Key indices slide as Sebi tightens norms on offshore derivative instruments

Concerns about future foreign equity inflows triggered by tougher norms from the Securities and Exchange Board of India (Sebi) on offshore derivative instruments (ODIs) or participatory notes (P-notes) pulled Indian stocks lower. The barometer index, the S&P BSE Sensex, fell 64.16 points or 0.25% at 25,335.56, as per the provisional closing data. The losses for the Nifty 50 index were higher than those for the Sensex in percentage terms. The Nifty fell 33.70 points or 0.43% at 7,749.70, as per the provisional closing data. The two key benchmark indices witnessed volatility during the latter part of the trading session. The Sensex and the Nifty trimmed losses after both these indices hit two-week low in late trade.

The Sensex fell 147.82 points or 0.58% at the day's low of 25,251.90 in late trade, its lowest level since 6 May 2016. The barometer index rose 106.34 points or 0.41% at the day's high of 25,506.06 in afternoon trade. The Nifty fell 47.65 points or 0.61% at the day's low of 7,735.75 in late trade, its lowest level since 6 May 2016. The index rose 29 points or 0.37% at the day's high of 7,812.40 in afternoon trade.

The broad market depicted weakness. There were almost two losers against every gainer on BSE. 1,688 shares declined and 878 shares rose. A total of 181 shares were unchanged. The BSE Mid-Cap index was provisionally off 0.49%. The BSE Small-Cap index was provisionally off 0.83%. The fall in both these indices was higher than the Sensex's decline in percentage terms.

Stock market regulator Sebi after trading hours yesterday, 19 May 2016, announced tightening the regulations for issuers and subscribers of offshore derivative instruments (ODIs) or participatory notes (P-notes) with a view to enhance the transparency and control over the issuance of ODIs. In order to bring about uniformity in the know-your client (KYC) and anti-money laundering (AML) norms, it has been decided that Indian KYC/AML norms will now be applicable to all ODI issuers. The KYC/AML norms applicable to ODI issuers will be the same as that for all other domestic investors.

Sebi also said that ODI issuers would have to identify and verify the beneficial owners in the subscriber entities, who hold in excess of the threshold that is 25% in case of a company and 15% in case of partnership firms/trusts/unincorporated bodies. The ODI issuers will have to identify and verify the persons who control the operations of these entities, Sebi said in a press release issued yesterday, 19 May 2016, after the conclusion of a meeting of the Sebi board in Mumbai. P-notes are derivative instruments issued by registered foreign portfolio investors (FPIs) to overseas investors to enable them to trade in Indian stocks without having to register with Sebi.

Henceforth, the ODI subscribers will have to seek prior permission of the original ODI issuer for transfer of ODIs. As per prevailing regulations, ODI subscribers are not required to take prior permission of the ODI issuer for transfer of ODIs to another investor offshore. The ODI issuers will have to capture the details of all intermediate transfers during the month and report the same to Sebi in the prescribed monthly report. Presently, ODIs issuers submit the details of the holder of ODIs in a monthly report to Sebi. The regulator also said that ODI issuers would have to file suspicious transaction reports with the Indian Financial Intelligence Unit on the ODIs issued by them. Besides, the ODI issuers will have to carry out reconfirmation of the ODI positions on a semi-annual basis.

According to Sebi data, the notional value of ODIs to the AUC (assets under custody) of FPIs has declined over the years from a high of 55.7% in June 2007 to 10% in March 2016.

The total turnover on BSE amounted to Rs 2488 crore, lower than turnover of Rs 5195.09 crore registered during the previous trading session.

Index heavyweight and cigarette major ITC rose 3.99% after the company announced a 1:2 bonus share issue at the fag end of the trading session after the announcement of its Q4 March 2016 results. The company's net profit rose 5.67% to Rs 2495.20 crore on 9.49% rise in total income to Rs 10580.33 crore in Q4 March 2016 over Q4 March 2015.

Cement stocks dropped. ACC (down 1.43%), Ambuja Cements (down 1.71%), Shree Cement (down 4.12%) and UltraTech Cement (down 1.12%) declined.

Grasim Industries declined 1.09%. Grasim has exposure to the cement sector through its holding in UltraTech Cement.

Tata Power Company rose 1.75% after its wholly owned subsidiary Tata Power Renewable Energy (TPREL) completed the acquisition of 100% shareholding in Indo Rama Renewables Jath (IRRJL). IRRJL has a 30 megawatts (MW) operating wind farm in Sangli district of Maharashtra. With the latest acquisition, Tata Power's total generation capacity now becomes 9,213 MW and current operating non-fossil based capacity increases to 1,704 MW, the company said in a statement. The announcement was made during market hours today, 20 May 2016.

Meanwhile, Sebi has made it mandatory for the top 500 listed companies in terms of market capitalization to formulate and disclose a dividend distribution policy in annual reports and on their websites. The dividend distribution policy will include the circumstances under which shareholders can or cannot expect dividend, the financial parameters that will be considered while declaring dividends, internal and external factors that would be considered for declaration of dividend, policy as to how the retained earnings will be utilized and provisions in regard to various classes of shares. When a company proposes to declare dividend on the basis of parameters other than what is mentioned in the dividend distribution policy or proposes to change its dividend distribution policy, it will have to make appropriate disclosures. According to Sebi, a formal dividend distribution policy will help investors in taking an informed investment decision.

Meanwhile, with an aim of smoothening the process of registration of Infrastructure Investment Trusts (InvITs) with the Securities and Exchange Board of India (Sebi) and launching of the offer, the stock market regulator has proposed amendments to the SEBI (Infrastructure Investment Trusts) Regulations, 2014. Sebi intends to allow InvITs to invest in two-level SPV structure. The stock market regulator has also proposed bringing down the mandatory sponsor holding in InvIT to 10% from current 25%, subject to certain conditions. The stock marker regulator has proposed increase in the number of sponsors in InvITs to 5 from 3. Sebi said that it would bring out a consultation paper in due course proposing the above-mentioned changes in the InvIT regulations.

In overseas stock markets, resources stocks led gains in European equities as metal and crude oil prices rose. Earlier during the global day, most Asian stocks edged higher, with increase in crude oil prices boosting investors' risk appetite. US stocks edged lower yesterday, 19 May 2016, on mounting fears that the US Federal Reserve's next interest-rate hike could come as early as June and after global credit rating agency Moody's Investors Service cut its 2016 forecast for US economic growth to 2% from 2.3%. Hawkish comments from two Fed officials yesterday, 19 May 2016, amplified the market's rate-hike worries. New York Fed President William Dudley said an interest-rate increase in June or July is possible if fresh data confirm his optimistic forecast of economic growth. Richmond Fed President Jeffrey Lacker defended the Fed's hawkish stance in an interview with a news agency, saying the case is pretty strong for a June hike.

Expectations of further increase in US interest rates had already gained more traction after recent data showed improvement in the US economy and after minutes from the US Federal Reserve's April policy meeting showed that Fed policy setters discussed the possibility of a June rate increase if the economy continued to strengthen. The Fed released the minutes of its April policy meeting on 18 May 2016. The Federal Open Market Committee next undertakes monetary policy review on 14-15 June 2016. The US central bank had lifted rates in December 2015 for the first time in nearly a decade.

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