life in financial markets: rare action against listed companies

Securities market regulators, including stock exchanges that regulate their intermediaries and issuers, tend to show weakness when it comes to non-compliance of disclosure or any other rules of a stock exchange.

In India, although cases (occasional or frequent or a bit of both, I don't know) of delayed, improper, misleading disclosures by listed companies happen, the National Stock Exchange and the Bombay Stock Exchange have never imposed a hefty monetary penalty on any of their listed companies that will send out a clear message to future potential miscreant companies.

No wonder then I was pleasantly surprised yesterday in learning that London Stock Exchange (LSE) imposed an unprecedented amount of monetary penalty on one of the companies listed {Regal Petroleum, see its price graph below (click on image to see it enlarged & clear)} on


its Alternative Investment Market (AIM). Read LSE's official press release below.

The real challenge before LSE, however, is to keep an intense eye on what their Main Market listed companies. The AIM is for small and medium companies and the Main Market has all the biggies. It is easier to go after the small fish. Therefore, a standing ovation beckons a stock exchange that dares to go after the big fish.

Of course, if there are no violations by any of the big companies then what can you do? But that is an illusion created by the strong lobby groups these big companies manage to create and successfully use in excessively influencing government ministers and regulators' chiefs. You just have to look at India's one-year old Satyam Computers case to see how not a single rupee or dollar fine has been imposed yet by Sebi on the company for rigging its accounts and inflating its profit figures for 3-5 years.

Here then is LSE's press release of yesterday:

17 November 2009

REGAL PETROLEUM PUBLICLY CENSURED AND FINED £600,000

("Regal" or "the Company"). These sanctions were imposed by the AIM Disciplinary Committee for numerous, serious breaches of the AIM Rules in connection with its oil exploration wells in the The London Stock Exchange today issued a public censure and fine of £600,000 against Regal Petroleum plcKallirachi Prospect, an area in the North Aegean Sea.

On 11 separate occasions, Regal failed to take reasonable care to ensure that its announcements were not misleading, false or deceptive, and did not omit material information. On two occasions, Regal also failed to release price sensitive information without delay.

In particular, Regal contravened AIM Rule 9 (equivalent to the current AIM Rule 10) by:

using language in its announcements that created a misleading impression as to the potential commercial viability of the Kallirachi Prospect;
being over-optimistic in the information it notified, focussing on the higher end of expectations without adequate explanation of this fact, and omitting an adequate description of the risks associated with the Prospect; and
not accurately reflecting in its announcements the test results from the Kallirachi wells or the conclusions of independent experts on which the announcements were based

In contravention of AIM Rule 10 (equivalent to the current AIM Rule 11), Regal failed to announce without delay poor test results and the plug and abandonment of the two wells drilled within the Kallirachi Prospect.

Nick Bayley, Head of UK Regulation at London Stock Exchange Group, said:

"Today's public censure and fine closes an exceptional case in AIM's history. It is unprecedented in terms of the seriousness of the rule breaches involved and the resultant market impact. These factors contributed to the AIM Disciplinary Committee's decision to impose the highest fine in AIM's history.

"Following an investigation by the Exchange and the FSA, the Exchange's action was contested by Regal, resulting in lengthy disciplinary proceedings. Today's action demonstrates that the Exchange takes the accurate and timely disclosure of price sensitive information by quoted companies very seriously. Whatever the size, profile or complexity of the breach, the Exchange is prepared to take firm action against companies that fall short of the required standards."

Full details of the breaches can be found in the censure.
- ends -
For further information please contact:
Patrick Humphris / Alastair Fairbrother
Press Office +44 (0)20 7797 1222
newsroom@londonstockexchange.com

Background to Regal Petroleum:
Regal Petroleum, a company focussing on exploration, development and production of oil and gas assets in various countries including Greece, Ukraine and Romania, was admitted to AIM in September 2002.
Relevant Regulatory Provisions:
All references to the AIM Rules in today's censure are to those in effect at May 2003. While the AIM Rules were amended during the Relevant Period, the rules that are the subject of this censure remain unchanged, other than in respect of their numbering. The equivalent rules currently in force are Rules 10 and 11 of the AIM Rules for Companies, June 2009:
AIM Rule 10
The information which is required by these rules must be notified by the AIM company no later than it is published elsewhere. An AIM company must retain a Regulatory Information Service provider to ensure that information can be notified as and when required.
An AIM company must take reasonable care to ensure that any information it notifies is not misleading, false or deceptive and does not omit anything likely to affect the import of such information.
It will be presumed that information notified to a Regulatory Information Service is required by these rules or other legal or regulatory requirement, unless otherwise designated.
AIM Rule 11
An AIM company must issue notification without delay of any new developments which are not public knowledge concerning a change in:
♦ its financial condition;
♦ its sphere of activity;
♦ the performance of its business; or
♦ its expectation of its performance,
which, if made public, would be likely to lead to a substantial movement in the price of its AIM securities.

life in financial markets: unviable Sebi's new small companies' listing rules

It looks like it is doomed to fail.

