Wednesday, February 29, 2012

Collective Investment Schemes Still Pose Problems

Indian capital and securities market regulation is still in process to expedite litigation process in light of investors protection. Though SEBI was established in 1992 with primary objective of Protection of Investors interest in market, but still a long waiting list of complaints have made this task more slow and indicative.

The Hindu, undoubtedly raise this concern in present article. Review of this Article as follows:

Way back in 1997, the Union Government decided to clamp down on collection of funds under collective investment schemes (CIS) and decided to appoint SEBI as a regulator. The market watchdog brought requisite regulations in force in 1999 to ensure that investors are not lured by promises of super normal returns.

But more than a decade after, there is no dearth of investors' complaints of getting duped.
According to SEBI annual report of 2010-11, there has been a steady flow in the number of investor grievances against collective investment schemes (CIS) over the previous two years.

Strict Legislation

The number of complaints against non-receipt of investment and returns on such schemes has increased from 1,09,121 cases in 2008-09 to 1,09,897 cases during the 2010-11 fiscal.

According to SEBI, a CIS is defined as “any scheme or arrangement made or offered by any company under which the contributions, or payments made by the investors, are pooled and utilised with a view to receive profits, income, produce or property, and is managed on behalf of investors”.

The most common instruments for such schemes were bonds – for investments in real estate properties; plantations and agriculture and art objects.

According to the Collective Investment Schemes Regulations, 1999, existing entities were also asked to get registered (with SEBI).

Only one legal entity

According to SEBI, ever since the new regulations came into force, only one company — Ahmedabad-based Gift Collective Investment Management Company Ltd – has been allowed to raise funds under CIS.

Interestingly, though Gift Collective, a subsidiary of Gujarat International Finance Tec City, obtained registration in 2008-09, it is yet to raise funds through these routes.

According to the vice-president and company secretary, Mr Dipesh Shah, Gift Collective initially planned to launch CIS schemes to raise funds for developing real estate but reversed the decision as it felt that the peripheral conditions were not suitable. Even if the only authorised player stays away from the CIS market, there is no dearth of investor complaints even today. Logically, some of the complaints must have been against schemes that were floated before the 1999 regulation came into being.

Shut down notice

Having brought the regulations into force, SEBI started issuing wind-up notices to entities failing to comply with the norms.

However, the process of prosecution is slow as most of these companies approached different courts of law.

As on March 31, 2011, SEBI launched criminal prosecution cases against 552 companies collecting funds under such schemes. So far, court judgements have been obtained against 115 entities, indicating that most of the CIS related cases are currentlysub judice.

Investors suffer

Whatever the reason may be, it is clear that the regulations were not enough to prevent entities from collecting investments under CIS schemes even after 1999 or that many such entities were raising finances even without SEBI approvals.

A classic example is that of Rose Valley Real Estate and Constructions, which was barred by SEBI from raising public money and launching any scheme in January 2011. The closure order dated January 3, 2011, states that Rose Valley raised approximately Rs. 1,272 crore (without any registration from SEBI) between 2003-04 and 2009-10 as earnest deposits for selling plots of land on a future date. Approximately Rs 566 crore was raised in 2008-09 alone.

Sunday, February 26, 2012

Swiss Regulator Issued Discussion Paper on Regulation of the Production and Distribution of Financial Products

The Swiss Financial Market Supervisory Authority (FINMA), has issued discussion Paper on Regulation of the Production and Distribution of Financial Products, to laid down adequate measure to protect interest of various players including investors of Capital Market.

Swiss financial market law aims at safeguarding the functionality of the Swiss financial market and protecting clients, i.e. creditors, investors and policy holders. These two goals are supported by ensuring an adequate flow of information between market participants. An efficient financial market, and the trust of market participants in that market, can only exist if the key information on products traded and services offered is available to all market participants in a timely, comprehensive and easily comprehensible form. Creating transparency for all market participants is therefore vital to the implementation of the goals that are firmly established in law.

In its discussion paper on regulating the production and distribution of financial products to retail clients dated October 2010 (“FINMA Distribution Report”), FINMA noted that the law as it stands does not ensure that all market participants have appropriate access to key information, with the result that clients are not adequately protected. The report invited discussion on a number of regulatory measures to rectify the shortcomings identified. In their comments on the FINMA Distribution Report, many of the consultation respondents also called for regulatory adjustments to strengthen client protection.

In FINMA’s view, the following measures should be taken to improve client protection:

Rules for Financial Products

1. To improve client protection on the Swiss financial market, a prospectus requirement should be introduced for all standardised financial products offered in Switzerland. Prospectuses should be drawn up in accordance with a prescribed format and should contain all the key in-formation about the producer and the product itself.
 2. Clients should be provided with a clear and concise product description before acquiring com-pound financial products. The product description should set out the key product characteristics, risks and costs. To increase comparability between the different product types, the legislature should enact regulations governing the composition of the document. 
3. The prospectus requirement and the obligation to draw up a product description should apply primarily to products aimed at retail clients.

Stricter Rules on Business Conduct and Organizationfor Financial Services Providers

4. Financial services providers have to inform clients about their own business activities and their authorisation status before they carry out a financial transaction. 
5. Financial services providers should be obliged to inform clients of the content of their specific service. They may only describe themselves as being independent if they do not accept incentives from third parties when performing services for their clients.
 6. Financial services providers must inform clients of the characteristics, risks and costs of the type of transaction under discussion before they perform the service in question.
 7. Financial services providers must provide product documentation. In particular, they must provide retail clients with a product description for compound financial products. Prospectus documents are only to be made available on request. During contact with the client, advertising material should be clearly separated from the documents required under supervisory law.
 8. Before carrying out a transaction for a retail client, financial services providers should be obliged to determine the client’s experience and knowledge of the type of product in question or the service to be provided. If they regard a transaction as being inappropriate, they should warn the client. 
9. Before issuing personal advice, financial services providers should determine whether a transaction is suitable for the client. For this purpose, they must ascertain their clients’ experience and knowledge, investment objectives and financial situation. Before taking on portfolio management mandates, they must also ascertain whether the client has understood the significance of issuing the order and whether the chosen investment strategy is suitable for the client.
 10. Financial services providers may only carry out transactions with financial products for a retail client without an appropriateness test if the client instructs the provider to carry out the trans-action on their own initiative and the products in question qualify as simple financial products. Simple financial products are readily understandable, do not impose any obligation on the cli-ent over and above the acquisition costs, and may be regularly sold on the market or returned to the producer.
 11. Financial services providers should document the scope and subject matter of the agreed ser-vice. They should also duly account for the services provided.

Eextension of Supervision 

12. All portfolio managers that are not supervised under current law should be made subject to supervision. They must comply with the rules of business conduct and must have an appropriate organisation and adequate capital. 
13. Those who have contact with clients should prove in a test that they have sufficient knowledge of the rules of business conduct, the principles of financial planning and the products distributed. Their specialist expertise should be improved through regular further training. Clients should also be able to check via a publicly accessible register whether their client advisor or product distributor meets the corresponding quality standards. 
14. Cross-border services may only be provided to clients in Switzerland from other countries if those clients enjoy the same protection as they would if the financial services provider were based in Switzerland. The Swiss regulations on the distribution of financial products should therefore be extended to cover activities from abroad. 

Enforcement

15. Enforcement of the claims of retail clients against financial services providers should be im-proved. 

Creation of a Financial Services Act 

16. Implementation of the measures will require the creation of a new statutory basis. To ensure that the conduct and product rules at the point of sale apply across all sectors and without exception, they should be firmly established in a new law (financial services act). 
17. The rules on the authorisation and supervision of portfolio managers should be incorporated into the Swiss Stock Exchange Act. 
18. The introduction of cross-sector business conduct and product regulations necessitates changes to the applicable financial market laws and the Swiss Code of Obligations. Existing provisions on the documentation and distribution of financial products should continue to apply only when sector-specific circumstances require special arrangements.

