”

There were no plans to increase steel capacity in its facilities in Europe and UK, he said.

In October last year, Tata Steel had spun off its UK and Netherlands operations into two independent subsidiaries “pursuing separate strategic paths”, according to its annual report.

Addressing shareholder queries on how soon the company intends to have zero net debt, Chandrasekaran said the company’s intent was not to take the net debt levels to zero as that would make its capital allocation inefficient.

He said Tata Steel was comfortable with the current capital allocation policy goal of bringing down debt by $1 bln (nearly 79 bln rupees) every year. At the end of 2021-22, the company’s consolidated net debt was 510.5 bln rupees, down from 753.9 bln rupees a year ago.

Responding to shareholder questions on the trend in price of steel in Apr-Jun quarter, so far, for the company, Chandrasekaran said there was a downward correction of 15%.

Lower steel prices will translate into reduced revenues for Tata Steel.

“But there is also a correction in coking coal price to the extent of 30-35%,” he said. Coking coal makes up for 40% of Tata Steel’s production costs and the company imports 80% of its coal requirement.

The fall in coal prices will cancel out the impact of fall in steel price on the operating margin, according to Chandrasekaran.

In response to a shareholder’s query on speculation that Tata Steel has been importing coal from Russia, Chandrasekaran said that it was not the case and that the company was importing coal only from Australia “at this point in time”.

Moody’s cautiously upgrades Tata Steel’s rating outlook to positive

27 Jun 2022

Moody’s Investors Service today said that it had changed the rating outlook on Tata Steel Ltd to positive from stable. The rating agency also retained Tata Steel’s Ba1 corporate family rating.

The rating outlook upgrade by a notch by Moody’s was based on its assumption that Tata Steel’s debt to earnings before interest, tax, depreciation, and amortisation ratio would remain below 1.5 times over the next two years while the company consistently generates positive free cash flow.

Moody’s was impressed by Tata Steel’s capital allocation policy that prioritised debt reduction over capital expenditure and new investments. But it said that it was still cautious in its forecasts for Tata Steel.

The rating outlook upgrade by Moody’s was after factoring in an EBITDA per tonne decline to $140-$150 in 2022-23 (Apr-Mar), and further to $40-$50 in 2023-24, from $180 in 2021-22.

Tata Steel’s EBITDA per tonne is estimated to decline due to lack of vertical integration at its European operations “and the wide swings in the business’ profitability in previous years,” said Moody’s.

Looking at Tata Steel’s liquidity metrics, the rating agency said that the company’s $3.1 bln in cash and liquid investments at the end of March 2022 indicated a good liquidity position.

But it cautioned that “given the inherently volatile steel industry, some unevenness in intra-year working capital is likely, which could lead the company (Tata Steel) to continue relying on short-term 364-day working capital facilities.”

Cochin Shipyard allowed by SEBI to use ETF route for public shr norm

24 Jun 2022

Cochin Shipyard Ltd, a government-owned company, has been permitted by the Securities and Exchange Board of India to comply with the 25% minimum public shareholding requirement by way of government reducing its stake through CPSE Exchange Traded Fund issue in February 2020.

The company said in an exchange filing today that SEBI has given a one-time relaxation on the sale of shares by the government, as a method to comply with the minimum public shareholding norm.

After a buyback of shares by Cochin Shipyard in October 2018, the public shareholding had fallen to 24.79%.

Following the CPSE ETF tranche of February 2020, the company’s promoter holding went up to 27.14%. But since the method was not a part of the approved methods of meeting the 25% minimum public shareholding norm SEBI had directed the company to comply by December 2020.

Subsequently, the company said, the government requested SEBI to allow disinvestment through the ETF route as one of the methods for achieving the compliance with the minimum public shareholding rule.

Varun Beverages chairman settles insider trading norm breach probe

 22 Jun 2022

The chairman and promoter of Varun Beverages Ltd, Ravi Kant Jaipuria, has paid 5.6 mln rupees to the Securities and Exchange Board of India to settle an investigation against him for allegedly having violated the insider trading norms.

According to a settlement order issued by SEBI on Tuesday, a show cause notice was issued to Jaipuria for having allegedly passed on unpublished price sensitive information pertaining to a strategic partnership between Varun Beverages and PepsiCo India during December 2017 to January 2018.