The latest Securities and Exchange Board of India (Sebi) move to allow listing of small IPOs of paid-up equity capital of Rs 10 crore and less on existing stock exchanges had been in the offing for about two years.

Such small IPOs were already possible under BSE's listing norms but had to comply with difficult requirements such as minimum revenue of Rs 3 crore in each of preceding three years and a 1,000 minimum public shareholder requirement.

These restrictions won’t apply under the new relaxations for the BSE. Even the NSE, that presently has a minimum paid-up capital requirement of Rs 10 crore for IPOs, will be able to list small companies.

But two new conditions that Sebi has introduced are expected to discourage small-size IPOs. These are the minimum IPO application size amount of Rs 1 lakh and a post-listing minimum trading lot size of Rs 1 lakh. These are expected to take away liquidity in trading and scare away even the big investors and institutional investors.

life in financial markets: wild west among india's equity brokers!

In the last one month or so, the National Stock Exchange has been publishing ads in newspapers alerting readers (who would be investors in the stock market) about the role of Power of Attorney (PoA) that they hand over to brokers.

I am amused. The NSE is spending a lot of money in these ads. Instead, it can spend one-tenth of it by just auditing the records of 5% clients of its top 20 brokers (by number of clients) and checking the PoA documents signed by the investors and handed over to brokers. These lie with with the broker and NSE has regulatory powers to inpsect any broker's records.

But as I said in a post earlier this month, the stock exchanges are amazingly loathe to take any tough action against its brokers.

Anyway, the NSE ad reminded me of a story I had written last year and submitted, in December 2008, to the magazine I work for, for a potential new, but undecided, specialised and frequent section in the magazine.

That story talked of the dangers of the documents that investors were being forced to sign by brokers and DPs. Here is that story:


One-sided agreements

Its a wild west out there among brokers and DPs. Put on your Client Eastwood hat to take them on.

The underlying principle behind legal agreements is that they protect the rights—and spell out the obligations—of ALL the parties to the contract or agreement. The stock market has its share of legal agreements but they are getting increasingly opposed to the rights of you—the investor.

To carry out your investment activities in equity shares you have a trading account with a NSE (National Stock Exchange) or BSE (Bombay Stock Exchange) broker and a demat account with a NSDL (National Securities Depository) or CDSL (Central Depository Services) depository participant (DP). The legal umbrella is the client-broker and client-DP agreement. Willy-nilly you sign them.

Well, this umbrella is leaking. What's worse is that brokers are making you sign various authority letters and powers of attorney. We take a look at these legal agreements to see whether they offer you protection or potential hazards.

Client-broker agreement. In the last seven years, brokers have almost resorted to incorporating all kinds of clauses that are heavy on your obligations but feather-light on the broker's. More than 95 per cent of them dwell on your do's and don'ts and the remaining tiny portion is on jurisdictional and dispute issues. This wasn't the case two years ago. Then, these agreements contained specific clauses on broker's obligations to deliver shares and pay funds within 24 hours of settlement pay-out to the client and dispatch of contract notes within 24 hours of the trade. Such clauses have performed the Houdini act. In their place have come new ones that are nothing but a sleight of the hand for investors.

The NSE and BSE have been mute witnesses to the mutation of this crucial legal document. Pick up any agreement of any big broking firm and one sees this new trend. Although exchanges' rules and regulations also define the rights and obligations of broker vis-a-vie their interactions with investor-clients, not-so-savvy investors are not likely to know the existence of these and therefore vulnerable to being taken for a ride by some unscrupulous brokers. Their brokers will point to the agreement and say "See! Your complaints are not covered here. So chill!" The chill should have been going down the spines of the officials of the inspection department on uncovering such agreements during their yearly sojourn of brokers' offices. But so far the two exchanges have chosen to ignore this investor-related area in their regulation of the markets.

Irrevocable power of Attorney. The rolling settlement cycle got shortened to T+2 from April 2003, and since then there has been pressure on you to pay funds or deliver shares to your brokers on time. Taking advantage of this situation many brokers today coerce you to give them your irrevocable power of attorney (PoA) to manage your demat account (and with some brokers whose associates are banks even your bank account) so that you are saved from the effort of handing debit instruction slips to your DP against your sales on time. These PoAs also go further to include your investments in mutual funds, government securities and other securities through the broker who could be an authorised mutual fund agent and investment agent to government agencies.

