| When SEBI had introduced the concept of ad valorem fees for filing of various securities offering documents the fee rates were clearly perceived as a money-making mechanism that was out of line with SEBI's responsiveness on such filings. |
| The filing fees for an NFO offer document has now been brought down to 0.005 per cent subject to a maximum fee of Rs 50 lakh. This is a significant reduction from the earlier filing fee of 0.03 per cent with a cap of Rs 1 crore. The filing fee for draft letters of offer under the takeover regulations has been fixed at a standard rate of 0.125 per cent (a departure from a complicated multi-tier slab system) and has been made subject to a cap of Rs 3 crores. Similar reductions and rationalisation has been effected to filing fees for IPO documents too. |
| The size of a securities offering has no linkage to the burden shouldered by SEBI in reviewing these documents or in attendant regulation of the capital market. Such ad valorem fees result in increased transaction costs in the capital market, where it is market intermediaries who ought to charge fees that is a function of the service provided. While the imposition of an ad valorem fee has now been held to be constitutional, one cannot lose sight of the fact that leaving the legal validity aside, such fees impose an economic burden on the market and therefore they have to be sensible and rational. |
| The first fee imposed by SEBI after it was provided with statutory powers was ad valorem fees imposed on stock brokers. This fee, introduced in April 1992, was a turnover-linked fee payable by stock brokers as a percentage of the value of securities transacted by them, regardless of the amount of brokerage earned by them as income. Stock brokers saw red, struck work, and challenged the constitutional validity of the fee in various courts all over the country. |
| The Supreme Court clubbed the proceedings from all over the country and heard arguments. Nearly ten years later, in February 2001, a constitutional bench of the Supreme Court upheld the constitutional validity of ad valorem fees, ruling that SEBI was indeed providing a general service to the market at large. It was held that there need be no direct co-relation between the benefits enjoyed by the market and the fee imposed in terms of accounting for every rupee of the fee earned by SEBI. That the market gained benefits of regulation was adequate. |
| In that case, the court even held that the fact of only stock brokers being singled out for such regulation too did not matter. It was open to SEBI to introduce such fees for other market intermediaries too. It is another matter that, in reality, stock brokers alone shouldered this burden for a long time, and SEBI did not really impose such fees on other market intermediaries. Until 2001, it would have been unwise to do so too, since the very constitutional validity of the fee was in question. |
| Eventually, the ad valorem fee model was extended to filing fees payable in relation to securities offering document filings. However, there is hardly any case of an IPO document being cleared within the stipulated 30 days, or a letter of offer under the takeover regulations being cleared in 21 days. |
| Worse, SEBI still holds on to the figment of purporting that it does not have to give approval of documents in securities offerings. The initial founders of SEBI wanted to make sure that they were not sued by losers in the market for having given their "approval" (read endorsement) of the |
| securities being offered. This approach took a life of its own. SEBI routinely claims in various forums that it does not have to give approval for securities offerings to be launched. This is far from the truth. |
| In reality, there is no scope for any IPO or NFO or open offer under the takeover regulations being launched unless SEBI issues its purported "observations" or "comments" (read "approval"). The deadline for issuing these observations is seldom met. Any public comment on this aspect has historically met with an angry reaction of how it is the market participants who provide documents without proper diligence, thereby requiring SEBI to take a lot more time to understand the documents' contents. This underlines how no securities offering can proceed unless SEBI gets comfortable. |
| Having rationalised the fees, it is now time to clean up the "observations" and "comments" act, and bring in a sensible regime for ensuring that the Indian capital market is not riddled with delays on account of regulatory clearances for securities transactions. |
| The author is a partner of JSA, Advocates & Solicitors. The views expressed herein are his own. |
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