Mumbai: People who trade in and are associated with India’s stock market are happy with the start made by the new chief of stock market regulator Securities and Exchange Board of India, or Sebi—especially in terms of the changes regarding initial sales of stock—but they’d like to see him put his house in order by empowering Sebi’s investigation and legal wings.
Chandrasekhar Bhaskar Bhave, 57, completed 100 days in office on Tuesday.
Taking stock: As Sebi chairman, investor-friendly changes in initial public offerings have been on top of Bhave’s agenda
The need to strengthen Sebi’s investigation and legal wings arises because instances of the appellate body, the Securities Appellate Tribunal or SAT, setting aside Sebi orders have been on the rise.
However, it is the so-called primary market reforms, or investor-friendly changes in initial public offerings (IPOs) that have been on top of Bhave’s agenda—as he admitted in an interview with Mint published on 7 April, his first after taking over as Sebi chief on 18 February. Bhave, previously the head of India’s largest depository, National Securities Depository Ltd (NSDL), had said he would like to reduce the time between a company’s public issue and the listing of its stock from 21 days to seven. He had also said he wanted to make the working of the investigation and legal departments more efficient and ensure that parties involved in any dispute or alleged violation of market laws were heard before Sebi passed a judgement.
Bhave himself declined to comment on his first 100 days in office. Several market participants Mint spoke to didn’t want to be identified either, given the fact that some of their companies operate in a market regulated by Sebi.
Primary markets push
In May, Sebi introduced the alternative payment mechanism for IPOs and rights issues. Under this, the application money for public issues will remain in an investor’s bank account until the issuing firm finalizes the share allotment. Under the old system, the money, usually paid in full by retail investors (institutional investors pay only part) remains with the company and is refunded after the allotment of shares. Sebi is looking to enforce the new system from 1 July in select centres.
In another investor-friendly initiative, the regulator has rationalized and reduced the fees charged for filing offer documents for mutual funds, public issues, and share buy-backs. In the secondary (or trading) market, Sebi has allowed direct market access, or DMA, to institutional investors. Under this system, foreign institutional investors, or FIIs, as well as domestic institutions can buy and sell shares without going through brokers.
DMA enables clients who engage in such trades the same opportunities as proprietary desks that already enjoy direct access. A proprietary desk of a firm trades in stocks with its own money rather than customers’ money with the objective of turning a profit for itself. Although DMA is yet to start, the regulator expects the move to curb front-running and increase liquidity in the options market. Front-running is a market strategy where brokers buy or sell shares or take similar positions in the stocks ahead of large orders given by their institutional clients. Currently, all investors place their orders with brokers and the brokers enter them into the exchange’s trading system.
“Keeping in mind the innovations of the world market, Bhave has announced direct market access, which will bring home a new class of institutional investors to increase depth to our markets,” said Kaku Nakhate, co-head of equities at DSP Merrill Lynch Ltd. To be sure, this is not a new initiative. An expert committee on Mumbai as an International Financial Centre had in April 2007 recommended introducing DMA. Bhave was a member of that committee.
Bhave’s emphasis on reforms continued with Sebi simplifying offer documents of mutual fund schemes. The offer document of any mutual fund scheme will now be in two parts—one containing all information on the fund and the other on the specific scheme. Sebi has also increased the prescribed time for risk warnings in mutual fund commercials from two seconds to five seconds.
He has also taken forward some of the important initiatives of his predecessor M. Damodaran by introducing real estate mutual funds or REMFs and allowing short selling by institutional investors. He has also given the go-ahead to the securities lending and borrowing mechanism in the capital market and the creation of products built around volatility and bond indices. REMFs allow individual investors to take advantage of real estate assets while short selling allows institutional investors to sell shares without owning them. Earlier, only retail investors could short sell in the cash market. Apart from improving efficiency and liquidity, this will help increase participation in a falling market since institutions will try to take advantage of it by going short.
After he took over, Bhave’s very first move was to set up an independent committee, headed by Sebi’s non-whole time member Mohan Gopal, director of National Judicial Academy in Bhopal, to oversee ongoing proceedings against NSDL in the IPO scam. This move was initiated to avoid any potential conflict of interest because the issue dates back to Bhave’s time as head of NSDL.
The Sebi-NSDL row began in April 2006 when the regulator unearthed a scam involving depositories, depository participants and market operators, who allegedly played a role in using 59,000 fictitious demat (or electronic share) accounts to corner share allotments in IPOs. Bhave vigorously fought the charges. In an ex-parte order, Sebi had said the depositories “failed to exercise oversight over the depository participants” and the promoters of NSDL (and CSDL, another depository) were directed to take “all appropriate actions including revamping of management.”
In November 2006, Sebi issued a “disgorgement” order against NSDL and a few others for a sum of Rs115 crore for alleged carelessness in opening of demat accounts. Of this, NSDL’s share was Rs45 crore. Disgorgement essentially means that any ill-gotten gains made should be restored to the original parties. NSDL appealed to SAT, and the tribunal that hears appeals against Sebi orders set aside the order in January 2007, describing it as a clear “violation of the principles of natural justice.”
The ability to pass appeal-proof orders continues to elude Sebi. Since Bhave took over the regulator’s reins, SAT has set aside two important judgments of Sebi. In both cases, it has questioned the ability of Sebi’s adjudicating officer to understand the subject.
In the April interview, Bhave admitted that Sebi had lost some high-profile cases. “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,” Bhave had said.
Sebi is looking for an executive director for its legal department after Sandeep Parekh quit. It is also waiting to fill in the posts of two whole-time members. The positions have been lying vacant since March when V.K. Chopra and G. Ananthraman retired.