Swiss Regulator Proposes Package of Measures to Strengthen Client Protection

The Swiss Financial Market Supervisory Authority (FINMA), capital market regulator of Switzerland, takes the view that Swiss financial market legislation needs to be improved as regards client protection. To reduce the asymmetrical power relationship between financial services providers and clients and strengthening the market, FINMA has written a position paper proposing as key measures clear rules of business conduct for financial services providers and better product documentation. It also sees the strategic extension of supervisory powers as necessary. These measures are to be implemented through legislation.

In order to improve protection for clients, FINMA proposes introducing a package of mutually complementary regulatory measures. FINMA published a discussion paper on regulating the production and distribution of financial products to retail clients in October 2010 stating that, under the current legislation, clients are neither sufficiently informed nor adequately warned about products that are not appropriate for them. In FINMA’s public consultation on this subject and the measures that could be taken, many participants also called for regulatory changes to strengthen client protection.

New rules of business conduct for financial services providers

At the core of the proposed package of measures are standardised, cross-sector rules of business for banks, insurers and portfolio managers with which they must comply in their contact with clients. The focus here is on the obligation to inform all clients about the content of a service and the characteristics of financial products, and to warn them about the risks involved. Clients should in future be clearly informed about all the costs associated with a service or the purchase of a product.

Better documentation for clients

FINMA is in favour of financial services providers furnishing clients with complete and readily understandable product documentation. In particular, providers of standardised financial products such as shares, bonds and structured products should be obliged to draw up a prospectus. This document must contain all the key details of the product and the provider and ensure transparency concerning the risks associated with buying the product. To ensure that retail clients are better able to understand compound financial products such as structured products and unit-linked life insurance plans, and are informed about the direct and indirect costs these products entail, FINMA is also calling for brief, roughly two to three-page product descriptions along the lines of the simplified prospectuses produced for securities funds.

Strategic extension of supervision and obligation to provide proof of relevant knowledge

FINMA considers a strategic extension of its supervisory powers as essential to ensuring that the proposed conduct and information requirements are put into practice. Portfolio managers, for example, should in future be allowed to exercise their wide-ranging powers of decision with regard to the investment of client assets only if they have been authorised by FINMA. In addition, all client advisors should prove that they know the applicable rules of business conduct and have the necessary specialist knowledge by taking a compulsory test and regular further training.

Implementation based on a new financial services act

The coherent implementation of the proposed measures requires a financial services act covering all the relevant sectors. Only those rules of business conduct that reflect the specific features of individual sectors should continue to be governed by the existing financial market laws.

In addition to these changes to supervisory law, FINMA also regards measures at the level of civil law as expedient. These should facilitate the enforcement of retail clients’ claims against financial services providers.

Saturday, February 25, 2012

Indian Competition Regulator Eases Rules for Group Restructuring

Competition Commissions of India (CCI), anti trust watchdog of India has amended regulations of transaction of business related to combinations under The Competition Commission of India (Procedure in regard to the transaction of business relating to combinations) Amendment Regulations, 2012.

In a move that will assist corporate houses undertaking group restructuring, the Competition Commission of India (CCI) has notified that the merger of wholly owned subsidiaries with the parent holding company will no longer require the approval of the antitrust body.

Alongside this, CCI has also increased the threshold limit on the acquisition of shares that require prior approval to 25% from 15%, in sync with the takeover code of the Securities and Exchange Board of India. 

The antitrust regulator has also significantly increased the filing fees for companies that are obliged to inform it of mergers and acquisitions (M&A) activity by law. While the filing fee for form I has been increased to Rs10 lakh from Rs50,000, the fee for form II has been increased to Rs40 lakh from Rs10 lakh. While form I is for initial scrutiny, form II requires greater detail in terms of reporting the transaction to CCI and is filed when there’s likely to be a greater anti-competitive effect in the market. 

The notification also said that in the case of buy-back of shares, where there is no acquisition of control, companies do not need to seek CCI approval. Currently, only bonus, stock split and subscription of rights issues, where there is no acquisition of control, are outside CCI’s purview. 

From 1 June 2011, all high-value deals came under the CCI scanner. The new regime came into effect with the notification of sections 5 and 6 of the Competition Commission Act, 2002. According to the provisions of the Act, companies with a turnover of more than Rs1,500 crore will have to approach CCI for approval before merging with another firm. Further, only those proposals would need CCI’s nod where the companies have combined assets of Rs1,000 crore or more, or a combined turnover of Rs3,000 crore or more, as per the Act. CCI has, since June last year, approved 23 merger proposals.

Thursday, February 23, 2012

Australian Regulator Releases Draft Disclosure Guidance for Hedge Funds

Australian Securities and Investments Commission (ASIC), market watchdog, released for consultation draft regulatory guidance with new disclosure benchmarks and principles for hedge funds to improve investor awareness of the risks associated with these products. 

The guidance, contained in Consultation Paper 174 Hedge funds: Improving disclosure — Further consultation (CP 174), sets out the specific features and risks of hedge funds that should be addressed in a Product Disclosure Statement (PDS) for these products. 

ASIC Chairman Greg Medcraft said it was necessary to ensure that disclosure gives investors the information they need to make an informed investment decision, which may include a decision not to invest in these products. 

‘Our proposed disclosure guidance has been prompted by our experience that, in some cases, inadequate disclosure has contributed to investors not understanding the risks when purchasing a hedge fund product,’ Mr Medcraft said. 

‘It is one of ASIC’s priorities to ensure that investors and financial consumers are confident and informedparticularly before they invest in financial products. 

‘Improved disclosure of the risks associated with hedge funds is particularly important because hedge funds can pose more diverse and complex risks for investors than traditional funds due to their various investment strategies, complicated structures and use of leverage, short selling and derivatives.’ 

The proposed principles and benchmarks cover a range of disclosures relating to the responsible entity, the individuals making the investment decisions for the fund, service providers, fund strategies and fund assets. Where a hedge fund has invested 25% or more of its assets in an underlying hedge fund or structured product, the disclosure principles and benchmarks should be taken to apply to each such underlying fund or structured product. 

Hedge funds must disclose whether they meet the benchmarks and if not, why not. ‘Why not’ means explaining how they will deal with the business factor or the issue underlying the benchmark. Where ASIC has provided guidance on a disclosure principle, this identifies a particular feature or risk of hedge funds that we consider a responsible entity should clearly and prominently address in the PDS. 

CP 174 also addresses our response to submissions on Consultation Paper 147 Hedge funds: Improving disclosure for retail investors (CP 147), which was published in 2011. 

Comments on the consultation paper are due by 19 April 2012.

Wednesday, February 22, 2012

Indian Regulator Laid Down Advertising Code for Mutual Funds Industry

Securities and Exchange Board of India (SEBI) has taken another step to lay down well regulated mutual funds market in India and  notified Model code of Advertisement for Mutual Funds Industry.

SEBI notification defines “advertisement” shall include all forms of communication issued by or on behalf of the asset management company/mutual fund that may influence investment decisions of any investor/prospective investors.

