Exclusive: SEBI board to meet on Monday, may discuss fast-tracking of rights issues, MF rules, Hindenburg allegations

The first meeting of capital market regulator Securities and Exchange Board of India (SEBI) following the release of a report by US-based short-seller Hindenburg Research is scheduled for Monday, September 30. The board is expected to discuss and approve various policy measures and issues at the meeting, and may also address serious allegations leveled by Hindenburg against the SEBI chairperson, as well as the protests by the regulator's employees against top management.

On the policy front, the issue of fast-track rights issues can be taken by the board, as it will make fundraising easier for companies. It will also cut down the role of merchant bankers and reduce the whole post-board meeting timeline to around 20 days. This will be a kind of combination of rights issues and preferential issues. The idea is to make rights issues as the preferred route for fundraising by companies. Data shows that companies prefer the QIP and preferential issue routes to the rights issue because of the long timeline and other complexities.

“It is observed that many times, promoters choose the preferential issue route to benefit the selected people instead of existing shareholders, so the whole issue is being simplified," a regulatory source said. 

Another big policy measure for board discussion will be the ease of doing business and the harmonisation of ICDR and LODR norms. While ICDR rules apply to the issuance of capital and disclosure requirements, LODR norms comprise listing obligations and disclosure requirements regulations. This includes a review of regulations linked to related party transactions, promoter classification, and a single filing system for IPOs across stock exchanges, giving a three-month timeline for filling up board vacancies and strengthening corporate governance-related issues on the ICDR part. They combine the pre-issue advertisements and price band advertisements, enabling issuers with outstanding stock appreciation rights (SARs) to file draft offer documents and permitting issuers to obtain the certificate for the utilisation of loans from peer-reviewed chartered accountants, the disclosure of pre-IPO transactions after filing of DRHP, the clarification on promoter lock-in periods where issue proceeds are used for repayment of loans and utilised for capex.

#ZbizExclusive | सेबी बोर्ड की सोमवार को होगी बैठक। किन किन मुद्दों पर बोर्ड में हो सकती है चर्चा? एनालिस्ट, ब्रोकर्स और मर्चेंट बैंकर्स और MF निवेशकों के लिए क्या है खास? हिंडनबर्ग का भी मुद्दा हो सकता है फोकस में। पूरी खबर बता रहे हैं ब्रजेश कुमार। #Sebichief #SEBI… pic.twitter.com/NCuui4Ra7L

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The SEBI board is also likely to review the merchant bankers' regulations that define which activities they can take and which they cannot. Additionally, the net worth criterion for merchant bankers is likely to be raised from Rs 5 crore to Rs 50 crore. It was last revised in 1995. The regulator wants only serious players in the market. SEBI has observed that at times, merchant bankers are engaged in private placement activities of unlisted companies, advisory services for projects, and syndication of rupee term loans, which are outside the domain of SEBI. The regulator believes such activities may pose significant regulatory and systemic risks as such activities are outside its jurisdiction.

The long pending proposal of the performance validation agency may also go to the board for consideration. SEBI had floated a consultation paper on the same. An entity under NSE will be the first such agency. SEBI may initially allow it for investment advisors, research analysts, and algo makers. This will be voluntary for the market participants in order to get their claims authenticated.

Expanding the summary proceedings for intermediaries is another issue that the board may discuss and approve. There are certain cases of violations wherein it has been observed that the violations are obvious in nature or are either accepted by the intermediary or need minimal documents or evidence to corroborate the facts. So if such violations are covered under summary proceedings, it will enhance the board's ability to act swiftly in protecting the interest of investors and in maintaining the integrity, transparency, and efficiency of the securities market. It may address issues related to the expulsion of members from the exchange, non-payment of registration fees, and wrong claims of return and performance.

Another long-pending and much-discussed issue regarding light-touch regulations for passive funds is also likely to be brought before the board for discussion.

Considering the lesser risk inherent in managing passively managed MF schemes, the proposed MF Lite Regulations intend to reduce the compliance requirement, foster innovation, encourage competition, and promote the ease of entry for the MFs interested in launching only passive schemes. It is expected to promote ease of entry, encourage new players, reduce compliance requirements, increase penetration, facilitate investment diversification, increase market liquidity, and foster innovation. The proposal is to allow existing as well as new fund houses to enter the segment.

Another proposal about the New Asset Class is also likely to be taken up by the board. The new class will fill the gap between mutual funds (MFs) and portfolio management services (PMS). A minimum investment of Rs 10 lakh has been proposed for this New Asset Class, which will be riskier than mutual funds and will not be permitted to be advertised as a mutual fund product, but will be suitable for higher-risk taking investors earlier invested in the unregulated sphere. Such investors may now get a well-regulated entity. There was a demand for such kind of asset class as MFs allow investment from Rs 100 onwards, but PMSes and AIFs require minimum investments to the tune of Rs 50 lakh and Rs 1 cr respectively.

To deal with the persistent issue of insider trading, the SEBI board may consider expanding the scope of ‘connected person’. SEBI has observed that certain categories of persons, who are not covered in the scope of the definition of ‘connected  persons‘ under existing regulations, may also be in a position to have access to UPSI from ‘ connected persons’ to a company, by the virtue of their close relationship with such ‘connected persons’. Such deemed connected persons, owing to their proximity and close relationship with the connected persons, are considered to be in a position where they can potentially indulge in insider trading. With the proposed regulation, it is intended that the relatives of a 'connected person' are also recognised as connected persons.  The meaning of 'immediate relatives' is also being widened. The credit for this proposal goes to the insider trading case of a Delhi-based corporate group.

The board is also expected to discuss and approve regulations related to investment advisors (IA) and research analysts (RA), a move set to remove the condition of passing the base certification every three years and to relax the existing minimum qualification requirements for registration as IA or RA from a post-graduation to a graduate degree. The board may also dispense with the experience requirements for registration as IA and RA under the condition that they must possess relevant knowledge and skills desired to provide their services. The net worth criteria may also be relaxed for individuals. There may not be the requirement of any net worth for IAs and RA but for non-individuals, a condition of fixed deposit based on the number of clients may be imposed. Also, registration as both an investment adviser and a research analyst may be allowed and the fee structure may also be reviewed.

“There are more than two dozen items in the agenda for consideration of of board but it depends on how much time will be left for policy issues because the Hindenburg issue is likely to be discussed widely," said another source.

"The board will discuss the allegations and if sufficient disclosures have been made by the SEBI Chairperson, it may also discuss the issue of the employees' unrest. It was an unprecedented incident where almost half of the staff were out in protest against the top management," the source added. 

A few other issues, related to FPIs and debt matters, may also come up to the board for discussion.