SEBI was probing whether Jaipuria, who was also a director in Lemon Tree Hotels, had communicated the information to two directors of Lemon Tree Hotels, chairman and managing director, Patanjali Keswani, and independent director, Arvind Singhania when they met in a hotel in Bangkok.

SEBI investigation had found that shares of Varun Beverages were bought by two entities controlled by Keswani and Singhania during the period when news of partnership with PepsiCo India was not in the public domain and sold it all immediately after the news was announced by Varun Beverages and the prices had moved up in reaction to the announcement.

SEBI Watch: RIL insider trading case highlights need for clarity in norms

21 Jun 2022

The insider trading regulations of the Securities and Exchange Board of India are one of the key pillars of investor protection.

It ensures that, on a continuous basis, price sensitive information within a company is brewing it is kept under tight wraps till it is made public and all those in the know-how of such information, including deemed insiders, do not trade and profit from it.

Secondly, when the information is required to be made public under the listing and disclosure norms then it is made public for all and not selectively.

These principles were in full play in the order by SEBI on Monday against Reliance Industries Ltd imposing a penalty of 3 mln rupees on the company for not clarifying, on a suo moto basis, upon media reports claiming that Facebook was close to signing a preliminary agreement to buy a multi-billion dollar stake in Reliance Jio.

The information revealed in the news report, without an ensuing suo moto clarification by the company, was clearly price sensitive in nature and its revelation amounted to leakage of unpublished price sensitive information that was known only to select company officials and non-company persons who are considered as deemed insiders under the norms.

Although the company made a formal announcement of the deal a month later SEBI held it accountable for abdicating its responsibility to issue a timely clarification.

The company protested that the stock exchanges did not seek a clarification from it as covered in the listing and disclosure norms and that suo moto clarification provision in the norms was voluntary and not mandatory.

This is indeed the case when it comes to specific clauses in the norms. Reliance Industries had also said, in its response to SEBI’s show cause notice in the case, that there was “constant speculation in the media and on social media platforms about RIL's (Reliance Industries Ltd’s) business and operations, and it would be impossible for RIL to track every news report and confirm or deny the same suo moto.”

SEBI, in its order, was right in applying the overarching principles of the insider trading norms and its connected provisions in the listing and disclosure norms.

But it must address the strong counter made by Reliance Industries that specific clauses in the norms did not cast a mandatory obligation on a listed company to clarify on any and all media reports.

There is clearly a grey area in the regulations and SEBI would do well to amend it to remove the ambiguity.

Reliance Industries also contended strongly that at the time of the initial media reportage the due diligence process was still going on and there were only tentative agreements on valuations. It told SEBI that no credible and concrete information had got created and so there was no obligation on it to clarify.

Listed companies are frequently in talks with entities for striking agreements or deals, and the stage of finality is reached only when the board of the company and the other entity approve it.

Most of the time the talks do not conclude in legally-binding deals.

But SEBI was right in dismissing this point on the ground that any information that is price sensitive, including a listed company’s ongoing talks with other entities for striking deals, came under the scope of unpublished price sensitive information and consequently attracted the application of insider trading norms.

The provisions of the insider trading norms and its connected provisions in the listing and disclosure norms have evolved over the years but there are still some grey areas that need to be tackled.

SEBI fines RIL, officials 3 mln rupee for insider trading norm breach

20 Jun 2022

The Securities and Exchange Board of India today fined Reliance Industries Ltd and two compliance officers of the company 3 mln rupees for breach of insider trading regulations.

In its order, SEBI said that unpublished price sensitive information pertaining to a likely deal between Facebook and Jio Platforms was not clarified upon by Reliance Industries for nearly a month after the media first reported it on March 24 and March 25, 2020.

The media report had said that Facebook was seeking to buy a multi-billion dollar stake in Reliance Jio and that it was close to signing a preliminary deal.

On April 22, 2020, Reliance Industries made a formal announcement that Facebook was investing 435.7 bln rupees in Jio Platforms for 9.99% stake.

SEBI held that the insider trading norms imposed an obligation on Reliance Industries to clarify on the matter when the deal got reported upon in March since it was a price sensitive information. But the company failed to take initiative in issuing any clarification and committed a breach.

