SEBI Watch: Right to apply insider trading rule on trades in MF units

11 Jul 2022

The Securities and Exchange Board of India is keen to extend the applicability of insider trading rules to transactions in mutual fund units. It has made this clear through a paper released last week for public consultation.

Applying insider trading norms to mutual fund units represents a paradigm shift in regulations.

It promises to the retail investor in a mutual fund scheme that critical unpublished information pertaining to the scheme is not exploited by insiders to his detriment.

The mutual fund industry was managing 35.6 trln rupees of assets as of Jun 30, of which around 88% were in actively-managed schemes and the rest in index funds, index exchange traded funds and fund of funds.

SEBI is likely make its big move through the detailed proposals laid down in the consultation paper.

If and when these proposals see the light of day then every time anyone who is an employee of an asset management company, its trustee and any person connected with them enters into a transaction in the units of the relevant schemes then he will be subject to the new, extended insider trading rules.

If he bought, redeemed, or switched units, or traded in them in any other permitted form, because he knew something about the scheme that was going to materially affect the NAV of the scheme or the functioning of the scheme then he would have violated the insider trading rules.

The six-schemes-shut-down episode of Franklin Templeton Mutual Fund two years ago had revealed major failures of fiduciary responsibility by a few senior officials and directors of the AMC and the trustee companies managing the mutual fund.

These executives and directors, including their family members, had personal investments in some of the six affected schemes but they exited prior to the shut-down announcement.

When the schemes got shut down the other investors were stuck.

The domestic mutual fund industry is a large industry. One can appreciate the complexities in day-to-day management of the funds but that must be no reason to get undemocratic.

The whole scenario gets unfair when AMC and trustee company officials and directors enter or exit their own investments in the schemes of their employers using information they are privy to in their official capacities.

These officials must not lose sight of their fiduciary role at any time, even during times of crises. They must know that they are in their respective positions to ensure optimal use of funds invested by each and every investor in their schemes.

When violations such as those in the Franklin Templeton MF case happen it also raises concerns of malafide intent.

SEBI is, therefore, right in getting the fund industry officials into the ambit of insider trading rules.

It must also consider applying the same standards on the alternative investment funds industry whose assets are growing steadily every year.

The disclosures standards for the alternative investment funds are nowhere near the same as that for mutual funds, and the insider trading rules, if applied to them, will serve as an important check on their fiduciary standards.

Bajaj Hind to appeal SEBI order on non-disclosure of pollution orders

11 Jul 2022

Bajaj Hindusthan Sugar Ltd will appeal against a recent order by the Securities and Exchange Board of India imposing a 1-mln-rupee penalty for breaching disclosure provisions of the listing norms.

The SEBI order, passed on Friday, held that the company had not made material event disclosures as required by the listing norms.

The company failed to file with the stock exchanges information about action taken by the Central Pollution Control Board and state pollution control authorities on some of its units during 2018-19 (Apr-Mar) and 2019-20.

This happened in 14 instances and included show-cause notices, closure directions and penalties by the pollution control bodies.

These were material events and had to be disclosed to the stock exchanges, according to SEBI. It was also a breach of disclosures on environment, social and governance related matters.

“An appeal will be preferred by the Company to the Securities Appellate Tribunal in this regard,” the company said in a stock exchange filing today.

IIFL Wealth settles SEBI probe in Alkem Lab block deal rigging case

8 Jul 2022

Brokerage IIFL Wealth Management Ltd settled an ongoing probe against it by the Securities and Exchange Board of India for alleged price rigging by paying a settlement amount of 31.3 mln rupees.

Price rigging amounts to a breach of SEBI’s norms on prohibition of fraudulent and unfair trade practices norms.

SEBI’s settlement order today said that IIFL Wealth, along with another brokerage firm of the IIFL Group, IIFL Securities Ltd, allegedly manipulated the reference price considered for execution of block deals in shares of Alkem Laboratories Ltd during Apr-Sep 2019.

In February, IIFL Securities had settled this case by paying a settlement amount of 22.19 mln rupees.

The two brokerage firms were alleged to have manipulated the volume weighted average price of Alkem Lab shares in the cash market in order to meet a commitment given to both seller and buyer in the block deal.

Block deals are permitted to take place at a reference price that is determined by the volume weighted average price of a particular time period during a trading day.

The acts of the two brokers were alleged to be malpractices and in breach of SEBI's anti-fraud norms and stock broker regulations.

SAT orders SEBI to reconsider Cairn UK’s dividend claim on Cairn India

8 Jul 2022

The Securities Appellate Tribunal has directed the Securities and Exchange Board of India to hold an enquiry whether Cairn India, a subsidiary of Vedanta Ltd, violated the Companies Act and the regulator’s listing norms in withholding dividend of 3.41 bln rupees payable to Cairn UK Holdings

The appellate body, on Tuesday, ruled in a case filed by Cairn UK Holdings against SEBI’s rejection of its complaint against Cairn India for not paying dividends for three years from 2013-14 (Apr-Mar) to 2015-16.

