“Mobilization of household savings into productive investment in the capital market must be a key goal for all actors in the financial sector, including SEBI”- Dr. Manmohan Singh, Prime Minister of India
I was looking for some quotable quotes for this story. And, I found it interestingly intriguing that not many notable thought leaders of the yore had nice things to say about the different facets of the banking and finance sector:
“A banker is a fellow who lends you his umbrella when the sun is shining, but wants it back the minute it begins to rain.” ― Mark Twain
“The secret of high finance…if you really need a loan, you won’t qualify. And if you don’t need a loan, all the lenders will line up to give you money.” ― Joanne Fluke
“I try not to borrow, first you borrow then you beg.” ― Ernest Hemingway
“So, in everything: power lies with those who control finance, not with those who know the matter upon which the money is to be spent. Thus, the holders of power are, in general, ignorant and malevolent, and the less they exercise their power the better.” ― Bertrand Russell
This sample, though may not be representative of the total body of work, and may not be entirely untrue, which has been produced over time on this theme, yet it can be said that in philosophical parlance at best either it has either been despised, ridiculed or at worst it has been demonized. Whatever greatest of the minds may say about it, but the problem is that it is something which you cannot do without. The thing the banking and finance sector deal with, for a layman like me in simplest of the terms is ‘Capital/finance’.
But it is only this ‘Capital/finance’, which provides life blood to every material human activity. This is that, which makes the world go around. And as was described in the financial sector legislative reforms commission ‘it is the brain of an economy’ as it allocates resources for the economic development. So if it is truly life blood or brain of the economy then it is very important to worry about its health and well being.
Thorsten Beck, reflecting on the nature of the financial system, constituted by Banks and financial institutions, in a European Banking center discussion paper titled “the role of finance in economic development: benefits, risks, and politics” writes that ‘a sound and effective financial system is critical for economic development and growth. The financial system, however, is also subject to boom and bust cycles and fragility, with negative repercussions for the real economy. Further, the political structure of societies, often pre-determined by historic experience, is critical for the structure and development of the financial system. Given the importance of finance for growth, its inherent risks, and the large socioeconomic costs of banking crises, it is not surprising that the financial sector is often at the top of the policy agenda.’
So in this story I am going to discuss some events which are indicative of the health of this sector and also why we must remain hopeful.
Mounting Bad debts The year 2012 was very bad for the banking sector in general and public sector banks in particular as the latter felt suffocated because of micro-management and erosion of operational autonomy by the govt. With new business for banks seemed difficult to come by due to general economic distress and RBI’s reluctance to cut rates due to inflation kept the interest rate cycle elevated and coupled with a fiscal policy logjam over project clearances, the urge to invest among companies remained low. Banks didn’t find many takers for their loan products on the corporate side.
As per the data published by Corporate Debt Restructuring Cell, a voluntary and informal mechanism to shore up genuine corporates out of troubled financial waters, supported by RBI. In its CDR performance data, it has reported the over all status of corporate debt restructuring in the economy that till March 31st 2013, an aggregate debt approved for restructuring was 2.29 Lac crores. And this is not a very encouraging sign.
Be it cobra post sting operation, Sharada chit fund fraud, or ATM Heist, the story is the same. Its like playing cat and mouse with Regulators on one side and rogue elements on the other. While the Cobrapost sting operation raised the fears of rampant money laundering with so many banks being named therein. The latest ATM heist, wherein a global criminal gang stole $45 million from two Middle Eastern banks by breaking into the two card processing companies based in India and raising the balances and withdrawal limits, the incident has implications in the sense that the same theft could happen in India it wields threat for outsourcing industry as well. In the aftermath of Sharda Chit Fund Scam, in a knee jerk reaction the State Govt. proposed West Bengal Protection of Interest of Depositors in Financial Establishments Bill which would enable the state to override mortgages and seize any asset from fraudulent financial enterprises for recovery of depositors’ dues with retrospective effect. But how can a government promulgate a law and seize properties that are already mortgaged to lenders and as per industry experts no law can prevent banks from selling securities held by them under SARFAESI.