But the problem arises when you are given no other option but to give your broker or DP such a PoA. Says the NSE official: "As far as any authorisation is concerned the investor has got complete freedom not to give it and the broker can't refuse service on that ground. Brokers' internal arrangements can not override our or Sebi rules."

This would be reassuring if the reality reflects it. But walk in to any office or branch of a large- or medium-sized brokerage firm and enquire about opening a new trading account and demat account with either of them and you will find their representatives clearly telling you that if you do not sign on the POA, they will not process your application form at all. A majority of brokers do this and NSE and BSE do nothing about it. This is despite alternative solutions made available by NSDL and CDSL enabling investors to move shares through the internet. Brokers and DPs are stingy in informing their investors of such an alternative solution.

What makes matters worse is that the PoA does not specify that it will be used only for settlement for trades done through the broker. They give unhindered and all-pervasive rights to the broker to do what it wants to with your demat account including making off-market transfers. Where the PoA confers rights to your broker to operate your money account with certain specified banks then your entire savings account balances are at risk if there is malfeasance committed by any official of the broker. The chances of this are not exactly remote because in most PoAs the brokers are also conferring upon themselves the right to choose one or more substitutes, that is external persons, to execute the rights under the PoA. Potentially it could really become a wild west out there.

In the past even DPs used to take PoAs. In November 2005 NSDL detected anomalies in the account-opening process of one of its DP, Indiabulls Securities, wherein not only the PoA was made mandatory but it took away all rights of the investors to operate their demat account and only the DP retained that the right. Taking a cue from its inspection of Indiabulls NSDL ended up issuing a circular to all DPs to discontinue with the PoA compulsion and desist from doing four things through the PoA – (i) restraining the investor from operating his demat account, (ii) denying delivery instruction slip books, (iii) merging shares kept under various client accounts and (iv) having a lien on the clients' shares.

Other authorisations. Many brokers additionally take an authority letter to maintain a running account wherein the broker keeps the shares you bought or the funds received against your sales unless you ask for it in writing to be returned to you. This too is being forced upon investors.

On 3 December, posing as an investor, this BW reporter walked in to the Annie Besant Road (Worli, Bombay) branch of LKP Shares & Stock Brokers, and enquired with an official, Jolly Shah, about wanting to open a trading account and a demat account. On asking, she showed the documentation docket that included the client-broker agreement but also included a set of documents termed as 'Voluntary documents'. The first document in the 'Voluntary documents' was that of a running account authorisation. This reporter asked her whether it was a must for him to sign that document she said 'Yes'. On questioning how LKP is making it compulsory for investors to sign on a 'Voluntary document' she took offence and did not answer.

Both the exchanges are not taking action against the scores of brokers who are subtly but surely forcing the signing of documents that according to NSE's rules and regulations they can't force any one to sign. The running account authorisation is pernicious because under it the broker gets to retain the shares or funds for almost any reason or even without a reason when the investor buys or sells shares. As per NSE's and BSE's rules the broker has to transfer the shares/fundswithin 24 hours of the pay-out. The forced running account authorisations are violating this important exchange rule. BW queried both the exchanges but did not receive any response.

As an investor you can complain to the stock exchange if you have similar experiences. If it's with a NSE broker write to cc_nse@nse.co. if it's a BSE one write to corporate.affairs@bseindia.com. Safe investing!

life in financial markets: killing the access to trading in small companies' shares

Killing a good concept due to one's false assumptions is commonplace. Take the latest example, seen in the Indian financial markets. The Securities and Exchange Board of India (Sebi), announced, last week, its regulatory framework for stock exchanges to set up trading platforms for small and medium enterprises (SMEs). It opened its doors for Rs 100 crore-net worth stock exchanges to apply for setting up the SME trading platform. But the spoiler is the clause where it pegs the minimum trading lot size to be Rs 1 lakh.

An earlier Sebi discussion paper for SME trading platforms had recommended zero restrictions on size and track record for SMEs to raise equity capital but had recommended a minimum application size of Rs 5 lakh in a SME's primary equity issue. All this is meant to deter retail investors from burning their fingers with fly-by-night operators.

But in the process, it is likely to drive away liquidity-supplying day traders, speculators and arbitrageurs as they would not want to place orders of Rs 1 lakh and more for a company whose share capital might not be more than Rs 1 crore. This, many market traders say, is going to kill the liquidity from day one of listing itself.