The Securities and Exchange Board of India (Sebi) on Thursday ushered in the convergence of securities and commodities trading on a single exchange and cleared the listing of security receipts issued by a securitisation and reconstruction company. The decisions were taken at board meeting. However, the regulator deferred decisions on making debt defaults by companies public and the Kotak committee recommendations, both of which it felt required deeper consideration. The capital markets watchdog, nonetheless, indicated that just like listed equities, even for listed debt securities the issuers will need to file quarterly P&L statements and half-yearly balance sheets. The commodities and securities derivative markets will be integrated by bringing together participants, brokers, and operational frameworks and Sebi has set an effective date of October 1, 2018. The implications of the move are far-reaching. Investors may now be able to transact across asset classes on the same exchange, using just one account.
The move will also change the dynamics of the business. National Stock Exchange (NSE), which is the largest shareholder in National Commodity Development Exchange (NCDEX) with a 15% stake, could look to integrate the operations of both entities. Similarly BSE could consider either launching its own commodities segment or look to enter into integration arrangements with commodity exchanges MCX or Indian Commodity Exchange (ICEX). The commodity exchanges could also explore initiating securities trading. Sebi chairman Ajay Tyagi noted that synergies had been brought in at the brokers level and what was required was synergy at the exchange level. “From October 1, they would be eligible to deal with all products subject to stipulation and guidelines,” he said. Tyagi also clarified that Sebi had decided turnover fees for options contracts in commodity derivatives would be be computed the same way as for equity derivatives. The other important decisions taken at Sebi’s board meeting on Thursday include the addressing on conflict of interest issues in credit rating agencies (CRAs) and mutual funds (MFs). It restricted any CRA or MF from holding directly or indirectly a stake or voting interest equal to or more than 10% in another or from having any member on the board of the other. It also restricted any other entity from having such interest in more than one CRA or MF. However, it excluded institutional investors from this clause, and permitted such holding only in case of a change in control approved by Sebi. In the case of CRAs, the move assumes specific relevance as Crisil had acquired a near 9% stake in CARE Ratings, following which the latter had complained about a hostile intent.
Sebi also raised the minimum net worth requirement for CRAs to Rs 25 crore from Rs 5 crore earlier. This would come as a partial relief to those who had lobbied against the earlier proposal to up this to Rs 50 crore. In addition, the market regulator has stipulated that promoters of CRAs must maintain a minimum 26% stake for three years after being registered with Sebi. The other important regulation with regard to CRAs was with regard to non-ratings & research businesses being necessarily housed in separate entities. Both Crisil and Icra offer services like advisory, risk solutions and data services through subsidiaries, while CARE offers valuation services itself. It isn’t clear if a subsidiary structure too would be ineligible. Ratings agency Crisil observed the higher minimum net worth requirements for CRAs and increased shareholding requirements along with minimum holding period for promoters of CRAs will ensure that only serious and credible players with long-term perspective enter the field. Sebi provided much needed relief to promoters of listed companies that fail to meet the minimum public shareholding of 25% by allowing them to dilute up to 2% of equity through qualified institutional placements or direct secondary market sales by promoters to meet the requirement. Earlier, companies could use mostly offers to the public, rights issues and institutional placements to achieve this. Sebi also relaxed norms for real estate investment trusts (REITs). It allowed REITs to invest at least 50% stake in a holding company or special purpose vehicle (SPV), and similarly allowed the holding company to invest at least 50% stake in the SPV. Effectively, this provision eliminates a tax liability because shares of the holding company are now directly eligible to be enlisted as shares of the REIT. According to the earlier regulation, a transfer of shares was mandated, which would trigger a tax outgo for the holding company. Experts said the announcement is on expected lines and aligned with infrastructure investment trusts regulations. Other changes included enabling investments by REITs in unlisted shares under the 20% investment category. Although a REIT could invest 20% of its corpus in under construction projects earlier as well, it was not allowed to invest in unlisted shares. The board also cleared several niggling issues for foreign portfolio investors by simplifying the requirements on various compliance matters. It also expanded the eligible jurisdictions for registration, by including countries with diplomatic ties with India. Moreover, the regulator may rationalise “fit and proper” criteria for foreign investors, as well as simplify