Sebi under UK Sinha
Against a backdrop of heightened market volatility, India opts for continuity by extending U.K. Sinha’s term as Sebi chief by a year
Mumbai: In the months leading up to the end of U.K. Sinha’s five-year tenure as India’s capital markets regulator, the government pored through the resumes of dozens of candidates for his hot-seat job.
Finally, three people emerged as front-runners to succeed him—Ramesh Abhishek, chairman of the erstwhile commodity markets regulator Forward Markets Commission (FMC), State Bank of India chief Arundhati Bhattacharya and Thomas Mathew, a senior civil servant in the presidential palace.
The appointment eventually came down to the wire.
On 15 February, just a day before Sinha, 63, was due to retire, the finance ministry extended his term as chief of the Securities and Exchange Board of India (Sebi) by one more year, opting for continuity at a time when market volatility has become the new normal, globally.
“It is a wise decision taken by the government to maintain continuity at a time when the market is under turmoil due to the global factors. The only downside is that the announcement should have been made a long time back to avoid unnecessary speculation,” said J.N. Gupta, co-founder and managing director at proxy advisory firm SeS Governance.
Sinha, according to The Economic Times newspaper, had been packing his bags in anticipation of retiring and moving to New Delhi, where his family lives, from Mumbai when he was told to stay put. He was called for a meeting with the government’s six-member selection panel only 48 hours prior to his reappointment, the report said.
The extension means that Sinha, a 1976 batch Indian Administrative Service (IAS) officer of the Bihar cadre, will become the second longest serving chief of Sebi.
D.R. Mehta, who served as Sebi chairman from 1995 to 2002, held the job for seven years.
Sinha’s five years have already been marked by some important milestones—from landmark orders against companies such as the erstwhile Satyam Computer Services Ltd and DLF Ltd to a clampdown on collective investment schemes and a bruising battle with Sahara Group over money raised through the illegal sale of securities.
But an overarching theme of Sebi under Sinha so far has been a strengthening of financial market regulations. These include stronger rules to crack down on insider trading; changes to listing and delisting regulations; and an attempt to improve corporate governance at listed companies.
Insider trading rules
It was on 20 November 2014, after a gap of nearly 20 years, that Sebi announced an overhaul of the insider trading rules governing Indian capital markets.
The first thing that Sebi did was to widen the definition of an insider. Is an insider just a person who works at a company? Is that definition too narrow to curb the use of restricted information to make unlawful gains?
In answering those questions, Sebi decided that the definition must include more than just the people who work in a senior position at a certain company.
As such, the definition was expanded to include persons connected on the basis of being in any contractual, fiduciary or employment relationship that allows them access to unpublished price sensitive information (UPSI).
This meant that even directors or those in consulting roles would be covered. The definition of UPSI was also strengthened.
An insider can be a person who is in possession or has access to UPSI; his or her immediate relatives will be presumed to be “connected persons”, said Sebi. Under previous regulations, the definition of a connected person was largely based on his or her position in a firm.
Sebi, however, stopped short of including public servants, who may have access to information pertaining to a company or a sector, in the definition of an insider—a key recommendation of the committee that reviewed the rules.
Even so, the new insider trading rules act as a bigger deterrent to wrongdoing, said Arindam Ghosh, partner at law firm Khaitan and Co. “It is amply clear from the new insider trading regulations that Sebi’s intent is to put in place stringent provisions and follow it up by suitably enforcing them. Recent orders of Sebi and penalties imposed have confirmed this intention,” he said.
“Market participants would sure have to undergo changes to keep them on the right side of the law—this by itself is a positive consequence,” he said.
An example of how Sebi is widening the scope of insider trading investigations came through in a 4 February order against a firm called Palred Technologies Ltd. In that case, the regulator cited the fact that two individuals were connected on Facebook as one of the pieces of evidence to prove insider trading allegations.
“…listed companies, market intermediaries and professional firms exposed to sensitive information as part of their business (like accountancy firms, law firms and such others) have had to exercise additional care in re-modelling their own codes of conduct in terms of the new regulations, while following certain basic standards and governance principles,” Ghosh added, commenting on the impact that the widened insider trading rules are having.
Even before the clampdown on insider trading, Sebi had announced a review of corporate governance rules in April 2014. The rules covered a wide gamut—from related party transactions to the role and tenure of independent directors and the need to appoint female directors.
In particular, the April rules on related party transactions were a strong statement in favour of the rights of minority investors.
In its original rules, Sebi set a wide definition for transactions that will fall under the head of “related party transactions” and said “material related party transactions” will be those that account for 5% of the annual stand-alone turnover and 20% of the stand-alone net worth.
Under the listing agreement, all material related-party transactions have to be approved by a majority of minority shareholders in order to ensure that business decisions taken by promoters or majority shareholders are not detrimental to the interests of small shareholders.
Sebi, however, was eventually forced to dilute these norms to bring them in line with the new Companies Act, which had a narrower definition of related parties and a higher bar on what qualifies as a material related-party transaction.
Ghosh of Khaitan and Co. acknowledges that there has been some dilution of the rules, but adds that there are “reasonable protective measures” built in.
Also a part of the overhaul to corporate governance rules was an attempt to bring true autonomy to the role of independent directors on company boards.
Meant to act as a balancing force against a company’s management, the practice of having independent directors on the board had been diluted over the years. Even large reputed firms have had independent directors who served for decades on end, which, experts argued, makes them beholden to the management.
To break this trend, Sebi said an independent director can serve a maximum of 10 years (two tenures of five years) on the board of a firm. The rules came into effect on 1 April 2015.
