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BIG NEWS – Sep 08th 2017


Posted on 08-Sep-2017 Comments  0

ITC Versus IIAS


An absolutely pointless defamation case…



Recently,ITC has slapped a defamation case to the tune of Rs.1000 crore against IIAS, a proxy advisory service based out of India. The reasons, to begin with, are quite frivolous. Ahead of the AGM last month, IIAS had urged the shareholders of ITC to vote against a particular resolution. While majority shareholders eventually voted in favor of the resolution, the company has still sought defamation charges from the proxy advisory…


What is the background?


The resolution pertained to the payment of a monthly remuneration of Rs.1 crore per month to Mr. Deveshwar, who has recently demitted office as the CEO of ITC. This was to be paid in lieu of Mr. Deveshwar’s long tenure with ITC and his continuing role as a consultant. Proxy advisory firm, IIAS, was of the view that a payout of Rs.12 crore per annum to an ex CEO was not justified and did not really have any precedent in the Indian corporate context. IIAS also opined that such a resolution would be patently unfair to the existing management of ITC and would therefore be detrimental to shareholder value.Therefore IIAS had urged the shareholders of ITC to vote against the resolution and had also put up its argument on the website. While the resolution did get passed at the AGM, ITC felt that this note by IIAS had done reputational damage to ITC and hence the demand for a huge compensation!


Does ITC really have a case?


While the Kolkata High Court has admitted the case and summoned the parties for a hearing, the case filed by ITC appears to be prim a facile frivolous. For starters, since there is no precedent for a huge payout to an ex-CEO, it behooves upon the proxy advisory firm to highlight the same to the shareholders. IIAS has been only doing its job and discharging its duty towards minority shareholders of ITC. To opine that the note put out by IIAS could have created a reputational damage to the extent of Rs.1000 crore is far-fetched and preposterous. It is hard to fathom the relation between a note putout by the proxy advisory firm and the demand for compensation by ITC.


Is it a clear attempt to bully?


Prim a facile,it looks like a clear attempt to bully. India really lacks in shareholder activism and it is a good start to let these proxy advisory firms do the job that portfolio investors are not exactly able to do. If companies like ITC are permitted to browbeat proxy advisory firms then it sets a bad precedent and could be detrimental to the interests of shareholders. What ITC is trying to do through this defamation case is purely to put pressure on IIAS and detract public attention from its recent proposal. Sadly, ITC does not have the likes of Murthy who drew the line when the Infosys board faltered. Touch! ©


Options Delivery


How interesting a product could this become?



The regulator proposes to come up with detailed guidelines for permitting actual delivery against stock futures and stock options. Currently,all transactions on the F&O segment in the equity markets are cash settled only. That means, irrespective of whether you reverse your position or exercise your option, the eventual impact will only be adjusted in cash. That defeats the entire purpose of exercising the option and that is what the SEBI is now trying to redress…


May begin with stock options…


While the proposed note is currently put up for public comments, there are some broad pointers that are emerging of the likely color of the product. It is likely that SEBI may commence with delivery on stock options and then may extend to stock futures too. In India, stock futures and options have been used more as a proxy for punting on the stocks by paying a lower margin and therefore getting a higher leverage. That is what SEBI wants to curb. The regulator feels, and rightly so, that the introduction of delivery against options could induce more stability and less volatility in the equity markets,especially around the expiry period. In the current scenario, there is a rush to cover options position ahead of expiry and that results in unnecessary volatility in the markets. This can be largely avoided if delivery were to be permitted against options. More so, as retail and traders are active in stock options!


How options delivery will help?


Firstly and foremost, stock options will not serve as a proxy for the cash market with leverage. Of course, like in the commodities market,traders will still have the facility of reversing their positions and settling their trade on a cash basis. Exercising the option and converting it into delivery will be purely optional. So, it does not change the game for the traders in options in any way. What it does is to offer an additional avenue for delivery buyers and sellers to use the options market as a proxy for cash buying or selling. It helps buyers and sellers to lock in their stock purchase or sale at a certain price and this becomes invaluable in a highly volatile equity market.


There will be hurdles…


Principally,there could be 3 challenges for delivery options to take off.Firstly, this exercise can become meaningful if traders have the facility to short sell and then borrow stock and get delivery. That is yet to take off in a big way. Secondly, the higher STT on exercise and delivery could queer the risk-return trade-off in case of stock options and that needs to be factored in. Lastly, the VWAP price at which options will get converted into equity is still subject to manipulation in case of mid-cap stocks and that is something the exchange needs to be wary of. All said and done, it is a good start for F&O markets! ©


Mutual Fund AUM


A great start, but MF industry still has along way to go…



Mutual fund Assets under Management (AUM) in India crossed the $300 billion(Rs.20 lakhs) mark for the first time in its history. While the growth has been frenetic in the last 3 years (AUMs have doubled since 2014), it is equity funds that have actually been the star performer sin terms of retail collections. So, what exactly has led to this frenetic growth? Remember, even at $300 billion the entire mutual fund AUM is much smaller than the AUM of individual global mutual funds…


The TINA factor at play…


To be fair, equity funds have become attractive due to other asset classes consistently under performing. Gold is still below its 2011 levels and lower interest rates mean lower yields on debt. The combination of RERA and the attack on black money has made realty investments also unviable. It is here that equity becomes the sole store of value over the longer term. With the scrapping of the entry loads in 2009 and SEBI enforcing greater transparency among mutual funds, retail investors are finally getting value for money. The consistent performance by funds and buoyant equity markets has also been largely responsible for this frenetic growth. It is estimated that retail Indian investors will infuse $75 billion into equities in the next 3 years and most of it could come through the equity mutual funds route. So the big shift to MFs is just about starting!


Remember past experiences…


However,Indian mutual funds would do well to remember the lessons of the past. In the past, we had cases like CRB, Dundee and Alliance that had a hugely negative impact on retail perception of mutual funds.The UTI fiasco of 1998 also dampened retail sentiments in mutual funds. One must also not forget that between 2008 and 2014, equity mutual funds were seeing net outflows in all the fiscal years. Hence retail interest in mutual funds is largely a function of the state of equity markets. Any cataclysmic event like 2008 can change sentiments drastically.


Get the big picture right!


By global standards, the Indian MF industry at $300 billion is paltry.The world’s largest fund, Black rock has an AUM of $4.4 trillion.Most of the marquee names like Fidelity, Vanguard, and Temple ton etc have AUMs that are much larger than the size of the Indian mutual fund industry. In terms of scale, Indian mutual funds are still small. But the US MF industry also took 50 years to reach the $1 trillion mark but subsequent growth was purely on the back of momentum. That is the big challenge. What is the next big story for Indian MFs? In the absence of a forced retirement plan like 401 K, it is doubtful whether Indian MF industry can achieve global scale. But that will be for a different forum to debate on! ©


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