SEBI CIRCULAR ON INTERNAL AUDIT

DEPUTY GENERAL MANAGER
MARKET INTERMEDIARIES REGULATION &
SUPERVISION DEPARTMENT
DIVISION OF POLICY AND SUPERVISION - III
Tel: 26449261, Fax: 26449021
Email: manojk@sebi.gov.in
MIRSD/ DPSIII/ Cir-26/ 08
August 22, 2008

The Managing Director / Executive Director
of all Stock Exchanges

Dear Sir,

Sub: Internal Audit for stock brokers/clearing members

In continuation with the Circular No.F.1/5/SE/83 dated May 31, 1984 of Government
of India, Ministry of Finance, Department of Economics Affairs, Stock Exchange
Division, you are advised to direct your stock brokers/clearing members to carry out
complete internal audit on a half yearly basis by independent qualified Chartered
Accountants.

The scope of such audit shall cover, interalia, the existence, scope and efficiency of
the internal control system, compliance with the provisions of the SEBI Act, 1992,
Securities Contracts (Regulation) Act 1956, SEBI (Stock Brokers and Sub-Brokers)
Regulations, 1992, circulars issued by SEBI, agreements, KYC requirements, Bye
Laws of the Exchanges, data security and insurance in respect of the operations of
stock brokers/clearing members. The first such audit period should be from October
1, 2008 to March 31, 2009.

The exchanges shall ensure compliance of the above mandatory requirements by
all the stock brokers/clearing members.

The Stock Exchanges are advised to:

1. make necessary amendments to the relevant bye-laws, rules and
regulations for the implementation of the above decision immediately,

2. bring the provisions of this circular to the notice of the member brokers
/clearing members of the Exchange and also to disseminate the same on
the website, and

3. communicate to SEBI, the status of the implementation of the provisions of
this circular in the Monthly Development Report.

This circular is being issued in exercise of the powers conferred by Section 11 (1) of
Securities and Exchange Board of India Act, 1992 to protect the interest of
investors in securities and to promote the development of, and to regulate, the
securities market.


Yours faithfully,

MANOJ KUMAR

SEBI REDUCES TIME DURATION FOR RIGHT ISSUE TO 43 DAYS

MUMBAI: The Securities and Exchange Board of India (SEBI) on Wednesday reduced the time duration for a rights issue from 109 days to 43 days.

“The reduction in timelines would reduce the market risk faced by investors and issuers and would ensure faster turnaround of money for investors,” said C. B. Bhave, Chairman, SEBI, while addressing a press conference here after its board meeting.

The board also approved the proposal for prescribing and standardising the format for abridged scheme-wise annual report and reduction in time period for dispatching the annual report to mutual fund unit holders from six months to four months.

The new time limit for dispatching will be made applicable for the annual reports of 2008-09 onwards..

To reduce the time duration for a rights issue, SEBI has decided to amend the SEBI (DIP) guidelines and the listing agreement.

Reduction in timeline approved include: the number of days for the notice period for a board meeting will be reduced from seven days to two working days; the notice period for record date will be reduced from 15/21/30 days to seven working days for all scrips; issue period will be reduced from a minimum of 30 days to a minimum of 15 days with a maximum of 30 days and the time period for completion of post-issue activity will be reduced from 42 days to 15 days.QIP pricing norms

The SEBI board has decided to revise the pricing norms for QIP (qualified institutional placement) and preferential allotment: Floor price may be based on the two weeks average for making a QIP or for making preferential allotment to QIBs (qualified institutional buyers); and relevant date for QIP will be the date on which the board of the company or the committee of directors duly authorised by the board of the company meets to take the decision to open QIP.

Quarterly results

Further the SEBI board decided to amend Clause 41 of the listing agreement.
Accordingly, a listed entity in addition to submitting quarterly and year-to-date standalone financial results within one month of end of the quarter, may also submit consolidated financial results to the stock exchanges within two months from the end of the quarter.
“A listed entity opting to submit consolidated financial results in addition to standalone results to the stock exchanges will be required to publish consolidated financial results only.”

