Sebi measures will ensure investor-friendliness: Experts

The Securities and Exchange Board of India (Sebi) board approved a wide range of comprehensive reforms to revamp the primary markets. The regulator also announced sweeping changes to boost growth in the mutual fund industry and issued norms for e-IPOs.

A panel of experts comprising N Sethuraman Iyer, CEO, Daiwa AMC, Brijesh Mehra of RBS, Sanjay Sachdeva, President & CEO, Tata AMC, Gesu Kaushal, ED, Kotak Investment Banking, Sanjay Sharma, head - ECM, Deutsche Bank and Milind Barve, MD, HDFC AMC explain to CNBC-TV18 the various aspects of the Sebi's decisions and agree that the measures announced, if not sufficient, are positive and in the right direction. Below is an edited transcript of the experts' analyses on CNBC-TV18. Also Read: Sebi board clears norms for e-IPOs, incentives for MFs Q: Your quick take on what you have heard from market regulators on several crucial decisions taken by the SEBI Board? Sethuraman: Yes, the decisions regarding mutual funds are definitely welcome but my worry is that we don’t how far they should be useful. Take for instance, the announcement regarding mobilisation beyond 15 cities. I don't know how many would qualify for a significant mobilisation beyond 15 large cities. Another instance is the mandate on 30% of the fund-mobilisation from beyond 15 cities. I not sure how many mutual funds would actually comply. Q: So you don’t actually believe that this is going to provide the much-needed boost or the fillip that is expected? You think theses measures are not enough? Sethuraman: Yes. It maybe useful for large fund houses who have already reached beyond 15 cities, but certainly not for smaller fund houses, particularly like Daiwa where our exposure is only to a limited number of cities. Q: As the investors are concerned, the fundability of the expense ratio, the service tax and the flow back of the exit load are probably going to have no impact. Is this assessment correct at this stage? Sethuraman: Yes. SEBI has mentioned that service tax would have an impact of 2- 3 bps. My guess is that it could be slightly higher. We need to wait-and-watch and do our calculations, but my guess is that the impact should be more than 10 basis points.
Overall, this fundability aspect is beneficial. On the exit load, industry will have to start re-calculations. The exit load has been used to keep investors in the scheme and industry has paid upfront brokerages accordingly. Now if the exit load goes back into the fund, the AMC would be paying the upfront brokerage. But if the investor leaves the fund, the AMC does not get compensated. Q: The crucial point of this entire exercise was to somehow make the mutual fund industry more attractive. Chidambaram followed it up by calling for a halt in the unhealthy shift towards gold investments and increasing the focus on mutual funds. Do you agree that all these announcements are sufficient? Brijesh Mehra: What is enough or not enough is a question of judgment. Overall I would say that this is positive news for the asset management industry as it would strengthen the industry's base. One could argue that there is more to do, but the initial steps are positive. One may have to read the fine print to ascertain the exact costs, but the direction is correct.
_PAGEBREAK_ Q: What are your thoughts as far as the eligibility criteria is concerned? The average operating profitability has been set at about Rs 15 crore over three years and the QIB for non-profitable companies has been hiked to 75% from 50%? Brijesh Mehra: In general, it is a positive move. Given the state of where the AMC industry is or the capital markets are in terms of retail investors, I think some kind of protection such as minimum profitability, are good markers and controls for the retail investor.
Similarly, the institutional segment is also good for the retail investor. Over time, the next stage will be when profitability per se is not a parameter. Q: What do you make of the SEBI chairman’s announcements regarding reforms? Sanjay Sachdeva: I think it is important to adopt the perspective that all these decisions have been taken to ensure that the investor benefits. From that standpoint, it's a very good beginning. It also allows asset management companies to actually invest in the future of the business and go beyond the first 15 cities. When AMC industry goes beyond the major cities, it will be actually bringing in larger retail participation.
One of the key aspects that I understand to have been cleared today, is the clarity on the product labeling that will make investors understand that risk and return go together.
The second aspect is the exit load. I think that insertion of the exit load into the fund is the right thing to do. It only will help investors as it will enhance the returns of the funds. So, every announcement it seems to be very investor-friendly. Of course, since the beauty is in the details, we will have to wait and see the guidelines. Overall, I think it’s a good beginning. Q: What's been left out? What would have you expected SEBI to do? Sanjay Sachdeva: I think there is a lot more that can be done. I am sure SEBI and AMFI and everybody else will put their heads together and work on that. But I think what needs to be done first is to make it easier and more convenient for investors to invest in mutual funds. SEBI has already started initiatives in that direction but it’s not there yet. Q: Several big ticket items have been cleared by the SEBI board as far as the primary markets are concerned. What do you make of the decisions that have been taken and how significant will these be? Kaushal: The initiative that SEBI has taken, particularly for retail investors, are very good, including assuring minimum allotment to retail investors and introducing the e-IPO route which enhances the reach and coverage of retail investors.
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What is also very timely is addition of the two routes, which is the rights and the bonus, for companies to achieve minimum public holding of 25%. What is particularly interesting is the fact that SEBI has left an open window for considering case to case suggestions by corporates who want to achieve this in a timely manner. But due to the lack of investor interest, they are not able to achieve through IPP or OFS. Q: We have seen this battle between corporate India and market regulator over the last couple of months, with the SEBI chief maintaining every time he publically spoke that there is no question of further extension. We have seen industry seeking more time, seeking more avenues and finally it seems that the lobbying has worked? Kaushal: You are right in a sense because the two routes that are currently available were not successfully being used by corporates probably because of the way the market is. Companies have approached SEBI and so have intermediaries on alternate suggestions and SEBI has taken them onboard. Q: One of the issues that have actually been deferred which was on the agenda is the issue of the safety net that was being provided to retail investors. We understand that SEBI is likely to seek public comments as per the Primary Market Advisory Committee (PMAC) recommendations. What is your own take on that? Kaushal: I wouldn't know the details, but safety net as a concept needs some deliberation and it's a good idea to put it up for public for comments. What we don't want is retail investors coming into issuance without really taking a conscious call or understanding the fundamentals of the company because of the safety net provision
On the converse side, promoters or companies discouraging retail participation because they now have to provide for safety net. So it is good that they have gone up for public comments.
_PAGEBREAK_ Q11: In terms of the unfinished agenda, the SEBI chief has said that a committee has been set up and will submit a report in the next six months to address tax matters. On the basis of decisions taken today what is the likely impact going to be for the industry and what are the issues, that you think, have been left unaddressed? Sharma: I am not clued-in on the report. I think a lot of small irritants in the IPO process which have been cleared are very positive for the market as it allows flexibility in accessing capital markets. One of the highlights in the revised eligibility criteria is the introduction of the threshold of Rs 15-crore profit.
So, if an AMC is not eligible, the QIB portion has been increased to 75% which is very good because it will prevent companies which are unready, from gaining access to the capital markets. I expected ASBA to be made compulsory for all category of investors. Q: What are your thoughts on broker compensation? Sharma: Broker compensation for incentivising ASBA is a good step. But it would have been better if it was made compulsory. Q: The time SEBI will take to clear issues remains unclear. What did you gather regarding the time taken to issue clearances? Sharma: With SEBI getting the right to reject offer documents, it very clearly send forth a message proper information from the issuer company is essential. The act of rejection acts as a deterrent for both parties to work together to try and make it as streamlined as possible.