Reliance Industries contended before SEBI that at the time of the media reportage in March the due diligence was still going on and there were only tentative agreements on valuations. It told SEBI that since no credible and concrete information had got created at that time no obligation was cast upon it to suo moto clarify on the media report.

The penalty of 3 mln rupees will have to be paid jointly and severally by Reliance Industries and two compliance officers, the SEBI order said.

SEBI’s income surplus fell in FY21, for the second consecutive year

20 Jun 2022

The surplus of income over expenditure of the Securities and Exchange Board of India fell for the second consecutive year in 2020-21 (Apr-Mar) causing the accumulated income surplus, or SEBI’s General Fund, to record a low single-digit growth for the second year running, according to audited annual accounts for 2020-21 (Apr-Mar) released by it today.

SEBI earned an income surplus of 1.59 bln rupees in 2020-21, down nearly 30% on year. In 2019-20 too it had fallen sharply, by 52% to 2.24 bln rupees. Prior to that, it had recorded a growth of 6% in 2018-19 and 21% in 2017-18.

The capital market regulator has accelerated its spends on operational matters in the last two years while the growth in income from fees and other charges levied on market intermediaries has not kept pace.

This is interesting because the 2020-21 was second year of the effect of a new government rule which required SEBI to transfer 75% of its annual surplus of income over expenditure to the government exchequer. This new rule may have spurred SEBI to spend more on establishment-related items and also on technology.

Fee income stayed flat at 6.1 bln rupees in 2020-21, while establishment expenses rose 16% on year to 4.38 bln rupees. In the previous year, 2019-20, the fee income had dropped 19% to 6.08 bln rupees and establishment expenses had risen sharply by 28% to 3.76 bln rupees.

The establishment expenses of SEBI are mainly on account of staff salaries, staff allowances and bonus, staff welfare expenses, provisions for gratuity and leave encashment.

Overall, in 2020-21, SEBI’s total expenses were up by 13% on year to 6.67 bln rupees and total income inched up by 2% to 8.26 bln rupees.

In the market regulator’s financial accounts, the annual income surplus gets added to its General Fund.

The General Fund of SEBI represents the accumulated annual surplus of all years and its corpus stood at 44.59 bln rupees as of March 31 2021, up by only 4% from the year ago level. In 2019-20 too, the General Fund had gone up by just 6% to 43 bln rupees at the end of the year.

Since the General Fund serves as the pivotal account to tap into for capital expenditure like technology upgrades and acquisition of new software, hardware and network systems for improving surveillance, enforcement and other regulatory matters.

The Investor Protection and Education Fund, like the General Fund, sits on the liabilities side of SEBI’s balance sheet, and its corpus saw a substantial rise to 8.83 bln rupees in 2020-21 from 1.28 bln rupees in the previous year.

SEBI’s annual report for 2021-22 is expected to be released in the next couple of months, while the annual accounts for the year will follow next year.

MFs sold ACC, Ambuja Cem shares in May in likely reaction to Holcim exit

17 Jun 2022

Domestic fund houses sold shares of Ambuja Cements Ltd and ACC Ltd in May during which their promoter, Holcim Group, announced that the Adani Group was buying its entire stake in Ambuja Cements and ACC for a cash payment of 501.8 bln rupees.

Mutual fund schemes, collectively, cut the number of shares they held in Ambuja Cements by 3.8%, and that in ACC by 7.1%, in May as compared to their collective holding in April, data by brokerage East India Securities showed.

The Holcim-Adani deal was announced on May 15 and it triggered the mandatory open offers by the Adani Group to buy 26% stake each from the public shareholders of Ambuja Cements and ACC.

At the declared open offer price of 385 rupees for Ambuja Cements, the Adani Group would pay 198.8 bln rupees to the public shareholders assuming full acceptance. Similarly, for ACC, it would pay 112.6 bln rupees at its declared open offer price of 2,300 rupees.

Mutual funds collectively net sold 4.9 mln shares of Ambuja Cements shares in May from their April-end holding of 130.3 mln shares. Based on the company’s average closing price of 365.7 rupees in May, the net selling would have been for around 1.79 bln rupees.

In ACC, mutual fund net selling was for 1.22 mln shares which bought down their collective holding to 16 mln shares at the end of May from the end of the previous month. Based on the company’s average closing price 2,219.7 rupees in May, mutual funds would have sold ACC shares worth around 2.7 bln rupees.

