At its board meeting last Thursday, the Securities and Exchange Board of India (Sebi) passed a large number of amendments to its regulations for the capital market. It overhauled primary market rules to induce more transparency and attract retail participation. Other key amendments seek to revive the mutual fund (MF) industry. Mutual funds have seen net redemptions of about Rs 22,000 crore in the past 12 months. On the primary market front, the pipeline of initial public offers (IPOs) and follow-on public offers (FPOs) has dried up due to low retail subscription. Apart from the broad desirability of channelling a larger share of household savings into equity, there is a need to revive PSU disinvestment; retail participation is also necessary to meet Sebi’s target of a minimum 25 per cent public shareholding.
Side by side with demanding more MF disclosures and labelling mis-selling a “fraudulent and unfair trade practice”, the regulator has introduced a proportionate compensation formula. It has raised total expense ratio (TER) by 30 to 50 basis points, subject to MFs generating higher corpus from outside the top 15 cities. There will be more fungibility in TER, offering funds an inducement to cut expenses and thus generate larger management fees. Entry loads have not been introduced. Exit loads will be reinvested in schemes, raising returns for those who buy and hold. A self-regulatory organisation will be set up to oversee MF distribution. Sebi has also recommended that the tax benefits of the Rajiv Gandhi Equity Savings Scheme (RGESS) should apply to MFs. The net effect will raise costs to MF investors, while offering the industry inducements to widen its network. India already has very high TERs compared to global averages.
The measures taken in the primary market are more likely to be positive in impact. A long-awaited e-IPO subscription mechanism has been introduced. While the minimum retail application size has been raised, a guarantee is offered that retail subscribers will receive a certain minimum allotment. There has been an attempt to induce greater transparency. Funds raised for general corporate purposes are capped at 25 per cent of issue size (this was unlimited). Non-retail subscribers have been restrained from withdrawing bids, or changing price and lowering the amount they bid (they may raise it), thus reducing the scope for manipulation. On the debt side, disclosure requirements have been raised. Regulations on investment advisers have also been redefined for more clarity and transparency.
Issuers also receive sops. Minimum free-float considerations have been lowered. Issuers may offer discounts of up to five per cent for qualified institutional placements, and may also change the issue size by up to 20 per cent without refiling the draft red herring prospectus. More clarifications on rights issues and FPOs are awaited — these are necessary if the 25 per cent minimum public holding requirement is to be met. The long-term health of the primary market should certainly improve. The MF industry may respond positively to the sops on offer. But the immediate impact of the changes may be minimal. Equity investment has given poor returns for two years. Until the market trend performs a U-turn, retail sentiment is unlikely to dramatically change.