ADVERTISEMENT CODE

(a) Advertisements shall be accurate, true, fair, clear, complete, unambiguous and concise.
(b) Advertisements shall not contain statements which are false, misleading, biased or deceptive, based on assumption/projections and shall not contain any testimonials or any ranking based on any criteria.
(c) Advertisements shall not be so designed as likely to be misunderstood or likely to disguise the significance of any statement. Advertisements shall not contain statements which directly or by implication or by omission may mislead the investor.
(d) Advertisements shall not carry any slogan that is exaggerated or unwarranted or slogan that is inconsistent with or unrelated to the nature and risk and return profile of the product.
(e) No celebrities shall form part of the advertisement.
(f) Advertisements shall not be so framed as to exploit the lack of experience or knowledge of the investors. Extensive use of technical or legal terminology or complex language and the inclusion of excessive details which may detract the investors should be avoided.
(g) Advertisements shall contain information which is timely and consistent with the disclosures made in the Scheme Information Document, Statement of Additional Information and the Key Information Memorandum.
(h) No advertisement shall directly or indirectly discredit other advertisements or make unfair comparisons.
(i) Advertisements shall be accompanied by a standard warning in legible fonts which states „Mutual Fund investments are subject to market risks, read all scheme related documents carefully.‟ No addition or deletion of words shall be made to the standard warning.
(j) In audio-visual media based advertisements, the standard warning in visual and accompanying voice over reiteration shall be audible in a clear and understandable manner. For example, in standard warning both the visual and the voice over reiteration containing 14 words running for at least 5 seconds may be considered as clear and understandable.”;

Monday, February 20, 2012

FATF Identifies Jurisdictions with Strategic Deficiencies

In order to protect the international financial system from money laundering and terrorist financing, the FATF has published the following public documents, identifying countries with strategic deficiencies regarding anti-money laundering and combating the financing of terrorism (AML/CFT).

The Financial Action Task Force (FATF) is an inter-governmental body whose purpose is the development and promotion of policies, both at national and international levels, to combat money laundering and terrorist financing.  The Task Force is therefore a "policy-making body" which works to generate the necessary political will to bring about national legislative and regulatory reforms in these areas.

Followings are list of countries laid down as AML/CFT strategic deficiencies country:

Democratic People's Republic of Korea (DPRK)
Cuba**
Bolivia
Indonesia
Kenya
Myanmar
Nigeria
Pakistan
SĆ£o TomĆ© and PrĆ­ncipe

Guernsey Regulator Issued Consultation on the Draft of the Authorised Collective Investment Schemes (Class B) Rules 2012

The Guernsey Financial Services Commission, market watchdog of  the Bailiwick of Guernsey issued Consultation on the Draft of the Authorised Collective Investment Schemes (Class B) Rules 2012. The Collective Investment Schemes (Class B) Rules 1990 (“the 1990 Rules”) came into operation on 1 October 1990.  Whilst the 1990 Rules have been subject to various amendments they have not previously been the subject of a detailed review.  In light of amendments made to the rules relating to Class A open-ended collective investment schemes and the introduction of rules covering authorised closed-ended investment schemes and registered collective investment schemes it was considered appropriate to conduct such a review of the 1990 Rules.

It was against that background that a working party consisting of industry representatives from the open-ended fund sector and the Investment Business Division was established to review the 1990 Rules. 

Having considered the review undertaken by the working party the Commission has produced the revised rules and is currently seeking written feedback from Investment licensees on these revised rules.  A more detailed consultation paper is attached which outlines particular areas of the revised rules where the Commission would welcome feedback.



The Commission is expecting any comments on these rules to ClassBRules@gfsc.gg by close of business on Thursday 5 April 2012.

CPPS-IOSCO Release Final Report on OTC Derivatives Data Reporting and Aggregation Requirements

The Committee on Payment and Settlement Systems (CPSS) of the Bank for International Settlements and the Technical Committee of the International Organization of Securities Commissions (IOSCO) have published their “Report on OTC derivatives data reporting and aggregation requirements”.

The report deals with the data on over-the-counter (OTC) derivatives transactions that should be collected, stored and disseminated by trade repositories (TRs). It stresses that by centralising these data, TRs will be able to provide authorities and the public with better and more timely information. This will make OTC derivatives markets more transparent, help prevent market abuse and promote financial stability.

The final report reflects comments received in response to a consultative version published in August 2011. It was expanded in light of the consultation exercise in order to explore possible options for addressing data gaps.

The report was also updated to reflect recent international advances made by the Legal Entity Identifier (LEI) working group, under the auspices of the Financial Stability Board (FSB), in support of a request made at the G20 Cannes summit to advance the development of a global LEI. Another aim of these international efforts is to assist with implementation of the European Market Infrastructure Regulation.

However, as the report points out, questions remain about how best to address data gaps and determine which authorities should have access to TRs. As requested by the G20, two internationally coordinated working groups will address these issues in the course of the year. The FSB will set up an ad hoc group of experts to further explore means of filling data gaps, and the CPSS and IOSCO will form a joint group to study authorities’ access to TR data.

The report responds to Recommendation 19 of the FSB report of 19 October 2010 titled “Implementing OTC Derivatives Market Reforms”, which called on CPSS and IOSCO to consult with the authorities and the OTC Derivatives Regulators Forum in developing:

- minimum data reporting requirements and standardised formats, and
- the methodology and mechanism for data aggregation on a global basis. The final report was due at end 2011.
The requirements and data formats will apply both to market participants that report to TRs and to TRs reporting to regulators and the public. The report also finds that some information not currently supported by TRs would be helpful in assessing systemic risk and financial stability. It puts forward several options for bridging these data gaps.

Issues concerning data access for authorities and reporting entities are discussed, including methods and tools that could facilitate authorities’ access to data. The report emphasises that public dissemination of data helps all stakeholders to better understand OTC derivatives markets, facilitates the exercise of market discipline and underpins investor protection.

The report also deals with the mechanisms and tools that authorities will need to aggregate OTC derivatives data.

Follow these links to download the report from the BIS or IOSCO websites:

Australian Regulator Releases Policy on Enforcement and Investigations

Australian Securities and Investments Commission (ASIC) released policy documents discussing how it undertakes investigations and enforcement activity. 

The policy documents are:
  • Information Sheet 151: ASIC’s approach to enforcement (INFO 151). This discusses how ASIC approaches enforcement and why it responds to different breaches of the law in different ways.
  • Information Sheet 152: Public comment (INFO 152) is about when ASIC may comment publicly on investigations and enforcement actions. It replaces the public comment policy in Regulatory Guide 47 Public comment (RG 47)
  • Regulatory Guide 100 Enforceable undertakings RG 100) outlines what an enforceable undertaking (EU) is and when ASIC will consider accepting an enforceable undertaking

ASIC Chairman Greg Medcraft said: ‘ASIC wants the public to understand how we use our enforcement powers and why we might pursue a particular type of outcome in a given case. We are improving the transparency of our enforcement approach to help people understand our enforcement role and what we want to achieve by using our enforcement powers. 
‘The enforcement guide is about letting Australians better understand how and when we will take action. It is about what happens when the law is broken or when someone thinks they have broken the law and complains to us. It provides transparency about what matters we take on, what matters we don’t and why we seek particular remedies.’ 
ASIC decision on whether to take enforcement action is based on assessing:
  • evidence
  • cost vs regulatory benefit; and
  • level of harm or loss.
‘Our revised public comment policy will help stakeholders understand how and when we can comment on investigations. Every year ASIC conducts scores of investigations, some of which will never reach the courts. So ASIC has to balance the need for public transparency with the need to protect individual reputations,’ Mr Medcraft said. 
‘Enforceable undertakings can achieve a more effective regulatory result than other remedies in some cases - such as an improved compliance or a quicker outcome for investors. This guide will help spell out how and why we use them and what we expect from parties who enter into them.’ 
The enforceable undertaking guide outlines:
  • what an enforceable undertaking is;
  • when ASIC will consider accepting an enforceable undertaking;
  • what terms are or are not acceptable to ASIC; and
  • what happens if an enforceable undertaking is not complied with.

Sunday, February 19, 2012

Vodafone tax case: Income-Tax Department Files Review Petition in Apex Court of India

In accordance to an Article in Economic Times, the Income-Tax Department has filed a review petition in the Supreme Court asking it to reconsider its verdict dismissing the government's $2.2-billion tax claim on telecom company Vodafone, but the UK-based group appeared unfazed.

