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Changing The Landscape

Changing The Landscape
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First Published: Wed, Feb 16 2011. 11 45 PM IST
Updated: Wed, Feb 16 2011. 11 45 PM IST
Primary Market
•Reduced the timeline between the launch of an IPO and listing of shares to 12 days from 21 days earlier. This ensures the money invested in an IPO is blocked for a shorter time.
• Introduction of Application Supported by Blocked Amount, or Asba. Under this, an investor’s account is debited only when the actual allotment of shares happen in a public issue. Recently, Asba has been made mandatory for all non-retail investors. Asba is safer, less time-consuming, and more transparent as compared with the traditional method of investing in public floats.
• 100% margining for institutional investors in IPOs from 10% earlier. This ensures only serious institutional investors will participate in the bidding. It enhances transparency as it prevents issuers from attracting investors by way of displaying inflated over-subscription numbers from institutional investors.
• Introduction of French auction for follow-on public offerings. Under this, institutional investors are allotted shares according to the bidding price and the lowest bid price becomes the cut-off for retail investors. This ensures higher listing premium for retail investors.
• Allowed more time for retail investors for investing in IPOs and FPOs. Extra two days allow retail investors to gauge the demand from the bigger investors and the prospects of the issuer.
•Introduced anchor investors for primary market issuances. This would help firms going public to get a capital commitment from a group of institutional investors for a period longer than usual investors, which in turn could indicate the strength of the company and promotes its brand in the market circle.
Secondary Market
•Introduced extended trading hours on exchanges—this helps the domestic exchanges to synchronize with global peers, which in turn helps in better price discovery of shares and reduces volatility.
•Allowed new exchange-traded derivative products such as currency futures and options and interest rate futures. This reduces the counterparty risks in such products and enhances transparency.
•Introduced margining of institutional trades. This would mean the risk taken by brokers who trade on behalf of institutional clients would be reduced as they would be required to take the entire margin money from the clients before executing their trade.
• Lifted ban on participatory notes (PN)—This made it easier for overseas investors to buy Indian equities. In 2007, during M. Damodaran’s tenure, FIIs were asked to stop issuing fresh PNs. In the third quarter of 2008 when the economy faced an acute liquidity crunch following the onset of global recession, Sebi had to lift the ban on PNs to bring in foreign money to support domestic markets. FIIs poured in record $29.3 billion in Indian equities in 2010.
• Introduced stringent disclosure norms for PNs to enhance transparency by ensuring that the ultimate beneficiary of the investments done through PNs is known and there is no illegal routing of money into Indian equity markets.
• Allowed physical settlement in equity derivatives to reduce investor risk.
Mutual Funds
• Scrapped entry load for investments in mutual funds. This was a landmark move. Between August 2009 and December 2010, it helped investors save at least Rs2,000 crore that they would have paid to the mutual fund distributors in commission. This sparked off a major debate, forced thousands of distributors to migrate to other industries and consequently resulted in negatives sales. This ensured a slow but steady growth of the MF industry.
• Imposed restrictions on exit load and mandated uniform exit load structure for all classes of investors.
•Allowed trading of mutual fund units on exchanges. This allowed MFs to bring in more stock market investors into the mutual fund industry and ensure that growth is not impacted in the long term.
•Ordered evaluation of liquid and liquid plus schemes on marked-to-market basis. This took away mark to market risks for investors and also ensured that mutual funds do not face liquidity risks in the event of redemption pressure.
• Banned certain nomenclatures of funds and tightened approval of new schemes to avoid duplication of schemes in the industry. Earlier, mutual funds were launching one scheme after another with similar asset allocation structure, which confused investors and only earned more commissions for agents.
Satyam
• Set up a special committee to investigate Satyam fraud and ordered for peer review of top-listed firms. This was to ensure that the listed companies follow strict corporate governance norms, auditors do not play hand-in-gloves with promoters of companies and there is no headroom to fudge accounts.
•Tweaked takeover rules to facilitate smooth takeover of Satyam by Tech Mahindra. Allowed open offer pricing to be more flexible.
•Recently proposed a change in the Companies Bill to disallow interested shareholders in related party transactions from participating in special resolutions taken for such transactions. This will ensure fair treatment of minority shareholders and restrain promoters of group companies from frequently conducting bulk stake sales within group companies.
• Continuous and quarterly disclosure of shares pledged by promoters of listed firms. This would indicate the financial health of firms, risks involved in investments in listed companies and enhance transparency. This indicates the liabilities of the companies.
•Disclosure of audited review reports on a more regular basis (half-yearly). This indicates the adherence to corporate governance norms on a continuous basis and indicates the financial health of the company.
Unit-linked Insurance Policies, or ULIPS
• Show-cause notice to life insurance companies asking them to take prior approval before launching or selling Ulips. This was another landmark move by Bhave and reinforced his investor-centric approach. Sebi argued that since the money invested in Ulips is allocated in equities they should be governed under Sebi’s Collective Investment Schemes regulations.
•Debates with Irda, stating that Ulips should be regulated by Sebi. This was one of the most high profile battles between India’s two major regulators. The government was forced to tweak the existing laws to keep Ulips under Irda.
Policy Moves—Exchanges, Takeover Committee
• Forms a takeover committee to review and recommend changes in the takeover code. The recommendations will increase the acquisition price for companies buying majority stakes or taking control over Indian firms. This will ensure that all categories of investors are treated at par and only serious companies are attracted to buy into Indian companies. The recommendations have been submitted to Sebi in July last year, but the government’s reservation about certain proposals has restrained Sebi from formally finalizing the new guidelines.
• Forms a special committee under the chairmanship of former RBI governor Bimal Jalan for studying the market infrastructure institutions such as exchanges, depositories, and clearing houses, their operations, risk-management and possible self-listing/ cross-listing procedures.
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First Published: Wed, Feb 16 2011. 11 45 PM IST
More Topics: Primary Market | IPO | FPOs | Capital | Asba |