According to analysts the selling by mutual funds was likely in reaction to the Holcim-Adani deal, although the data did not indicate it took place before or after May 15 when the deal was announced.

The mutual fund selling was not across the board in cement sector stocks, indicating that the selling in Ambuja Cements and ACC was extraordinary.

In UltraTech Cement Ltd, for instance, fund houses collectively bought shares adding 1% to their collective holding, while in case of Shree Cement Ltd, they sold shares and pared their exposure by just 1%.

Among the fund houses, the major sellers in Ambuja Cements included PGIM India Mutual Fund which sold 3.5 mln shares amounting to 99.1% of its holdings as on Apr 30. Mirae Asset India Mutual Fund sold 7.4 mln shares, or 30% of its holdings, while HDFC Mutual Fund sold 1.5 mln shares and pared its stake in the company by 9.2%.

On the other hand, there was significant buying of Ambuja Cements shares by Quant Mutual Fund, Nippon India Mutual Fund and Mahindra Mutual Fund. Quant MF bought 4.6 mln shares raising its holding in the company to 7.6 mln shares from 3 mln shares, while Nippon India MF bought 3.1 mln shares and doubled its holding in the company.

In ACC, major mutual fund sellers were HDFC MF, Franklin Templeton Mutual Fund, PGIM India MF and DSP Mutual Fund, while major buyers were Tata Mutual Fund and SBI Mutual Fund.

Analysts do not expect the same rate of selling by domestic fund houses in the current month as the share prices of Ambuja Cements and ACC have slipped sharply below their respective open offer prices. The tendering period for the open offer has been tentatively fixed as July 6 to 19 by the Adani Group.

SEBI fines Zenith Steel, others 108 mln rupees for GDR fraud

16 Jun 2022

The Securities and Exchange Board of India today levied penalties aggregating to 108 mln rupees against Zenith Steel Pipes & Industries Ltd and six other entities for fraud committed in the company’s global depository receipt (GDR) issue in May 2010.

Zenith Steel Pipes & Industries was levied a penalty of 100 mln rupees, while its managing director, three other directors, and two other entities were fined a total of 8 mln rupees.

In its investigation, SEBI held that $23-mln-GDR issuance of Zenith Steel Pipes & Industries in 2010 was fraudulent.

The company, its directors and two entities, Arun Panchariya and Mukesh Chauradiya were involved in the dubious issue where the proceeds from the GDR issue were pledged with a foreign bank which then provided a loan to a Panchariya-controlled entity to subscribe fully to the GDR issue.

The company projected misleading information to investors when it notified that its GDR issue was fully subscribed by a set of eight investors. This misled the domestic investors and breached SEBI's listing norms and norms on prohibition of fraud in the market.

The company also did not make any disclosures of the pledge agreement and certain other agreements of credit and account charge which were a part of the fraudulent scheme of things.

SEBI issues penalty recovery notice to BSE, NSE in Karvy Broking case

15 Jun 22

The Securities and Exchange Board of India today raised a notice of demand for recovery of penalty of 30.9 mln rupees, including interest, from BSE Ltd and another one for recovery of 20.6 mln rupees, including interest, from the National Stock Exchange of India.

The notices were sent to the two exchanges for not complying with SEBI’s orders in April against them in the Karvy Stock Broking case.

On April 12, SEBI had imposed penalties on the NSE and BSE, through two separate orders, for their failure in timely detection of the fraudulent conduct of Karvy Stock Broking which had membership on both the exchanges.

The NSE was fined 20 mln rupees while the BSE was directed to pay 30 mln rupees in the SEBI orders.

In its orders, SEBI said that Karvy Stock Broking had misutilised client securities worth 23 bln rupees belonging to more than 95,000 clients by illegally pledging them from its demat account and raising funds against the pledges for itself and its group entities.

“The scale of misuse by KSBL (Karvy Stock Broking Ltd) points to the loss to investors which can potentially be caused when irregular conduct is not detected in a timely manner,” SEBI said in its orders, and held the two bourses responsible for not having checks and balances in place which could detect the fraud much earlier.

SEBI’s first order, an interim one, in the Karvy case was issued on November 22, 2019 when it barred the brokerage from taking new clients and imposed other restrictions.

