Sebi plans physical settlement in derivatives.
The Securities and Exchange Board of India (Sebi) board today brought institutional investors at par with retail investors for public issues. Institutions will now have to pay 100 per cent margin at the time of application for all initial public offers, follow-on offers and rights issues. The market regulator has also given an in-principle approval for physical settlement in the equity derivatives segment. It will discuss the finer details with the stock exchanges.
“In the primary issuance process, qualified institutional buyers (QIBs) that currently pay only 10 per cent margin while applying will be required to pay 100 per cent money in line with what other investors are required to do for all the issues that open on or after May 1, 2010,” Sebi Chairman CB Bhave told reporters after a board meeting here today. Currently, while QIBs have to pay only 10 per cent margin with their applications, retail investors and high net worth individuals pay 100 per cent money upfront.
The regulator’s move is likely to reduce the time required for completing a public issue, as institutional investors are now likely to use ASBA — Application Backed by Blocked Amount — for applying in IPOs. ASBA considerably reduces the paperwork by blocking the application money in the account of the applicant and is debited only at the time of allotment. Incidentally, QIBs have so far stayed away from ASBA as they were required to pay only 10 per cent margin.
“The board decided this in the context that our efforts to reduce the gap between the date of issue closure and the date of listing are going on; our aim is to bring this down to one week by the end of this year. Probably, from May 1, institutions would start using ASBA,” Bhave added. According to Sebi estimates, 15 to 20 per cent of retail applications are currently being routed through ASBA.
The Sebi board also gave in-principle approval for introducing physical settlement in the equity derivatives segment. “We will discuss with the stock exchanges and institute a proper mechanism for physical delivery in the derivatives markets,” said Bhave, adding: “No time frame has been set as we need to figure out what exactly needs to be done.” The Sebi chairman, however, said that he intends to implement the “decision as soon as possible”. At the time of introduction of stock futures in 2002, the market regulator had intended to introduce physical settlement but could not do so as the market did not have an active mechanism for borrowing and lending of securities.
| The great leveller |
| Measure: QIBs to pay 100% upfront margin in IPOs, FPOs, rights issues Impact: More realistic bidding in public issues; overall IPO time-frame to go down; removes disparity between retail & institutional clients |
| Measure: Physical settlement in equity derivatives Impact: Cash market volumes expected to surge; volatility to go down |
| Measure: Derivatives on VIX to be introduced Impact: Another avenue to hedge against market volatility |
In physical settlement, the derivative contracts have to be settled in the underlying shares instead of the current practice of cash. The decision whether physical delivery would be optional or compulsory would be taken after discussing it with the stock exchanges, said Bhave.
The regulator has decided to make available long-term contracts up to five years. Currently, long-term contracts are available for a maximum of three years. The regulator has also decided to introduce derivatives on volatility index (VIX), provided “proper risk containment mechanisms (are) in place”. Currently, NSE alone has such an index.
The regulator also said that employees of the subsidiaries of issuer companies will be eligible for applying in the employee quota of a public issue. “Employees of companies whose accounts are consolidated with the issuing company will be eligible for applying in employee quota,” said Bhave. This, he added, will become operative “as and when the guidelines are amended”.
Meanwhile, Sebi’s Takeover Committee under the chairmanship of C Achutan, the former presiding officer of the Securities Appellate Tribunal, is expected to submit the report soon.”They expect that before April-end they should be able to submit the report to us,” said Bhave. The committee has been set up to examine the takeover regulations and suggest necessary amendments. “This is a complex area and the committee is taking its time for taking various views into account... We have obviously not tied them down to a time line. We would prefer that they give us an exhaustive report,” added Bhave.