In consonance with Basel III norms which set out the minimum capital requirements to ensure the financial stability of the Banking System world over. With many questioning the timing of the provisioning norms the Reserve Bank of India in late May 2013 has notified new rules which include raising capital requirements and forcing banks to seek personal guarantees from controlling shareholders of companies whose loan terms are eased. Indian banks have increasingly sought to restructure troubled corporate loans instead of declaring them to be non-performing. Applicable from June 1, the new rules, the banks must set aside provisioning for 5 percent of the value of a loan that is newly restructured, from 2 percent previously. The RBI said that requiring personal as opposed to corporate guarantees “will ensure promoters’ ‘skin in the game’ or commitment to the restructuring package.” Indian lenders sought to restructure a record $16.6 billion in loans in the year that ended in March, an increase of 38 percent year-on-year basis. According to the recent RBI financial stability report, Indian banks will require an additional capital of Rs. five trillion to comply with Basel III norms, including Rs 3.25 trillion as non-equity capital and Rs 1.75 trillion in the form of equity capital over the next five years.
The Financial Sector Regulatory Commission (FSLRC) inspired by the vision to draft a body of law that will over the years, will be able to cope with technological change, and the financial products and processes which will come into play in the coming years. And believing that the current approach of multiple sectoral regulators induce economic inefficiency because when the true activities a financial firm are split up across many entities, each of which has oversight of a different supervisor, no one supervisor has a full picture of the risks that are there. And it in its final report recommended a financial regulatory architecture featuring seven agencies. This proposal features seven agencies and is hence not a ‘unified financial regulator’ proposal. It features a modest set of changes, which renders it implementable: 1. The existing RBI will continue to exist, though with modified functions; 2. The existing SEBI, FMC, IRDA and PFRDA will be merged into a new unified agency; 3. The existing Securities Appellate Tribunal (SAT) will be subsumed into the FSAT; 4. The existing Deposit Insurance and Credit Guarantee Corporation of India (DICGC); will be subsumed into the Resolution Corporation; 5. A new Financial Redressal Agency (FRA) will be created; 6. A new Debt Management Oice will be created; 7. The existing FSDC will continue to exist, though with modified functions and a statutory framework.
‘Investors’ confidence in the capital market can be sustained largely by ensuring investors protection, Disclosure and transparency are the two pillars on which market integrity rests’, reiterated Hon’ble Supreme Court recently in N. Narayanan Vs. Adjudicating Officer, SEBI. In that case a Company and its Directors had inflated figures of the company’s revenue profits, security deposits and receivables which were relied upon by investors for making investment decisions. And thereby failed in their duty to exercise due care and diligence and allowed the company to fabricate the figures and making false disclosures. Facts indicated that they had overlooked the numerous red flags in the revenues, profits, receivables, deposits etc. which should not have escaped the attention of a prudent person. Further the Directors had pledged their shares and artificially inflated prices of the scrip based on inflated financial results which enabled them to raise higher quantum of funds that would not have been possible otherwise.
Sounding a Word of Caution both for SEBI and Media, in their respective roles for the health of the securities market hon’ble Court held that ‘SEBI, the market regulator, has to deal sternly with companies and their Directors indulging in manipulative and deceptive devices, insider trading etc. or else they will be failing in their duty to promote orderly and healthy growth of the Securities market. Economic offence, people of this country should know, is a serious crime which, if not properly dealt with, as it should be, will affect not only country’s economic growth, but also slow the inflow of foreign investment by genuine investors and also casts a slur on India’s securities market. Message should go that our country will not tolerate “market abuse” and that we are governed by the “Rule of Law”. Fraud, deceit, artificiality, SEBI should ensure, have no place in the securities market of this country and ‘market security’ is our motto. People with power and money and in management of the companies, unfortunately often command more respect in our society than the subscribers and investors in their companies. Companies are thriving with investors’ contributions but they are a divided lot. SEBI has, therefore, a duty to protect investors, individual and collective, against opportunistic behavior of Directors and Insiders of the listed companies so as to safeguard market’s integrity.’
