Overhaul of corporate governance rules likely

Sebi also proposes to come out with final guidelines for Reits

To give a greater say to minority shareholders and put more onus on independent directors and institutional shareholders, the Securities and Exchange Board of India (Sebi) is planning an overhaul of corporate governance rules. The capital markets regulator also proposes to come out with the final guidelines for real estate investment trusts (Reits), which could open a new liquidity stream for the cash-starved realty sector.

Both the proposals would be taken up at Sebi’s board meeting here on December 24, said three people privy to the development.

In October, Sebi had floated a discussion paper on Reits. In January, it had brought out a consultative paper on corporate governance norms. Sebi’s new corporate governance norms will re-align the existing framework with that in the new Companies Bill, which has already been approved by Parliament.

SEBI’S YEAR-END AGENDA

• The regulator could introduce whistle-blower policy, class action suits, lead independent director
• Curbs on related-party transactions; mandatory rotation of auditors
• New rules aimed at increasing transparency, giving greater say to public shareholders
• Reits could open new revenue stream for the real estate sector
• Experts say Sebi regulations will have to be backed by tax breaks

A source said though several clauses pertaining to corporate governance in the Companies Act had to be notified by the government, Sebi had decided to go ahead with finalising the new corporate governance norms. Sebi’s governance norms, to be applicable only for listed companies, are stricter than the norms in the new Companies Act.

The new norms could see the introduction of a whistle-blowing policy, class action suits, a lead independent director and compulsory rotation of auditors. “The new Companies Act has come out with a number of new stipulations and clarity on what the country wants to achieve in corporate governance in India. But Sebi’s role and the role of stock exchanges also includes ensuring disclosures are made on time, the disclosures are complete and relevant and nothing significant is suppressed,” Sebi Chairman U K Sinha had said in a speech on Saturday.

It is unclear whether all the recommendations made in the consultative paper were accepted by the Sebi board. The paper had also recommended giving more powers to independent directors, putting curbs on related-party transactions by companies and enhancing the role of institutional investors by asking them to define a clear voting policy.

Sources said the draft regulations on Reits, after incorporating some public suggestions, were likely be accepted by the Sebi board. “Reits may only succeed if these are given tax incentives; but we are readying the regulations that will enable setting up Reits in the country. We need not wait for the tax breaks to come first,” said a senior Sebi official.

Experts believe Reits will have to be treated as pass-through instruments; for these to succeed, these will be taxed only at a single point.

In the discussion paper, Sebi had suggested a model on the lines of an initial public offering (IPO), with a lot of emphasis on transparency and disclosures for Reits. It had proposed an initial offer size of at least Rs 250 crore and a public float of at least 25 per cent. To attract only high net worth individuals, the draft regulations had also proposed a subscription ticket size of at least Rs 2 lakh.

“It is important for Reits to come in India. Real estate developers will benefit, as these will give them institutional funding. It will also help retail investors with relatively lower investment sizes to be part of real estate…and benefit from the upswing. Taxation, however, will be the key for investments in Reits,” said Anuj Puri, chairman and country head, Jones Lang LaSalle India.

This is Sebi’s third attempt to introduce a real investment vehicle. The market regulator had issued draft regulations on Reits in 2008 as well, only to withdraw these later. Also, Sebi’s real estate investment management company framework didn’t find any takers.