Daily News Compilation (HINDU) for 20th March

SEBI bars FTIL from holding shares in stock exchanges

The Securities and Exchange Board of India (SEBI), on Wednesday, ordered that Financial Technologies (India) Ltd (FTIL) is not a ‘fit and proper person’ to acquire or hold any equity share in a recognized stock exchange or clearing corporation, either directly or indirectly. The order also covers warrants that FTIL may be holding.

SEBI issued today’s order in the aftermath of the decision taken by the commodity market regulator against FTIL, which was also a promoter of the scam-tainted National Spot Exchange Ltd (NSEL)  SEBI’s order observed that commodity future exchange and stock exchange basically discharge similar functions and obligations except that the two exchanges deal in different underlyings —physical commodity being underlying in the commodity futures exchange and the securities being the underlying in the stock exchange.

Further it stated that systems and processes such as trading platform, clearing and settlement are similar in both the markets. Settlement defaults in both the markets pose systemic risk to the respective markets.

Both the markets are connected through substantial number of common stakeholders and flow of finance.

Commodity future exchange as well as stock exchange and clearing corporation are market infrastructure institutions of the financial markets needing the same level of integrity and governance standards.

 SEBI concluded that a person who is not 'fit and proper' to hold shares in commodity future exchange cannot be a 'fit a proper person' to hold share in the recognized stock exchange and the clearing corporation. 

Gyaan

Commodities Exchange

An entity, usually an incorporated non-profit association, that determines and enforces rules and procedures for the trading of commodities and related investments, such as commodity futures. Commodities exchange also refers to the physical center where trading takes place.

Modern commodity markets began with the trading of agricultural products, such as corn, cattle, wheat and pigs in the 19th century. Modern commodity markets trade many types of investment vehicles, and are often utilized by various investors from commodity producers to investment speculators.

For example, a corn producer could purchase corn futures on a commodity exchange to lock in a price for a sale of a specified amount of corn at a future date, while at the same time a speculator could buy and sell corn futures with the hope of profiting from future changes in corn prices.  

There are 24 commodity exchanges in India. There are three national level commodity exchanges to trade in all permitted commodities. They are:

1. Multi Commodity Exchange of India Ltd, Mumbai (MCX) 
2. National Commodity and Derivative Exchange, Mumbai (NCDEX) 
3. National Multi Commodity Exchange of India Ltd, Ahmedabad (NMCE) 

Commodity Futures Contract

An agreement to buy or sell a set amount of a commodity at a predetermined price and date. Buyers use these to avoid the risks associated with the price fluctuations of the product or raw material, while sellers try to lock in a price for their products. Like in all financial markets, others use such contracts to gamble on price movements.

Can anyone tell who is the regulator of such markets in India?

Issues of corporate governance

If you are a multinational company with a foreign subsidiary that contributes more to your bottomline than even your home business, general wisdom would be that you handle the subsidiary and its issues with care. Not so with Suzuki Motor Corporation (SMC), which is now embroiled in a controversy over a plan to set up a car plant in Gujarat as a fully owned subsidiary when it already has Maruti Suzuki India Ltd, where it owns a little over half the equity. 

Maruti’s royalty payment to SMC last year was higher than the Japanese corporation’s net profit derived from its business in Japan, and Maruti is the market leader in the Indian car market. Yet, SMC came up with a proposal that is adverse to Maruti’s minority shareholders. Confronted by adverse reaction from the market and institutional and retail investors alike, the multinational has now watered down the proposal and also said it will seek the consent of the minority shareholders as envisaged under Section 188 of the new Companies Act.

The basic question, however, has not been answered, and that is: why does SMC want to go it alone when it has a 56.21 per cent subsidiary in Maruti Suzuki? The question becomes more relevant if you consider that Maruti has Rs.7,500 crore of free cash idling on its balance-sheet, earning about half of what the company earns as return on its capital employed. This is the point that some minority shareholders are still unhappy about, and the company has not answered the question. The issue is one of corporate governance especially because the creation of a wholly owned subsidiary when a partly owned one exists can lead to conflict of interest. It could also lead to tricky transfer pricing issues in transactions between the wholly owned subsidiary and the parent given that Maruti will be taking the cars produced by the new plant at cost. There is the fear among Maruti’s minority shareholders — not entirely misplaced — that in course of time the company will be reduced to a marketing unit selling cars produced by the wholly owned subsidiary. The role of institutional investors, including FIIs, will be critical to the fate of the resolution when it is put up for vote. Shareholder displeasure being justified, the Life Insurance Corporation of India, which is the single-largest shareholder after SMC with 6.93 per cent stake, should take the lead and vote down SMC’s proposal for being unfair to minority shareholders.

