Mumbai: A Securites and Exchange Board of India (Sebi) panel has made sweeping recommendations to strengthen loss-bearing capabilities and enhance transparency of market intermediaries such as asset management companies (AMCs), merchant banks and brokers.

It has also suggested that corporate brokers who trade on the National Stock Exchange (NSE) and the Bombay Stock Exchange should have a net worth of Rs1 2012.

These recommendations were put on the Sebi website on Thursday. The Sebi board will study the recommendations before making any changes, but no time frame has been indicated.

The committee has asked credit rating agencies to state ownership patterns, split the net worth requirement for merchant banks into so-called core capital and risk capital.

While core capital will be used only for building infrastructure, risk capital will determine the exposure limit.

“The Sebi rules regarding capital requirements had not been revisited since they were formed in 1992. The endeavour of the committee was to make the law more contemporary and modern. In many cases, this would close the gap between the law and actual practice," said Deena Mehta, managing director of Asit C Mehta Investment Intermediaries Ltd. She headed a sub-group of the committee that looked into issues related to brokers. “For example, capital requirement for brokers was Rs30 lakh according to Sebi. But NSE had a higher net worth requirement at Rs1 crore."

The recommendations have come at a time when Sebi and the Insurance Regulatory and Development Authority are battling over unit-linked insurance plans and many insurance players are criticizing mutual funds for having very low net worth requirements, while their businesses run into trillions of rupees.

The move is also significant against the backdrop of the global financial crisis that rocked the capital market in 2008.

Also See Sebi Recommendations (PDF)

An overhaul in mutual fund norms was critical, following the liquidity squeeze in the last quarter of 2008, which resulted in huge redemption pressure and challenges due to change in ownership patterns in the AMCs, said a sub-group of the committee.

An increase in net worth will help the mutual fund bear initial lossess better while giving it access to liquidity from banks.

Existing mutual fund companies can gradually increase the net worth to Rs20 crore at the end of the year and move to Rs50 crore in three years, the panel said while recommending an exemption to those funds which deal only in exchange-traded funds.

The mutual fund norms were prescribed 15 years ago, said A. Balasubramanian, CEO, Birla Sun Life Asset Management Ltd, who was part of the group that studied asset management companies. “Even adjusting for inflation, logically speaking it should be a lot more."

“The MF business is trusteeship and the increase in net worth requirement does not amount to an entry barrier. At the end of the day, only serious players who want to be in this business will enter this space," he added.

The panel also suggested that only regulated entities can be considered as sponsors for AMCs.

It also proposed that the present definition of a sponsor as a 40% shareholder, coupled with the requirement that a change in the controlling stake of AMC shareholding requires a notice to all unit holders allowing them to sell without exit load, creates confusion. It suggested that control could be defined only for the purpose of classifying a stake of less than 50% going to more than 50%.

It has also recommended penalties on mutual funds for inadequate disclosure.

According to the panel, intermediaries should be classified on the basis of risk business, which should be linked to capital adequacy.

It has proposed to increase the stock broker’s net worth to Rs1 crore for companies and Rs75 lakh for individuals by the end of this year, and Rs3 crore for both categories by 2012.

The net worth requirements for regional stock exchange brokers could, however, be relaxed.

At present, a stock broker is required to maintain a base minimum capital of Rs5 lakh (Rs30 lakh for corporate brokers) for the national exchanges and less for regional exchanges.

For registrars, the recommendation is to increase the net worth to Rs1 crore from Rs6 lakh and for transfer agents, from Rs3 lakh to Rs50 lakh.

Vallabh Bhansali, managing director, Enam Securities Pvt Ltd, and head of one sub-group, said it sought to create a uniform definition for capital and look into issues relating to multiple units of the same group operating different businesses.

“We also attempted to practically define the infrastructure requirements for the intermediaries," Bhansali said. “We have also looked into registration criteria to make it long term or do away with it wherever possible, without getting into whether it will benefit one intermediary or other."

Mehta of Asit C Mehta said that there were different definitions for capital at different places like cash segment, portfolio management services and broking. “We have tried to bring some uniformity across these different categories. For brokers, earlier the focus was on liquid net worth; now the attempt has been to base it on the balance sheet capital."

The report not only addresses the capital but has attempted to take a comprehensive account of capital, eligibility of people and infrastructure of these intermediaries, she said.