Mumbai: Primary market reforms are on top of the agenda of India’s capital market regulator Chandrasekhar Bhaskar Bhave. He wants to kick off the exercise by cutting down the time between a company’s public issue and the listing of its stock from 21 to seven days. He also wants to iron out glitches in Sebi’s investigation and legal wings and make sure that involved parties are heard before any judgement is passed. In his first interview after taking over as Sebi chairman on 17 February, Bhave, 57, sets out his agenda for reforms. Edited excerpts:
The market is not in the best of health. Isn’t it an ideal time for reforms as nobody will accuse you of spoiling the party?
All times are good times for carrying out reforms.
Primary agenda: IPO reforms are top priority, says Sebi chief C.B. Bhave. (Photo: Ashesh Shah/Mint)
What’s your agenda for the primary markets?
I always hear the argument that while the secondary market processes have been made very efficient, in the primary market it takes a long time for an IPO (initial public offering) to get listed after it closes. The delay throws up issues of its own and we try to address the issues in different ways, instead of reducing the time gap. Why can’t we reduce the gap? We are far more technologically equipped today than when we started the secondary market reforms in the mid-1990s.
Let’s take the case of Reliance Power Ltd’s IPO. We had something like 45 lakh applications, and along with these 45 lakh applications, 45 lakh payment instruments were put through the clearing system. None of the applicants gets full allotment of shares in such hugely subscribed issues. This means for every single applicant, refund is due—either fully or partly. So, another 45 lakh refund orders need to go through the clearing system. Overall, 90 lakh instruments need to go through the clearing system and the postal department needs to carry these instruments. This is an anachronism when the banks are technologically well equipped.
How do you address this?
Why does money have to leave an investor’s account when he is applying for shares? Can we have a mechanism to lock the money in the bank account when one applies for shares? The banker can give the data to the registrar. Essentially, till the shares are allotted, the investor cannot use the money meant for the shares even though no physical transfer of money takes place at the time of application (of shares). Once the allotment is done, the registrar can instruct the bank to transfer funds, depending on the shares allotted, and remove the lock. We can eliminate the movement of instruments both ways—as application money and refund.
This will not only reduce the burden on the system, but also make investors happy. In normal circumstances, the delay in getting the refund order makes an investor anxious. When there is a delay, he often writes to the registrar, but the registrar does not issue a duplicate refund order because he is not very sure whether both the refund orders (including the original one sent earlier) will be encashed. So, the registrar waits for the confirmation from the bank that the first refund order is not encashed. If the money is lying in investor’s account, he is not terribly worried whether it is unlocked today or tomorrow.
How fast can this happen?
Banks will have to be ready for this. I have had discussions with some of the banks, and they do not find this difficult. Initially, both systems will have to be allowed to operate, and gradually the new system can become the basic way.
Will we see this in six months?
I hope so. I think the beginning should be faster than that. We don’t have a time frame and these issues are still being discussed at the advisory committee (of Sebi). We are looking at various things. For instance, can we eliminate the system of physical application? Can we minimize the data capture requirement? When an investor gives the depository participant and client identification, along with the PAN number, why do we need the rest of the data as that is already captured when one opens the depository account.
Today, nobody can apply for shares without having a depository account. If KYC (know your customers) norms are followed at the time of opening the depository account, why do we need all the data again?
What’s the ideal time for an IPO to list?
It’s difficult to put down an exact number, but reducing it from 21 days to seven days is a reasonable target. We are keeping this as our goal for the time being and I am sure we can go down even below seven days. It’s much like the secondary market. When we were following the 15-day settlement system, we could not have imagined of the T+2 (trade plus two days) settlement system.
Are you planning to ask the qualified institutional investors (QIBs) to put in full money while applying for shares, instead of 10% as has been the practice?
If the money is going to remain with the investors, then it’s possible for us to ask the institutions to put in full money at the time of application for shares. This is because we are not taking the money away from their accounts. We will take away the money only when the shares are allotted to them. Many of them have difficulties in paying full money upfront as their governance structure does not allow them (to) pay unless they get the allotment of shares. The new system will take care of that.