The department has sought the review on the grounds the judgement suffered from errors, failed to consider its submissions, and that certain provisions in the income-tax law had not been correctly interpreted.

The Governmet of India through Income-Tax Department has filed 100-page review petition wherein it has listed 121 grounds on which it considers earlier judgment in favour of Vodafone as an error in judgment. The review petition is for reconsideration of its verdict dismissing the government’s $2.2-billion tax claim on telecom company Vodafone which had been confirmed by Mumbai High Court verdict of 2008 that had upheld the tax authorities’ decision to levy tax on Vodafone’s $11-billion deal to acquire a controlling stake in the erstwhile Hutchison-Essar from Hong Kong-based conglomerate Hutchison Whampoa.

Following few issues raised by the department:
  1. No investment or inflow of money into India took place at all, since the sale consideration was paid outside India by one non-resident to another. Hence, FDI had no role to play in the case.
  2. The SC ruling may have the impact of legitimizing tax haven structures, even for round-tripping purposes.
  3. The reliance placed by the court on the provisions of DTC Bill 2009, is not correct as the same was merely a ‘public discussion draft.’
  4. Further, the express use “indirect transfer of capital asset situated in India” was not incorporated in the DTC Bill 2010 and the provisions of Section 5(1) of DTC 2010 are similar to Section 9(1) of the existing Act.
  5.  The petition states the DTC bill provision on offshore transfers is merely an exemption provision and not a charging provision meant to tax such transactions.
  6. Supreme Court own ruling in McDowell’s case which distinguhsed between tax avoidance & tax planning has not been taken into account while delivering justice.

Indian Regulator Laid Down Investor Grievance Redressal Mechanism at Stock Exchanges

Securities and Exchange Board of India (SEBI), Indian capital market regulator has come with new circular related to Investor Grievance Redressal Mechanism at Stock Exchanges.

At present, the stock exchanges having nationwide terminals, such as National Stock Exchange of India Ltd.(NSE) and Bombay Stock Exchange Ltd.(BSE) operating in equity as well as equity derivative segments are providing investor grievance redressal mechanism and arbitration facility (arbitration as well as appellate arbitration) at four regional centres (Delhi, Mumbai, Kolkata and Chennai).

With a view to increase investor confidence in the securities market and in order to make it more convenient to the investors to file their grievances and arbitration cases near to their places, SEBI has initiated steps to set-up this facility by stock exchanges at more centres after examining the data on complaints and arbitrations filed by investors from various regions. In consultation with all the major stock exchanges, it has been decided that initially:

i. NSE and BSE shall set up Investor grievance redressal mechanism at Ahmedabad and Hyderabad by March 31, 2012 and at Kanpur and Indore by September 30, 2012.

ii. NSE and BSE shall provide arbitration facility (arbitration as well as appellate arbitration) at all the above mentioned four new centers by September 30, 2012. They shall abide by all the applicable circulars issued by SEBI in this regard.

iii. NSE and BSE shall have adequate infrastructure and manpower, as considered appropriate, at these new centres to handle investor grievance redressal mechanism and arbitration facility effectively.

Wednesday, February 15, 2012

EBA Publishes a Consultation Paper on Draft ITS on Reporting of Large Exposures

The European Banking Authority (EBA) published today a consultation paper on a draft Implementing Technical Standard (ITS) on reporting of large exposures (CP51). The public consultation starts today and runs until 26 March 2012. 

The European Banking Authority was established by Regulation (EC) No. 1093/2010 of the European Parliament and of the Council of 24 November 2010.

The EBA has officially come into being as of 1 January 2011 and has taken over all existing and ongoing tasks and responsibilities from the Committee of European Banking Supervisors (CEBS).

The EBA acts as a hub and spoke network of EU and national bodies safeguarding public values such as the stability of the financial system, the transparency of markets and financial products and the protection of depositors and investors.

Main features of this ITS

This consultation paper puts forward a draft ITS on reporting of large exposures as requested by Article 383 of the Capital Requirements Regulation (CRR) and represents an addendum to the ITS proposal on supervisory reporting requirements published on the EBA’s website on 20 December 2011.

This draft ITS aims at implementing uniform reporting requirements which are necessary to ensure fair conditions of competition between comparable groups of credit institutions and investment firms. Uniform requirements will ultimately make institutions more efficient and result in a greater convergence of supervisory practices.

The ITS on reporting has been developed on the basis of the guidelines on common reporting of large exposures. The draft ITS will be covering both (i) information needed to check institutions’ compliance with the large exposure regime as set out in Articles 376 – 392 of CRR and (ii) information on concentration risk which competent authorities need to analyse as per Article 79 of the Capital Requirements Directive (CRD). The scope and level of application are in line with the CRR, currently under discussion by the EU legislators.

Tuesday, February 14, 2012

French Regulator End of the Short Selling Ban Regarding French Securities of the Financial Sector

The AutoritƩ des marchƩs financiers (AMF), French capital market regulator under New Press Release , the provisions prohibiting any creation of a net short position and increase of an existing one in relation to French equity securities of the financial sector (as listed below) came to an end on Saturday 11 February 2012.

As a consequence thereof, the prohibition of short sales regarding equity securities and securities giving access to the share capital of the following credit institutions and insurance companies is lifted:

- April Group
- Axa
- BNP Paribas
- CIC
- CNP Assurances
- CrƩdit Agricole
- Euler HermĆØs
- Natixis
- Scor
- SociƩtƩ GƩnƩrale
 
The AMF recalls that, with regard to equity securities, a net short position disclosure regime has been implemented since 1 February 2011. The AMF further highlights that pursuant to French regulation, any investor must be in a position to deliver the securities he has sold within 3 trading days (T+3).

Singapore Regulator Reviews Regulation of the Derivatives Market

The Monetary Authority of Singapore (MAS), capital market regulator in Singapore is conducting a review on the regulatory oversight of the over-the-counter (OTC) derivatives  market in Singapore and is seeking public comments on its proposals: http://www.mas.gov.sg/resource/publications/consult_paper/2012/OTCDerivativesConsult.pdf.

In developing these proposals, MAS has taken into consideration international developments such as the commitment pledged by the Group of Twenty Finance Ministers and Central Bank Governors (G20), as well as recommendations made by the Financial Stability Board (FSB) and other standard setting bodies, to improve the regulation and supervision of the derivatives market. These form part of the global effort to strengthen the international financial regulatory system in the wake of the 2008/09 global financial crisis.

Regulatory Oversight of Over-the Counter Derivatives Market

Under the proposals, MAS will expand the scope of the Securities and Futures Act (SFA), Chapter 289 to include:

i) mandatory central clearing of OTC derivative trades at regulated central counterparties;
ii) mandatory reporting of OTC derivative trades to regulated trade repositories; and
iii) putting in place regulatory regimes for market operators, clearing facilities, trade repositories and market intermediaries for OTC derivatives. 

MAS has considered amendments to relevant parts of the SFA arising from the regulation of OTC derivatives, and will make changes to align the treatment for OTC derivatives with that for securities and futures contracts where appropriate. 

In addition, MAS is currently working with the Singapore Foreign Exchange Market Committee (SFEMC) to encourage standardisation of OTC derivatives. MAS is also engaging the industry to better understand the costs and benefits of introducing mandatory trading on exchanges or electronic platforms in Singapore’s context and will consult on this at a later date.

Ms Teo Swee Lian, Deputy Managing Director (Financial Supervision), said, “The proposals will reduce systemic risk, improve transparency and protect against market abuse in Singapore’s OTC derivatives market, in a manner consistent with the G20 recommendations.”

