Mumbai: India’s capital market regulator won’t extend the deadline for listed firms to meet the minimum public shareholding limit of 25%, Securities and Exchange Board of India (Sebi) chairman U.K. Sinha said in an interview on Tuesday. The regulator is working on penalties for companies that don’t meet the norm, Sinha said.

Some 150 non-state listed firms are yet to comply with the minimum public shareholding norm—they have until 4 June to do so. State-owned companies have until 31 August to ensure at least 10% of their equity is held by the public. The government has told Sebi that all public sector units will meet the deadline.

The regulator, which celebrates its 25th year on Friday, is also seeking sweeping powers to pass so-called cease and desist orders on offenders. Such orders seek to stop individuals or companies from pursuing a particular activity and not resume it. Enhanced powers will allow Sebi to recover penalties—it is owed at least 150 crore.

“We have asked for powers, like other regulators such as Competition Commission (of India) has. We have asked for powers to recover our dues," Sinha said

Sebi has created additional avenues of promoter stake dilution to help companies meet the public shareholding norm, apart from follow-on public offers (FPOs). These are the offer for sale (OFS), and institutional placement programme (IPP) routes. Companies also use the bonus and rights issue routes.

The regulator will try to ensure that any action taken won’t hurt minority shareholders and companies that have made an effort to comply will get some leeway. As of Tuesday, 13 state-owned listed firms had less than 10% public holding. Since being established in February 2012, there have been 42 OFS issues worth 42,117.08 crore and eight IPPs worth at least 3,700 crore. Edited excerpts::

Our understanding is you will not budge from the deadline given to listed firms for meeting minimum public shareholding norms. What kind of action will you take against the defaulters?

For example, the avenues through which they could reduce their own holding and increase public holding were limited. We have been proactive in improving that. So, we brought in OFS, rights issue, bonus issue, IPP. Now, even after giving these facilities, if a corporate has decided not to follow rules, obviously the inference is that it is prepared to face the consequences.

What are the consequences?

Any violation of the listing agreement, ICDR (issue of capital and disclosure requirements) or Sebi Act can have many implications. Starting from action against the company, against the promoters— monetary, non-monetary, cease and desist—a lot of things can happen.

In order to give you a clearer picture, I would like to add that Sebi will be following two main parameters. First, we will be conscious of the fact that the small and minority shareholders of the company should not suffer. Because it is not their fault. The fault lies with the management or the promoters. The second, we will give due weightage and consideration for the efforts made by a company.

For instance, say there are two companies and both were at 5% public shareholding in the beginning. If one company has come to 20% and the other has remained at 5%, I think justice demands the first one should be given a different treatment. So, these will be the two parameters on which we will be deciding our action.

Does this include the government-owned companies too?

I am very happy to tell you that last year, before I embarked upon this campaign to force companies to have minimum public shareholding, I talked to the government and I got assurance from the government that they will be fulfilling the criteria well in time. Last month, I received another confirmation from the government that all public sector undertakings will follow the guidelines well in time. I have got that assurance.

The government has accepted your demand. You have said all along that there should be a regulator for all the deposit-taking companies in any form. You never insisted that Sebi should be the regulator. But we believe the government wants Sebi to be the regulator.

I am not in a position to tell or speculate what is the thinking of the government. Sebi has made a representation to the government, highlighting how multiplicity of regulators and lack of accountability among various agencies, not only in the central government but even the state government, complicate things. For example, in the CIS (collective investment scheme) section of Sebi Act, there are exemptions like cooperatives, chit funds, nidhis... These three are regulated by state governments. Then there are companies raising deposits regulated by ministry of corporate affairs. The non-banking finance companies are under the Reserve Bank of India.

So, within the CIS section of the Sebi Act, there are several exceptions. That creates a situation where you do not know which agency is looking at what... When we embark on a CIS enquiry, we meet with a lot of resistance… They say, “Look I am not a CIS, I am a chit fund, I am a cooperative" and so on. These make things very difficult.

It would be a good attempt that above a certain threshold one agency is given the entire responsibility. I have no information what is the government’s thinking... What I can inform you is that we have been called for dialogues, about the amendment of Sebi Act and I am sure they have called other agencies also. Many of these things have been discussed—about the need to have one regulator— and Sebi’s position has also been that there should be one regulator. But we have no idea about the final outcome.

We hear you need more teeth. If finance minister plays Santa Claus this Friday, what will you ask for?

First, I would like to point out what all we are concentrating on right now. One is improvement in trading infrastructure. The first batch of trading infrastructure improvement happened in the 1990s. But now we have a new set of challenges and it comes from the use of technology. How to deal with algorithmic trading, high-frequency trading? How to ensure that our risk management system works? How to ensure that the clearing corporations are empowered? We are concentrating on the trading system.

