Retail investors should avoid trading in commodity indices

Dubai - Investors may decide to deal in indices instead of investing directly in gold futures

Q: I want to know whether commodity investors are allowed to engage in futures trading in commodity indices. Are there any regulations prescribed in this behalf?

A: The Securities and Exchange Board of India (Sebi) has permitted exchanges to launch futures trading in commodity indices. However, the exchange has to seek approval from the Sebi for doing so. For this purpose, they have to submit index data of the past three years along with data on monthly volatility. The constituents of the commodity index should have had futures contracts on the exchange for the preceding 12 months and they should have traded for at least 90 per cent of the trading days during the previous 12 months.
The benefit of this will be that fund managers and large investors may be able to spread their risk by investing across various asset classes, such as equity, bonds and commodities. However, retail investors have been cautioned to avoid trading in commodity indices due to the high risk of volatility. The trading hours of index futures will be the same as those of index constituents' futures trading. Since gold prices are at an all-time high, investors may decide to deal in indices instead of investing directly in gold futures.

Q: Debt mutual funds are gaining popularity with investors who are averse to taking risks. However, I want to know how safe it is to invest in units of these debt funds and whether they are properly regulated by authorities. As I want to invest a substantial amount in debt mutual funds, I want to know whether I would be taking the right decision.

A: New guidelines and measures for securing the rights of mutual fund investors have been put in place by the securities regulator. Last month, additional safeguards have been announced by reducing the sectoral limit from 25 per cent to 20 per cent. In other words, the debt fund will have to diversify its portfolio and not put any emphasis on a particular sector like fast-moving consumer goods, pharmaceutical, engineering, etc. Furthermore, investment in housing finance companies has been cut from 15 per cent to 10 per cent.
Liquid schemes of mutual funds will compulsorily have to invest atleast 20 per cent of their funds in government securities and treasury bills. In case of shares which are pledged by promoters, disclosure will have to be made if the value of the shares pledged exceeds 20 per cent of the total equity of the company or 50 per cent of the promoter holding. Any type of encumbrance on the shares will fall within the definition of 'pledged shares'. Promoters will be given a loan of not more than 25 per cent of the value of the shares which are pledged.

Q: In some foreign countries, like the United States and China, shares can be issued with differential voting rights (DVRs). Does Indian law permit issue of shares with different voting rights?

A: A new framework has recently been announced for the issue of shares with differential voting rights. In other words, there would be dual class shareholding but there would be a limit prescribed for shareholders who hold shares with superior voting rights. Furthermore, this will be permitted only in case of technology startups. DVR shares have to be issued before the listing is done on a stock exchange. Such shares will have to be held for atleast six months before filing of the documents pertaining to the initial public offering.
A sunset clause is also prescribed to provide the tenure during which the differential voting rights for promoter shares should continue. Currently, a five-year period is provided, but the tech industry is clamoring for this period to be extended to fifteen years. The benefit of having shares with DVRs is that promoters and founders of technology companies will have more control over their ventures even after diluting a significant portion of their shareholding.

The writer is a practicing lawyer, specialising in tax and exchange management laws of India.

• India