SEBI amends takeover norms for Satyam like companies

Securities and Exchange Board of India (SEBI) has made a significant amendment in the takeover norms. The amendment was declared on February 13, 2009 on SEBI's webiste.

The amendment was triggered by the sale of scam-hit Satyam Computer Services Ltd. After the fraud was disclosed by Satyam's founder in January 2009, the stock had fallen more than 90%. However, with the interest of getting a buyer the stock has gone up but is still down by more than 70% when compared to pre-crisis period. The current situation of Satyam demands an urgent restoration of customer's faith which can be brought if a well established player buys Satyam. Many corporates have shown interest in buying Satyam's business as it is currently available at huge discount to its peers. However, the uncertainty over the law-suits which Satyam may face is restricting the buyers. L&T, iGate Global Solutions Ltd., & Spice are the front runners in the race to acquire Satyam. L&T has gone ahead and bought 12% stake from public. To gain management control it has to buy more shares. By the current norms any company acquiring more than 15% stake in any publicly listed company has to give an open offer to the public for buying additional 20% shares. There is some regulatory restrictions on the price of open offer. Simply stated, the price has to be more than the six months average trading price, which in the case of Satyam will be about Rs 250 per share whereas its current market price is about Rs 50 per share. This would be a significant premium to its current market price as the value of Satyam has eroded significantly post the fraud-disclosure. No buyer would be keen on paying such a higher price as indicated by the SEBI's open offer regulations.

To meet this challenge SEBI had two options: make Satyam an exceptional case or amend the regulation to suit such cases. SEBI has gone forward and relaxed the regulations for Satyam like cases. SEBI has added the following sub-regulations:

"
(i). No public announcement for a competitive bid shall be made after an acquirer has already made the public announcement pursuant to relaxation granted by the Board in terms of regulation 29A.
(ii) Relaxation from the strict compliance of provisions of Chapter III in certain cases.
The Board may, on an application made by a target company, relax any or more of the provisions of this Chapter, subject to such conditions as it may deem fit, if it is satisfied that –
(a) the Central Government or State Government or any other regulatory authority has removed the board of directors of the target company and has appointed other persons to hold office as directors thereof under any law for the time being in force for orderly conduct of the affairs of the target company;
(b) such directors have devised a plan which provides for transparent, open, and competitive process for continued operation of the target company in the interests of all stakeholders in the target company and such plan does not further the interests of any particular acquirer;
(c) the conditions and requirements of the competitive process are reasonable and fair;
(d) the process provides for details including the time when the public offer would be made, completed and the manner in which the change in control would be effected;
(e) the provisions of this Chapter are likely to act as impediment to implementation of the plan of the target company and relaxation from one or more of such provisions is in public interest, the interest of investors and the securities market.
”

Source: SEBI Act.

Though this will make the way clear for Satyam bidders, this amendment is highly unlikely to be applicable for other cases as the conditions required are very narrow and unlikely to be met by even a similar company in future.

How securities are traded

The involvement of retail investors in capital market has increased significantly. While many of them invest in market passively through mutual funds, there are quite a few who either invest using demat account or get help of the broker for investment. Many might wonder how shares come to their account and money is deducted online? Why the exchange trading in India is termed as T+2? And what do clearing and settlement means?

The whole trading starts with decision to trade, when the investor looks for some script and place order for that. If the order matches with the counter order placed by some other investor, it gets executed. Once the order gets executed, on the next day it goes to the clearing house where all trades are confirmed. Which is shown in the diagram at T+1 days. Then these cleared trades get settled, where pay-in & pay-out of all the securities and funds takes place. This settlement takes place on T+2 days. Such settlement is called rolling settlement.

In India, rolling settlement was first introduced by Over the counter exchange of India (OTCEI). In the year 2000, SEBI made rolling settlement compulsory for 10 selected securities which had volume more than Rs 1 crore. With time by December 2001, other stocks were also included for rolling settlement. SEBI introduced T+5 rolling settlement in equity market from July 2001, which was subsequently shortened to T+3 from April, 2002. To reduce the risks in settlement like counterparty risk and system risk, SEBI mandated rolling settlement of T+2 days for all the scripts from April 1, 2003.