Regulatory Oversight of OTC commodity derivatives

As part of the review, it is also proposed that the regulatory oversight for commodity derivatives be transferred from the Commodity Trading Act, currently administered by the International Enterprise (IE) Singapore, to the SFA. The objective of the proposed transfer is to harness synergies and align regulatory approaches across the major classes of OTC derivatives, while at the same time, provide greater clarity to industry participants on the regulatory approach for commodity futures and other commodity derivatives. An MAS-IE joint consultation paper on the transfer of regulatory oversight can be accessed here: http://www.mas.gov.sg/resource/publications/consult_papers/2012/TransferofRegOversightofCommodityDerivatives.pdf

MAS invites interested parties to give their views and comments on the proposals outlined in the two consultation papers.  The consultation period for both consultation papers will end on 26 March 2012.

Thailand Regulator Allows Voluntary Credit Rating by Foreign CRAs

Securities and Exchange Commission (SEC), capital market regulator of Thailand has approved a draft revision to the regulation governing investment advisory business to allow foreign credit rating agencies (CRA) to disseminate voluntary rating reports to the local public.

The voluntary rating means more regional scale rating information, which would contribute to the Thai capital market policy to promote foreign investment for risk diversification and the increasing cross-border offering of debt securities among ASEAN markets. More and easier access to voluntary rating information will be useful for Thai and foreign investors alike, especially for clearer comparison between local and foreign products.

Under current regulations, foreign CRAs, if approved by the SEC, are allowed to conduct mandatory rating of debt securities offered to the public or instruments in which a fund plans to invest without the need to apply for an investment advisory license. The services provided by the said foreign CRAs are, however, limited only to permissible products and under specific conditions. 

The revised regulation will widen availability of foreign CRAs’ rating information on local and foreign financial products or businesses so that local investors can make more use of comparative information and make informed investment decisions. The voluntary rating would increase visibility of Thai and regional products and thus support the upcoming integration of ASEAN capital markets. 

The foreign CRAs allowed to provide voluntary rating, though not required to obtain the investment advisory license, must meet the following criteria:
- operating credit rating business legally under the law of home country; 
- supervised by an IOSCO member regulator;
- not having a business premise in Thailand, except through shareholding in an SEC approved local CRA; and
- assigning rates for instruments or businesses for the purpose of regional or international scale comparison or for those specified to be credit rated under SEC regulations.

“We expect to see more fund mobilization and investments across ASEAN countries when the ASEAN Economic Community takes off in 2015. We are exploring opportunities and studying possible challenges for investors, fund raisers and business operators, and urging stakeholders to make careful preparation for new business environments. Investors unfamiliar with certain products should seek sufficient, well-round and useful information before making investment decisions. We hope this voluntary rating will do just that,” said SEC Secretary-General Vorapol Socatiyanurak.

SEBI Amended Portfolio Managers Regulation

Securities and Exchange Board of India, an Indian capital market Regulator amended Portfolio Managers Regulation under the Securities and Exchange Board of India (Portfolio Managers) (Amendment) Regulations, 2012.

Followings are major changes in existing Portfolio Manager Regulation under present amendment:

Increased Minimum Amount for Portfolio Scheme

SEBI has increased minimum amount for any portfolio management scheme under the Securities and Exchange Board of India (Portfolio Managers) Regulation, 1993 from five (5) Lacs to twenty five (25) Lacs.

Provided that the minimum investment amount per client shall be applicable for new clients and fresh investments by existing clients.

Provided further that existing investments of clients, as on date of notification of Securities and Exchange Board of India (Portfolio Managers) (Amendment) Regulations, 2012, may continue as such till maturity of the investment.

New Norms of Portfolio Manager Scheme for Unlisted Securities

Present amendment has expanded regulation of portfolio management scheme to include listed and unlisted securities.

Provided further that the portfolio manager shall segregate each client’s holding in unlisted securities in separate accounts in respect of investment by new clients and fresh investments by existing clients.

Provided further that existing investments in unlisted securities of clients, as on date of notification of Securities and Exchange Board of India (Portfolio Managers) (Amendment) Regulations, 2012 may continue as such till maturity of investment.

Change in Disclosure Document

Amend Regulation inserted under the heading “MODEL DISCLOSURE DOCUMENT FOR
PORTFOLIO MANAGEMENT”, in item III after clause 13(ii), for the words “Name and signature of all the Directors of Portfolio Manager” the words “Name and signature of at least two Directors of Portfolio Manger” shall be substituted.

Sunday, February 12, 2012

Indian Market seen 60 Firms Delisting in Last Two Years

Indian Business newspaper Business Line has reported unique observation in an Article. Precisely this article has evaluated various dimensional reasons behind delisting of firm in Big and small in term of market capitalization quantum.

At one hand, many Indian companies are waiting for the stock market to revive so that they can launch their IPOs (initial public offerings). But others are equally eager to call it quits. As many as 61 companies have delisted from leading stock exchanges in the last two years. Many more are waiting in the wings. 

Companies that announced delisting plans recently include chemicals conglomerate Chemplast Sanmar, multinationals such as Alfa Laval India and acquired firms such as Patni Computer and UTV Software.

Overlooked 

Why do companies want to give up on the visibility and value that a stock market listing brings? There are many reasons. 

Some companies seem downright vexed with investors' refusal to view their business in favourable light. FMCG challenger Nirma, after diversifying from detergents into chemicals and announcing its entry into pharmaceuticals and cement, saw its stock valuation pegged down in the markets to trade at a big discount to other FMCG players. 

Announcing plans to voluntarily delist in 2010-end, Nirma said, “The (company's) profile is likely to change further towards entering into select early-stage and capital-intensive businesses. The nature and risk profile of these businesses may not be easily understood and may not be appropriate for non-promoter investors.” 

Steel-door maker Shakti Met-Dor decided to delist last year, as it felt its stock was overlooked by the markets. 

Chemplast Sanmar, which announced delisting plans a couple of weeks ago, pointed to the wide swings in the petrochemical cycle, which have led to losses and high debt in recent years. While this calls for fresh capital infusion, regulations prohibiting promoter holdings of over 75 per cent and the current “depressed state of capital markets” have limited the company's options. Delisting is the only alternative, the company decided.

Prompted by law 

Quite a few delisting moves have also been triggered by the minimum public shareholding norm stipulated by the Government in 2010, which cap the promoter holdings for listed companies at 75 per cent. After this new rule, multinational firms with high promoter stakes have been quick to announce buyouts that make their Indian arms private. 

Alfa Laval Corporate AB Sweden, which holds 88.7 per cent stake in Alfa Laval India, for instance, is opting to buy out all public shareholders to fully own its Indian arm. The Swedish parent has said that the delisting will give it “increased operational flexibility.” Micro Inks, with a German promoter and Atlas Copco, are also doing likewise. 

In some cases, delisting proposals have followed a change in the ownership of the company. After acquiring a controlling stake in UTV Software in June 2011, the Walt Disney Group initiated plans to delist the company from the bourses to get “enhanced operational flexibility.” 

Patni Computer, acquired by the US-listed iGate Global in January 2011, initiated delisting proceedings in November 2011, so that the promoters can obtain “full ownership.” 

In many of these cases, relatively low market levels and a weak rupee have made for an opportunity to acquire the domestic company at a low outlay.

Bonanza for investors 

Ironically, though, delisting proposals by companies have proved a bonanza for investors in some cases. SEBI regulations stipulate that a company seeking to delist can only buy back shares at the price set through a reverse book-building process. That is, investors can bid the price at which they will part with their shares. 

Now, with investors demanding a hefty premium in some cases, stock prices of companies tipped to be delisting candidates have soared in the moribund market of the past year. 

With a 149 per cent gain, Alfa Laval India has been a top performing stock in the last one year.
UTV Software's share has more than doubled, even as the Sensex has made a gain of less than 1 per cent. 

Even Chemplast Sanmar, languishing at Rs 5 when the delisting announcement came, vaulted to Rs 6.37 in the past week — notching up a 27 per cent gain.

