SEBI Spreads its Wings

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SEBI spreads its wings

SEBI spreads its wings
SEBI spreads its wings | Source

SEBI spreads its wings

Control over financial analysts will invite opposition

SEBI, the Indian watchdog for the capital markets, has extended its domain to all spheres except the activities of financial analysts. SEBI controls stock markets, companies, commodities markets, financial institutions, mutual funds, intermediaries and everybody in Dalal Street. Soon it will spread its nets to cover financial analysts also. But the move is expected to meet with widespread opposition. See my article in the link below.

Small fund houses will be affected

SEBI has asked fund houses to perform due diligence of distributors themselves. This has worried small fund houses. There are more than 500 distributors of mutual funds. There are 42 Asset Management Companies in India. Each AMC takes at least two days to do a due diligence analysis of a distributor. It will take 84 days totally for all the AMCs to complete the stipulated task by SEBI. In order to reduce the huge time delay, big distributors may altogether skip the due diligence process involving small fund houses. The small fund houses will lose business as a result of the SEBI instructions. In other words, SEBI’s action will cultivate and groom big fund houses whereas the small fund houses will be left in the lurch, fending for them in the hot competition.

Direct investment by QFIs on the cards?

Finance Ministry has held discussions with SEBI to permit Qualified Foreign Investors (QFIs) to directly buy shares in Indian stock markets. This move may bring more money from the foreign investors and designate India as a global investment destination. The government has already permitted QFIs to invest upto $13 billion in debt and equity schemes of mutual funds in infrastructure sector. So far QFIs have been permitted to invest in Indian stock markets only through mutual funds route. SEBI is likely to relax norms for mutual funds’ advertisements. Mutual Funds can reduce disclaimer size and use more space for their products.

Penal actions of SEBI

SEBI has penalised Anand Rathi Financial for Rs.5 lakhs for violation of guidelines on contract notes. SEBI banned seven companies from issuing fresh shares or convertible debentures for price manipulation through GDR issues. SEBI has cancelled the registration of Benchmark MF following its buyout by Goldman Sachs MF. SEBI has banned brokers and FIIs for GDR manipulation. SEBI banned headless UTI Mutual Fund from launching new plans. SEBI investigated 213 cases in 29 months for trading malpractices. SEBI has roped SAS, an intelligence provider, to analyse trading data in the stock markets.

Auditors need to be disciplined

After the Satyam fiasco and the involvement of PwC in the scam, SEBI feels that there needs to be separate regulators for auditors. Quality of audit leaves much to be desired. There is a lack of effective disciplinary action by ICAI on auditors. Therefore SEBI’s observation is correct. In fact, SEBI itself can be made as the regulators for the Auditors also. ICAI’s role can be restricted to framing guidelines and imparting education through various courses.

IPO revamping

Many IPOs face volatility on the listing day in the stock markets. This has attracted the attention of SEBI rightly. SEBI has started IPO revamping. SEBI is also planning to impose time limit to companies offering IPO to reply to SEBI’s queries. SEBI is also going to make it mandatory for the merchant bankers to disclose their IPO track record. Very often, the merchant bankers do not reply to SEBI’s queries and let the matter rest in the dust bin. Therefore SEBI’s Chairman U K Sinha wants to end this state of affairs and start dynamism into the IPO process. Many manipulations take place on the listing day of an IPO to shoot up the share prices to create an impressive record. On the very next day, the share price touches the nadir.

Controversy over appointment of SEBI Chief

There have been controversies about the appointment of U K Sinha as the SEBI Chief. Supreme Court has refused to entertain public interest litigation (PIL) against the SEBI Chief. The Apex Court observed that challenging the appointment of the SEBI Chief was a waste of time and a publicity stunt. Finance Minister Pranab Mukherjee has been accused of interfering in the process of selection to the post of SEBI Chief. The petition stated that the amended rules for the appointment of the SEBI Chairman gives unbridled powers to the Finance Minister. Already a former SEBI board member G Mohan Gopal stated that he was asked to reverse his orders on NSDL. The government of India has taken a serious view about the way the NSDL issue was handled by the SEBI. It has now emerged that the Prime Minister chose Bhave as SEBI chief on the then Finance Minister (now Home Minister) Chidambaram’s advice, overruling Rangarajan and Montek Singh Ahluwalia for the post. It is noteworthy that Chidambaram has been accused of involvement in the 2G spectrum scam. Chidambaram has also been accused of winning his MP seat from the Sivaganga Constituency in Tamil Nadu in 2009 through electoral fraud. Cases are pending against him on both the counts.

