Suggesting a facilitative role for Sebi, its international advisory board (IAB) today suggested to the regulator to study migration to fee-based model for robo-based investment advisory and also be "tough but open to innovations" in new areas like crowd-funding.
The panel also asked the capital market regulator to ensure performance evaluation for boards of listed companies has to go "beyond a box-ticking exercise" and enable disclosure of the evaluation result with shareholders.
At its two-day meeting that ended today, the IAB discussed in detail the issues and developments relating to corporate governance and noted that it must help the companies achieve their objectives and implement their corporate strategy while keeping the interest of various stakeholders in mind.
"A matrix of expertise may be introduced to make the board diverse, balanced and in tune with the requirements for effective functioning of the company," the panel noted.
The observations assume significance in the wake of the recent boardroom battles at some big corporate houses including the Tatas, an issue which was also discussed at Sebi's board meeting held later today in Jaipur.
The IAB said there has to be transparency in board appointments and removal process and similar requirements need to be prescribed at both stages.
Audit committee should also focus on forward looking risk assessment, in addition to retrospective evaluation.
The IAB also deliberated on board evaluation as applicable to listed companies in respect of role of the Nomination and Remuneration Committee (NRC), role of independent directors, evaluation of independent directors, disclosure requirements and the like.
The IAB also took note of the global practices and said the process of evaluation of the performance of board has to go beyond a box-ticking exercise. The process has to be conducive to the growth of the company and can differ from company to company.
"The best evaluation is actually an exercise in self evaluation of the company's own performance and effectiveness in terms of its mission, financial returns, strategy, business model and social responsibility, and in this context whether the standards expected from the board are being realised," Sebi said in a statement after IAB meeting.
"It would be a good practice if the result of the evaluation of the board as a whole is disclosed to the shareholders.
IAB also observed, according to Sebi, that there is a need
that boards of companies are educated about the evaluation process.
On migration from the commission based to fee based advisory model, the IAB took note of the extant framework for investment advisory business in India, including role of mutual fund distributors and regulatory arbitrage between the investment advisor and mutual fund distributor providing advice.
The board also noted international regulatory developments aimed at addressing inherent conflicts of interest and introduction of more transparency in relation to inducement and commissions received by financial advisors and distributors in jurisdictions like Australia, the United Kingdom, the US, Canada, the European Union and Singapore.
The IAB also deliberated on Robo Advisory and advised that fee for advice is the journey which needs to be completed. It, however, advised that the proposed migration needs to be calibrated.
It observed that commission based as well as fee based approach to investment advisory can co-exist for the time being. The transition from commission to a fee based approach has to be gradual. Such transition has to happen in tandem across regulatory segments to have uniformity in regulatory stringency across competing segments like securities market, insurance and pension businesses.
"Regulators need to keep in mind the financial viability and the business model of the advisory business. Proper due diligence before transition in regulatory regime is essential. Distinction between retail and sophisticated investors should be clear. There is a felt need for greater awareness among investors on cost of commission versus fees based advisory," the IAB said.
"More transparency is required on distributors' commission in all financial products. Before undertaking any effective steps, Sebi may consider undertaking a study of migration to fee-based advisory model under RDR, FOFA and robo-advisory models," it added.
It also suggested promoting ETF investments as they entail low investment management costs.
The IAB also discussed how the framework of passporting of investment funds works, their benefits to investors, industry and economy.
In this context, the IAB referred to the global practices with regard to passporting of funds -- Undertaking for Collective Investments in Transferrable Securities (UCITS) in Europe, ASEAN Fund Passport Framework and Asia Region Fund Passporting (ARFP).
It noted that relative size of the country and that of the markets matter in passporting -- passporting is more beneficial to smaller markets and there is need to study the above passport arrangements in detail.
"Sebi may also explore some alternative framework like mutual recognition and regulatory equivalence for cross- jurisdictional investment flow," the regulator said.
"Given that the Indians have the talent to manage international funds, India may focus on manufacturing and managing cross-country financial assets locally with the help of overseas advice and passporting of such funds all over the world.
The meeting saw deliberations not only on the pros and
cons of internationalisation of securities market but aspects like framework for product innovation, risk management and whether the current stage of development and maturity of the Indian markets to support internationalisation of domestic securities market.
The panel also discussed if GIFT IFSC may be a substitute to internationalisation of Indian securities market.
"Capital control liberalisation is a pre-condition to facilitate internationalisation of domestic financial markets. This liberalisation hinges on presence of robust financial institutions domestically," the panel said.
"Market for international financial centre (IFC) is very competitive and therefore, IFC needs to specialise itself in a particular area for its success," it added.
The IAB also weighed in on international regulatory developments on crowd-funding relating to investors, issuers and crowd-funding platforms in jurisdictions like the US, the UK, France, New Zealand, Singapore, Australia, Malaysia, Japan and China.
It also deliberated on whether India is ready to initiate securities based crowd funding, keeping in view the recent developments in the Indian financial technology space (UPI, UID, payments banks and the like) and other aspects relating to operations and regulations of crowd-funding in India.
The IAB suggested that innovation be allowed as long as the same is not illegal in any way.
"Crowd-funding, as a trend globally, is still at its beta-testing stage, where the investors and the issuers need to quickly learn what works and what does not. Appropriate systems and processes should be put in place," noted the panel.
The open-house session at the meeting saw an exchange of ideas among IAB members on various important challenges faced by various securities markets jurisdictions.
The session witnessed several important issues like cyber-security, cross-border and internal competitiveness among market infrastructure institutions, shrinking of public markets, emergence of dark pools, non-bank transfer of money and growing importance of social media, among others, being highlighted.