Sensible rules from Sebi

New regulations promise better governance and transparency

The Securities and Exchange Board of India (Sebi) at its recent board meeting took key decisions, apart from approving accounts for last fiscal year. The regulator has pushed through the proposal to demand enhanced disclosures of beneficial ownership and economic interests from certain categories of “high-risk” foreign portfolio investors (FPIs). It has also deferred the controversial proposal to regulate the total expense ratio (TER) of mutual funds until a further consultation process is completed.

Sebi has shortened the listing period for initial public offerings (IPOs) to three days from the date of closure (T+3), as against the earlier six days. It has tweaked the grievance registration and redress process to make it more investor-friendly. It has altered regulations governing real estate investment trusts (ReITs) and infrastructure investment trusts (InvITs) to give board representations to large unit-holders and altered the terms of sponsorship of such trusts. It has also changed the regulations pertaining to non-convertible debentures (NCDs) to allow easier listing and delisting of such instruments and cleared the way for more direct participation in the Limited Purpose Clearing Corporation corporate bonds market.

Overall, these regulations will promote better governance standards and bring in more transparency. They will enable fast turnarounds and better liquidity in the case of listing and provide more liquidity for NCDs. However, despite extensive stress testing, there may be initial challenges in complying with the reduced IPO timelines, given the number of handovers between stakeholders in the application process.

Mandating greater disclosures of economic interests and beneficial ownership of FPIs that hold concentrated positions in the shares of companies promoted by a single group is sensible in theory. High-risk FPIs holding more than 50 per cent of assets under management (AUMs) in a single corporate group would be required to furnish additional look-through details of ownership if such concentration exceeds a temporary window of 10 days. This plugs a gap wherein a promoter, who already holds the maximum of 75 per cent stake in a listed company, could hold more shares through an FPI using shell companies as a front. It also forestalls the possibility by which citizens of countries with land borders with India could be trading through FPIs in violation of Press Note 3. But in practice, given the way in which corporate entities layer ownership via a web of holding companies, it may be difficult to enforce. However, the regulator would ask FPIs, which cross that threshold, to wind up operations or diversify their holdings and dilute concentrations within three months. The regulator recently estimated FPIs’ AUMs of Rs 2.6 trillion may be identified as held by high-risk FPIs.

Sebi has put in an integrated system of complaints relating to regulated entities. Among other things, it will look at reducing timelines. Two levels of review have been proposed if the complainant is dissatisfied with the resolution. The second review will be done by Sebi itself if the investor is still dissatisfied after the first review, which will be by a designated entity.

To facilitate transparency in price discovery, Sebi has amended the regulations pertaining to non-convertible debt securities. It will now be possible to list or delist such securities as the issuer chooses. Allowing large unit-holders the option to sit on the boards of ReITs and InvITs is also a commonsense move.