New Sebi norms will ease investment process: Parekh

Recommendations in the KM Chandrasekhar Report submitted to Sebi will not turn sentiment around because fundamentals are not changing, says Sandeep Parekh of Finsec Law Advisors.

Talking to CNBC-TV18, he says that the new Sebi norms will reduce procedural glitches in the investment process for foreign participants and this is one factor that might change sentiment. He says he expects to see the new investor class – the FPI, in a couple of months. He says he disagree with the minimum buyback norms proposed by the market regulator, because ultimately the interest of the shareholders is the same as the interest of the company.  Below is the edited transcript of his interview with CNBC-TV18 Q: Let me begin by asking you first about the KM Chandrasekhar Report. We all read about that the recommendations have been about clubbing the Foreign Institutional Investors (FIIs) and Qualified Foreign Investors (QFIs) into new investor class. Will this really turnaround sentiment? How will it change things on ground? A: I don’t think it will turnaround the sentiment because fundamentals are not changing, but the procedural change that we are supplying to the foreign investors that does get reduced. To that extent you can say that it may change sentiment to the extent of the process. We are unnecessarily making them jump hoops and do exercises which had no relevance to inviting clean foreign investors into the country. So, with that dismantling I think it is a good sign but its definitely not going to change the sentiment. Q: This report is also talking about simplification of KYC norms something that P Chidambaram also spoke about in his Budget speech. What are the implications of that, what are the changes that you would like to see? A: I would want only one or two categories of foreign investment. One would be foreign direct investment (FDI) the other would be portfolio and it is kind of going to be step two to merge the other things also into a single category. So, currently we have NRI, we have FII and we have QFI. All these three should also be collaged. Our only concern has to be money laundering and things of that nature. Besides that I don’t think we should worry about short-term money, long-term money – what is claimed to be long it is often short, what is short sometimes stays for years. So, I think those artificial boundaries are not necessary. Q: So, the sense I am getting is that KM Chandrasekhar recommended that lets leave non-resident Indians (NRIs) out of Foreign Portfolio Investors (FPIs), that’s something that has not impressed you. You feel that this should have perhaps also been included? A: This is also a big way forward. If you say that FIIs don’t need to be registered with Sebi, I think that is a huge step forward because it is a procedural nightmare for foreign investors to enter into India. Q: The other thing, they are capping perhaps the investment limit for a FPI at 10 percent of the equity of a company feeling beyond that should be counted as FDI. Where do you stand on this recommendation? A: I don’t have a very specific view on this at this point of time because it complicates – the existing understanding changes very substantially with this change. So, I don’t have very specific comment on it but if numerical limit beyond which something becomes FDI it does provide a lot of clarity. So, I would say that it is probably a good thing though that is not my last word on it. Q: You do track all of this very closely. We understand Sebi which has largely accepted the KM Chandrasekhar report is now going to submit it to the government with its views. So, how long do you think that we are actually going to see all of this taking place – a new investor class – the FPI? A: I would say couple of months. I don’t expect anything in less than six weeks is what I would say. _PAGEBREAK_ Q: The other big thing that the Sebi board took a call on today was making the buyback norms more stringent. I understand there are proposals such as for the first time companies will be told that 50 percent of the funds earmarked for buybacks have to be used and that is going to be made mandatory. 25 percent will have to be kept in an ESCROW account, what do you think of these norms? A: I disagree with the minimum buyback norms which have been proposed sometime back because ultimately the interest of the shareholders is the same as the interest of the company. If you are forcing the company to do something including buying back shares at a price which they have not envisaged so for instance after declaration of a buyback let us say the price goes up from Rs 50 to Rs 100 no company in its right senses would buy shares from the market at Rs 100 because the point of buyback was to support the share price. So, if you are forcing that company to buy at Rs 100 you are shorting the small investor and you are only benefiting the speculators. So, I don’t agree with this minimum buyback norms and all. Q: Then I am guessing you will also not be happy about the penal provision that in case the company does not actually utilize those 50 percent of the earmarked funds then there will be a penalty of 2.5 percent on what is going to lie in escrow account? A: Absolutely not – basically with the proposal itself, penalty is out of the question. Q: What about halving the buyback period from 12 months to 6 months, where do you stand on that? Sebi feels that, that's how long actually genuine companies wanting to go in for a buyback, that’s how long it actually takes them? A: I think its entering into micro management territory. I don’t have a view on six months or 12 months. There is no harm in having a 12-month period. The point of the buyback is the company thinks the shares are more highly valued than what daily traders think. They are saying we will put the money where our mouth is. If they are willing to put their money where their mouth is, so 12 months instead of 6 months – I am not again fully in support of the proposal.