Gyaan

Transfer Price

The price at which divisions of a company transact with each other. Transactions may include the trade of supplies or labor between departments. Transfer prices are used when individual entities of a larger multi-entity firm are treated and measured as separately run entities.
In managerial accounting, when different divisions of a multi-entity company are in charge of their own profits, they are also responsible for their own "Return on Invested Capital". Therefore, when divisions are required to transact with each other, a transfer price is used to determine costs. Transfer prices tend not to differ much from the price in the market because one of the entities in such a transaction will lose out: they will either be buying for more than the prevailing market price or selling below the market price, and this will affect their performance.

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Conflict Of Interest
A situation where a professional, or a corporation, has a vested interest which may make them an unreliable source. The interest could be money, status, knowledge or reputation for example. When such a situation arises, the party is usually asked to remove themselves, and it is often legally required of them.
An example of a conflict of interest would be a board member voting on the induction of lower premiums for companies with fleet vehicles when he is the owner of a tow truck company outside of the corporation. In relation to law, representation by a party with a vested interest in the outcome of the trial would be considered conflict of interest, and the representation would not be allowed.

Catching up with the rest of the nation

The Prime Minister’s high-level Sachar Committee, which analysed the social, economic and educational status of Muslims in India — based on data for the 1990s, concluded that Muslims were doing much worse than the rest of the population on most social indicators. Here, we examine how the socio-economic indicators of Muslims have evolved over the past decade.

Author has used indicators found in the Sachar Committee report that have been re-examined by the India Human Development Report (IHDR) 2011 based on data for the 2000s. 

They show that indicators for Muslims are converging with the rest of India. Across the board, most economic and social indicators for Muslims show convergence through the 2000s: per capita consumption expenditure, unemployment rate or child labour rate; health-related ones like infant/child mortality rate, total fertility rate or child immunisation; access to toilets, and literacy.

Growing literacy

Similarly, in literacy rates, Muslims are improving faster than the all-India average, with the gap narrowing over time. For instance, the difference between the national average and the Muslim average in literacy rates in rural areas was 6 percentage points and in urban areas 10 percentage points in 2001. Both fell to 3.5 percentage points and 8.5 percentage points respectively (although Muslims still continued to have lower literacy rates compared to the national average in 2008-08).

Most interesting is the fact about the fertility rate for Muslims. Fertility rate refers to the number of children born to a woman during her reproductive ages of 15-49. The Sachar Committee had noted that the fertility rate for Muslims was higher than the national average by 0.7 in 1992-93. The difference increased to 1 in 1998-99. However, by 2006, the Muslim fertility rate on average was higher only by 0.5 (3.09) compared to the national average (2.6) — and converging with the latter.

Thus, the main conclusions to be drawn are that gaps between Muslims and the national average on most human development outcomes are narrowing, reflecting their improving condition. Muslims fare better than Scheduled Castes and Scheduled Tribes on most social indicators. The SCs and STs remain, in this sense, the most marginalised of social groups in Indian society. However, except for child mortality indicators (infant mortality rate and under-five mortality rate), access to toilets and the percentage of underweight children the absolute levels of most other indicators among Muslims are lower than the national average. Hence, the challenges before any future government remain significant.

For all communities, per capita consumption expenditure has been increasing, and poverty has been declining. However, an issue of concern should be that per capita consumption expenditure for Muslims in urban areas has been diverging from the rest of urban India, even though in rural India, it has kept pace with the rest of India.

Don’t let in malicious content, EC tells social networks

The Election Commission has directed content managers of social networking sites to make sure that candidates do not post anything violative of the model code of conduct.