FII sold heavily in mid January crash

While the Mutual Funds started selling in the initial days of the previous week, they started pumping in the money during the fall of the stocks. FIIs on the other hand were about neutral in the week before but they suddenly started selling off heavily each day and even on last few days of the week when the sensex gained significantly, FIIs were net sellers to the extent of more than 1000 crores of rupees. Though the last day selling was very less compared to previous three days in which they sold about 2500 crores worth of stocks each day.

Where to get the FII and Mutual Fund investment activity in Indian stock/equity & debt markets?

FII (Foreign Institutional Investors) and Mutual funds activities are very important for short term traders to speculate the trend. Being major players most of the time their actions moves the market up or down. Fortunately SEBI (Securities and Exchange Board of India) publishes the total amount of buying and selling done by FIIs and Mutual Funds in the Indian equity and debt market.

The data are made available to the public through SEBI's website in the "FII / Mutual Funds Trends" column. The webpage gives the last trading day's activities by FIIs and MFs and has archives for each day of current month. To visit the archieves for periods earlier than one month another archive section for both FIIs and Mutual Funds is available. To access any historical data enter the closing date of that month and click 'go'.

According to a note on SEBI's website:

"Note: The data pertains to all the activities undertaken by FIIs in Indian Securities Market, including trades done in secondary market, primary market and activities involoved in right/bonus issues, private placement, merger & acquisition etc."

SEBI has a 'investors awareness campaign' and provides the investors with the latest data/information to help them make informed choices.

NSE launches MINIFTY for retail investors

India's biggest stock exchange National Stock Exchange (NSE) on December 27, 2007, has introduced a new contract, MINIFTY, in with S&P CNX Nifty Index as underlying. The new contract is a small derivatives contract and has a lot size of 20 for fures and options. The main contract NIFTY has lot size of 50. With the value of underlying at about 6250 points the total contract size of MINIFTY can be estimated about 125,000 INR. With the introduction of this contracts NSE, India's biggest derivatives exchange, expects the retail investors' participation to increase significantly. Currently NIFTY futures and options are the highest traded index derivatives in India with an average daily turnover of about INR 20000 crores (200 billion INR). With the introduction of MINIFTY there are arbitrage possibilities between Nifty and mini Nifty derivative contracts.

Nifty 50 is the benchmark index of NSE which captures the Indian stock market movement and is based on 50 highest market capitalization securities.

Thus, the cost of taking a derivative position on the index has reduced from around Rs 3 lakh to a little over Rs 1 lakh.

Bombay Stock Exchange (BSE) has also introduced a mini contract named MSX in the futures segment. The contract is based on BSE's benchmark index SENSEX and has a lot size of 5. The SENSEX is currently at about 20800, making the total contract amount to be just above Rs. 100,000. BSE's main product in the futures segment has a lot size of 25.

Securities and Exchange Board of India (SEBI) has approved the introduction of seven new derivative products for the Indian market. SEBI has put a minimum contract size limit of Rs. 100,000 on the contracts at the time of introduction in the market.

SEBI allows institutional investors to short sell

[India]

On December 20, 2007, Securities and Exchange Board of India, SEBI, has passed circular permitting institutional investors to short sell shares in Indian securities market. Previously, only retail investors were allowed to short sell. SEBI has also planned a securities lending and borrowing (SLB) scheme to provide platform for settlement of short sold securities.

“Short selling” is selling a stock which the seller does not own at the time of selling. If the view on a particular security is bearish (price is expected to go down), one can short sell now and buy later. The time for buying back securities short sold is till the end of week. The short seller has obligations to buy back the security.

According to SEBI guidelines naked short selling is not permitted in the Indian securities market. All investors have to mandatorily honour their obligation of delivering the securities at the time of settlement.

SEBI has also mentioned that institutional investor will not be allowed to do day trading. Also, the institutional investors will be required to disclose upfront at the time of placement of order if short selling.

It has also announced that securities traded in Futures and Options (F&O) segment shall be eligible for short selling.

Source: The SEBI circular is available on the website.