‘Print and Electronic Media have also a solemn duty not to mislead the public, who are present and prospective investors, in their forecast on the securities market. Of course, genuine and honest opinion on market position of a company has to be welcomed. But a media projection on company’s position in the security market with a view to derive a benefit from a position in the securities would amount to market abuse, creating artificiality. SEBI has the duty and obligation to protect ordinary genuine investors and the SEBI is empowered to do so under the SEBI Act so as to make security market a secure and safe place to carry on the business in securities.’
Hon’ble Supreme Court contemplated the scope of withdrawal of a public offer and had the occasion to interpret regulation 27 of the SEBI takeover code. The court itself opined on the point in issue as: “The main issue involved in this appeal is whether under Regulation 27(1)(d), SEBI has power to grant exemption to the appellants from the requirement of making a public offer under Regulation 10. The alternative issue framed by Mr. Divan is as to whether dehors Regulation 27(1) (d), SEBI would still have the residual power to grant exemption.”
After a thorough examination of the provisions in question it reached the conclusion that “Permitting such a withdrawal would lead to encouragement of unscrupulous elements to speculate in the stock market. Encouraging such a practice of an offer being withdrawn which has become uneconomical would have a destabilizing effect in the securities market. This would be destructive of the purpose for which the Takeover Code was enacted.”
Disagreeing with the reasoning of the appellant’s counsel that: “unless they are allowed to walk away from the public offer they would have to bear losses which would otherwise have been shared by the erstwhile shareholders of the target company. Accepting such a proposition would be contrary to the aims and objectives of the Takeover Code which is to ensure transparency in acquisition of a large percentage of shares in the target company. It would also encourage undesirable and speculative practices in the stock market. Therefore, it found itself unable to accept the submission of learned counsel. Regulation 27(1) (d) would empower the SEBI to permit withdrawal of an offer merely because it has become uneconomical to perform the public offer.
In his speech on the celebration of 25 years of SEBI’s existence Dr. Manmohan Singh in his speech stated that ‘SEBI has successfully modernised our capital markets and brought international best practice to this sector. It is a matter of pride that the Indian stock exchanges today rank among the best in the world in terms of technology as well as value-cum-volume of business. This is in a large measure due to the efforts of SEBI.’ Recounting its successes Dr. Singh stated dematerialization of shares has eliminated the problems of delays, bad deliveries, theft and forgery of share certificates. At the same time it has facilitated the introduction of shorter settlement cycles and later rolling settlement. India is amongst the first countries in the world to have screen-based trading in which the price and volume data become instantly available to investors in all parts of the country. Computerised trading has led to reduction in the scope for price rigging and manipulation. Investors are more empowered today than ever before because of the availability of a large amount of relevant information.
So in the conclusion it can be said that the troubles continue to be there yet losing hope cannot be an option and there have been many encouraging signs listed above. And I would like to finish the story I would like to quote Dr. Manmohan singh ‘a weakness in our system relates to the market for corporate debt. While the market for government debt is very large, the market for corporate debt has yet to develop as it should. It is not large enough and not liquid enough. To some extent the reduction in the fiscal deficit is a precondition for this development since sovereign debt crowds out private debt. Efforts are being made to reduce the fiscal deficit and as we succeed we can expect the corporate debt markets to expand. But we need other initiatives also. ‘ So if we can find solutions for these troubles, the ‘brain’ of our economy will very smartly guide us through troubles and usher in greater prosperity.
www.grandmasters.in | 8 Years & Counting
www.rcls.in | 8 Years & Counting
www.itlegalsummit.com | 8 Years & Counting
www.bfls.in | 8 Years & Counting
www.maels.in | 8 Years & Counting
www.plcs.co.in | 8 Years & Counting
Copyright © 2020 Lex Witness - India's 1st Magazine on Legal & Corporate Affairs Rights of Admission Reserved
