News Flashes

ICAI to make the ‘fair value’ method to be use by companies for Esops

29th June 2004: The company for expensing employee stock options, stock appreciation rights and share offered under the employee stock purchase plans should adopt the ‘fair value method’ said the Indian Institute of Chartered Accountants (ICAI). These guidelines will be effective from April 1, ’05.

            Recently the Central council of the Institute cleared, a guidance note on accounting for ‘employee share-based payments’, which allow use of the intrinsic value method, provided the company makes extensive fair value disclosures. The note is likely to be issued soon.

            The Sebi guidelines for accounting the employee stock option plans (Esops) and employee stock purchase plans (ESPPs) allows the option to follow either the fair value method or the intrinsic value method with fair value disclosures. As of now, the listed companies are required to follow the guidelines prescribed by the Sebi.

            ICAI is currently in talks with Sebi to replace the stock markets regulator with that prescribed by the institute. Also the markets regulator has indicated their willingness to withdraw the 1999 Sebi (Esop and ESPP).

Sebi to restrict splitting shares before IPO

29th May 2004: The Securities and Exchange Board of India (Sebi) has stated that restrictions will be placed on splitting of shares before an Initial Public Offer (IPO). Greenshoe options are to be allowed for all IPOs whereas initially they were allowed only for the IPOs which went through the book- building route. The minimum share application size has been changed in terms of value of shares. For issue prices below Rs 500 per share, the face value of the share should be Rs 10 per share. If the issue price is Rs 500 or more, the minimum face value of a share should not go below Re 1. At present, the guidelines permit the issuer to determine the denomination of shares for public or rights issue and to change the standard denomination. Sebi has also amended the ‘Depositor and Investor Protection’ guidelines in respect of the minimum share application size. The retail investor is defined as “one who applies for a minimum amount of shares worth up to Rs 50,000”. A minimum application value of Rs 5,000 to Rs 7,000 has been introduced. Applications can be made in multiples of these values. The minimum application value shall be with reference to the issue price of the shares and not with reference to the amount payable on application. So in an issue priced at Rs 500, the application amount is Rs 100 and the remaining money has to be paid on allotments and calls. In such a case, the application value of Rs 5000-7000 will be arrived at with reference to the issue price of Rs 500 per share. As such, the minimum application size, to be stipulated in the offer document, will range from 10 shares to 14 shares and not 50 shares to 70 shares. The proportional allotment procedure has been changed. The shares should be allotted on a proportionate basis within specified groups. The minimum allotment will be the amount that is decided by the issuer. The existing guidelines state that if an issue is oversubscribed, the allotment is to be made in terms of the proportionate allotment procedure, which is subject to the determination of successful applicants by drawing lots and allotting a minimum of 100 shares per minimum tradable lot to successful applicants. The guidelines have been amended to permit reservation on a competitive basis. Now all pre-IPO shareholders and promoters who have more than 5% of shares are permitted to lend their shares for the greenshoe option. In the case of public issue of bonds by designated financial institutions, the guidelines have been amended to provide that once the issue size and oversubscription limits are disclosed in the shelf prospectus, issuers can raise and retain any amount through the tranche issues, subject to this being within the respective limits specified in the shelf prospectus and also subject to the condition that the issuer has to disclose the minimum amount proposed to be raised and the maximum oversubscription proposed to be retained in the shelf prospectus.

Banks might trade in exchange - traded derivatives

13th May 2004: The Reserve Bank of India (RBI) is considering the option of letting banks trade in exchange-traded derivatives. This would provide acceleration for re-launch of the instruments. It is also considering the issue of capital indexed bonds as part of the Government-borrowing Programme in order to help banks and long-term investors against uncertainty due to interest rate fluctuations. These bonds (or Government securities) would be associated with inflation through consumer rice index, or even the wholesale price index. The investors would benefit by saving on the principal in case the interest rate goes down. The Securities and Exchange Board of India has already issued clarifications allowing the usage of Yield to Maturity (YTM) model pricing of derivatives. Following this, the Bombay Stock Exchange is also understood to have obtained the approval from the Securities and Exchange Board of India for launching the product. The present market scenario has mostly buyers and only few sellers. However, a developed market with sufficient buyers and sellers is necessary for the success of the product.

RBI insists on screen-based trading for provident funds

13th May 2004: The Reserve Bank of India (RBI) has decided that Provident Funds (PFs) should deal under the screen-based trading framework. This is to ensure that no fund can enter into any suspicious deals with market brokers for buying corporate bonds. Screen-based trading will help the funds deal under the Negotiated Dealing Settlement (NDS) platform without entering into non-transparent deals with brokers. This step has been undertaken, as many PFs have entered into deals that led them to buy gilts at high prices. Screen-based trading will make easy buy-sell quotes at the prevailing market rates and deals could be finalized on the screen. In the past, various PFs used to buy high-yielding state government papers and corporate bonds that are below investment grade in off market deals with the brokers. The deals, at times, would not be registered in the exchanges and would be entered into without contract notes. The non-transparency of corporate bond deals was under a question mark when PFs were made to pay high rate of returns inspite of the interest rates in the market going down. Screen-based trading will make a record of the bonds and the prices at which they are bought. SEBI and RBI have taken many steps to clean up the private placement market, which till now was completely unregulated. The new guidelines have asked for rating and listing of all privately placed bond issues in various exchanges.

RBI may restrain foreign banks acquisitions

6th May 2004: Foreign Banks who have branches or subsidiaries in India and are making acquisition plans may undergo restrictions from the Reserve Bank of India (RBI). As per the proposal being discussed with the finance ministry, foreign banks operating in India cannot hold over 10 percent equity in another Indian bank. Currently, banks hold upto 30 percent stake in other banks. If the proposal passes then Foreign Banks will have to reduce their stakes in other Indian banks to 10 percent within a fixed time period. The proposal further envisages that the 10 per cent stake will be treated as FII (Foreign Institutional Investor) holding. This would encourage diversified holdings in private and Foreign Banks. The RBI is formulating guidelines for foreign banks setting up subsidiaries in India. The guidelines will also propose a minimum initial capital requirement of Rs 300 crores. Private Indian banks are given a three-year timeframe with the initial equity requirement of Rs 200 crores. Under the existing rules, RBI permission is required to open new branches. In its commitments to the World Trade Organisation, India is committed to allow opening of at least 12 new foreign bank branches a year.

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