The market regulator had a breathlessly busy year, with far-reaching changes made across asset classes and radical reforms initiated to protect investor interest.
The Securities and Exchange Board of India (Sebi) earned extreme sobriquets on social media—the derogatory ‘Bebi’, for its alleged inaction against influential entities; and the salutary ‘Baap’ for its unflinching crackdown on online celebrities.
Sebi won the admiration of global securities-market regulators by rolling out T+1 settlement and aiming for a T+0 cycle, and censure closer home from the Securities Appellate Tribunal for the regulator’s “lackadaisical approach” in one case and for its directing a depository to act like a “highway robber”.
Whatever differing opinions there are, in the final tally, the regulator came out trumps this year. Here are the seven reasons why.
Also read: SEBI's shortening of the settlement cycle will take a toll on the market1. Overhaul of regulatory approach
The first was the dramatic change made in its regulatory approach. Sebi became more consultative even encouraging the setting up of industry standard forums (ISFs) for this.
While the regulator will tell ‘what’ is to be done, it will consult with the ISFs before defining ‘how’ it is to be done. ISFs are now part of the regulatory architecture.
Then, the regulator vigorously tackled the pendency of applications. It did away with a loophole that many government agencies use to escape accountability, of counting the pendency of applications from the date of last receipt of information. Whenever the deadline nears, the agency simply sends another question to extend the deadline.
In contrast, at Sebi, the pendency is now counted from the date of first receipt.
The third commitment that Sebi reiterated this year is to be led by data. When the much awaited change in delisting norms did not go through, it was anti-climactic, but the Sebi Chairperson Madhabi Puri Buch said that they were “very happy” to report that the Board has asked the regulator to review its suggestions because the regulator did not have enough data to support the suggestions.
Buch said that the Board’s decision reflected their commitment to data and their refusal to be led by opinions.
When Sebi introduced the Environment, Social and Governance (ESG) reporting framework—the Business Responsibility and Sustainability Report (BRSR) Core—it did extensive backtesting to understand if the implementation of this framework was even possible.
“If we cannot be sure that the policy that we are about to make into law can actually be implemented, I am sorry I don’t sign (off on it),” said Buch.
2. FPI disclosures
Early this year, the short-seller Hindenburg Research came out with a scathing report on the Adani Group and the group stocks lost as much as $132 billion.
A Supreme Court-appointed expert committee noted that Sebi “suspects wrongdoing” but, because foreign portfolio investors (FPIs) were allowed to set up opaque structures, the market regulator could not put to rest its suspicion. These opaque structures, which hid the ultimate chain of ownership in these FPIs, could be created because Sebi had said that the declaration of beneficial owners was already covered under the Prevention of Money Laundering Act (PMLA). But the Adani probe was not based on money laundering allegations.
The expert committee remarked that “the legislative policy stance of Sebi on the ownership structure of FPIs has moved in one direction while the enforcement by Sebi is moving in the opposite direction”.
The very next month, after meeting with its Board, Sebi announced that certain FPIs—which had high exposure to Indian markets, particularly to a single corporate group—would be asked to make additional “granular level” disclosures on ownership, economic interest and control. \
Also read: Material price movement not material event to be considered for rumour verification, proposes SEBI
3. Capturing what’s ‘material’
Listed entities are required to disclose material events. But deciding what is ‘material’ is not easy.
Therefore, legal experts believe that quantifying these ‘material’ events was one of the most significant changes introduced by the regulator this year. Following the amendment made to the Listing Obligations and Disclosure Requirements (LODR) Regulations, any event or information will be considered material if it affects more than 2 percent of a company’s turnover or 2 percent of its net worth or 5 percent of the average value of profit or loss based on three audited consolidated financial statements.
Thus, a quantifiable ‘materiality threshold’ was put in place.
Siddharth Mody, Partner at J Sagar Associates, said that this “addresses concerns about inadequate, inaccurate, misleading, or delayed disclosures by listed entities”.
Shiju PV, Senior Partner at IndiaLaw, cited other significant changes made to LODR Regulations too—the requirement placed on the top companies to deny/confirm/clarify rumours circulating in the mainstream media, the requirement to disclose agreements which affect the mode of control of a listed entity or create any restriction or liability on a listed company, and the requirement to get periodic shareholder approval for granting any special rights to a shareholder.
