SEBI has taken the following significant decisions in its board meeting held on 28 March 2018:

Decision on recommendations of the Kotak Committee

As a reaction to the reducing governance standards in listed companies and the heated board room battles, SEBI had formed a committee to re-look into the corporate governance norms in India under the Chairmanship of Mr. Uday Kotak. The Kotak Committee had submitted its report on October 5, 2017. SEBI has now accepted some of the proposals of the Kotak Committee.

With regard to the directors:

·           Reduction in maximum number of directorships for a director of a public company from 10 to 8;

·           Additional disqualifications for independent directors, such as, a member of the promoter group of a company cannot be an independent director in the same company;

·           Minimum number of directors on the board increased from 3 to 6;

·           At least one ‘woman-independent director’ on the board of top-500 listed companies;

·           Quorum of board meetings to be increased from 2 to 3; and,

·           Separation of position of ‘non-executive chairperson’ from MD/CEO for the largest companies.

With regard to the disclosure norms:

·           Disclosure in the annual report regarding expertise of directors;

·           Utilization of proceeds generated from preferential issue and qualified institutional placements to be disclosed;

·           Reasons of resignation of auditors.

With regard to various committees of the board:

·           Audit Committee to also review the utilization of loans given or investments made into a subsidiary company;

·           Nomination and Remuneration Committee to appoint and decide the remuneration of the ‘senior management’, including compliance officer and chief financial officer;

·           Risk Management Committee to look into the cyber security issues of the company.

With regard to Related Parties:

·           Determination of ‘related party’ for restriction on voting rights should be on transaction basis;

·           Related party transactions to be disclosed on a half-yearly basis, instead of yearly.

Although implementation of some of these recommendations may increase the level of transparency and reduce the possible sources of conflicts, it will also increase the time spent and cost incurred on compliance by the companies. We are of the view that 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 an independent non-executive chairman, even though that person’s appointment, pay and exit are in fact determined by the controlling shareholder.

Reduction in the additional expenses charged by AMCs

In 2012, the practice of retaining 1% of the redemption value by the Asset Management Companies (AMCs) out of the exit load charged from investors in mutual fund schemes was discontinued and the AMCs were directed to credit the entire exit load to the scheme. In lieu of the lost revenue, SEBI allowed AMCs to charge an additional expense of up to 20 basis points. In light of exit load in fact being much less, the Mutual Fund Advisory Committee (MFAC) of SEBI placed a proposal to reduce the permitted additional expense from 20 basis points to 5 basis points, which is now accepted by SEBI.

Disclosure: Mr. Sandeep Parekh of Finsec is a member of the MFAC.

Relaxing of provisions regarding Angel Funds

Based on the recommendations received from a working group comprised of angel networks, consultants and start-ups, SEBI Board 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.

The maximum investment amount in any venture capital undertaking by an angel fund has been increased from five to ten crore rupees, and the minimum corpus required of an angel fund has been reduced from ten to five crore rupees. The maximum period of accepting funds by the angel fund from angel investors has been increased to five years from the existing three years period. To simplify the procedure of launching schemes by the angel fund, the requirement of filing the scheme memorandum ten days prior to the launch of a scheme has been replaced with the requirement to file a term sheet containing material information within ten days of launching the scheme. Further, it has been clarified that the provisions of the Companies Act, 2013 shall apply to an angel fund formed as a company.

The relaxation in the regulations may accelerate the growth of angel funds and provide better accessibility of funds to start-ups. The increase in the maximum period will benefit the funds by providing a larger time-frame for them to realize the returns on their investments.

Revised Framework for non-compliance of the Listing Regulations

SEBI has decided to revise the enforcement framework for improving the compliance of the SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015 (Listing Regulations) by listed entities. One of the key highlights of the revised framework is to empower stock exchanges to block the shareholding of promoter and promoter groups (P&PGs) in non-compliant entities as well as their shareholding in other securities. This decision seems to be in line with the existing enforcement framework, wherein the stock exchanges are empowered to act against the P&PGs of non-compliant entities to ensure effective compliance with the requirements of the Listing Regulations.

