29 July 2011

SEBI comes out with massive set of changes and reforms

In the first press release and interaction with the press, the new SEBI chairman U K Sinha brought about a massive slew of reforms and improvements. Here are some I thought important (More comments will follow on this page itself):
Initial trigger threshold increased to 25 % from the existing 15 %.
  • Non-compete fees banned - all shareholders shall be given exit at the same price.
  • The minimum offer size shall be increased from the existing 20 % of the total issued capital to 26 % of the total issued capital.
  • No delisting pursuant to an open offer.
Comment: Great.What I have been advocating - a 100% open offer is not required (there is a more tax efficient exit option for shareholders i.e. the stock market - no one is really getting deprived of anything) and would have severely damaged the market for control in India by making open offers prohibitvely expensive. The advisory committee itself shows that 85% of all offers till now have occured at the minimum level of 20% open offer. See my pieces in the blog previously, my ET and FT pieces.
The going away of non compete is also legally sound. S. 27 of the Contract Act prohibits non compete fees. Thus now SEBI disallows what was previously illegal under the Contract Act.
Not permitting delisting through an open offer is an investor friendly move. If someone wishes to delist, they will continue to go through the reverse book building process.

Mutual funds
In order to help Mutual Funds penetrate into retail segment in smaller towns, the distributor would be allowed to charge Rs. 100 as transaction charge per subscription. No charge can be made for investments below Rs. 10,000. An additional amount of Rs. 50 can be charged to first time Mutual Fund investor.
Comment: Not sure this will help much in bringing back the distributors who would rather sell insurance based investment products with double digit percentage commissions. Besides it may work out a bit expensive for small investors as it is a fixed fee - for every new investment made the fee is payable.

AMC activities
Permissible activities that can be carried out by Asset Management Companies (AMCs)
AMCs are allowed to manage and advise pooled assets such as offshore funds and pension funds etc. that are broad based, provided there is no conflict of interest due to differential fee structure. AMCs will continue to deal with Portfolio Management Services (PMS) under the current arrangements.
Comment: Good developement, this is permissible even today with prior approval of SEBI, but seems this is being streamlined.

Harmonization and Rationalization of KYC in Securities Market
Currently, Know Your Client (KYC) is done by each SEBI regulated intermediary viz. Broker, Depository Participant (DP), Mutual Fund, Portfolio Manager etc. Initial KYC including the identification of beneficial ownership will henceforth be undertaken only once The change in methodology of KYC process will not compromise PML Rules and FATF Standards; rather the proposed change will strengthen the uniformity of the conduct of KYC process.
Comment: Sounds like a minor change - but is important change for investors, who earlier had to pass through hoops to invest. Next step - single KYC throughout the financial sector whether it is banking, securities or insurance products.

Amendment to SEBI (Issue of Capital and Disclosure Requirements) Regulations, 2009

  • In order to ensure that materially important information is provided in a structured, logical and user-friendly manner to aid the investor in making his investment decision, SEBI has revised the structure, design, format, contents and order of information of Bid-cum-Application Form and Abridged Prospectus.
  • Approximately 50% reduction in number of pages
  • Rationalisation and logical sequencing of information to make it more readable and investor friendly, highlighting material disclosures and availability of information regarding price
Comment: Fantastic, see previous comment. Next step,  or maybe this step, mandate plain English in a prospectus. A prospectus should not be a legal defence document but a document which communicates with investors. Another change which Sebi needs to make is paring down risk factors - every prospectus has earthquakes as a risk factor - this is generic filler.

Disclosure of voting results by listed entities
In order to ensure wider dissemination of information regarding voting patterns which gives a better picture of how the meetings are conducted and how the different categories of investors have voted on a resolution, listed entities shall be disclosed within 48 hours from the conclusion of the concerned shareholders’ meeting.
Comment: This expands the mandate given to mutual funds to disclose voting patterns and rationale. Good move for the benefit of investors and transparency.

Simplifying and rationalizing Trading Account Opening Process
Comment: A single and simplified account opening is great and the over 50 signatures that are currently required are bizzare.
Amendment to the SEBI (Prohibition of Insider Trading) Regulations, 1992
Certain amendments were made to disclosure standards to be made by promoters and persons who are part of promoter group of a listed company.
Comment: This was a disclosure loophole which has been filled.

NSDL Matter
Pursuant to the order dated May 09, 2011 of the Hon'ble Supreme Court, the Board decided to release the orders of the Two member Committee, in the matter of IPO irregularities and DSQ software, to NSDL for compliance.
Comment: In very subtle language, SEBI has brought back the orders of the Gopal Mohan and Leeladhar - which required NSDL to improve its processes and fix individual accountibility for their role in the IPO scam.

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