Regulatory changes on Sebi plate: Here's a list of key discussion papers

The board meeting of the Securities and Exchange Board of India (Sebi) is scheduled for September 30. Continuing with its consultative approach, the markets regulator, over the past one year has floated a number of discussion papers in areas such as IPO pricing, retail algo, and pricing of share sales by state-owned entities. We look at some of these key proposals.

1. Bringing MFs under purview of insider trading
 

What is proposed 

Bringing mutual fund (MF) transactions under the purview of stringent insider trading regulations to prevent misuse of sensitive information by key personnel of the MF industry.

Current framework

Currently, MF units are excluded from the definition of ‘securities’ under the Prohibition of Insider Trading (PIT) Regulations. Also, buying and selling MFs is excluded from the definition of ‘trading’.

What changes

Sebi has mulled applying concepts such as connected persons, designated persons, closure period, pre-clearance for MF transactions. This will also put in place a code of conduct for designated persons. This would be applicable to every person who is required to handle unpublished price sensitive information (UPSI) relating to a MF scheme or its units during business operations.

Impact

Transacting in MF units will become at par with shares, and would put a lot of responsibility and onus on top industry officials.

2. Pre-filing of IPO papers

What is proposed

Introduction of confidential initial public offering (IPO) filings and ‘pre-filing’ of offer documents

Current framework

At present, an issuer has to file a so-called draft red herring prospectus (DRHP) with Sebi. The DRHP is required to have detailed disclosures about the company’s business, financials, competitive landscape and financials. All the DRHPs filed with Sebi are available in the public domain. Typically, Sebi takes more than 30 days to approve or give its final comments on the DRHP. 

What changes
 

Under the proposed changes, companies will only have to make a public announcement stating that they have done pre-filing of offer documents with Sebi and exchanges. Later, if the issuer decides to go public, it will have to update the document with observations provided by Sebi and other latest information before putting it in the public domain.

Impact
 

Pre-filing of IPO documents will give issuers more flexibility and alleviate concerns around privacy. Firms will be able to withhold sensitive information before going public

3. Cutting timelines for buyback, open offers

What is proposed
 

Bringing down the timelines for completion of buybacks and open offers.

Current framework
 

Currently, the overall time for completion of a share buyback is 43 days while completion of an open offer takes 62 working days

What changes
 

Sebi intends to cut timelines for buyback and open offers to 36 days and 42 days, respectively.

Impact

Move will benefit both the shareholders and the companies as it will reduce the turnaround time and effort required on such transactions. It will help harness use of technology and make Indian markets more efficient.

4. Disclosure for basis of issue price

What is proposed
 

To include non-traditional parameters -- like key performance indicators (KPIs) -- in disclosures along with traditional accounting ratios to arrive at the issue price for an IPO.

Current framework

At present, the issuer is required to make disclosure of accounting ratios such as earnings per share (EPS),  price to earnings (P/E),  return on net worth (RoNW) and net asset value (NAV), including comparison of such ratios with its peers. However, these parameters may not aid investors in taking investment decisions in case of a loss-making company.

What changes

The issuer company will also have to make disclosures on KPIs and valuations done at the earlier rounds of fund raisings. It will have to disclose all material KPIs that have been shared with any pre-IPO investor at any point of time during the three years prior to IPO.

Impact

New disclosures will help investors analyse better companies which do not have a track record or do not have any operating profit in the preceding three years, such as new age technology companies, for which the bourses have seen a slew of listings in the recent months. 

5. Easing of pricing formula for PSUs

What is proposed

To relax certain provision in the Takeover Regulations for disinvestments of public sector undertakings (PSUs)

Current framework

Under the Takeover Regulations, an acquirer has to bring an open offer for 26 per cent stake so as to provide an exit opportunity to the shareholders. The pricing for this has to be higher than volume weighted average market price for the 60 days before the acquisition announcement.

What changes
 

The requirement of 60-day volume weighted average market price based parameter for calculation of offer price will be dispensed with, in case of disinvestment of PSUs and for indirect acquisition of any other company in which the PSU has stake in.

Impact
 

Typically, information around a PSU strategic disinvestment becomes public at the time for cabinet approval. Sebi is concerned that market price of the PSU concerned gets highly susceptible to such developments. As the prices rise for the PSUs, the acquirer ends up chasing a higher price. The relaxation could help address this problem.

6. ‘Execution-Only’ platforms for MFs
 

What is proposed

To introduce a separate framework for Execution Only Platforms (EOPs), facilitating their registration as an intermediary with either Sebi or Association of Mutual Funds in India (Amfi).

Current framework
 

Currently, there is no specific framework available. Many investors are using technology platforms of Sebi-registered investment advisors or portfolio managers to only execute services in direct plans of MF schemes, without availing any advisory services. Thus, the need for introducing a new framework has been felt by Sebi.

What changes
 

Introduction of a regulatory framework will bring visibility of transactions, connectivity with AMCs, and data sharing among stakeholders. To provide continuous service, EOPs may be required to be adequately capitalised in addition to other infrastructure requirements.

Impact
 

There will be a cap on fees levied by such EOPs as intermediary agents. EOPs may be mandated to have a minimum net worth or be prescribed minimum capital requirements by either Sebi or Amfi. Sebi has also sought consultations on whether to allow EOPs to provide both financial services like purchase and redemption of MF units along with non-financial services like email-id/contact updates.

7. Online Bond Trading Platforms

What is proposed

Mandatory registration of online bond trading platforms as stock brokers (debt segment) under Sebi, and limiting trade to only listed securities on these platforms.

Current framework
 

Online bond trading platforms do not come under any regulatory purview – the platform providers are not registered with any regulator. Sebi observed that there has been mushrooming of online bond trading platforms which sell debt securities to investors, particularly non-institutional ones.

What changes
 

Standard KYC will be applicable and with registration as stock brokers, these online bond platforms will be subject to regulatory oversight. Transaction on these platforms will be routed through Exchange platforms, helping mitigate settlement risk. It will become similar to the model followed by equity trading platforms.

Impact

Participants in the bond market will benefit from fair and transparent pricing, guaranteed settlements, risk management framework, and grievance redressal. The framework will help weed out bond platforms that do not have a sound and stable financial health or indulge in mis-selling.

8. Framework for ESG rating providers
 

What is proposed
 

To accredit ESG Rating Providers (ERPs) to assign ESG ratings to listed entities and listed securities.

Current framework

Sebi has observed that the ESG rating market in India is unregulated. There is inconsistency in disclosures, a lack of transparency in methodology and rating process. Moreover, Indian companies are typically benchmarked to global benchmarks for ESG Rating and there is no differentiation in the performance of issuers within the domestic space.

What changes

Clarity in various ESG rating products, such as ESG Corporate Risk Ratings, ESG Financial Risk Ratings, ESG impact ratings. Credit rating agencies and research analysts with a minimum of Rs 10 crore net worth and with standard infrastructure and manpower will be eligible to be accredited by Sebi.