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The hits and misses in 5 recent vital decisions by Sebi

The hits and misses in 5 recent vital decisions by Sebi

The hits and misses in 5 recent vital decisions by Sebi
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By Sandeep Parekh   | Deepika Goyal  Apr 24, 2018 1:55:17 PM IST (Updated)

Sebi has now accepted some of the proposals made by Kotak Committee.

Here are five vital decisions taken by the board of capital market regulator Sebi in March and what they mean:

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  1. Acceptance of Kotak Committee’s proposals
  2. As a reaction to the reducing governance standards in listed companies and the heated boardroom battles, Sebi had formed a committee to review the corporate governance norms in India. Sebi has now accepted some of the proposals made by Kotak Committee.
    With regards to the directors: Separation of position of ‘non-executive chairperson’ from MD/CEO for the largest companies; additional disqualifications for independent directors such as members of the promoter group of a company cannot be an independent director in the same company; minimum number of directors on the board doubled to six; at least one ‘woman-independent director’ on the board of the top 500 listed companies.
    With regards to the disclosure norms: Utilisation of proceeds generated from preferential issue and qualified institutional placements to be disclosed; RPTs to be disclosed on a half-yearly basis instead of yearly.
    With regards to various committees of board: Nomination and remuneration committee to appoint and decide the remuneration of the ‘senior management’, including compliance officer and CFO; risk management committee to look into the cyber security issues of the company.
    Although implementation of some of these recommendations may increase the level of transparency and reduce the possible source of conflicts, it will also increase the time and cost spent on compliance by the companies. Prescribing principles and giving flexibility in their implementation to the company is better than stipulating a rule-based approach, which encourages a tick box approach to compliance. Many of the provisions will also increase false comfort and moral hazard as investors will assume that their interests are being taken care of by a guardian independent non-executive chairman, even though that person’s appointment, pay and exit are in fact determined by the controlling shareholder.
    1. Relaxing of provisions regarding Angel Funds
    2. Sebi has simplified certain provisions of the Sebi (Alternative Investment Funds) Regulations, 2012 with respect to ‘Angel Funds’ to facilitate the growth of start-ups and bolster innovation, such as: reduction of minimum corpus from Rs 10 crore to Rs 5 crore; doubling maximum investment limits to Rs 10 crore; increase in the maximum period of acceptance of funds to five years. The relaxation in the regulations may accelerate the growth of angel funds and provide better accessibility of funds to startups. It will also provide a larger time-frame for the funds to realise the returns on their investments.
      1. Revised framework for non-compliance of the Listing Regulations
      2. To ensure effective compliance with law, Sebi has permitted stock exchanges to block the shareholding of promoter and promoter groups of a company which acts in violation of the Listing Regulations. However, such restriction should not be applicable in circumstances where insolvency professionals have been appointed to manage the affairs of a company and the promoter group has lost control over the operation and management of such entities.
        1. Strengthening the Algorithmic Trading Framework
        2. Sharing of co-location services: Sebi has now mandated stock exchanges to permit stock brokers to share the co-location services provided by the stock exchanges. Currently, stock brokers are required to license one exclusive rack for accessing co-location services even if they have to carry out small trades. Conversely, the brokers can now share these racks with other brokers resulting in reduction of costs, which would encourage small brokers to do algorithmic trading.
          Tightening of Order to Trade Ratio: If an algo-trader carries out trades largely at a price beyond ±1% of last traded price of the security, such orders are penalised by the exchanges. The current limit would now reduce to 0.75%. This is a welcome measure, as it would ensure that algo-trades are carried out at a price close to the last traded price to ensure market stability and accurate price discovery.
          1. Strengthening the equity derivatives market and physical delivery
          2. To further strengthen the equity derivatives market, Sebi has resolved to introduce physical settlement of all stock derivatives, in a phased manner. Stock derivatives that were hitherto settled in cash i.e. by squaring off the exposure on the expiry of the contract, will gradually be available for physical settlement by delivery. Further, changes have been made to the existing entry criteria for introduction of stocks into the derivative segment in line with increasing market capitalisation. Towards this, Sebi has modified the market-wide position limit from three hundred to five hundred crore rupees and the median quarter-sigma order size to Rs 25 lakh from Rs 10 lakh. Additionally, a minimum deliverable value of Rs 10 crore in the cash market of a particular stock has also been introduced. These changes are designed to remove unnecessary, and at times manipulative, speculation in the derivatives segment for illiquid or low volume stocks.
            Sandeep Parekh, is the managing partner of Finsec Law Advisors and Deepika Goyal is an associate at Finsec Law. Their views are personal.
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