ANALYSIS: SAT ruling in Kotak Bank case puts bourses on the back foot

1 September 2022

The recent order by the Securities Appellate Tribunal upholding an appeal by Kotak Mahindra Bank Ltd against National Stock Exchange of India's order to the bank to refrain from invoking the pledge of securities of defaulting broker Arcadia Share and Stock Brokers has again shined the spotlight on the bourses' jurisdiction over entities dealing with their members.

It also puts the bourses into a quandary on how to deal with a broker who siphons off securities from clients, pledging these to borrow funds for its own use and then refuse make good the shortfall of securities in client accounts.

The NSE had made a claim on the securities in the broker’s demat accounts saying it included clients’ securities and consequently the pledge of these securities was illegal.

The appellate body however said NSE did not have the legal jurisdiction to issue directions to banks and other entities other than its trading members.

While the NSE is expected to appeal against the SAT's ruling in the Supreme Court of India a recent difficult experience in the court on a similar matter will make it akin to walking on burning coal.

In a similar case the SAT had, in November last year, quashed NSE's order against Axis Bank directing it to freeze the bank accounts of defaulter broker Karvy Stock Broking to meet the claims of investors against the brokerage.

In that order, too, the SAT held that NSE's bye laws permitted it and its defaulter committee to issue directions only against a trading member, which was Karvy Stock Broking in the case being heard, and not against a third party, which was Axis Bank the appellant.

The NSE immediately went to Supreme Court of India appealing against SAT's order. The Supreme Court, however, dismissed the exchange's appeal on Feb 14 saying that "we are not inclined to interfere the order passed by the Securities Appellate Tribunal."

But there are reasons why NSE's hand can be seen to be stronger in the current case pertaining to Kotak Mahindra Bank.

For this one will have to first look at SAT's line of thinking in the Axis Bank case. The Securities and Exchange Board of India, which was a party to that case, had strongly argued before the  SAT that since the monies in Karvy's Stock Broking's bank accounts were proceeds from unlawful activities by the broker it had the first right of claims on it.

On the other hand, Axis Bank had argued that it had a banker's lien on Karvy's deposit accounts as it had extended loans to the broking firm which became non-performing.

The SAT made an important point in that ruling that it would have accepted SEBI's contention had evidence been shown to exist that the monies in the broker's bank accounts were linked to the siphoning off of clients' securities and were not the exclusive monies of the broking firm.

But now in the Kotak Mahindra Bank there may be evidence to show that a chunk of the securities lying in Arcadia Share and Stock Broker's demat account were not the broker's own shares bought by it from its own funds but were rather clients' securities that had been illegally siphoned off by the broker.

The NSE had got a forensic audit carried out on the broker's operations which had shown that it were the clients' securities that were illegally pledged by the broker. The SAT order mentions this aspect but does not consider the implications from it.

The NSE may consider using the evidence from the forensic auditor's report to tell the Supreme Court that the securities in the broker's demat accounts were unlawful and therefore the broker could not be considered as the legal owner of the securities as Kotak Mahindra Bank had argued before SAT.

The NSE had declare the broker a defaulter and expelled it from the exchange’s membership on Jul 2, 2021, for the misuse of clients' funds and securities and failure to resolve investor complaints against it.

The market regulator is also expected to see that stock exchanges' stand is vindicate since its own circulars require stock exchanges to direct banks and depositories to freeze bank and demat accounts when dealing with a case of broker default.

ACC's CFO Yatin Malhotra resigns, held position for two years

1 September 2022

ACC Ltd's Chief Financial Officer, Yatin Malhotra, has resigned with immediate effect, the company said in a filing with stock exchanges on Wednesday.

The reason behind the resignation was not provided by the company or the CFO. Securities and Exchange Board of India's listing regulations requires disclosure of reason behind resignation in the case of independent directors but not when the CFO of a company resigns.

Malhotra was the CFO of ACC from September 1 2020. Prior to him, Rajani Kesari was the CFO from August 1 2019 to August 31 2020.

According to the company's annual report for 2021 (Jan-Dec) Malhotra was paid a remuneration of 20.7 mln rupees in 2021 which included 1.61 mln rupees performance linked incentive for Sep-Dec 2020 and "performance shares of Holcim Ltd (ultimate holding company)" of 1.18 mln rupees.

ACC's promoter holding was recently been acquired by the Adani Group and the open offer by the acquirer under the takeover rules is currently going on.
Holcim Group recently sold its entire stake in ACC and Ambuja Cements Ltd to the Adani Group for 501.8 bln rupees and the open offer by the acquirer under the takeover rules is currently underway.

MOIL cuts prices of manganese ore by 10-15%

1 September 2022

--[I] MOIL: Cut prices of grades of ferro by 15% today
--[I] MOIL: Cut prices fines and chemical grades by 10%

MOIL Ltd has cut prices of select ferro grades of manganese ore by 15% with immediate effect, the company said in a filing with stock exchanges today. This applies to ore with "manganese content of Mn-44% and above," the company said.

For other manganese ore grades the prices have been reduced by 10%. The prices of fines and chemical grades of manganese ore have also been revised downwards by 10%.

The company also said that the price of electrolytic manganese dioxide has been increased with effect from today to 1,65,000 rupees per tn from 1,55,000 rupees per tn.

High input costs, weakening demand pose challenges, says Excel Ind

1 September 2022

Chemical producer Excel Industries Ltd has pointed to prices of key raw materials rising to "new highs" in recent weeks in its annual report for 2021-22 (Apr-Mar).

"In addition to the unfavourable input cost situation... we are seeing a weakening of demand in several key end user segments and geographical areas," the company said.

The company was also encountering a "customer pushback to further price increases"

The profitability of Excel Industries is likely to get impacted by these factors in the current and next quarter.

The company admitted in its annual report that it expected the business environment in the current financial year "to be very challenging."

An equity fund manager at a large fund house told Informist that yellow phosphorus prices have stayed elevated in the current quarter and that this was a major raw material for Excel Industries.

Excel Industries imports its key raw materials. Yellow phosphorus prices are steered by Chinese producers, who have access to domestic supplies.

The company noted this risk in its annual report. "China has a track record of taking advantage of this situation by pegging the price of the Raw Materials at a high level and at the same time pricing the downstream intermediates and finished goods aggressively," it said.

But current reports from China are pointing to temporary shutting down of yellow phosphorus manufacturers in Sichuan due to lack of power supply. Operational producers are reluctant to offer reliable quotations according to these reports.

Prices of yellow phosphorus in Yunnan and Guizhou regions of China have jumped by over 20% in the last one month, data from Shanghai Metals Market, a leading online metals data provider. The yellow phosphorus with benzene content of 99.9% or more was quoted at around 26,500 yuan per tn in early August and it was quoting at 31,900 yuan per tn.

Excel Industries produces specialty chemicals, intermediates and actives and sells to end user segments like soaps and detergents, lube oil additives, mining chemicals, polymer additives, agrochemicals and pharmaceuticals.