SEBI presses ahead with reforms agenda, new developments to re-write ground rules

Madhabi Puri Buch

The Securities and Exchange Board of India signalled March 29 it is serious about implementing ground-breaking novel initiatives that push the envelope in terms of transparency, accountability and covering emerging avenues.

However, chairperson Madhabi Puri Buch was silent about the Adani-Hindenburg issue, the legal setbacks that SEBI faced in the National Stock Exchange co-location case, and matters such as beneficial ownership of FPIs. Her response to queries on these matters was to say they were sub-judice or that it would not comment on entity-specific issues.

Still, there was enough for retail investors and intermediaries to note:

SEBI approved the Application Supported by Blocked Amount (ASBA) facility for the secondary market.

“At this stage, it will be optional for brokers and investors to offer and avail of this,” Buch said after the SEBI board meeting.

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ASBA is used in applying for shares in initial public offerings and other primary market issues. Under ASBA, funds are blocked but remain in the applicant’s account, earning interest.

The move is expected to enhance the safeguarding of funds of retail investors parked with stockbrokers and clearing members, and will also mitigate fund-related risk by mandating daily upstreaming of all investor funds from stock brokers and clearing members to clearing corporations.

The market regulator issued an Environmental, Social and Governance (ESG) rating framework that aims to encourage sustainable development and corporate responsibility.

SEBI also introduced the Business Responsibility and Sustainability Reporting (BRSR) Core to enhance the reliability of ESG disclosures and also formulated measures to promote ESG investing.

Earlier, SEBI had expressed concern about the activities of unregulated ESG rating providers, which could lead to larger issues of investor protection, market efficiency, risk pricing, capital allocation, and greenwashing.

To address these concerns, SEBI introduced the concept of BRSR Core reporting, which mandates 49 parameters for ESG reporting, down from 800.

Buch emphasised that all proposals were co-created by the market and were back-tested with 10 large conglomerates before being laid down.

The regulator is assessing the process of Total Expense Ratio (TER) and plans to release comprehensive guidelines on the matter. Buch emphasised the importance of transparency in TER and said it must encompass all expenses.

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She noted that SEBI has long recognised the existence of economies of scale in fund management. While SEBI continues to review TER, it has provided guiding principles to ensure clarity and thoroughness in expense reporting.

SEBI proposed a major overhaul of the internal and external dynamics of alternative investment funds (AIFs), which will have a far-reaching impact on their operations and their equation with investors.

To improve governance and transparency with respect to transactions involving conflict of interest, the board approved a proposal to mandate obtaining the approval of 75 percent of the investors by value for buying or selling investments potentially involving conflict of interest.

“If a single investor holds more than 50 percent of the corpus, that person is considered a related party... if you deal with him or associate with him, then it will need separate approvals,” Buch said.

The provision will cover transactions by an AIF from or to associates of the AIF or schemes of AIFs managed or sponsored by the manager or sponsor or their associates, or an investor who has a commitment to the extent of more than 50 percent of the corpus of the scheme of the AIF, the SEBI chief explained.

In January and February, the market regulator released consultation papers seeking inputs from the public on the operational dimensions of AIFs.

To prepare for a market dislocation event (read: significant market meltdown), SEBI approved a new safety net that can be used by specified debt mutual funds in an emergency. The board approved the framework to set up a Rs 3,000 crore Corporate Debt Market Development Fund. This fund, which will be set up in the form of an AIF, will act as a backstop in the event of market dislocation.

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The government has approved a 10-time leverage to this fund, meaning a corpus of Rs 30,000 crore.

“This Rs 30,000 crore will be guaranteed by the National Credit Guarantee Trust Company, the government’s guaranteeing arm. So it will be a sovereign guarantee,” Buch explained.