SEBI Watch: Plug loopholes allowing misuse of preferential share issue funds

13 Jun 2022

A recent ruling by the Securities Appellate Tribunal has put a spanner in the works of the Securities and Exchange Board of India with regard to the latter’s regulatory and enforcement rigours in the rules governing preferential issue of shares by listed companies.

Early this month, SAT ruled against a SEBI order of April that had fined a company, Terrascope Ventures, for a significant deviation from the stated use of funds garnered in a preferential issues of equity shares in 2012.

The sole ground on which SAT allowed the appeal was that the deviation in funds use was ratified by shareholders in an annual general meeting in 2017 by a majority vote.

This ruling by SAT may have adverse ramifications for shareholders if companies manage to get majority votes for ratifying earlier use of funds that was not in line with the stated purposes at the time of a preferential issue.

It opens a pandora’s box which SEBI would find it hard to grapple with. A majority approval is easy for companies where promoters hold stakes of 25-30% or more.

At present, the issue of capital regulations require companies raising funds through preferential issue of shares to specifically state the various purposes for which the funds proposed to be raised by them and get shareholder approval prior to giving effect to the preferential allotment of shares.

SEBI had rightly contended in its order against Terrascope Ventures that the company’s use of funds for other purposes would render the information provided prior to the preferential issue as untrue, misleading and distorted.

This violated the listing regulations, the issue of capital norms and the regulations on prohibition of fraudulent and unfair trade practices in the securities market. It was, therefore, appropriate that SEBI impose penalties on the company, its managing director and another director in the case.

But, given the negative implications for investor rights from SAT’s order, SEBI must appeal the ruling in higher courts.

SEBI also has the option to tweak its regulations on issue of capital and listing obligations to specifically prohibit retrospective shareholder approval of deviation in use of funds raised through preferential issues.

Any misuse of funds raised from issue of shares, even if it is within the ambit of court rulings, will hurt the interests of investors. Existing loopholes in the norms that get exploited by companies in the court appeals must get removed.

UltraTech new capex plan to commence in FY23 or FY24, says brokerage

13 Jun 22

UltraTech Cement Ltd’s recently announced 22.6-mln-tonne-per-year capacity expansion is likely to be funded entirely through internal accruals and will commence in 2023-24 (Apr-Mar) or 2024-25, the company said in a recent investor conference according to a report by brokerage Jefferies India.

In 2022-23, the company will be adding 16.5 mln tonne per year capacity which was a part of capex plan announced in 2020.

On Jun 2, UltraTech Cement had announced that it would incur capital expenditure of up to 128.9 bln rupees towards increasing capacity by 22.6 mln tonne per year by way of integrated units, grinding units and bulk terminals, in a phased manner by 2024-25.

It had specified in the stock exchange filing that it would fund the capex through a mix of borrowings and internal accruals.

The brokerage report said that UltraTech specified its blended capex plan was for $76 per tonne, greenfield expansions were likely at around $100 per tonne and brownfield expansions at around $50 per tonne.

The report also stated that the company found cement demand in Apr-May to have fallen short of its expectations which led to price declines of 10-12 rupees per bag in May which followed price hikes of 30 rupees per bag in April.

The company also reportedly said that based on current petcoke prices of 250-260 rupees per tonne and international coal cost of $370 per tonne, its power and fuel costs are likely to increase by around 300 rupees per tonne as compared to the Jan-Mar quarter’s number.

Meanwhile, Fitch Ratings said today that it had raised the outlook of the ‘BBB minus’ long-term foreign currency issuer default rating of UltraTech Cement to stable from negative, following the rating agency’s recent upward revision of the outlook on India’s issuer default rating of ‘BBB minus’ to stable from negative.

The ratings agency said that UltraTech’s higher capacity expansion capex and the faster new capacity additions in the domestic cement industry will weigh on margins and lead to moderately negative free cash flow over the current and next financial year.

SEBI directs F6 Finserve to return siphoned off client funds, shares

9 Jun 2022

The Securities and Exchange Board of India today directed brokerage firms F6 Finserve and F6 Commodities and their promoter directors to return funds and securities of their client, along with annual interest of 15%, which they siphoned off in grave violation of regulatory norms.