However, this criterion should not be applied in all cases. Every member of the P&PG should not be penalized and exemptions should be provided to those who have lost effective control over the affairs of non-compliant entities. In circumstances where insolvency professionals and official liquidators are appointed to manage the affairs of non-compliant entities, the P&PGs may lose control over the operation and management of such entities. They are not in a position to direct/compel the management to comply with the requirements of the Listing Regulations. In such situations, it is infructuous to penalize the members of the P&PG as they cannot ensure that non-compliant entities will comply with the requirements of the Listing Regulations. In addition, the obligation on promoters blurs the obligation of the board of directors who are in fact the legally responsible group for any defaults. This distinction will cause some discomfort where the promoter shareholding is limited, say only 15% and thus their obligation vis-à-vis the board ought to be more limited.

Strengthening the Algorithmic Trading Framework

SEBI has prescribed the following measures in relation to algorithmic trading mechanism in India:

Sharing of co-location services: SEBI has now mandated stock exchanges to permit stock brokers to share the co-location services provided by the 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. In terms of the new mandate, the brokers can now share these racks with other brokers resulting in lesser costs, which would encourage small brokers to do algorithmic trading.

Tick-by-Tick (TBT) Data for free: SEBI has mandated exchanges to provide their TBT data feed for free to the brokers. Currently, exchanges charge a nominal fee for this data and making this zero would reduce entry barriers for small brokers who intend 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 penalized 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.

Unique identifier for each algorithm: SEBI has proposed that each of the trades carried out by way of algo-trading should be tagged with the algorithm generating the trade. This would provide a trail of each trade and act as an efficient risk mechanism tool.

Latency disclosures: SEBI has increased standards of disclosure in terms of the latency, both within the exchange trading infrastructure and also between a reference rack in the co-located facility and the core router of the exchange.

Mock trading: SEBI has recommended better infrastructure such as simulated marker environment for mock testing of algorithmic software.

Strengthening the equity derivatives market and physical delivery

To further strengthen the equity derivatives market, SEBI has resolved to introduce physical settlement of all stock derivatives, in a phased manner. Stock derivatives which 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 capitalizations. 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 from ten to twenty-five lakh rupees. Additionally, a minimum deliverable value of ten crore rupees 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.

The intention is to make all equity derivatives compliant with the new framework within a period of one year. Stocks which fail to meet the enhanced criteria will be sequentially moved from cash to physical settlement and upon continuing failure to meet the enhanced criteria, will be entirely removed from the derivatives segment, based on prescribed timelines. SEBI has also tried to limit the exposure of small investors towards the derivatives segment by prescribing exposure limits based on disclosed income and by requiring rigorous due diligence in cases where such investors wish to invest beyond the exposure limits. The changes are a step in the right direction towards curbing speculation in the derivatives segment, as many instances of mis-selling derivatives products to smaller investors have been uncovered.

Other decisions taken in the Board Meeting

In addition to the registrar and share transfer agents (RTA), the companies will also be allowed to obtain assistance from the registered depositories for distribution of returns on investment, such as, dividend. Since the depositories are in direct contact with the investors through various means of communication, their direct involvement will make the process faster and more accessible for the investors. This action by SEBI is probably motivated by the unearthing of a massive fraud at an RTA entity a few years back.

To promote transparency and reduce fraudulent transfer of securities, SEBI has now decided to discontinue with transfers in physical form by amending Regulation 40 of Listing Regulations.

SEBI has initiated a public consultation by issuing a discussion paper on applicability of various securities laws on companies which are undergoing corporate bankruptcy and insolvency process, to address the practical issues which are being faced by such companies.

SEBI has issued a discussion paper for amending the archaic SEBI (Buy-back of securities) Regulations, 1998. It has also proposed changes in the SEBI (Substantial Acquisition of Shares and Takeovers) Regulations, 2011, to make it consistent with the new Companies Act, 2013 and various new securities laws and regulations.