A listed entity would also be required to place the limited review report on unaudited financial results before its board of directors or committee before submission to stock exchanges only if the variation (as defined in present Clause 41) between unaudited financials and financials amended pursuant to limited review for the same period exceeds 10 per cent.

SEBI also decided that “where the listed entity chooses to submit unaudited financial results for the last quarter (instead of submitting audited financial results for the entire financial year within three months of end of the financial year), the limited review report will be submitted for the last quarter also.”Ahmedabad office

The board approved the opening of Western Regional Office of SEBI at Ahmedabad. This office will look after the regulatory aspects of investor protection and market regulation and supervision regarding issuers, investors and intermediaries.

PTI reports:

Belying expectations, the SEBI took no decision on restrictions on issue of Participatory Notes by foreign institutional investors (FIIs) but it gave an in-principle nod to the National Stock
Exchange for starting currency futures.

SEBI set to fine 7 i-bankers for shoddy work

MUMBAI: Capital market regulator SEBI is set to impose penalties on some of India's top investment bankers for what it considers "shoddy work" done by them while handling public offerings over the past few years. The regulator's Market Intermediaries Regulation and Supervision Department (MIRSD) has uncovered serious shortcomings in the due diligence process for initial public and rights offerings, besides open offers, carried out by seven investment bankers — Kotak, Enam, DSP Merrill Lynch, SBI Caps, HSBC, Keynote and Aryaman Financial.

A due diligence process relates to the examination and independent verification of material and financial facts and statements provided by companies seeking to raise capital. It is the responsibility of merchant bankers to ensure compliance with the norms laid down by the regulator and the government in the run-up to a flotation. They also have to ensure that allotment of shares and refunds to investors are done, post-issue.

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The regulator's investigation has revealed major lapses in the due diligence process relating to initial public offerings, rights issues and also open offers, according to an official close to the development. SEBI has set in motion adjudication proceedings for imposing a monetary penalty against all these bankers, the official said.

He added that arbitration proceedings against Enam and Kotak pertain to YES Bank and IDFC IPOs dating back to 2006. A SEBI probe had revealed a scam involving manipulation of retail category in these IPOs. DSP Merrill Lynch was also rapped by SEBI for the YES Bank IPO as the regulator's inspection showed that the details of the promoters as mentioned in the IPO document were different from the one filed with the Reserve Bank of India.

HSBC and SBI Caps were charged with failure in disclosing key details in open offers managed by them. In some cases, the regulator has found 10-15 lapses in the offer documents, the official said. In several cases, bankers have not followed the prescribed procedures while conducting due diligence, said SEBI officials. SEBI chairman CB Bhave had told ET, in an interview shortly after taking over, that one of the issues SEBI was actively looking at was to make merchant bankers more responsible, post-issue.

In some cases, the merchant banker had not even verified the plant and machinery of the companies, the issues of which they had managed. Besides, litigation against the company directors was not mentioned in the public issue documents. Errors were also noticed in financial details provided in the documents.

SEBI's inspection also found serious deficiencies in some IPOs. For instance, in one IPO, the regulator found out that the post-issue capital of the company was higher than its authorised capital — a clear indication of poor due diligence carried out by the issue's merchant banker. The same mistake was found in Weal Infotech IPO's case and the regulator has pulled up the merchant banker to the issue, Aryaman Financial.

SEBI has taken a grim view of the fact that merchant bankers, who are entrusted with the task of vetting a public issue, have failed to discharge their responsibilities fully, which is detrimental to the interest of investors. Five of the merchant banks who were served notice by SEBI declined to comment on the issue when ET contacted them. Keynote Financial said it had not received any notice from the regulator. Officials of Aryaman Financial were not available for comment.

It is not only in IPOs that serious lapses on the part of merchant bankers were detected. Even in case of open offers, SEBI has indicted merchant bankers. The market watchdog has taken HSBC to task on the Garware Offshore open offer. In this instance, SEBI found out that the open offer document did not furnish important details of the target company. The offer was made by India Star Mauritius and the financial details of the acquiring company were not given in the offer document.