In a final order passed against the two brokerage firms, Pankaj Goel, Meenu Goel and two other promoter directors, SEBI held that they were carrying out their broking operations with various flagrant violations and mismanaging their clients’ funds and securities.

Although the SEBI order did not specify the exact amount of client funds and securities that had to be returned, it stated separately that the claims by the clients of the broker valued 433 mln rupees.

The egregious irregularities in handling of client funds and securities were carried out for at least two years during 2016 to 2018 when an inspection by the National Stock Exchange of India brought it out in the open.

SEBI then took over the probe and carried out a detailed investigation. It found that the broker was not settling the credit balances of several clients in contravention of SEBI norms that required brokers to settle once every quarter.

Among several violations, F6 Finserve had used client securities to meet settlement obligations on its proprietary account and had transferred securities inter se between its clients.

Earlier, in April 2018, the NSE and BSE had declared F6 Finserve as a defaulter and expelled it. F6 Commodities was expelled by the commodity derivatives exchanges in May 2018.

In today’s order, SEBI also barred the two brokerage firms and the four promoter directors from all securities market activities and positions for five years.

Gulf Oil Lub’s FY22 receivables jump due to Mar sales surge, says co

9 Jun 2022

The trade receivables of Gulf Oil Lubricants India Ltd at the end of 2021-22 (Apr-Mar) represented a big increase over the year ago level but the company attributed it to the high topline growth during the financial year.

Trade receivables were up sharply by 57% to 3 bln rupees as of Mar 31, data from Informist Corporate Fundamental Database showed. The revenue from operations of the company, which is a leading private player in the domestic lubricants business, rose by 33% on year to 21.9 bln rupees in 2021-22.

Analysts tend to view any significant jump in trade receivable as an indicator of potential liquidity problem,

Manish Gangwal, chief financial officer at Gulf Oil Lubricants, said in a recent conference call with investors and analysts that the full year topline of the company grew by nearly 33% in 2021-22 which increased the receivables overall. Further, March was a “very-very high month” in terms of sales and those were all standing in the trade receivables at the end of the year.

The company’s March quarter net sales of 6.4 bln rupees was 29% of full year sales, the data showed. The revenues for Jan-Mar grew by 24% on year and 6% on quarter.

Given that trade receivables jumped up by 57% while full-year revenues grew by a lower rate of 33%, the March sales surge would have likely been significant.

The company’s clarification on the trade receivables was in response to a query from an analyst on the sudden jump in of high trade receivables. The analyst further pointed to falling cash flows.

The company said it was in control of the working capital and that the trade receivables were “only 5 to 6 days higher” than normal. It said that the buyback it effected in 2021-22 led to a total cash outflow of 1.1 bln rupees.

The company had cash and cash equivalents of 5.7 bln rupees as of March 31, higher than the year-ago level of 5 bln rupees.

Analysts look at trade receivables to turnover ratio of companies to gauge the liquidity position. A rise in the ratio is generally considered as problematic.

In case of Gulf Oil Lubricants, the data showed that that average trade receivables in 2021-22 were nearly 12% of full year revenues and it was significantly up compared to the previous year ratio of 10.1%. The average was calculated as a mean of the Sep 30 and Mar 31 figures provided in the balance sheets as of those two dates.

A rise in operating costs had reined in the company’s growth in earnings before interest, tax, depreciation and amortisation to 3.3 bln rupees in 2021-22 from 3.2 bln rupees in the previous year, while the EBITDA margin contracted sharply to 14.8% from 18.6%.

Price cuts, input cost rise in May to hit cement cos, say brokerages

7 Jun 2022

A slack in demand last month led to cement companies partially rolling back the price hikes they had taken in April in key regions.

Further, spikes in petcoke and coal prices, a key input cost for the cement industry, continued in May and analysts expect this, along with subdued net price hike in Apr-May, to hit the operating margins of cement companies.

The average domestic selling price of cement declined 3% on month In May, with multiple markets seeing declines, on the back of weak demand, said brokerage Jefferies India in a report.

Average cement prices witnessed 3% on-month decline in May on account of a sharp 7% decline in the major region of North, followed by 3% on-month decline each in central and southern regions, according to brokerage JM Financial.

