Sucheta Dalal :Bull by the Horns
Sucheta Dalal

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Bull by the Horns  

April 28, 2008

Exclusive news, the stories behind the headlines and the truth between the lines Edited by SUCHETA DALAL

Bull by the Horns

Under a new chairman, the Securities and Exchange Board of India (SEBI) has quickly initiated action on an issue that was debated years ago by SEBI-appointed committees and also approved but never implemented. These are changes to Clause 49 of the Listing Agreement of stock exchanges that have now been notified by SEBI on 8 April 2008. The need for amendment is self-evident. For instance, when a company appointed an 18-year old as an independent director, it was clearly time to introduce a minimum age requirement of 21 years. SEBI has also added the non-mandatory recommendation that the person appointed must have the required qualifications and experience to be able to contribute effectively to the company’s management. When the board was packed to favour the management by appointing a family member as a non-executive chairman, the board composition had to change. The new rules require that 50% of such boards will comprise independent directors. Two other loopholes existed because there was no specific requirement to disclose inter-se relationships. That again allowed relatives (especially by marriage) to be appointed as independent directors. The relationship must now be disclosed in the annual report. Curiously enough, while the Listing Agreement provided for appointment of directors, it did not prescribe a time frame within which vacancies had to be filled up when an independent director resigned. This allowed technical compliance with Clause 49, making
a mockery of the provision. SEBI has now said that the gap between the resignation of an independent director and the new appointment cannot be more than 180 days.

Having fixed the loopholes in Clause 49, what remains is implementation. SEBI’s former chairman M Damodaran spent his entire three-year tenure threatening action against companies that did not comply with the provisions regarding independent directors. He also issued show-cause notices to 20 (unnamed) companies, but failed to follow them up with any action. Last heard, over 40% of listed companies were in breach of the Clause 49 provisions

Get EDIFAR Working

While the SEBI initiative on Clause 49 is welcome, SEBI must follow this up by swift implementation of the database on corporate disclosures which allows investors to access this information online whenever they need to research a potential investment decision. To do this, chairman CB Bhave will have to examine how and why SEBI bungled on the official database EDIFAR (Electronic Data Information Filing and Retrieval System) which is now defunct.

This was an automated system for filing, retrieval and dissemination of time-sensitive corporate information that would be available online through a centralised database to increase transparency and access of information to all classes of investors. During Mr Damodaran’s tenure, SEBI abandoned its attempts to set EDIFAR right and the two national exchanges -- National Stock Exchange (NSE) and Bombay Stock Exchange (BSE) -- jointly sponsored a database to be set up by a private company. That too is neither complete nor known to investors. Meanwhile, a hasty and controversial circular by SEBI had allowed companies to send abridged annual reports to investors, leading to a situation where the detailed annual accounts are no longer available to the public. This effectively means that Caveat Emptor (investors beware) may be a fine Latin expression, but an investor can hardly follow it because of a poor disclosure regime. Mr Bhave, with his experience at creating and maintaining large databases, may be best placed to set EDIFAR right and make it the statutory reporting website to help investors. After all, EDIFAR is modelled on the EDGAR (Electronic Data Gathering and Retrieval) database of the powerful US Securities Exchange Commission, which is among the most accessed sites for corporate information about US-listed companies.

Not Wanted

Many account holders of ICICI Bank are agitated with its decision to double the minimum quarterly average balance from Rs5,000 to Rs10,000 and to encourage those customers who do not want to maintain this balance, to close their accounts within 60 days. With this, the Bank is signalling that it no longer wants to chase growth in terms of number of accounts and will focus on customer net-worth instead. The decision is clearly a part of several strategic initiatives to prepare for a tougher economic situation and a slowdown in growth as people and policy-makers grapple with high inflation and lower salary increases. Recently, the Bank also took a decision to get out of the small-ticket personal finance business where it had a Rs1,500 crore portfolio. It has also tightened its rules on issue of credit cards as well as financing of auto loans and other high-end durables. An interesting gain from this decision is a massive reduction in complaints against the Bank, especially about its loan recovery tactics. However, many depositors are naturally upset about the doubling of the minimum quarterly balances.

Dangerous PoAs

Over the past two years of its existence, MoneyLIFE has strongly flagged the issue of brokers asking investors to sign a Power of Attorney (PoA) giving them access to the investors’ depository participant (DP) account. Active investors do sign such a PoA as a matter of convenience and to avoid constantly signing DP instruction slips to meet the T+2 settlement norms. But that is a conscious decision. Our worry is about retail investors, who don’t even know they have signed a PoA, because it is slipped into bulky broker application forms. We took this up with M Damodaran during his tenure as SEBI chairman and even collected a few ‘standard’ broker application forms to prove our point. Nothing happened. We have raised the issue again with chairman CB Bhave and his initial reaction is heartening.

This case illustrates the problem. A well-known chartered accountant, Mr Patel was relentlessly pursued by a bright HSBC executive to start an investment relationship with the Bank. This involved signing several dozen forms and opening an account with HSBC. He was then advised to invest in a Franklin Templeton mutual fund scheme. A few years later, Mr Patel wanted to cash-out and buy property; so he wrote to Franklin Templeton seeking redemption and discovered, to his horror, that they would not accept his request. Since he had signed a PoA with HSBC, he had no power to decide the fate of his own money. By then, he had no relationship with HSBC and located the executive only after a lot of effort. There was another nasty surprise in store. Franklin Templeton would not issue a cheque but insisted on crediting his money to the HSBC account. He got his money back after much arguing and fighting with HSBC. Mr Patel’s case is a stunning example of how the convenience of electronic systems and PoAs lock investors into financial relationships that are difficult to unravel and dangerous to their financial health.

Barclays’s Capers

This name conjures the image of a ‘propah’ British bank but, in India, it has followed a strategy of aggressively pushing subprime personal loans and credit cards through pesky but persistent agents. That may be a good business strategy, but Barclays had a lot to learn about doing business in India. An RBI executive director succumbed to an agent’s pester power and filled up a credit card application form. Soon after, he learnt that his application had been rejected. Why? Because the Bank is not keen on politicians, RBI officials and advocates as customers! The feedback was met with disbelief and RBI decided to double-check by asking another senior official to make an application. That too was rejected. Last heard, the Bank had been asked to explain its policy and it is probably safe to bet that a visit to the RBI office would teach the Bank management some instant lessons on doing business in India

-- Sucheta Dalal