Sebi's top measures and their impact on the markets

On Friday, the Securities and Exchange Board of India (Sebi) unveiled a series of measures after a scheduled meeting of its board. In her first press conference, Sebi’s new chief Madhabi Puri Buch said liberalising rules and keeping the market accountable through disclosures and transparency would be the key objectives of the regulator. Here is a ready reckoner of the key measures the regulator announced and their implications for the markets.

Want money? Make disclosures

Measure: Sebi proposed that companies seeking to raise money through an Initial Public Offering (IPO) of shares disclose key performance indicators that are not included in their financial statements. More importantly, the issuing company must disclose its price per share in past fund-raising rounds, giving potential investors a clear picture of their valuations. Funds raised going back three years need to be disclosed. This is significant after the losses investors made on recent IPOs by start-ups that raised questions about their valuations.

Impact: The additional disclosures will enable investors to make an informed decision on whether to participate in an IPO or not. This also makes IPO managers accountable in explaining on how valuations are arrived at by giving a historic comparison of valuations. Start-ups will find it easier to convince investors of their potential because they would be able to put forth the unique parameters that are more representative of their business beyond traditional metrics.

Fund manager under the radar

Measure: Sebi included mutual fund units under its prohibition of insider trading rules and said it would prescribe a separate chapter laying down the guidelines for the industry. A separate code of conduct would be released for designated executives in respect of fund houses. Sebi would get to monitor the transactions of fund managers closely under this rule. The measure comes after some fund managers were found to have transacted in the equity market through mutual fund units based on privileged information, sparking worries that such a practice may be rampant at other fund house. Buch said the regulator will ensure adequate surveillance and punitive actions.

Impact: The move would result in changes in the investment mandate of MF schemes or the conversion of an open-ended scheme to a close-ended one. This is also likely to reduce churn in schemes with the flipside that fund managers may lose some of their discretion in managing the schemes. Sebi will, however, have to assess whether privileged information has an impact on the net asset value of the fund even though it may move share prices in the market.

Bonding with Sebi

Measure: The regulator has proposed that online bond platforms be registered with it as brokers under the debt segment. Sebi said it would issue a procedural circular soon, dealing with specifics and the mechanics of online bond platform providers. For the retail investor, the platform interface would be the touchpoint but the backend of transactions, including settlement, would be through exchanges. Sebi has also proposed reducing the face value of listed debt securities to enhance retail participation.

Impact: Independent online bond platforms that mushroomed during the pandemic have so far been in a regulatory vacuum. By coming under Sebi’s ambit, bond platforms would gain more credibility. Instances of mis-selling have also worried market participants, with some online platforms offering structured deals to retail participants unaware of the underlying risks.

Speeding up payment, settlement

Measure: The capital markets regulator announced a set of measures to expedite processing of payments and the settlement of instruments. Fund houses would be required to process redemption in three working days instead of the current 10, and dividend payouts in seven working days instead of the current 15. In derivatives, Sebi will allow netting of cash segment settlement and physical settlement of the Futures and Options segment upon expiry.

Impact: The derivatives measure will reduce margin requirement for brokers after expiry, giving them some relief. It aligns the cash and derivatives markets, which will result in reduction of price risk.

Pre-filing of offer documents

Measure: Sebi has allowed an optional pre-filing of offer documents on stock exchanges for IPOs. This pre-filed document would be confidential between the issuer, exchanges and the Sebi. The document available to the public would have Sebi’s observations in it, giving potential investors an early peek into the regulator’s reservations, if any, on the IPO.

Impact: Potential investors in IPOs may get the regulator’s observations earlier as these would be incorporated in the offer document. This reduces the overall lead time for IPOs.

More the merrier in offer for sale

Measure: Sebi has allowed non-promoter shareholders with less than a 10 percent stake to participate in an Offer For Sale (OFS) by a company provided they have a minimum Rs 25 crore worth of shares to sell. This mechanism will be available to real estate investment trusts (REITs) and infrastructure investment trusts (InvITs). The cooling period has been reduced to two weeks from the current 12 weeks.

Impact: The move allows all non-promoters to participate in an OFS, subject to conditions. This would encourage greater participation in an OFS by companies. It also provides large institutional funds another route to trim their holdings in companies after repeated complaints over ‘leakage’ when such investors sought to sell a part of their stakes through the bulk and block deal windows.

Divestment boosts

Measure: Sebi has removed the requirement of a 60-day volume weighted average market price for open offer price calculations in the case of listed public sector entities. The move comes as the government pushes for divestment in the companies it owns. Sebi explained that strategic divestment requires several price-sensitive details to be made public at various stages. This makes shares of PSUs susceptible to volatility.

Impact: The move could help enhance the value the government can derive for its stake in listed PSUs. Excessive volatility in stock performance at times could be detrimental to the valuation of a company, especially PSU stocks that tend to have a higher level of volatility.

Easy induction of directors

Measure: Companies can now appoint independent directors through an ordinary resolution if they meet the threshold for the such a move as well as the threshold for a majority of minority shareholders. Currently, appointments, reappointments and removal of such directors requires a special resolution.

Impact: This makes the process of appointment and removal of independent directors easier for companies.