Even the company's paid-up capital was wrongly mentioned in the financial data, officials said. SEBI has prescribed a standard letter of offer containing various financial and other parameters of the company. In fact, HSBC was given a warning by the regulator in an earlier case.

SEBI has moved against SBI Caps for the investment bank's failure to provide a vital piece of information about a company in the open offer document. The open offer was made by a company listed on a regional stock exchange, but the document did not mention the fact that the company would soon list on BSE. Many investors tendered their shares in the offer since they did not possess the requisite information

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CA. VIKAS KAPAHI
TREASURER
JAB WE MET CA
REDEFINING PROFESSIONALISM

SEBI STEPS UP MUTUAL FUND REFORMS

It’s now time for the Securities & Exchange Board of India (Sebi) to focus on key reforms in the mutual fund (MF) sector. Sebi will call a rare meeting of all MF trustees, possibly by the end of this month, to discuss their role in detail and areas of conflict, if any. The regulator sees the role of trustees as critical to the proper functioning of MFs.
Sebi has also appointed SA Dave, former chairman of Unit Trust of India and a highly regarded personality in the financial sector, as chairman of its mutual funds advisory committee. The panel will comprise leading names from the funds industry and investor associations. The first meeting of the panel will also be held soon, sources in Sebi said. The MF panel will be the third of Sebi’s advisory committees, after those for the primary and secondary markets.
The meeting between Sebi and the MF trustees is the latest step by Sebi chairman CB Bhave to push through further reform in the capital markets. In a volatile market environment, MFs are seen as critical to getting retail investors into the capital market.
The role of trustees is akin to that of independent directors on company boards, and Sebi regulations on MFs places enormous emphasis on trustees to ensure the proper and orderly functioning of asset management companies (AMCs). A trustee company and AMC are expected to be at arm’s length, and trust-ees are meant to keep close watch on the AMC’s functioning. Sebi’s MF regulations specify that trustees must be people of “ability, integrity and standing”.
However, of late, sections of the market and MF industry itself have said there are cases where the independence of trustees is being severely diluted and that they have been reduced to mere figureheads or rubber stamps, endangering the functioning of AMCs. Sebi sources admitted there were cases that needed to be examined. Even MF chiefs agree that in cases, trustees may not have discharged their duties properly.
UK Sinha, chairman of UTI Mutual Fund, which is owned by four state-run institutions, said: “In the case of some fund houses, the trustees have no role at all, and are there merely as a formality. In some cases, the AMC and trustee boards even hold joint meetings, which is wrong and undermines the role of the trustees. Trustees often clear the AMC’s plans without the necessary due diligence.”
However, AP Kurian, chairman of the Association...
of Mutual Funds in India, denied there were any problems relating to the role of trustees and said they were performing their role diligently. “Trustees meet once in two months, do their due diligence before signing off the reports. We see trustees as first-level regulators. Schemes are approved by them, and the AMCs report to them,” Kurian added.
Sebi’s MF regulations clearly lay down the eligibility criteria for trustees. According to regulations, trustees “shall have a right to obtain from the asset management company such information as is considered necessary by the trustees”. The trustees must also ensure that before any scheme is launched, the AMC has the necessary systems in place; appointed all key personnel, auditors, a compliance officer and registrars; as well as prepared a compliance manual and designed internal control & audit mechanisms. They are also expected to ensure that specified norms for the empanelment of brokers and marketing agents have been complied with.
“The trustees shall ensure that an asset management company has been diligent in empanelling the brokers, in monitoring securities transactions with brokers and avoiding undue concentration of business with any broker. The trustees shall ensure that the asset management company has not given any undue or unfair advantage to any associates or dealt with any of the associates of the asset management company in any manner detrimental to interest of the unit holders,” state the Sebi regulations. The trustees have to ensure that the AMC has managed the MF schemes independently of other activities and taken adequate steps to ensure that the interests of investors of one scheme are not compromised by those of any other scheme or by other activities of the AMC....