Fundamental, structural changes required in way markets function

Written by Ashish Rukhaiyar | Updated: Jan 2 2013, 03:39am hrs
The Securities and Exchange Board of India (Sebi) was kept busy for most part of 2012 with changes in the way shares are allotted in public issues, restrictions on price movement on the day of listing, a total revamp of the consent mechanism, more avenues for increasing public shareholding and mutual funds being incentivised for increasing penetration beyond the top cities. In an interview with Ashish Rukhaiyar, chairman UK Sinha says he has also tried to bring in more discipline within Sebi while making sure that fundamental and structural changes and not mere window dressing are implemented to strengthen the market. Excerpts:

What do you think have been the key achievements of Sebi in 2012

Going by the state of the economy and of the market, we felt mere window dressing and incremental changes would not do. As such, we embarked upon some fundamental and structural changes in the way markets should function, keeping in mind the need for drawing household savings from across the length and breadth of the country into the market.

The whole IPO system underwent a major change in 2012. Electronic IPO using broker infrastructure at thousands of places, expansion of ASBA, stricter due diligence norms and code of conduct for Investment Bankers, disclosure of track record of Investment Bankers and, most importantly, introduction of rejection criteria for draft red-herring prospectus are in the rule book now. For the expansion of mutual funds to smaller cities and towns, extra incentives have been provided. Churning has been discouraged and regulations for distributors are in the pipeline. For risk mitigation in the market, rules for high frequency trading have been put in place and these rules are now being studied and even followed by other countries. Enhancement of base minimum capital for brokers, dynamic circuit filters and other similar measures are now in place to avoid any disruption in the market.

The focus of Sebi during the year has been to bring about more discipline on itself. One such example is transparent criteria for rejection of consent requests which has given a very clear cut signal to the market. We also had some important achievements in our enforcement actions some of which were successfully defended by Sebi in courts of law.

Some of the initiatives are significant. Can you elaborate

Some of the measures taken by Sebi in 2012 will have a positive impact on the securities market in India in the long term.

For example, a mutual fund is a product which is essentially meant for a retail investor. But you dont find the penetration beyond 15 cities. We have taken some initiative to help the AMCs to look beyond the 15 cities and bring in more investors.

Similarly, in the primary market, we have aimed at making it easier for investors to apply for IPOs through the brokers. We have made e-voting mandatory to help the investors participate more in the decision making of the companies. Certain initiatives have been taken for the corporates to help them achieve the minimum public shareholding norm. We have notified the Alternative Investment Fund (AIF) regulations which will help registration of AIFs. We revamped the consent order mechanism. So, some of these initiatives are significant.

Investors are wary of applying for IPOs. How do you address this issue

There are several aspects to it. One is the infrastructure availability for applying for IPOs. The second major issue is pricing of the issues. Third is the investor sentiment. I would like to address these one by one. Technologically, our market is very much advanced. What we have done is to allow the use of the technological infrastructure to help the investor apply for IPOs. We had instances were IPO forms were not available. Now, investor can apply for IPOs through brokers. All an investor has to do is to go a brokers office and apply for IPOs either in electronic form or physical form. This is what we call as E IPOs. This we feel is a major step in helping the investor even in far and remote places to participate in the securities market through IPOs.

Second major issue is pricing. Sebi has taken a serious view of this. We dont want to interfere in the pricing of issues. But, definitely, we want the investor to know how the merchant banker has priced similar issues earlier. We have mandated the merchant bankers to disclose the information relating to the performance of the issues handled by them, in the offer documents. This will help the investor to have an idea as to the performance of the merchant banker. This will also help in highlighting the issues that are over priced.

Mandatory safety net is another proposal at consultation stage, which is aimed at bringing in more discipline in pricing. Thirdly, earlier there were complaints of huge volatility on the first day of listing of the IPOs. We introduced the pre-open call auction and this has helped to contain volatility to a large extent. In addition to the above, share allotment system has been modified to ensure that every retail applicant, irrespective of this application size, gets allotted a minimum bid lot, subject to availability of shares in aggregate. The minimum application size has also been increased to R10,000-R15,000 against the existing R5,000-R7000.

We are also increasing the reach of ASBA by mandating all ASBA banks to provide the ASBA facility in all their branches in a phased manner. These measures, I think, will go a long way in increasing the retail participation in IPOs.

The pre-open call auction is a very unique move. How has it helped in checking volatility

As I mentioned earlier, the pre-open call auction was introduced to check the volatility on the initial day of listing. Pursuant to implementation of call auction, price of 10 re-listed scrips were observed to have moved up to only 5% on the first day of trading compared to 78% in the earlier scenario. Further, on the 20th day pursuant to re-listing, out of the 10 scrips, 8 were trading at a price range of 8% to 60% below the first day opening price compared to 23-80% in earlier scenario.

Similarly, price in two IPO scrips on the first day of trading were observed to have moved up to 6.5% only as compared to 76.% in the earlier case. Further, on the 20th day pursuant to Listing, both the IPO scrips were trading at a price range of 9- 10% below the first day opening price as compared to 38 %-85 %.After the introduction of the pre open call auction, we did not get any complaint of huge volatility on the first day of listing.

(To be concluded)