Saturday, February 11, 2012

Canadian Securities Regulator Modernize Rules Concerning Mutual Funds

The Canadian Securities Administrators (CSA) announced the completion of the first phase of its “Modernization Project”, which seeks to update the product regulation of publicly offered investment funds.

The purpose of the Project is to modernize investment fund regulation, making it more effective and relevant in today’s more diverse and increasingly innovative retail marketplace.

Specifically, the amendments introduced in the first phase recognize the proliferation of Exchange Traded Funds (ETFs) and streamline their access to the market by eliminating the need for them to apply for regulatory exemptions. This will reduce regulatory costs, which is also expected to benefit investors. The amendments are also designed to enhance the resilience of money market funds to certain short-term market risks, by introducing new liquidity requirements and term restrictions.

“By modernizing these important investment fund rules, we are responding to the rapidly evolving investment fund landscape, as well as maintaining consistency with global standards,” said Bill Rice, Chair of the CSA, and Chair and Chief Executive Officer of the Alberta Securities Commission.
  
Subject to ministerial approval, the amendments will come into force April 30, 2012. The new requirements for money market funds will come into force following a transition period.

SFC, Hong Kong to Implement New Guidelines on Anti-Money Laundering and Counter-Terrorist Financing

In a set of consultation conclusions released today, the Securities and Futures Commission (SFC), Hong Kong announced the gazettal of a new set of guidelines on anti-money laundering (AML) and counter-terrorist financing (CFT).

The gazettal of the new guidelines is in line with the SFC’s proposals to provide guidance to the industry relating to, among others, the operation of the provisions of Schedule 2 to the Anti-Money Laundering and Counter-Terrorist Financing (Financial Institutions) Ordinance (AMLO) which shall come into effect on 1 April 2012.

The guidelines will assist licensed corporations and associated entities in designing and implementing appropriate and effective policies, procedures and controls so as to comply with the AMLO requirements and/or other applicable AML/CFT legislation and regulatory requirements.

SFC stated “Associated entity” refers to a company that is in a controlling entity relationship with an intermediary and receives or holds in Hong Kong client assets of the intermediary.

The SFC received a total of 25 submissions from industry practitioners, trade associations and professional bodies in response to the proposed guidelines. Respondents generally found the guidelines helpful, and some sought clarification on specific matters and adaptation of certain requirements to facilitate compliance. The SFC has amended the guidelines in a number of areas to address comments whilst ensuring that they remain in line with international AML/CFT standards. Details of the submissions and the SFC’s responses to the comments are contained in the consultation conclusions.

To coincide with the commencement of the AMLO, the guidelines will take effect on 1 April 2012 to replace the existing Prevention on Money Laundering and Terrorist Financing Guidance Note published by the SFC.

Friday, February 10, 2012

Hong Kong Regulator Concludes Short Position Reporting Rules

The Securities and Futures Commission (SFC),  an independent non-governmental statutory body outside the civil service, responsible for regulating the securities and futures markets in Hong Kong today publishes the conclusions to the Further Consultation on the Securities and Futures (Short Position Reporting) Rules (Rules) ended in November 2011. The proposed Rules attached to the conclusions will be submitted to the Legislative Council for consideration. Subject to the legislative process, the Rules will come into effect on 18 June 2012. 

In view of additional market feedback, the proposed Rules have provided for reporting of short positions on a net basis. They also have been modified to provide greater clarity in certain areas, including reporting obligations in relation to corporate “umbrella” funds and jointly owned short positions. Other than the aforesaid refined policy proposals, the proposed Rules are fundamentally the same as those consulted previously.

Followings are major considered issues of final conclusion of the Rule by the Regulator:

(a) Short positions to be reported to the SFC will be on a net basis;

(b) For corporate ―umbrella‖ funds that have underlying sub-funds, we have provided in the Rules that the net short position that is attributable to each sub-fund is to be treated and reported separately and is not to be aggregated with the positions of other sub-funds within the same ―umbrella‖ fund;

(c) The Proposal will be retained to enable those market participants whose trading activities are conducted on a trading unit/book basis to leverage on their current trading infrastructure for short position reporting. As mentioned in the Further Consultation, the SFC will issue guidelines on the application of the Proposal in due course;

(d) On the question of reporting jointly owned positions, we envisage that this issue is most likely to arise in relation to short positions owned by partnerships. Consequently, we have provided in the Rules that if the partners in a partnership have a reportable short position, then a report submitted by a partner or another person authorized by all the partners, on behalf of those partners, is regarded as having complied with the Rules. A person who has a reportable short position as a partner in more than one partnership must treat the short position attributable to each partnership separately; and

(e) With regard to imposing criminal sanction for a breach of the Rules, as explained in the Conclusions, this approach is consistent with similar provisions in the SFO and other rules made by the SFC for non-compliance with notification requirements.

“The Rules published today have been shaped by extensive consultation with relevant stakeholders to lay down a clear regulatory framework for market participants to report short positions to the SFC,” said Mr Ashley Alder, the SFC’s Chief Executive Officer. “With this regime in place, the SFC will be able to perform its role more effectively in monitoring the market, including detection of significant build-up of short positions. We believe our publication of data on aggregated short positions will enhance transparency to the market,” Mr Alder added.

The Bank of Mauritius and the Financial Services Commission, Mauritius reinforce the framework for effective exchange of information

The Financial Services Commission (FSC) Mauritius and the Bank of Mauritius (BoM) have signed a Protocol to amend the Memorandum of Understanding (MoU) between BoM and the FSC at the Bank of Mauritius Tower, Port Louis, on Wednesday 08 February 2012. The signatories of the Protocol are Mr Yandraduth Googoolye, First Deputy Governor of the Bank of Mauritius and Ms Clairette Ah‐Hen, Chief Executive of the Financial Services Commission.

The MoU was originally signed in December 2002 to set out the framework for cooperation between BoM and the FSC in their common pursuit to maintain a safe, efficient and stable financial system in Mauritius.
The reputation of the Mauritius International Financial Centre, however, lies on compliance with standards set by international standard‐setting organisations and international norms relating, inter
alia, to the disclosure and exchange of information.

While the FSC has been complying with the International Organization of Securities Commissions (IOSCO) principles for the past years in matters of exchange of information with its counterparts, there were a few amendments that were required within our legal framework to enable Mauritius to fully subscribe to the IOSCO Multilateral Memorandum of Understanding (MMoU).

The present amendment to the MoU reinforces the framework for effective exchange of information between BoM and the FSC and enables Mauritius to comply with one of the requirements imposed under the IOSCO MMoU.
BoM and the FSC are pleased that the signature of this Protocol will bring Mauritius on the same level as other internationally recognized‐financial centres and reaffirm their commitment to collaborate further to safeguard the stability of the domestic financial system.

Thursday, February 9, 2012

Delivering a Twin Peaks Regulatory Model within the FSA

Financial Services Authority (FSA) vide press release FSA/PN/012/2012 published speech of Hector Sants, chief executive of the FSA in the British Bankers’ Association, , gave an update on the progress of the regulatory reform programme. He announced a major milestone in the regulatory reform programme, namely the introduction of a ‘twin peaks’ model operating within the FSA from 2 April 2012.

The new model will mean that banks, building societies, insurers and major investment firms will, from this date, have two groups of supervisors, one focusing on prudential and one focusing on conduct. All other firms (i.e. those not ‘dual regulated’) will be solely supervised by the conduct supervisors.

He explained that the FSA could not completely replicate the approach proposed by the Government in the Financial Services Bill published on 26 January, but he emphasised that the changes would go as far as possible to ensure that the cutover to the new regulatory structure in early 2013 will be seamless.

