Corporate governance, IPO pricing on Sebi radar

Written by fe Bureau | New Delhi | Updated: Jan 12 2014, 15:43pm hrs
UK SinhaUK Sinha on Saturday indicated that the regulator might tighten corporate governance rules
Highlighting the need to regain investors trust in the capital market, Securities and Exchange Board of India (Sebi) chairman UK Sinha on Saturday indicated that the regulator might tighten corporate governance rules, take a hard look at the pricing of shares during an initial public offering and come down heavily on Ponzi schemes duping investors.

Reviewing the corporate governance rules and aligning it with the new Companies Act is high on the agenda for the Sebi and it will be taken up at the next board meeting scheduled in February, Sinha said on the sidelines of a conference organised by Association of National Exchanges Members of India in New Delhi.

We had put out a draft paper (on corporate governance) in January last year. And now the Companies Bill has been passed. The board will take it up at the next meeting, he said, without divulging details.

In its discussion paper last year, Sebi highlighted various governance issues, including alignment salaries of top officials of the firm with the performance and goals of the company and a mandatory disclosure of the ratio of remuneration paid to each of their directors and their median staff salary. Similar provisions have been made in the new Companies Act. Sebi perceives the average remuneration of CEOs in certain Indian companies are unjustifiable and far higher than the remuneration received by their foreign counterparts. Sebi has also prescribed adoption of global practices without increasing the cost of compliance of firms.

Pointing to stricter enforcement in advanced nations, Sinha said the penalties against CEOs and CFOs are getting higher and higher. Sebi is following the same example, he said.

Emphasising the need to restore investor trust, Sinha said, More than two-third of IPO shares are ruling below the issue price. Even after adjusting for indices, IPO prices are ruling below the issue price. There is something wrong. We are looking at it seriously.

While the introduction of call option for IPOs on the opening day has reduced volatility, the Sebi chief doubted the way IPOs are being priced by merchant bankers. We have placed certain obligations of merchant bankers, he said, adding bankers need to be careful in verifying facts such as the companys plant and machinery and their locations before pricing their IPOs.

Referring to the menace of Ponzi schemes, he said the government ordinance has enabled Sebi to crack down on errant schemes. We have passed recovery orders and orders for attachment of properties in some cases, he added.

While liquidity was not a problem and the market infrastructure is the best in the world, Sinha urged corporates, stock exchanges and market intermediaries to work towards restoring investor trust. Scams not just erode investor confidence but also negate the positive aspects of reforms, he said.

National Stock Exchange CEO Chitra Ramkrishna outlined the need for increasing the flow of long-term savings such as pension and provident funds into equities. BSE CEO Ashish Kumar Chauhan said apart from the order-driven system, there was a need to introduce a market-making framework to attract investors.

Citing the example of the countrys largest provident fund EPFO, Sinha said while the finance ministry had notified a rule in 2008 that allows non-government provident funds, superannuation funds and gratuity to invest up to 15% of the funds in equities or equity linked schemes of mutual funds regulated by Sebi, the trustees of EPFO continue their distrust in the capital market and have not accepted the investment rule.

Hurts when called activist: Sinha

Unfazed by criticism that the market regulator acts like an activist working against business interests, Sebi chairman UK Sinha said it will continue to take steps to build investors trust. We take each of our decisions after active consultations (with public and other stakeholders), and take measures after that. But it hurts when you people call us activists (working) to affect your business, Sinha said. The Sebi chief said the measures that Sebi takes for risk management or investor protection should not be seen as a burden by the entities concerned. Whether you like it or not, we have to respond to the needs of society and we have to be guided in long-term growth. So dont think we are trying to be activists, as what we are trying to do is to generate a long-term trust in the market, he said.