4. Investors’ knight in shining armour
The misuse of investors’ funds seems to have been haunting the market regulator, particularly after the Karvy Stock Broking fiasco.
In March, market intermediaries such as brokerages were asked to provide investors with an option for an ASBA-like facility for the secondary market. ASBA, or Application Supported by Blocked Amount (ASBA), has otherwise been available only in the primary market, and it involves keeping the investor's money blocked in his/her account till the IPO allocation is made. This means that the client gets to earn interest on his/her money till the allocation is done and has more visibility on the use of his/her money, instead of the money going to the broker's pooled account and being open to misuse. This will be operationalised from January or February 2024.
Along the same lines, in June, the regulator prescribed a procedure for upstreaming and downstreaming of clients' funds to and from the clearing corporations on an end-of-day basis. This is so that client funds and securities are not held overnight by intermediaries, who can then use them for their funding purposes.
5. Finfluencer trouble
Another hot potato issue that the regulator had to contend with was the finfluencer menace.
Sebi passed several orders to take down unregistered advisories and illegal portfolio management services, and it earned a fan following after it went after two of the biggest names in the business.
On May 25, the regulator passed a settlement order on PR Sundar, his firm Mansun Consultancy Private Ltd and his business partner Mangayarkarasi Sundar. The three were banned from the securities market for a year and were asked to disgorge over Rs 6 crore.
In October, the regulator took down another celebrity finfluencer Mohammed Nasiruddin Ansari, who was known as Baap of Chart.
Social media hailed Sebi calling it the ‘Baap’ of capital markets.
To root out the problem, the regulator proposed going after the funding of these finfluencers. On August 25, it floated a consultation paper to restrict the association of regulated/registered entities with unregistered entities. This came after several reports showed that registered entities such as brokerages and mutual fund houses were paying finfluencers a referral fee to promote their products/services and that this arrangement was funding many illegal stock advisories.
The restriction will hit the broking industry hard. Zerodha’s referral programme, which brings in 10 percent of its new business, will end.
6. Debt-market dreams
The Sebi Chairperson has spoken about the regulator’s global ambitions for the Indian debt securities.
Buch, who has a penchant for one-liners, said, “We are hoping, down the line, it will be a case of ‘my name is bond, Indian bond’”.
Over the last year, the regulator has taken several steps to deepen the bond market, and one of the major ones was the setting up of the corporate debt-market development fund. The fund is to act as a backstop facility when a crisis dries up liquidity for debt funds. It is to avoid Franklin Templeton-like situations.
Then, taking into account investors’ interest in debt and fixed-income assets such as fractional ownership platforms (FOPs) and collateralised debt, the regulator decided to accommodate some of the available services under its regulatory purview.
Online bond platforms (OBP), which sell debt securities to non-institutional investors, have been asked to register as a stockbroker in the debt segment and apply to a stock exchange to act as an OBP.
The FOPs have been given the option to register under the SME REIT structure, which would inspire more confidence in investors and large distributors like banks.
However, the asset class that has been impacted most by Sebi’s interventions is REITs/InvITs, according to Abhiraj Arora, Associate Partner at Economic Laws Practice. He pointed to the regulator giving rights to unitholders (holding not less than 10 percent of outstanding units) to nominate directors on the board of the investment manager, allowing self-sponsored REITs/ InvITs which will also give exit to sponsors and help develop mature investment managers, and making offer-for-sale option available to unitholders.
Also read: Why SEBI’s latest proposal for debt securities can be game-changing
7. Trustees in spotlight
It was brought to the regulator's attention that the interests of unitholders of mutual funds and the shareholders of the respective asset management companies (AMCs) don't always align. For example, charging higher fund-management fee is bad for the unitholders but profitable to the AMCs' shareholders, or mis-selling of schemes to increase AUM is bad for the unitholders but works well for the AMCs' shareholders. Therefore, to protect the interests of mutual-fund unitholders', the regulator defined the role of trustees and the board of directors of AMCs.
Trustees have been tasked with various responsibilities including ensuring that there is fairness to the fee charged to unitholders, that the running of the AMC is not unduly influenced by the sponsor and that there are system-level checks to stop frontrunning by AMC's employees.
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