The key characteristics of the model include:
  • Two independent groups of supervisors for banks, building societies, insurers and major investment firms, covering prudential and conduct;
  • Supervisors making their own, separate, set of regulatory judgements against different objectives;
  • ‘Independent but coordinated regulation’ designed to allow internal coordination between both conduct and prudential supervisors to maximise the exchange of information relevant to their individual objectives, but with supervisors still acting separately when engaging with firms; and
  • Retaining the principle of seeking to ensure that regulatory data is only collected once.
He emphasised that the change will embed the forward-looking, judgement-based approach and accelerate the move away from the old reactive style of regulation. He stressed that the changes must not just be structural but must involve behavioural shifts from both supervisors and firms.

Hector Sants said:
The move to twin peaks is an opportunity to drive home and further embed the move to forward-looking, proactive, judgement-based supervision.  It is an opportunity that must not be missed.  We must crystallise the change from the old style reactive approach to the new style proactive approach.
“The most important change that will occur at twin peaks, in my judgement, is not the introduction of a new operational framework, but the opportunity to accelerate the process of behavioural change that the FSA embarked on when we began the reform of the supervisory process in the spring of 2008.”

He argued that if this new approach is to work effectively, firms would need to change the way they thought about regulation. Firms will be expected to:
  • recognise the importance of aligning their goals with those of the supervisors and society as a whole;
  • show a greater willingness to proactively comply with supervisory judgements.  “We are not asking firms to forgo their right to challenge their supervisor if their decisions have not been properly made.  But we are suggesting that dragging their feet in complying with requests when it is obvious to all that the outcome is in the best interest of society as a whole is not a behaviour which should survive in the new world”; and
  • Recognise that this new approach will require greater resources and expertise and thus costs more than the old reactive model which existed prior to the crisis.
Hector Sants concluded:
It is really important that we must use this opportunity to accelerate the behavioural and cultural change needed in both regulators and firms. The new world of judgement-based regulation needs to be embraced by us all.”

Changes Proposed in Equity Listing Agreement by Indian Regulator

As part of Securities and Exchange Board of India’s (SEBI) endeavour to review the listing conditions, certain amendments are hereby carried out to the Equity Listing Agreement. The amendments are as under:-

a. Amendment to Clause 40A
In addition to the existing methods which listed company can adopt to achieve minimum public shareholding, the listed company may also achieve the minimum level of public shareholding through Institutional Placement Programme (IPP) in terms of Chapter VIII-A of SEBI (Issue of Capital and Disclosure Requirements) Regulations, 2009, as amended.

Further, sale of shares by promoters through stock exchanges shall be now carried out in terms of SEBI circular CIR/MRD/DP/05/2012 dated February 1, 2012.

b. Amendment to Clause 43 & 43A

In order to enhance disclosure requirements, listed entities have been mandated to disclose utilization of funds raised upon conversion/ exercise of warrants issued along with public or rights issue of specified securities.

This circular shall be applicable with immediate effect.

SEBI: New Guidelines of Disclosure in respect of Buy Back of Securities

Securities and Exchange Board of India, capital market regulator of India has amended SEBI (Buyback of Securities) Regulations, 1998 (“the Regulations”) vide notification dated February 07, 2012 with an objective of aligning the regulatory provisions with the principle of equitable treatment to all shareholders and enhancing the efficiency in the Buyback process.

The purpose of this circular to provide standard letter of offer for Buy Back of equity in accordance with Chapter III of the SEBI (Buy Back of Securities) Regulations, 1998 (hereinafter referred to as “the Regulations”), to provide the requisite information about the company so as to enable the shareholders to make an informed decision of either remaining the shareholders of the company or to exit from the company.

Care shall be taken by the Merchant Banker to ensure that the Letter of Offer may not be technical in legal or financial jargons and it shall be presented in simple, clear, concise and easily understandable language.

This standard Letter of Offer enumerates the minimum disclosure requirements to be contained in the Letter of Offer for the Buy Back of equity. The Merchant Banker/ the company is free to add any other disclosure(s) which in his / its opinion is material for the shareholders.

The merchant banker shall ensure that the disclosures made in the letter of offer are not presented in an incomplete, inaccurate or misleading manner and are made in accordance with the Regulations.

The standard Letter of Offer prescribes only the nature of the disclosures that should be contained under various heads in the Letter of Offer and is not intended to describe the language to be contained therein.

SEBI circular has extensively elaborate contents of draft of Letter of Offer and other particulars of the same issue.

Tuesday, February 7, 2012

Canadian Securities Regulator Adopt Regulatory Regime for Credit Rating Organizations

The Canadian Securities Administrators (CSA), capital and securities market regulator of Canada has adopted of NI 25-101 Designated Rating Organizations, which will impose requirements on credit rating organizations wishing to have their credit ratings eligible for use in securities legislation.

The rule establishes a regulatory framework for the oversight of credit rating organizations by requiring them to apply to become a “designated rating organization” and adhere to rules concerning conflicts of interest, governance, conduct, a compliance function and required filings. The rule is also designed with the intent to be consistent with international regimes and European Commission endorsement and certification provisions, so that European market participants can rely on ratings of Canadian credit rating organizations associated with those registered in Europe.

“The CSA recognize the significant role credit rating organizations play in today’s global credit markets,” said Bill Rice, Chair of the CSA, and Chair and Chief Executive Officer of the Alberta Securities Commission. “By considering international developments while creating the Canadian regulatory regime for credit rating agencies, the CSA has set appropriate standards for credit rating agencies that are also consistent with international regimes.”

In March 2011, the CSA published for comment amendments to the rule, which included feedback received from the European Security Markets Authority on whether the proposed Canadian regulatory framework was "equivalent" to the EU Regulation. Following comments received by investors and marketplace participants on the 2011 Proposal, minor amendments have been made to enhance the rule.

In some jurisdictions, proclamation of legislation or proclamation of legislation and ministerial approvals are required. Subject to obtaining all necessary approvals, the rule will come into effect on April 20, 2012.

The final regulatory regime for credit rating organizations and related amendments are available on the websites of CSA members.

The CSA, the council of the securities regulators of Canada’s provinces and territories, co-ordinates and harmonizes regulation for the Canadian capital markets.

Global Antitrust Enforcement in M&A Transactions

Global M&A, Skadden's 2012 Insights, January 2012 has posted present Article.

United States 

In 2011, we saw a resurgence in antitrust challenges to mergers by the U.S. Department of Justice’s Antitrust Division (Antitrust Division) and the Federal Trade Commission (FTC). The Antitrust Division sought to enjoin transactions such as Verifone’s proposed acquisition of Hypercom (parties agreed to divestiture to settle litigation), Nasdaq OMX and the IntercontinentalExchange’s proposed acquisition of NYSE Euronext (parties abandoned the transaction), H&R Block’s proposed acquisition of TaxACT (Antitrust Division prevailed after full trial on the merits), and AT&T’s proposed (and later abandoned) acquisition of T-Mobile. Similarly, the FTC litigated and lost a federal court challenge to Labcorp’s consummated acquisition of Westcliff and lost its appeal in the Ovation Pharmaceuticals matter, where the FTC also litigated and lost a federal court challenge to a consummated acquisition.

From a practitioner’s perspective, industry structure remains a critical starting point for merger analysis. Each of these challenges involved markets that the antitrust agencies alleged were highly concentrated, and descriptions in the merging parties’ business and strategic planning documents frequently were cited as evidence supporting the agencies’ views of market structure. In addition, the antitrust agencies (especially the Antitrust Division) have shown a willingness to “fast track” problematic transactions for litigation without the need for a prolonged review. For example, in the NYSE matter, the parties announced the proposed merger on April 1, 2011, and the Antitrust Division announced its intention to enjoin the transaction only six weeks later and without the voluminous documents and data required by the Second Request process. Finally, the health care industry continues to be a primary focus for the FTC, with all health care mergers — including those for which Hart-Scott-Rodino (HSR) filings are not required — typically receiving heightened antitrust scrutiny. We expect these trends to continue, irrespective of the outcome of the 2012 election.