The second area we are concentrating on right now is how to attract more and more retail investors. We have a multi-pronged approach to it. We are concentrating on redressal of investor grievances, opening more offices and reaching out to people… We have also come out with KYC registration authority regulations. All these are measures to attract the retail investors.

The last area for us to concentrate on is corporate governance.

If you look at all these, then the question comes: How do we improve the trust of the ordinary investor in Sebi and in market regulation? Keeping this in mind, we have made some suggestions to the government for strengthening the Sebi Act.

What are they?

There are three important suggestions. One is that we do not have the powers to recover our penalties, our dues. We pass an order, the offender has the choice not to honour it. Our system of making recovery is very onerous. Cases are pending for last five years or so. I think we have about 150 crore worth of penalties imposed that people have refused to pay. We cannot play an effective regulator if that goes on.

So we have asked for powers, like other regulators such as Competition Commission has. We have asked for powers to recover our dues.

We want our right to demand, produce documents, enter into premises, search and seizures, freezing of bank accounts. Obviously, you will not be doing it in all the cases. But there are certain situations where we need them.

Finally, we have asked for power to get access to call data records. If we have a case of insider trading or a serious case of market manipulation for example, we need to access call data.

You are seen as a regulator which only regulates but does not develop the market.

I would seriously contest your assumption that we have not focused on development. In fact, we have been much more focused on development than many other agencies in the country. For instance, there was no regulation for hedge funds in the country. Last year, we came out with norms to cover these type of funds. We are quite conscious about market needs and development. In the budget, the government proposed rules for angel investors. We are soon going to have rules for angel investors now. Because of our rules on mutual funds, people in semi-urban pockets have started investing...

Recently your proposal to allow put and call options in share purchase agreements was cleared by the law ministry. How will you deal with the consequences of its implementation?

In some cases, we have passed orders against the corporates when such options were included in their agreements. We had to do this because we had to go by the existing laws, which made these schemes illegal. But then we also realized that going by the examples of any other parts of the world, there are certain schemes of arrangement where the investors who are coming on a long-term basis have to have certain situations in mind, certain protection so that things go in a certain way.

Going by the need of the economy, corporate world and investment community, not only from foreign but also from private equity and venture funds, it is necessary that some of these rights are given. For example, the rights of pre-emption such as drag-along, tag-along rights and right-of-first-refusal were legal earlier but not right now. So, both in terms of pre-emption rights and call and put options we have recommended that they should be allowed for development of the market. I understand from media reports that the government has accepted our recommendation.

Sebi has been criticized for its delay in taking enforcement actions and passing consent orders. Have you thought of ways to speed up such processes?

The best way to deal with the situation is to compare the statistics of consent in any recent year to that in the past. You will find that there has been an improvement in the manner in which investigation is completed or adjudication or other quasi-judicial orders are passed.

As far as consent mechanism is concerned, there were so much of uncertainty and subjectivity issues earlier and we saw that even serious offences were getting consented. And about one-third of the cases filed for consent were rejected. But no one knew which cases were rejected for consent. There was no pattern, no guideline about it.

We have given a discipline to ourselves now and decided that we will not allow cases like insider trading to be consented. We have also given a formula for setting a uniform amount for similar type of offences. I think Sebi should be appreciated for giving itself a discipline and bringing transparency in consent mechanism.

What kind of pressure does Sebi experience from big companies and the government?

It’s a question of how we conduct ourselves. The scheme of arrangement in the country is that Sebi is an independent, autonomous regulator. This is through the powers given by Parliament. The question is how as a person working in Sebi you interpret that – are you subjecting yourself to interference or are you able to stand up to it? It’s more on individuals rather than on the institution. My feeling is that successive chairmen and other members have been able to stand up to it.

Financial independence is the basis of all other independence parameters, which we have. If you look at any of Sebi’s actions, you will see basically there are three areas where we work—policy, regulation and enforcement. My interpretation is that policy is an area where the government will continue to have its say and that is how the Sebi Act has been enacted.

But once a policy view is taken, drafting the regulation is Sebi’s work. We are an expert body, no one can interfere in that.

And finally, implementation of those regulations is entirely our domain. For example, the IPO process, the consent process—we all handle independently. We have rejected more than 150 cases filed for consent. And, some of the cases which we have rejected for consent are related to some of the largest corporates in this country. We have passed orders against them. Despite this if Sebi is questioned if it is independent or not, it is unfair.

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