According to a 3 December report by proxy advisory firm Institutional Investor Advisory Services India Ltd (IiAS), 139 companies in the S&P BSE 500 index have less than 50% independent directors. Further, 21% independent directors have had a tenure of more than 10 years, which impedes their ability to be neutral and unbiased, said the report.
“If all these vintage directors (tenure > 10 years) are considered non-independent, the non-compliant boards increase to 54%. Companies need to address this issue in order to improve investor perception about the quality and objectivity of the board processes,” said IiAS, adding that most Indian boards follow regulations in letter but not in spirit.
Ensuring the appointment of at least one female director was also part of the new corporate governance rules, which a number of firms initially struggled to comply with.
Strengthening the primary markets
The other rules which have been dusted off during Sinha’s tenure include the rules for primary issues where Sebi has been fast-tracking initial public offering (IPO) applications and also reduced the time taken for a listing after the close of an initial share sale to six working days from 12.
Sebi has also expanded the network of collection points for IPO applications and moved to a system where investors could use the application supported by blocked amount (ASBA) facility for making payments for IPOs.
ASBA, which was made compulsory from 1 January, is a system through which the applicant authorizes the blocking of his IPO application money in his account. The money remains in his bank account until the shares are allotted.
In addition to changes to rules, Sebi chief Sinha, through his many public statements, tried to drill home the point that the success of an IPO eventually depends on how well the issue is priced.
All this came against the backdrop of a revival in the primary markets. In 2015, 21 firms tapped the capital markets, raising a collective Rs.13,600 crore, according to data from Prime Database. This was the highest amount raised since 2010.
“There have been a number of positive changes with respect to the primary markets. Reducing the timeline of primary issues and compulsory ASBA are among them,” said Prithvi Haldea, chairman of Prime Database Group, which tracks primary markets.
Streamlining the rules
Haldea says the ASBA rules, which kicked in from January, will mean that investor funds don’t get stuck and will also resolve the issue of refund orders.
“In the past... we have seen the need for huge refunds following the closing of an IPO. That has been a big issue which now gets resolved,” said Haldea.
Haldea added that other provisions such as the building of an anchor book (in which select institutional investors participate) ahead of the opening of a primary issue, which helps validate the company and price for retail investors, have also helped the primary market structure.
Delisting rules, too, have been streamlined after years of debate.
Revising its norms in November 2014, Sebi said a firm wanting to delist has to ensure its promoter shareholding reaches at least 90% after acquiring shares from the public, or if at least 25% of public shareholders tender their shares. A few months later, Sebi relaxed some of these rules after merchant bankers said the rule requiring that 25% of public shareholders tender their shares was leading to practical difficulties.
Sebi’s initiative to promote listings of small and medium enterprises (SMEs) on a separate SME exchange platform is starting to pay off in a small way. According to the latest data, 107 companies are listed on the BSE SME Exchange and 17 companies on the NSE’s Emerge platform.
Sebi has also floated the idea of a start-up listing platform, although the initial reactions to that have been tepid as bankers fear Indian investors may not be able to value start-ups appropriately.
Expanding the net
Perhaps one of the most notable changes of the Sinha years has been an expansion of Sebi’s own powers and also its jurisdiction.
In August 2014, the Indian Parliament passed the Securities Laws (Amendment) Bill, 2014, giving Sebi more powers to crack down on frauds such as ponzi schemes and to protect investors.
The bill was brought against the backdrop of thousands of small investors being duped by fraudulent investment schemes such as a Rs.2,000-crore scam in West Bengal involving the Saradha Group, a deposit-taking firm, that came to light in 2013.
The amendments also brought multi-level marketing schemes with a corpus of Rs.100 crore or more, which are disguised as a collective investment scheme (CIS), under Sebi’s ambit.
In addition, Sebi was handed powers to search premises and seize documents relevant to any violation of capital markets laws. They will also allow Sebi to access call data records in insider trading investigations.
In February 2015, Sebi’s powers expanded further when the government announced that the commodity market regulator, the Forward Markets Commission (FMC), will be merged with Sebi.
With that merger now concluded, Sebi is working on streamlining regulators governing commodity exchanges.
“A good regulator must command respect, to ensure that the industry goes along with its vision, and it must command fear, so that it can ensure enforcement of its rules,” said Haldea.
“Sebi has made huge progress in both these respects,” he added.
The task ahead
Sinha has a fair number of challenges to tackle over the next year.
In the secondary market, with the increasing number of trades through high-frequency trading (HFT), a debate over creating a level playing field for small and large sophisticated investors is heating up.
Although a relaxation in co-location facility rules has helped, Sebi is still trying to find a way to ensure that one set of investors does not get discriminated when another set of investors trades through HFT. The matter has been taken up for discussion with other market regulators in developed nations, but a solution is yet to be worked out.
Co-location refers to the bourses allowing members to set up automated trading systems on their premises to reduce the time required for orders to flow between the exchange and the broker’s trading system.
Sebi has allowed listing of stock exchanges, but the main test of regulations will be when the bourses actually launch their IPOs.
Norms relating to the shareholding pattern, avoidance of anti-competitive practices due to cross-listing, eligibility criteria for shareholders and issues on conflict of interest will pose multiple challenges for Sebi.
In the mutual fund sector, an issue that has once again gained prominence is the commission charged by funds, after a finance ministry-appointed committee asked for the lowering of commissions charged across financial products.
Sinha will now be faced with the difficult task of implementing the recommendations of the committee and increasing mutual fund penetration.
“The two key priorities before Sebi would be firstly to continue to have welcoming policies towards global investors and, secondly, to keep a steady focus on the critical task of increasing retail and household participation in the capital market and have strong intermediation,” said Leo Puri, managing director of UTI Asset Management Co. Pvt. Ltd.
Jayshree P. Upadhyay contributed to this story.