New badla system for rolling settlement

In a major move, the regulator has also decided to do away with the current 75 day-limit for carrying forward trades (under the weekly account period settlement). “This is part of the liberalisation process in the markets and making domestic market practices more in line with international norms. Every time the position will be treated as a fresh contract,” Sebi officials clarified.

Sebi has also approved a hike in the carry-forward limit per broker to Rs 40 crore from the current Rs 20 crore. Up to Rs 20 crore, the prevailing margin at 15 per cent will remain (to be paid upfront) while the incremental position will attract a margin of 20 per cent. A scrip-wise, broker-wise position limit has also been imposed at Rs five crore. The calculation of margins on carry-forward trades on gross basis will continue while an eligibility criteria will be specified for scrips under carry-forward both in weekly account period and rolling settlement as well as for the continuous net settlement (CNS).

With the National Stock Exchange making repeated representations for Continuous Net Settlement, the board also approved the introduction of CNS in the stock exchanges.

The Risk Management group of Sebi is looking at the issue of introduction of margins on gross basis in the cash market as well along with the incorporation of client code.

For subsidiaries of small exchanges, the board decided to exclude the turnover of the sub-brokers (who have paid registration fees as regional exchange members) from the total turnover of the subsidiary, thus granting them some relief in the payment of turnover based fees to the subsidiaries. The payment of turnover-based fees by the subsidiary would be decided by the court.

IPO NORMS REVISED: Major modifications have been made in respect of the working of debenture trustees while in the case of Initial Public Offerings it has been decided that companies with no track record can enter the market only through the book building route.

Companies without track record would also have to allot 60 per cent of the issue to Qualified Institutional Buyers (QIBs). Elaborating on this, SEBI executive director Pratip Kar said that in the absence of a track record, informed and large investors would make the price discovery. Hence the insistence on the book building route for such companies.

Companies raising capital more than five times their net worth and issues by existing companies would necessarily have to take the book building route, the Sebi board has decided. Here again 60 per cent would be allotted to QIBs. The book built issues will fail if the specified institutional subscription is not received.

Companies wishing to raise capital five times their net worth would have to adhere to the existing guidelines on track record and profitability. Rationalising the lock-in provisions, the Sebi board has decided that for IPOs the minimum promoters’ contribution of 20 per cent would be locked in for three years as per the existing provision, while the remaining pre-issue capital in the hands of promoters and their associates or friends would be locked in for a period of one year from the allotment date.

Senior executive director O P Gahrotra said that the idea behind the lock in was to allow the market to determine and stabilise the price of the scrip, before the investors decide to exit. However, he added, associates and friends can exit or exchange shares among themselves.

Further the promoters contribution will be kept in an escrow account, to be released to the company with the public issue proceeds. Where the promoter has brought in funds before the cash, a cash flow statement detailing the use of the funds has to be provided in the prospectus.

All preferential allotments – except those involved in share swaps for acquisitions – would be locked in for a year. Disclosures in the notice calling for a general body meeting to approve preferential allotments would be strengthened as also for utilisation of public issue proceeds to preferential offers.

Merchant bankers would have to justify the issue pricing in the prospectus. Mehta said that they had come across cases where such justifications were absent. For book built issues too justification would have to be provided, along with a declaration that the final price was determined by investor demand. In either case if the analysis of the merchant banker does not justify the pricing, the issue cannot go through.