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Business News/ Markets / Stock Markets/  SEBI board meet today: Regulating total expense ratio for MFs, other policy decisions on the agenda
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SEBI board meet today: Regulating total expense ratio for MFs, other policy decisions on the agenda

The Securities and Exchange Board of India (SEBI) board meeting on June 28 may discuss controversial policies such as regulating total expense ratio for mutual fund houses and increasing disclosures for foreign portfolio investors, among others, highlighted moneycontrol in its report.

The SEBI board is scheduled to meet on June 28. (HT_PRINT)Premium
The SEBI board is scheduled to meet on June 28. (HT_PRINT)

The Securities and Exchange Board of India (Sebi) board meeting could discuss a number of controversial policies, said moneycontrol in its report. The SEBI board is scheduled to meet on June 28.

According to the news report, there are some that seek to regulate the total expense ratio (TER) charged by mutual fund houses, others that seek additional disclosures from foreign portfolio investors to verify that businesses are not in violation of the MPS requirement, still others that seek to halt "suspicious trading activities" by placing the burden of proof on the party under investigation, and still others that seek to alter unpublished price  sensitive information (UPSI) to curb insider trading.

This is in accordance with the recently published consultation documents and the deadline for public submission of suggestions. According to moneycontrol's report, the Board may be discussing these regulations at this meeting if the deadline for submissions is earlier than June 28.

Regulations that aim to expand the corporate bond market, cover mutual fund houses, alternative investment fund managers, real estate investment trusts, and infrastructure investment trusts are a few of them. They can also significantly raise compliance obligations for companies.

Hotly debated

The attempt to reduce the TER charged by mutual fund houses or asset management firms (AMCs) has reportedly received most focus thus far, according to a moneycontrol report.

Recently, the deadline for comments on this draft was extended till June 8, 2023.

The market regulator has suggested that the TER charged for all mutual fund schemes should be consistent. Currently, fund houses are permitted to charge four additional fees in addition to the base TER: brokerage and transaction fees (up to 0.12 percent of the value of a trade in the cash market and 0.05 percent of the value in the derivatives market); additional costs not to exceed 0.05 percent of daily net assets for schemes that offer exit loads; and goods and services tax on investment and advisory fee.

With the proposed modification, the regulator wants the TER to be regulated at the AMC level and to take into account any costs that fall within the predetermined cap.

FPIs under scanner

As per the moneycontrol report, another consultation paper that sparked a lot of discussion was the one that demanded increased disclosures from FPIs, particularly from those with concentrated ownership in single-group firms.

According to moneycontrol's report, the regulator has suggested that high-risk FPIs who hold more than 50% of their equity Asset Under Management in a single corporate group or who hold more than 25,000 crore in total in the Indian equity market be required to abide by the requirements for additional disclosures up to the level of all natural persons and/or Public Retail Funds or large public listed entities.

As per the report, this was done to avoid violating the minimum public sector participation requirements and to protect against opportunistic takeovers of Indian enterprises through the FPI method.

The regulator aims to close any loopholes in the FII rules and the Prevention of Money Laundering Act. If an entity is not considered to be a beneficial owner in either case according to a materiality requirement (10% ownership of capital or rights for corporations and 15% ownership of the same for partnerships), then the information about the entity is not required to be revealed. Since each investor entity in the FPI is "generally found to be below the threshold prescribed under PML Rules," many of the beneficial owners of this economic interest are not reported, according to the Sebi research.

However, there is a chance that a person may be exercising economic control over the FPI through a number of investment firms, each of which would meet the criteria for determining who was in fact the FPI's beneficial owner. The consultation paper corrects this by stating that high-risk FPIs would be obliged to disclose the ownership and control rights to the level of natural people, public retail funds, or significant listed corporations, highlighted moneycontrol in its report.

These disclosures have to be made without applying any materiality threshold and despite “any secrecy laws that may be applicable in other jurisdictions of their domicile".

Guilty until innocent

The Sebi (Prohibition of Unexplained Suspicious Trading Activities in the Securities Market) Regulations, 2023 are the latest regulation that directly challenges the rule of law that one is presumed innocent unless proven guilty. According to this rule, guilt will be assumed unless the accused can demonstrate their innocence.

The market regulator recognised that there were numerous, hard to establish scams occurring in the securities market, which led to the proposal. Insider trading and front running were flagged by monitoring systems, leaving signs of the crime, but cutting-edge technology eliminated the evidence.

“The solution that SEBI has suggested is fairly simple," as Jayant Thakur, a chartered accountant, explained in a column for Moneycontrol.

“Reverse the onus of proof. Presume such persons as guilty and let them prove their innocence. In other words, if a serious transactions cross the prescribed bar of suspicion, that person needs to explain and justify them as not being insider trading, front running, etc."

As Thakur noted, it carries the risk of burdening minor participants like mules and name lenders, whose trading accounts can be utilised for a variety of illegal activities like frontrunning. Despite the fact that they may have had a minor role, the market regulator frequently holds them just as accountable as the larger ring leaders. They might not have the financial means to mount the same legal case as the actual offenders, and as a result, suffer disproportionately harsh punishment.

Catch 22 situation

As per the news report, compliance officers would be monitoring the regulation modification relating to UPSI that was discussed at the conference. On May 18, the market regulator recommended changing the Prohibition of Insider Trading Regulations' definition of UPSI to include disclosures mandated by Regulation 30 of the Listing Obligations and Disclosure Requirements (LODR).

As a result, it would be up to the compliance officers to choose the events that constitute "material events" and thereby set off UPSI events. The officers are concerned that they might be in a Catch-22 situation: either call "UPSI" too frequently and the company's management won't be pleased with the interruption in trading, or call "UPSI" enough and earn the regulator's wrath.

Mixed fare

A mixed day may be in store for REIT and InvIT management. While the larger REIT players may be hoping for some positive developments regarding fractional ownership platforms (FOPs), they may be concerned about what they term a "killer provision" since they believe that regulatory scrutiny will screen out the bad actors, according to a report by moneycontrol.

Fractional ownership platforms (FOPs) may be included in a framework for micro, small, and medium REITs or InvITs, according to the market regulator. However, the requirement that the sponsors of such REITs hold a minimum of 15% of MSM REITs' units for three years after the date of listing was the concerning addition to this framework. The FOPs expressed concern that this obligation on the sponsors might make their company unprofitable even if they generally supported the proposed law.

Other than these, there may be good news for retail investors. A decision regarding a speedier, online investor-grievance redressal method is likely to be made during the board meeting. Money Control stated in the report that this might make it simpler for investors to not only file complaints but also see them through to completion, including a review of actions made by first-level authorities or trade organisations and an online dispute resolution tool established by Sebi.

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Published: 28 Jun 2023, 10:52 AM IST
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