Last year we also saw the first substantial revisions to the HSR premerger filing form in nearly a decade. The most significant of the revisions eliminate or reduce, generally, the information and documents to be provided, but also require new, detailed information about (i) ex-U.S. manufacturing operations and (ii) “associates” of the acquiring filing person and their holdings, as well as the production of a new category of documents, called “4(d) documents,” that include synergies and efficiencies analyses. The new rules remain subject to ongoing clarification, and we will continue to alert clients when the premerger office provides guidance as to the scope and interpretation of the rules. In practice, the new HSR rules have had limited impact on filing parties, except for those with international manufacturing operations, which must now itemize their overseas products and related U.S. revenues, and private equity firms or master limited partnership buyers, which must now account for associates’ holdings.

Finally, the Antitrust Division issued a revised Policy Guide to Merger Remedies (Remedies Guidelines) earlier this year. The new Remedies Guidelines restate much of the Antitrust Division’s precedents for devising, implementing and enforcing remedy provisions and consent decrees in the merger context. Released in part to highlight the Antitrust Division’s approach to vertical transactions, which received significant attention following Comcast’s acquisition of NBC Universal and Ticketmaster’s merger with Live Nation, the Remedies Guidelines do not reflect a sharp change in the Antitrust Division’s policies. Rather, they highlight the greater flexibility and willingness on the part of the Antitrust Division to accept conduct, as opposed to structural, remedies, particularly in connection with vertical mergers.

European Union

There have been no significant changes in terms of merger enforcement in the EU in 2011, which is now a “well-oiled machine” in Commissioner JoaquĆ­n Almunia’s own words. Indeed, March 2011 marked two decades of enforcement of the EU Merger Regulation (EUMR), during which the European Commission (EC) reviewed 4,500 mergers and approved approximately 90 percent of them unconditionally.

Despite the fact that merger notifications increased slightly compared to 2010, last year was characterized by the deepening of the sovereign debt crisis and resulting recession in many EU countries. However, the crisis has not resulted in more lenient merger enforcement by the EC. This is evidenced by the prohibition of the Olympic Air/Aegean Airlines merger (M.5830) on the grounds that it would eliminate competition in many domestic air transport routes in Greece, the EU country at the epicenter of the EU financial crisis. As Commissioner Almunia has stated, the EC views effective merger control as a requirement for Europe to compete effectively in a globalized world economy, especially in times of recession.

In 2010, there was a lot of debate about whether the Upward Pricing Pressure (UPP) test introduced by the U.S. Horizontal Merger Guidelines would dispense with the need to define markets in the EU. The EC’s practice since then shows that market definition will remain the starting point for merger analysis in the EU, and that UPP, along with other econometric tools, will complement rather than replace market definition. The Unilever/Sara Lee Body Care decision (M.5658) is an illustration of this approach. In that case, the EC defined markets and subsequently, through the use of econometric models and other evidence, concluded that the merger would result in a price increase because some of the brands involved were close competitors. As a result, the EC required the divestiture of one of the brands in order to clear the merger. This approach is consistent with the U.S. approach, where industry structure remains a critical starting point for merger analysis.

On the remedies front, the EC has developed its practice of accepting nonstructural remedies to address foreclosure and interoperability concerns in nonhorizontal merger cases, even in Phase I, without a protracted Phase II investigation. In Intel/McAfee (M.5984), the EC had concerns that Intel, after its acquisition of McAfee, would foreclose security solutions and CPU/chipset competitors through technical tying and/or degradation or refusal of interoperability, given Intel’s position in CPUs/chipsets. To address these concerns, the EC accepted essentially interoperability commitments by Intel (i) to provide access to all necessary interoperability information for Intel’s CPUs/chipsets, (ii) not to impede the operation of competing security solutions from running on Intel CPUs and chipsets, and (iii) to avoid hampering the operation of McAfee’s security solutions when running on PCs containing CPUs or chipsets sold by Intel’s competitors.

Despite the mature state of EUMR enforcement on the substantive front, there are still procedural issues that could affect both the timing and substance of merger review under the EUMR.

The EC’s assessment of two parallel mergers in the hard disk drive (HDD) sector raised questions about the EC’s “priority rule,” a practice that it developed for parallel merger investigations. The mergers in question were Western Digital/Hitachi (M.6203) and Seagate Technology/Samsung Electronics (M.6214) (the WD merger and Seagate merger, respectively). The WD merger was announced on March 7, 2011, while the Seagate merger was announced on April 19, 2011. However, the Seagate merger was formally notified one day before the WD merger. As a result of the priority rule, which is based on a “first-come, first-served” approach, the EC assessed the Seagate merger as if the WD merger had not yet occurred, while the WD merger was assessed as if the subsequent Seagate merger already had occurred and Seagate/Samsung were a single entity. The strict application of the priority rule had a concrete impact, given that the WD merger was no longer assessed as a “4 to 3” deal, but instead as a “3 to 2” deal in certain HDD markets, and led to the imposition of remedies for the WD merger. In contrast, the Seagate/Samsung deal was assessed as a “4 to 3” deal and cleared unconditionally. The priority rule is under appeal before the European General Court by Western Digital, but in its current state, it complicates the antitrust risk assessment in M&A transactions that occur in oligopolistic markets with high barriers to entry.

Another procedural issue relates to transactions that do not automatically trigger the EUMR thresholds. Three of the nine Phase II decisions this year involved cases that did not trigger the EUMR thresholds but which were referred to the EC under Article 22 of the EUMR. Two of these decisions either resulted in significant commitments (Sygenta/Monstanto Sunflower Seed, M.5675) or were abandoned (SC Johnson/Sara Lee Household Insect Control Business, M.5669). The increased tendency of national competition authorities in the EU to refer cases to the EC, including authorities that did not originally have jurisdiction to review the deal, is a key parameter that could affect both the timing and substantive assessment of strategic M&A.

China, Brazil and India

China. 2011 was the third full year of enforcement by China’s Ministry of Commerce (MOFCOM) of the Chinese Antimonopoly Law (AML). MOFCOM has continued to vigorously enforce the AML and establish its presence as one of the “gateway” competition authorities for global M&A transactions.

MOFCOM has increased its clout by taking enforcement action for the first time against a transaction involving a Chinese State Owned Enterprise (SOE). On November 10, 2011, MOFCOM imposed remedies for the establishment of a joint venture between General Electric and Shenhua (a Chinese mining/energy SOE), to license coal-water slurry gasification technology to industrial and power projects in China. MOFCOM cleared the joint venture subject to commitments by Shenhua not to compel licensees of competing gasification technologies to use GE/Shenhua’s technology.
On August 29, 2011, MOFCOM adopted Provisional Rules for Assessing the Competitive Effects of Undertakings, which lays out basic principles for MOFCOM substantive merger review that reflect MOFCOM’s experience so far.

However, despite the progress made on the substantive front, the MOFCOM merger review process remains very lengthy, even for transactions raising insignificant merits issues. The vast majority of the notified transactions in 2011 led to Phase II investigations because of the lengthy decision-making process, which involves interagency consultations with many other Chinese government agencies.

Brazil. The new Brazilian Competition Law (Law No. 12529) was adopted on November 30, 2011, and will enter into force on May 28, 2012. The new law will include, among other things, a bar on closing that will prevent the parties from closing a transaction before a clearance is issued. This will be a major change compared to the current system, which does not have an automatic bar on closing, and would put Brazil on the map as one of the key jurisdictions that could affect the timing of global M&A deals.

India. The Competition Bill of 2007, which amends the Competition Act, 2002, introduced a mandatory preclosing filing system that also applies to M&A transactions that do not involve Indian companies. The new regime entered into effect as of June 1, 2011. However, the number of Indian merger notifications triggered from global M&A transactions under the new regime is less significant than originally anticipated, due to a transitory de minimis exception that exempts transactions where the target company has Indian turnover or assets below certain thresholds.