Cairn UK Holdings held 9.8% stake in Cairn India during this period.

The market regulator had in an order in December 2019 rejected Cairn UK Holdings' complaint on the grounds that the company had handed over the unpaid dividend to the income tax authorities on their directions.

But SAT held in its order that the income tax department’s attachment order on the dividend payment expired on March 31, 2016, after which Cairn India could have paid the dividend due to Cairn UK Holdings.

In the wake of the SAT order, SEBI will have to reconsider Cairn UK Holdings’ claim and issue its order in the matter within six months.

If SEBI decides in Cairn UK Holdings favour, the 3.41 bln rupees dividend payment will reflect in the consolidated books of Vedanta.

Preponed shutdowns led to 3% QoQ fall in JSW Steel’s output Apr-Jun

7 Jul 2022

JSW Steel Ltd’s crude steel production from its domestic operations declined 2.6% on quarter to 5.72 mln tn in Apr-Jun, the company said in a quarterly update today.

The company said the sequential decline was “due to preponement of certain scheduled shutdowns during the financial year 2022-23.”

Compared to the year ago period, the production was up by 16%. In Apr-Jun 2021, the production of most sectors, including steel, were affected adversely due to renewed lockdowns in several states.

Of the 5.72-mln-tn production in Apr-Jun, 0.11 mln tn was in JSW Ispat Special Products, a jointly controlled entity.

JSW Steel’s production from its US plants was up marginally by 0.1% on quarter to 0.16 mln tn. In the year-ago quarter, the production was 0.14 mln tn.

Cement demand picked up in June but prices did not, say brokerages

6 Jul 2022

Cement dealers have indicated an uptick in demand in June according to the latest monthly surveys by brokerage firms.

But cement companies have not been able to take advantage and hike the selling price of cement due to a supply overhang in the market.

According to Jefferies India the average price of cement in the country declined by 1-2% on month in June even as dealers indicated improved demand. It said that supply increase in the markets were depressing the selling price of cement.

Apart from cement dealer checks, analysts have inferred a demand increase in cement from the railway freight data. According to JM Financial, cement volumes transported through rail freight were up 2% on month.

It was up by a larger quantum of 16% on year, but analysts have avoided using the on-year growth as any indication due to the fact that in June 2021 the cement sales were among the worst hit due to new lockdowns in various states during May-Jun.

Brokerage ICICI Securities attributed the increase in demand in June to “pre-monsoon push, pick-up in infrastructure projects, reduction in prices of steel, cement, etc. and better manpower availability.”

The brokerage also said cement companies would have got respite on the input costs front as pet coke prices were down in international markets, indicated by the fact that US pet coke prices fell 10% on month in June.

It also said that “increased sourcing of coal from low-cost destinations like Russia” may have allievated the cost pressures on sourcing overseas coal, which is another key input cost.

A report by Reuters news agency at the end of last month said that UltraTech Cement Ltd, the largest cement producer in the country, had imported 157,000 tn of Russian coal towards the end of the month.

Coal-importing domestic companies from cement, steel and other sectors usually source coal from Asian countries such as Indonesia and Australia.

For the entire quarter period from April to June, the railway freight data, according to JM Financial, indicated an on-quarter decline to 38.6 mln tn from 40.9 mln tn.

Going forward, the key to earnings improvement, said Jefferies, would depend on how stable the cement prices stay during the ongoing monsoon season and whether any cement price hikes post-monsoon can be effected and sustained.

Steel export fall in May, export duty hike may hit cos’ FY23 earnings

5 Jul 2022

The on-year fall in May in exports for finished steel products has increased concerns in the market that the hikes in export duties on steel products at the end of May will add to the challenges of domestic steel companies in growing their overseas sales.

The government had hiked the export duty on most steel products by 10-50% with effect from May 22.

In May, exports of the steel products, which were covered in the export duty hike, fell 39% on year to 749,000 tn, according to a metals sector analyst at a rating agency. Official commodity-wise exports data for May has not been released by the government so far.

The previous month too had seen an on-year decline in the exports

According to Ritabrata Ghosh, senior vice president at ICRA, the road for domestic steel companies will get bumpier in 2022-23 (Apr-Mar) leading to a fall in exports by 25% on year.

He said the export duty hike would likely make products of domestic companies less competitive in the international markets. Ghosh also expected international steel prices to be lower in the current financial year.

The May exports data, showing a on-year decline, is an indication that fundamental factors hit steel exports even before the government announced the duty hikes on May 21.