Sahara dispute

Corporate Affairs Ministry is planning for tighter norms for private placement of shares. Only a maximum of 49 individuals can be issued shares through private placement. Once this limit is crossed, it becomes a public placement and will come under the guidelines of SEBI. Recently there had been a dispute between SEBI and Sahara group. SEBI asked Sahara to refund Rs.24000 crore to the investors. SEBI is mulling new rules to stop conflict of interest in the market. It wants to stop the nexus among the research analysts, corporate entities, investment advisors and different market organisations. This will give a professional look to the Indian stock markets. SEBI is also likely to release a new investment fund code. SEBI is planning to come out with rules and regulations for setting up a Know Your Customer (KYC) Regulation Authority.

Self regulatory body for investment advisors

SEBI is studying the impact on stock market if STT is scrapped. STT is presently levied on all stock market transactions – purchase as well as sales. New takeover code by SEBI makes it mandatory for the promoters to disclose the encumbered shares. Now the promoters cannot hide behind the pledged shares any more. But at the same time it has been pointed out that SEBI’s takeover code is rather soft on many issues whereas the one imposed by the British authorities is a harsher one. SEBI has made it mandatory for setting up of credit rating agency for structured products. SEBI has proposed self regulatory body for investment advisors. The formalities for foreign investment in debt and equity schemes in mutual fund are cumbersome. SEBI needs to ease them or allow them direct investment in stock markets. SEBI has come out with disclosure norms for IDR offering.

Penalty on margin shortfall

SEBI’s penalty on margin shortfall has upset the brokers. Brokers allege that this move will hamper F&O volume in the bourses. Investor bodies have requested SEBI to continue with the earlier penalty structure. Bombay High Court has asked SEBI to resolve issues with MCX-SX. High Court has pointed out that it should be a competitive scenario and not a monopolistic one. There are more than 3000 schemes in the Indian mutual fund industry. In order to consolidate these different funds, SEBI has cleverly asked the mutual funds through its August 22 circular to disclose the performance of all schemes managed by a single fund manager. This will force the funds to consolidate and club their various similar looking schemes in order to reduce the number of entities which will reduce confusion in the minds of the investors. SEBI has notified infra debt schemes in its official gazette.

Checking CEO salaries

SEBI has asked the bourses to disclose CEO salaries. SEBI and the government of India are jointly planning to implement Bimal Jalan Committee recommendations on market intermediaries. SEBI data has disclosed an increase in the number of brokers. SEBI has simplified procedures for opening of accounts. Customers need to sign only one document now to open their accounts. SEBI is planning to increase Portfolio Management Services entry level to Rs.25 lakhs. SEBI has also mooted new norms for private capital pools. SEBI is aiming to provide a framework for funds raised from High Net worth Individuals and institutional investors. Disclosures mandated by SEBI by the Fixed Maturity Plans of mutual funds will help the distributors to market the fund better.

Raising open offer trigger

There are mixed views on SEBI proposal on alternative fund rules. Some analysts have alleged that the rules impose restrictions and create confusion. SEBI’s move is seen as a reaction to the growing risk capital inflow into the listed companies in India. SEBI has asked debt funds to disclose the segments they avoid. The government is trying to bring new companies’ bill in synchronisation with SEBI’s takeover code. SEBI has incentivised mutual funds by providing return of entry loads. SEBI has raised open offer trigger to 25%. Pre-results buying spree by FIIs has come under SEBI scanner to prevent insider trading.

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