“Volumes in May slipped on MoM (month-on-month) basis by mid-to-high single digit, while remaining higher YoY (year-on-year) on soft base,” said Jefferies. The brokerage estimates cement industry demand for 2022-23 (Apr-Mar) to be in high-single digits, compared to around 8% increase in demand in 2021-22.

The key input costs were inching up materially, said JM Financial, with coal prices rising sequentially in May and average petcoke prices rising to around $390 per tonne in May from $360 per tonne level in the previous month and around $320 in March.

According to broker Motilal Oswal Financial Services the impact of sustained increase in energy costs will be felt by cement companies in Apr-Sep. Based on its channel checks, the brokerage estimated the Apr-Jun volumes to decline around 15% on quarter as against a historical on-quarter decline of 8-9% in the June quarter.

Jefferies India said that the price hikes announced by cement companies for June were limited to “very few” markets. As a result of price hikes not sustaining and input costs remaining elevated the brokerage said the downward risk on earnings estimates had resurfaced.

Analysts expect that the on-year volume growth in Apr-Jun to be high due to a low base and were, therefore, watchful of on-quarter trends which showed weakness.

Analysts are watching closely whether the Apr-May trends in prices, volumes and input costs will continue to worsen in the current month and result in a larger hit on the operating margins of cement companies.

UltraTech to incur 129-bln-rupee capex to raise capacity by 23 mln tn

2 Jun 2022

UltraTech Cement Ltd has decided to incur capital expenditure of up to 128.9 bln rupees towards increasing capacity by 22.6 mln tonne per year by way of integrated units, grinding units and bulk terminals, in a phased manner by 2024-25 (Apr-Mar).

The capacity expansion will be done through the brown field and green field routes, the company said in a stock exchange filing today.

The Aditya Birla Group company will fund the capex through a mix of borrowings and internal accruals.

UltraTech’s existing grey cement capacity is nearly 120 mln tonne per annum with a current capacity utilisation of 77%.

Kumar Mangalam Birla, Chairman, Aditya Birla Group said that the “ambitious capacity expansion plan is a significant milestone in the ongoing transformational growth journey of UltraTech.”

The company said the commercial production from the new capacities is expected to go on stream in a phased manner by 2024-25.

It said that the current expansion program was on track and estimated to be completed by the end of 2022-23 (Apr-Mar).

SEBI Watch: Client collateral safeguards in place, monitoring now key

2 Jun 2022

From May 2, a major gap in the client margin mechanism that enabled brokers to use excess funds or securities balance in one client to fund a shortfall in the account of another client was plugged. This is a substantial change.

Securities and Exchange Board of India announced this change along with others in a circular in July last year on client level collateral segregation and monitoring by brokers, clearing members and clearing corporations. It was initially scheduled to take effect from Dec 1 but market participants have got SEBI to postpone it.

After the Karvy Stock Broking fraud case came to light in 2019, the issue of client funds and securities misuse has become paramount for the regulators and market participants. The problem in the system was acute as many other cases of broker misappropriating client funds and securities came out in the open.

The underlying weakness in the mechanism of handling of client funds and securities by brokers and clearing corporations for margins and trade settlement purposes came as a shock to many.

But since then the capital market regulator has moved deftly and effected changes aimed at safeguarding client funds and shares.

The most important safeguard to have was that of one client’s funds and shares not getting misused to fund the shortfall in another client or the broker’s proprietary account.

At the same time, since mid-2020, the retail investor participation in cash and derivative markets has gone up exponentially and the need for changes became urgent.

It was leading to demand by some recalcitrant clients on brokers to take care of margin or other shortfalls in their accounts by any means possible. If the broker was not funding these shortfalls from its own funds or securities then it was dipping into funds or securities of other clients.

Broker proprietary account shortfalls also posed similar problems for the client funds and securities.

The changes that SEBI announced in July laid out in great detail on how the fund and securities collateral, including the recently introduced securities pledge and re-pledge for margins directly with the clearing corporation, will be handled at all stages from the client to the clearing corporation.

There is, since May, a strict bar o the broker from co-mingling client funds and securities with each other or with its proprietary account.

Now, if there is a margin or other shortfall in one client’s account, the broker will only be able to fund it from its own account and not accounts of other clients.

These much-needed safeguards are now in place, and credit goes to SEBI on persisting with the change.

