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Measures taken to curb volatility in markets

H. P. Ranina/Dubai
Filed on April 6, 2020


Question: Due to the coronavirus pandemic there is tremendous volatility in share prices on Indian stock markets.  Have any steps been taken to control the situation?

ANSWER : Some measures have been announced with effect from 23rd March, 2020 to curb volatility and restrict bets taken by speculators.  Trading in futures and options has been subjected to several restrictions.  It has been announced that foreign portfolio investors, mutual funds, proprietary desks and large traders cannot take short positions in index derivatives above a value of Rs.500 crore without owning the underlying shares. This restriction on index derivatives will make large traders more cautious about taking bets with systemic risk.  It will now be mandatory for large traders to deposit cash or liquid instruments, like Government bonds or treasury bills, for incremental bets on index futures and options above Rs.500 crore. 

To prevent excessive speculation in stock futures and options, the Market Wide Position Limits (MWPL) have been cut to 50 per cent in a phased manner.  At present, this limit is 95 per cent.  MWPL is the maximum outstanding position allowed across all stock derivative contracts.  For certain stocks, the minimum margin requirement in the cash market has been increased to 20 per cent from 23rd March, 30 per cent from 26th March and 40 per cent from 30th March, 2020.  The new margin rates will be applicable for a period of one month.  If any trader wants to create a new position in a stock which is in the MWPL, he will have to pay a penalty of 1 per cent of the value of the increased position or atleast Rs.5,000 per lot per day.  These moves will impact around 12 per cent of the stock futures and options where currently the volatility is high.

Question: There have been some press reports pertaining to foreign portfolio investors registered in Mauritius not being allowed to trade or make fresh purchases of securities.  Has SEBI taken any steps by way of restrictions on FPIs registered in Mauritius?

ANSWER : Some doubts have arisen about FPIs registered in Mauritius in view of the Financial Action Task Force putting Mauritius on the 'grey list'.  However, this means that FATF has put Mauritius on the increased monitoring list and the country is required to identify and resolve deficiencies.  Putting a country in the 'grey list' does not mean that any sanctions are imposed or that there is any financial embargo.  In the past year, Mauritius has made progress in complying with international tax norms and stepping up scrutiny of offshore fund structures. 

The country has made progress on a number of recommendations made in the Mutual Evaluation Report which was published in 2018. This has included amending the legal framework to require entities to disclose information in respect of their beneficial ownership.  Currently, about 80 per cent of FPIs from Mauritius are classified by the Securities & Exchange Board of India as Category-II.  On 25th February this year, SEBI has clarified that FPIs from Mauritius will remain eligible for registration but they will be subjected to increased monitoring.

Question: My colleagues and I want to set up a company in India so that we can start multi-dimensional activities ranging from manufacture, logistics and consultancy services.  We would be acting as directors of the company and also have professional management.  However, concerns have been expressed about statutory compliances and stringent action being taken against directors even if there are inadvertent violations committed by the company.  Are these concerns justified?

ANSWER : These concerns have been expressed from time to time, especially by independent directors who act in a professional capacity.  However, the Supreme Court has held in several cases that independent directors are not liable for offences committed by the company because they are not in charge of the day-to-day affairs or working of the company. Only whole-time directors and key management personnel can be held liable for any statutory violations arising from acts of omission or commission. 

The Government has also tried to address this issue.  Only recently it has been decided to decriminalize 35 offences under the Companies Act, 2013.  Further, imprisonment is no longer applicable in respect of 11 offences.  For example, in case of violation of the provisions pertaining to Corporate Social Responsibility, imprisonment was provided upto 3 years if there was deliberate violation.  This will no longer be so and there would merely be a fine applicable for violation of these provisions.  Most of the offences will now be compoundable by paying a fee.

This would be dealt with through an in-house adjudication framework managed by the Ministry of Corporate Affairs.  Even monetary penalties will now be reduced to bring down the burden of compliance. Therefore, so long as you and your colleagues are holding non-executive positions in the company which you propose to set up, there should be no fear of any penal action or prosecution proceedings being initiated.

- H. P. Ranina is a practicing lawyer, specializing in tax and exchange management laws of India.

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