Tushar Shah, Co-Chief Executive Officer, CareEdge Research said the revenue and profit of steel companies will be affected due to the export duty hikes making their steel exports expensive and hard to grow. “In FY22 (2021-22), exports had contributed around 12% of the total steel production in India and had touched a record high of 13.5 million tonnes (mln tn) which aided the revenues and profits of steel companies during FY22.”

Shah is hopeful that the import duty cuts on key raw materials for the steel sector may partially support the cost structures of steel makers, but a decline in steel exports, which hold a considerable share in overall production – the decline of which would adversely affect the overall profitability.

In a quarterly update disclosed by Tata Steel today the company said its crude steel deliveries from domestic operations in Apr-Jun were lower by 2% YoY “due to moderation in exports following the imposition of 15% export duty.”

Steel companies’ reliance on driving sale growth through exports will depend on domestic demand. In its annual report for 2021-22 Tata Steel said that it had opted for higher proportion of exports during periods of softness in domestic demand.

In the company’s annual general meeting recently, its chairman N Chandrasekaran was emphatic that the domestic steel industry in India was globally competitive and therefore they “should be able to expand capacity in value-added steel products for both ‘make for India’ and ‘make for the world’”.

“This is a defining moment in history where the Steel Industry can leverage its competitive position and export its products globally,” he said.

But the ground reality is turning out to be different with lower steel prices and export duty hike.

Tata Steel Apr-Jun crude steel sales decline 2% YoY on exports fall

5 Jul 2022

Tata Steel Ltd’s crude steel sales from its domestic plants declined 2.2% on year to 4.06 mln tn in Apr-Jun, the company said in a quarterly update today. Compared to the previous quarter the sales were down by 21%.

The company said this was “due to moderation in exports following the imposition of 15% export duty.”

The steel major increased its crude steel production from domestic plants by 6.3% on year to 4.92 mln tn. Sequentially, it was marginally higher by 0.4%.

From its operations in Europe, Tata Steel’s crude steel sales fell 7.3% on year, and 10% on quarter, to 2.16 mln tn during the June quarter. The production in this region fell 9% on year to 2.43 mln tn.

Tata Steel’s Thailand plants also saw sales fall 11% on year and 8.8% on quarter to 0.31 mln tn. The production figures for these plants were the exact same as sales.

The company said that its automotive and special products segment deliveries increased by 22% on year in Apr-Jun, while those for its industrial products and projects segment increased by 8% on year.

UltraTech disputes JP Associates claim on 10-bln-rupee preference shares

4 Jul 2022

UltraTech Cement Ltd today disputed the claim made by Jaiprakash Associates Ltd that it had defaulted on redemption of preference shares issued to Jaiprakash Associates.

The redemption was due on Friday as per terms of the issue, Jaiprakash Associates said in its filing on Saturday.

UltraTech had made different issues of preference shares and non-convertible debentures of around 46.3 bln rupees in 2017-18 as part of its 161.9-bln-rupee deal with Jaiprakash Associates and Jaypee Cement Corporation to acquire their cement plants, spread across five states, having total annual capacity of 21.2 mln tn.

Of these issues, many had been redeemed in that year itself.

The preference share issue that was due to be redeemed on Saturday was for 10 bln rupees.

UltraTech said in its filing that it “had offered” redemption of the preference shares after “adjustment of costs to be borne by” Jaiprakash Associates, “in compliance with the transaction arrangements.”

UltraTech said that it was expecting Jaiprakash Associates “to honour its obligations and execute necessary documentation for the redemption.”

The company did not specify the quantum of costs that had to be paid by Jaiprakash Associates.

Grasim gets partial relief in tax dispute case on demerger of fin biz

1 Jul 2022

Grasim Industries Ltd has got partial relief from the Income Tax Dispute Resolution Panel in a capital gains case pertaining to shares issued to its shareholders when it had demerged its financial services business in 2017-18 (Apr-Mar).

The company said in a stock exchange filing today that an order passed by the tax dispute resolution body on Thursday “rejecting various objections of the Company and in partial relief allowed objection in the matter of Capital Gain Tax on the value of shares issued to the shareholders of the Company on demerger of Financial Services Business.”

On Sep 30 the Income Tax Department had issued an order adding capital gains tax claim on Grasim to its earlier claims in the demerger case. The company had, on Oct 1, said that the additional tax demand was estimated to be 83.3 bln rupees.

The company subsequently appealed against this order to the Dispute Resolution Panel which gave its ruling on Thursday. The Income Tax Department will have to quantify Grasim’s tax liability for 2017-18 based on the Panel’s ruling, Grasim said in its filing.

In 2017-18, Grasim’s consolidated profit before tax was 56.3 bln rupees and total tax expenses amounted to 19.5 bln rupees, data from Informist Corporate Fundamental Database showed.