But continuous monitoring by clearing corporations and SEBI will still be needed. They will have to be on guard against false allocation of client level margins provided by brokers to clearing corporation, and undue withdrawal of client allocation by brokers without intimation to the clients.

The markets will be safer only if adequate monitoring and enforcement happens.

Even before the Karvy scam took place, the principle of client funds and securities not getting misused by the broker was enshrined in the rules. But the underlying mechanisms were not foolproof to ensure that it was followed all the time.

Religare Ent, Religare Finvest settle with SEBI in funds fraud case

1 Jun 2022

Religare Enterprises Ltd and its subsidiary, Religare Finvest, have paid settlement amounts of 54.2 mln rupees and 50.9 mln rupees respectively to settle a probe by the Securities Exchange Board of India into their alleged breaches of listing and prohibition of fraudulent practice regulations.

In a settlement order on Tuesday, SEBI said that it had issued a show-cause notice to Religare Finvest for allegedly being a part of a fraudulent and deceptive scheme to divert 24.74 bln rupees from Religare Enterprises to the promoter group entities. Shivinder Singh and Malvinder Singh were the ultimate promoters of Religare Enterprises when the alleged fraud took place.

SEBI was also probing Religare Enterprises for falsifying its consolidated financials and not disclosing on time Reserve Bank of India’s repeated adverse observations on Religare Finvest’s corporate loan book.

SEBI passed another settlement order on Tuesday in the same case against Pankaj Sharma, chief executive officer of Religare Finvest.

Sharma has paid 4.4 mln rupees to settle SEBI’s probe into his alleged failure to carry out adequate due diligence and exercise independent judgement with respect to grant of loans by Religare Enterprises during the period in question.

Religare Finvest had, in January, settled a similar case involving its alleged role in aiding and abetting the routing of funds from Fortis Healthcare to RHC Holdings and consequently to Malvinder Singh and Shivinder Singh, who were part of the promoter group of the Fortis Healthcare when the funds diversion took place.

It paid a settlement amount of 18.2 mln rupees to SEBI in that case.

SEBI fines six entities for front running Sterling Group trades

1 Jun 2022

The Securities and Exchange Board of India, on Tuesday, levied a fine of 3 mln rupees against an employee of Sterling Group and two of his family members in a front running case pertaining to trades carried out by them during 2010-2011.

SEBI held that Manish Chaturvedi and his family members made an unlawful profit 81.9 mln rupees by orchestrating the front running in trades Sterling Group trades by getting a few traders to execute trades ahead of the corporate group.

SEBI had, in December 2020, ordered Chaturvedi and his family members to disgorge 189.9 mln rupees, including interest of 105.7 mln rupees, towards the illegal gains made from the front running operation.

In the same matter, SEBI, on Tuesday, also fined Madhu Chanda, a dealer who was associated with brokerage firm, Sharekhan, during the period in question, and her two family entities 2.5 mln rupees. SEBI said they made unlawful gains of nearly 4 mln rupees from their front running trades.

Chanda and her family members were, in December 2020, directed by SEBI to disgorge 9.1 mln rupees, including interest of 5.1 mln rupees.

SEBI’s enforcement in front running cases is based on the premise that it is a fraud against the securities market as a whole and not only against the specific entity whose trades have been front run.

Front running is specifically barred under SEBI’s prohibition of fraudulent and unfair trade practices.

Former SBI MD Ashwani Bhatia joins SEBI as a whole-time member

1 Jun 2022

Ashwani Bhatia, who was a Managing Director in State Bank of India till last month, has joined the Securities and Exchange Board of India as a whole-time member.

In a statement, SEBI said that Bhatia took charge of his position today.

A whole-time member at SEBI occupies a seat on the market regulator’s board, which currently has Madhabi Puri Buch as the chairperson, three whole-time members including Bhatia, and four part-time members.

At SEBI, Bhatia will be required to handle all regulatory matters pertaining to foreign portfolio investors, market intermediaries, debt and hybrid securities, alternative investment funds, corporation finance and investor assistance and education.

Apart from Bhatia, S K Mohanty and Ananta Barua are the current whole-time members of SEBI.

The position of a whole-time member had fallen vacant after G Mahalingam’s 5-year tenure got over in November.

Mohanty became a whole-time member in June 2018 and Barua took over his position in August 2018.