In a communication to major social networking sites, the EC has issued detailed guidelines for political advertisements that include obtaining certification for contents before putting them in the public domain.

The guidelines will be applicable to a range of Internet-based social media including Twitter, YouTube, Facebook and Wikipedia.

Expenditure

The networking sites have been asked to maintain expenditure incurred by political parties.

The guidelines have been issued as part of the EC’s efforts to address the problem of paid news.

TB control: five key reasons to engage the private sector

India accounts for a quarter of the 8.6 million cases of TB that occur worldwide. India also accounts for a third of the ‘missing 3 million TB cases’ that do not get diagnosed or notified. Not only is TB not going away, we are now seeing severe forms of multi-drug resistant TB (MDR-TB).

While the Indian government has done well to make TB treatment freely available, the public sector alone cannot control TB. What we need is large-scale engagement of India’s massive private health sector. Here are five good reasons to work with the private sector for TB control.

First, half of all patients with TB seek care in the private sector, and private healthcare providers are often the first point of care even for patients who are eventually treated in the public sector. TB patients get diagnosed after a delay of nearly two months, and are seen by 3 different practitioners (including informal providers) before a diagnosis is made. During this long process, TB patients can infect many others in their family and community.

Most poor patients begin seeking care in the informal private sector, including chemists and unqualified practitioners. So, if we want to diagnose TB early and prevent further transmission of the infection, then engagement of such first-contact private providers is the key. These providers must be educated about the importance of considering TB as the diagnosis in any patient with cough for two weeks or longer. Early referral for sputum tests which detect the TB bacteria can greatly help in reducing diagnostic delays, and help in initiating the right treatment before more harm happens to the patient and the community.

Second, there is plenty of evidence that quality of TB care in the private sector is suboptimal. Private doctors prefer blood tests for TB and these are known to be inaccurate and have not been recommended by any guidelines, including the World Health Organisation (WHO). Even if diagnosis is made correctly, TB treatment in the private sector is far from standard. When private practitioners initiate anti-TB treatment, they tend to use drug combinations that are not recommended by the WHO or the Revised National TB Control Programme (RNTCP).

Third, even if the correct TB treatment is started, it is important to make sure patients complete the full course of TB medications. Adherence will ensure cure and prevent drug-resistance. Every TB patient, preferably with close family members, should receive detailed counselling from the doctor at the start of TB treatment, with emphasis on continuing the treatment till the disease is cured.

However, private practitioners struggle to ensure adherence in their TB patients. This results in patients stopping treatment early, or moving from one doctor to another. Doctors who manage TB patients have an obligation to monitor their patients periodically and keep them under supervision till the stipulated duration of treatment is completed.

Most private practitioners do not maintain medical records, and this makes it very difficult to follow-up patients during therapy.

Unlike the public sector, private practitioners rarely implement directly observed treatment in their busy clinical practice, and have little time to track patients who drop out.

Thus, in the private sector, there is a need to create systems to support patients during therapy. Technologies such as mobile phones could play a role in reminding patients about medications, and be used to contact patients who do not return for follow-up.

Fourth, engagement of the private sector is necessary to increase rates of TB case notification.

Since 2012, it is mandatory for all TB cases in the country to be notified to the RNTCP. Sadly, even in 2014, most private practitioners and private hospitals do not notify TB cases.

By notifying TB cases to local health authorities, private practitioners can get help from the public sector to help follow up patients who drop out during therapy, or need special care for MDR-TB. Notification also helps to understand the true magnitude of the TB epidemic in India, and to raise adequate funds.

The RNTCP could make notification of TB cases more practical and simpler, by allowing the doctors, hospitals and laboratories to notify via websites and mobile phones.

Fifth and last, engagement of the private sector is critical to detect drug-resistance and ensure that all patients with MDR-TB get linked to appropriate second-line treatment. All patients with risk factors for drug-resistance must be screened for MDR-TB using WHO-approved tests such as Xpert MTB/RIF (GeneXpert) which is now more affordable in over 60 labs via the IPAQT initiative (www.ipaqt.org). Since MDR-TB requires long-term and specialized management, patients should be referred to private chest specialists, or to specific government hospitals where free MDR-TB treatment is available.