Then, there is a feeling in the market that an unnecessary hype is created about the so-called QIB contribution (to IPOs). People announce that in 3 minutes an issue is subscribed X number of times. Unless in the first 3 minutes, the money is actually blocked, we should not say the issue is subscribed X number of times. The new system will take care of unnecessary hype.
Any plan to change the quota system for QIBs and retail investors?
The QIB portion is fixed in order to make sure that the price is discovered by knowledgable investors. QIBs are allotted shares at a price discovered by them and rest are for retail investors that include HNIs (high net worth individuals). I think the logic is sound and I don’t see any need to tweak the system.
Do you plan to make underwriting by merchant bankers mandatory for every issue?
This issue came up for discussion in the primary market advisory committee, but no view has been taken on that. Some people are questioning the price band given by the merchant bankers. The argument is that if the merchant bankers recommend such price bands with full responsibility, they should underwrite the whole issue. The counter-argument given by the industry is that since we are following the book-building process and discovering the price, where is the question of full underwriting?
Are some of issues overpriced?
I would say that the gap between the closure of an issue and its listing is partly responsible for such thinking. The market can move and in 20 days it can move tremendously. Normally, an issuer would leave something on the table for the investors. How much to leave on the table is a matter of judgement, and if the gap between the closure of an IPO and its listing is reduced the judgement would appear less questionable. The solution to this issue lies in reducing the time. In any case, Sebi does not take a view on pricing.
So, you are not looking at the pricing of IPOs?
Pricing is best left to the market.
Any plan to tackle the rampant grey market?
There is no price during the gap between an IPO closure and its listing and people want to form the price in the so-called grey market. Reduced time gap should at least partly provide a solution.
The government is pushing for wider public participation in listed firms.
The government is receiving comments on its draft paper on this issue and, once it takes a view, we will have to look at the issue.
Generally, a larger participation by non-promoters in the shareholding of a listed firm is a good thing because it ensures a diverse set of shareholders and the price formation in the secondary market becomes more reliable. We need to look into how the dynamics is going to work in the context of public sector, or listed companies which have small non-promoter holding.
Your agenda for the secondary market?
We must keep our market competitive. We have given the institutional investors direct market access to market. Institutional investors the world over have such access and prefer it. This is because of the delay involved in the process of placing orders with brokers and worries about front-running. This has been a long-standing demand from the institutions as well as exchanges.
Grey area: There is no price between an IPO closure and its listing and people want to form the price in the so-called grey market. Reduced time gap should at least partly provide a solution, says Bhave. (Photo: Ashesh Shah/Mint)
The world keeps on innovating and we have to keep our eyes and ears open and, at least, make sure that our markets don’t fall behind on account of regulatory delays. Our idea is to remain up to date in the areas of trading and settlement.
Will we see the settlement system shifting from T+2 to T+1?
There are not too many markets in the world that have even gone to T+2 system. But, we have to keep our options open. We still don’t have the ability to transfer money as fast as one would desire. Unless we have an efficient payment system, we can’t do this.
We get a lot of feedback from overseas investors that given the time zone differences, T+1 will be a challenge for them. At this stage, the issue of T+1 is not in the realm of consideration.
You are prescribing a net worth for investors in the derivatives segment.
Actually, it is not yet a Sebi position. We have discussed the issue with the exchanges. Soon after I joined (Sebi), we got a lot of complaints on mis-selling... As long as the market was going up, everything was fine, but the fall on 21-22 January changed the scene. We requested the stock exchanges to look into the issue of mis-selling. Is there any mis-selling by the brokers and if that is happening what kind of precaution do we need to take? We have put out suggestions of stock exchanges for the wider community. One of the suggestions is that before an investor takes position in the highly leveraged derivatives market, the broker should be asked to make sure the client has certain net worth.
What is the logic behind asking FIIs to offer a margin for their cash transactions? Not too many markets insist on this.
It’s probably a misconceived position that not many markets impose margin on institutions. In fact, there are not too many markets which make any distinction between institutions and retail investors. Typically, the limits to positions that a broker can take—irrespective of whether the broker is transacting on behalf of a retail investor or an institutional investor—is fixed on the basis of his capital.
What we are doing is not novel. Given what has been happening around the world, it is not possible for us to assume that the institutional investors will not fail. Institutions can fail and I think the risk management mechanism should be uniform for all investors. Institutions have some practical difficulties and, as we go along, we will take those into account.
How many Sebi orders have been set aside by the Securities Appellate Tribunal (SAT)? Are you looking at the loopholes?
I am yet to look at exact percentages, but my impression is that, in percentage term, Sebi is doing well, but we have lost some high-profile cases. I think we should use these examples for the purpose of educating ourselves as to how should our orders be structured to ensure that they pass the scrutiny by higher courts. Our people should be trained in writing proper orders, appreciating the evidence and interpreting provisions of law.
Where is the problem—your investigation or legal department?
One needs three things so that the order becomes an appropriate quasi-judicial order. You must appreciate the evidence correctly; the interpretation of law must be sound; and finally, the order must be reasoned properly. In all these three areas we need to strengthen our ability.
Some amount of reversal by the higher courts should be taken in one’s stride as even high court orders are turned down by the Supreme Court.
As chairman and managing director of National Securities Depository Ltd, you were not heard before Sebi passed a very critical order against you last year.
I would not comment on that case. The general principle that ex-parte orders should be an exception and not the rule is a good principle. Without going into specific cases, I would say that as a rule the regulator should not have any reason not to hear the involved parties. You can come to a fair conclusion only after you have heard both sides.
What needs to be done to make Sebi orders foolproof?
Appropriate training and good quality orders.
Any plan to change the norms for foreign institutional investors (FIIs) and investment through participatory notes? Lot of investors are leaving Indian market and rushing to Singapore…
The October (2007) decision of Sebi was a conscious attempt to tell the FII world what categories of investors are permitted to operate in our market and we prefer these categories to come and register here and we have had tremendous response. The foreign investors are registering with us as FIIs as well as sub-accounts. I am told more than 400 new registrations have happened since October.
Flows going up and ebbing is a phenomenon we will have to live with as the market conditions will change. There will always be a two-way traffic. In fact, the maturity of the market gets tested at such times.
As regards institutions going to Singapore, it is a larger issue. It is a question of whether we want to allow additional categories to come into the market. It depends on how far we want to go down on the capital account convertibility route.
Your plan for trading of corporate bonds?
There have been a lot of efforts in the past for the creation of a corporate bond market and there have been differing views. Some people maintain that this market will remain OTC (over the counter) while others feel that these bonds should be exchange-traded. We want to review the situation and find why our earlier attempts failed.
There is no point in making yet another attempt without understanding the issues. We will complete our review in the next two-three months.
There is another area which has also been engaging our attention for some time—creation of a market for smaller companies. We had OTCEI and Inter-Connected Stock Exchange. We also had Indonext platform on Bombay Stock Exchange for small firms. Unfortunately, none of these worked.
We are reviewing that area as well. Small firms are caught in a jam. They cannot access the market and, because they cannot access the market, private equity investors and venture capital firms do not want to invest in them as they do not see an exit route. There is an urgent need to create this market. We need to figure out what should be done. If we need to relax rules or change laws, we will attempt that.
You rejected the recommendation of the GRIP (Group on Review of Issue Processes) panel to digitize at one go the processing of IPO applications.
I am of the view that if we want to make a change, we must calibrate the change in such a manner that people do not feel excluded. We must show certain amount of latitude even at the cost of efficiency or time overrun.
Your take on the role of TV anchors and newspaper commentators in influencing markets and investors?
I am yet to study the issue fully. We are struggling with a few concepts here—the independence of media and people getting swayed by the comments of the so-called experts and finally these experts serving their own purposes. The ideal solution would be self-regulation.
There have been instances where firms without any operating assets on the ground entering the market with a substantial premium. Is there any plan to curb such instances?
The larger issue here is whether Sebi should focus on disclosure or merit. So far, the view has been taken that Sebi’s job is to ensure that the firms make full disclosures and take action if full disclosures are not made. Whether the issue attracts subscription or not is left to the market.
Finally, your message to the market participants…
I don’t know whether I can give any message other than what the preamble to the Sebi Act says. Sebi’s mandate is to protect the interests of investors and to develop and regulate the securities market. This is our priority. The only thing I can say is that the market players can rest assured that this will be done in a just and fair manner.